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The Equivalent of One-Third of My Monthly Retirement Contributions Gets Eaten Up by Fees. Am I Getting Ripped Off?


Paying fees is part of being an investor, as everything from mutual fund investing to a personal financial advisor can cost you. However, it’s also important to periodically review the fees you’re paying to ensure you’re not doing any long-term harm to your returns. For instance, depending on the size of your 401(k) or IRA, paying the equivalent to a third of your monthly contributions in fees could be totally normal, or it could be way too much. Learning more about how these fees work can help you make a better decision for your future.

Do you have questions about saving for retirement? Speak with a financial advisor today.

What Retirement Account Fees Are There?

Account fees are the price that your portfolio manager charges for their services or the cost associated with some investments. Specifically, these fees tend to pay for three main category of services:

Administrative Services

These are the operational and client service expenses of a portfolio management firm. They pay for the business’ overhead, and for client-facing expenses, such as customer service and web portals.

Standalone Offerings

Some portfolio managers offer individual client services, such as personal financial counseling. In these cases, some portfolio fees will go to pay for these services if you utilize them. 

Investment Management

This is the core of what a portfolio manager charges for. This covers setting an investment strategy, buying and trading assets and otherwise managing client portfolios overall.

To pay for these services, portfolio managers tend to charge three main types of fees:

  • Percentage-based fees: This is an ongoing, pre-set cost that the firm charges to manage a given portfolio. Typically, these use an account size tier-based approach that charges annual percentages according to their proprietary brackets. For example, a portfolio might charge a 1% annual management fee, meaning you’ll pay 1% of your portfolio’s balance annually, typically divided into monthly payments.
  • Fixed fees: A firm might set individual fees for specific services, like counseling or financial planning. In some cases, these may be a bundled aspect of the account and integrated into other existing costs.
  • Commissions: These are more rare, but some investments may have commission-based costs associated with them. Financial advisors are typically held to a fiduciary standard that’s designed to ensure they’re maintaining clients’ best interest first and foremost, though.

What Are Average Fees for Retirement Account Management?

According to data from the 2022 401k Averages Book, average fees for a 401(k) managed portfolio hover right around 1%. For example, accounts within a large 401(k) plan (about 1,000 participants and $50 million in cumulative assets) will pay an average management fee of 0.88%. That figure is higher for small 401(k) plans (about 100 participants and $5 million in cumulative assets), as the average management fee for these is 1.19%.

On the flip side, mutual fund, comparably tend to charge between 0.65% and 1.24% for individual investors, according to 2022 data from The Pew Charitable Trusts. However, investing on your own like this can have its own pitfalls, as you’ll need to manage your investments more closely over time.

How Do Fees Affect Your Account’s Value Over Time?

No one wants to pay fees for anything in life, but that can be the figurative price to pay for professional investment services. A firm most people would prefer to work with will manage your portfolio, explain the details of investing, retirement and finance and provide attentive service. Ideally this firm will also generate strong, risk-balanced returns for you, specifically over the long term.

In some cases, even seemingly-low fee portfolios can cost a lot of money without comparable gains. For example, take an investor who puts $100,000 into their 401(k) over a period of 20 years. With the S&P 500 historical average return of 10%, they might pay the following fees:

  • No fees
    • Final balance: $672,752
    • Fees paid: $0
  • 1% annual fee
    • Final balance: $560,440
    • Fees paid: $112,312
  • 1.5% annual fee
    • Final balance: $511,203
    • Fees paid: $161,549

For this investor, a 1% annual management fee over 20 years costs more than their total starting savings. Or, to put it another way, for every 0.5 percentage points, they spent more than $50,000 in fees.

This isn’t necessarily a bad thing. These numbers are over the long term, and many asset managers offer significant financial services in exchange for what they get paid. Just make sure that you get value for your money.

Bottom Line

Portfolio fees can eat up a part of your savings over time, so it’s important to be cognizant of this when making decisions about financial advisor fees and other investing costs. Be careful about high management fees, and do your best to shop around and understand the market before settling on a final choice.

Retirement Portfolio Tips

  • A financial advisor can help you invest for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Portfolio fees can charge you a lot over time, but with the right firm you can get valuable services in exchange. Review what you can get for your money, so that you can know what to shop for.

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