Retirement account fees take big bite over time

The Savage Truth

Your financial adviser may make as much money from your retirement account as you do.

That’s what happens when advisers put you into mutual funds that perform well but charge excessive fees along the way. Those fees can add up — especially when you consider what you could have earned along the way.

Consider this example: An investor put $100,000 into a large-cap growth fund 20 years ago. The fund earned an average annual return of 8 percent. After 20 years, the account should have grown to $411,580 — if she had purchased it directly from the fund company, on a no-load basis, with only minimal annual costs.

Instead, because she purchased through a broker/adviser/salesperson, at the end of 20 years the account was worth $332,809 — a difference of $78,771. That’s the true impact of excessive costs over the years.

This wasn’t some shoddy mutual fund that charged exorbitant fees. It’s a Fidelity large-cap fund — easily accessed directly at Fidelity.com with no upfront fee to purchase and a small annual management fee of 0.62 percent.

But when advisers help you choose a mutual fund, they have a choice of share classes, and each class has its own set of fees attached — for the very same mutual fund.

The investor in our example was sold the Fidelity Advisor Large Cap Fund Class C. This class of shares doesn’t have an up-front fee, but it does have much larger annual fees of 1.67 percent along with potential back-end fees if you sell within a year (used to pay the broker a promised commission).

The same fund has Class A shares, which carry annual fees of 0.91 percent and an up-front charge of 3.50 percent for our hypothetical investment of $100,000. Or a broker could sell the Class M shares, with a front-end commission and annual fees of 1.17 percent.

Unlike registered investment advisers, who are fiduciaries obligated to divulge all costs and put your interests ahead of their own, the salesperson is only obligated to find you a “suitable” fund — no matter the cost.

You can compare the fees you’ll pay in various share classes using the FINRA fund analyzer tool. But that tool doesn’t show the opportunity cost of the fees that were paid either at the start or along the way, strangling your account growth.

James W. Langston, founder of Fiduciary Integrity LLC, has created a service that will look at your mutual fund portfolio and tell you how much money you lost out on along the way by investing in shares that were unnecessarily expensive. For $99, you can see the impact of those costs.

Because the fiduciary rule has not been passed, there is no law that protects investors from undisclosed overcharges from brokers. The SEC says investors who think they have been overcharged should “raise the issue with their financial professional and contact the SEC hotline” at 800-732-0330. But the SEC has a sorry record of protecting individual investors against the brokerage industry.

What about a lawsuit? Class action attorney Clint Krislov notes that most brokerage clients give up their right to sue by signing arbitration agreements when they open an account. However, Krislov says clients can win in arbitration, and his firm has set up a special division to handle cases involving mutual fund costs.

Wall Street commonly laments the fact that Americans haven’t saved enough for retirement. One reason is the huge toll they extract from investors. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." She responds to questions on her blog at TerrySavage.com.

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