Monday, October 18, 2010

Hidden Fees

In an earlier article, “Starting July 2011 401(k) Providers Must Disclose Fees”, posted here on August 31, 2010, we talked about new fee disclosure rules taking effect next July that apply to 401(k) plan providers or advisors who receive fees of $1,000 or more for their products and services. Many different kinds of fees are embedded inside mutual funds related to administration, management, sales and marketing services. For employer plans and IRA accounts that are invested in mutual funds, individuals should be aware of these fees.

To give you an idea of just how much money is in IRAs and where that money is invested, we cite a recent report by the non-profit Investment Company Institute (ICI) indicating that:

• Americans had $4.1 trillion invested in IRA accounts as of September 30, 2009.
• $1.8 trillion of these IRA funds are invested in equity, bond, hybrid, and money market mutual funds.
• Mutual fund management fees, 12b-1 fund marketing fees and sales loads total about $24.18 billion in fees each year.

While it may be difficult to identify all of the fees, you can find many of them if you know where to look. Here are three ways to identify some of these fees:

1. Asset Management fees. If you own mutual funds, you are paying fees for the fund manager to invest your money. Look each fund up on Yahoo or Morningstar and find the “management fee.” Multiply it by the amount you own of the fund.

2. Marketing fees. Then look for the 12b-1 marketing fees and sales loads. Upfront loads are charged the first year and 12b-1 fees are charged every year. Multiply these by the amount you own of the fund.

3. Advisory fees. Find the broker or agent who handles your account on your brokerage statement and call them. Ask if there are fees for overseeing your account, and if so, what they were in actual dollars for 2009, and how they were calculated. Were you charged on your stocks, bonds, mutual funds, and cash?

When investment returns are good these fees seem to be insignificant in the grand scheme of things. But, when investment returns are not robust, they may become more significant to you. Be vigilant when it comes to looking out for your money. That’s one thing that won’t cost you any extra.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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