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4 Ways to Reduce Retirement Plan Fees

Author: Daniel Smith

One of the easiest and surest ways to maximize a return on an investment (ROI) is to minimize the fees and expenses associated with it. Any fee that you pay to a broker or mutual fund company, for example, is money that you don't get to keep for yourself. Even small differences in total return over a short period of time can add up to significant differences in value over the long term.

This is especially true for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) workplace savings plans. People often struggle to create well-funded retirement plans for reasons such as poor equity market performance, failing to save enough money or being let go from a job before reaching retirement age. Maximize the return on every dollar that you've saved for retirement.

Invest in Funds and ETFs With Low Expenses

Mutual funds and exchange-traded funds (ETFs) charge annualized expense ratios on assets managed within the funds. A lower expense ratio means that you keep a larger share of the fund's total return.

Index funds provide access to broad diversified portfolios for just about any asset. Index funds such as the Vanguard Total Stock Market ETF and the Schwab S&P 500 Index mutual fund charge less than 0.1% annually. That means for every $10,000 you invest, the fund's managers charge you $10 or less every year.

Passively managed index funds generally have lower expense ratios than actively managed funds, and they make solid choices for your retirement portfolio.

Choose Investments With Minimal Sales or Transaction Fees

Some mutual funds charge a load, which is a fee to purchase or sell shares. It's a separate charge from the expense ratio. In some cases, the fee can be as high as 6%. Paying 6% of your total investment to a fund company before your money even gets invested is not a good way to build long-term wealth. However, these fees are easy to avoid. Most mutual funds don't have any load; these are the funds that you should target in your retirement plan.

You can also trade stocks with very low fees as an individual investor. Higher-balance customers are generally charged lower rates for trading, but big investing companies such as Vanguard offer competitive rates to all investors. As of 2015, customers with $50,000 or less at Vanguard still pay just $7 on their first 25 trades, making investing with minimal fees easy and accessible.

Avoid IRA Account Maintenance Fees

Many mutual fund companies and brokerages charge annual account maintenance fees for smaller balance accounts. The fee goes to offset the additional cost of servicing these accounts – but in many cases, you can avoid the fee altogether.

Each investment company has different qualifiers. Some companies waive account maintenance fees if you meet a minimum balance requirement. Other companies waive these fees if you sign up for e-statements or paperless statements.

Choose a Fee-Based Planner Over a Commission-Based Planner

If you work with a financial planner to help manage your retirement portfolio, understand the type of planner you're working with and exactly how that planner or broker is getting compensated. Choosing a fee-based financial planner over a commission-based financial planner could help keep his interests and your interests aligned.

A fee-based planner is compensated by receiving an annual management fee based on the size of your account. Since the planner receives a percentage of your total account balance each year, he has an incentive to grow your balance over time, aligning his goals with yours.

A commission-based planner is compensated by receiving a sales commission for the products he sells you. In these situations, the planner may be tempted to recommend products that carry high sales charges to maximize his compensation. Since he is being compensated by sales, the planner has little incentive to grow your account balance.

Your goals more closely resemble those of the fee-based planner, making him an optimal choice when you're seeking retirement planning advice.

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