Investment Expenses

A little bit of cost control can pay off big time in the long run.

There are lots of administrative costs to investing, and if you can find ways to shave them just a little bit—without sacrificing the quality of advice that often comes with them—you can painlessly improve your future retirement security.

Here’s a quick example. Patty starts saving $10,000 per year at age 40 in some kind of tax-favored retirement plan. The annual administrative expense built into the plan is 0.4% of her assets. Using some reasonable assumptions, Patty figures as a result of her saving, she can expect retirement spending of $28,325 per year, beginning at age 65. Her cousin Cathy is identical to Patty, same age, savings, etc. Except that Cathy has lived most everywhere, and is a bit smarter than Patty. (In fact, she’s a bit of a Little Miss Smarty Pants.) Anyway, she manages to cut her administrative expenses by one-tenth of a percentage point (aka, 10 basis points, in financial world jargon) to 0.3%. Cathy projects annual spending of $29,067, which represents a 2.6% increase over Patty’s.

Admittedly, a 2.6% increase is not huge. Enhancing your retirement spending by a small amount like that is not a great idea. But it’s a modestly good idea. And when melded with all the other modestly good ideas available to you, it adds up. Anyway, it’s better than a headache.

What kind of administrative expenses are you incurring that might be eroding your savings? There’s lots of them: investment advisor fees, asset custodian fees, account maintenance fees, brokerage commissions, accounting expenses. If your account is inside an employer retirement plan, there are other fees as well: trustee fees, recordkeeping fees, accounting fees, legal fees. The list goes on. Some of these fees may be picked up by your employer, and others may be charged to your account.

Some of these fees may be disclosed, and some hidden. Often all you will ever see on your statement is the net return (or loss, of late) for the quarter, with no explicit statement of what size fee got you down to that net. Some services may be bundled, making it difficult to break out how much you’re paying for what service.

Sometimes there are fees layered upon fees. For example, your 401(k) plan may be invested in mutual funds. There may be some fees charged by the plan, and other fees charged by the mutual fund.

The more you can learn about the fees that erode your account, the better able you will be to find ways to shave them, to intelligently assess which fees are appropriate for the value added, and which can be shrunk without damage to your overall wellbeing.

That’s the theory anyway.