Business owners investing for retirement will benefit from offering qualified retirement plans that maximize returns and minimize expenses. Employers who maintain tax qualified plans subject to provisions of the Employee Retirement Income Security Act of 1974 (ERISA) are obligated to make decisions that are in the best interest of plan participants, which includes keeping fees and expenses reasonable. And what’s in the best interest of your employees is also good for you. For many retirement plans, two types of fees can quickly add up: administrative fees and investment fees.
Administrative Fees
Maintaining a retirement plan typically involves certain basic costs for services, such as recordkeeping, accounting, and communications. Furthermore, many plans offer enhanced services, often charging extra for features such as investment advice, Internet access to plan information, and the ability to make transactions online.
Today’s retirement plans are highly varied, and businesses often have options regarding the ways in which these fees are charged. For example, sometimes investment fees that are deducted from investment returns cover the administrative costs; as an alternative, a business may opt to pay these charges separately or have the fees deducted from plan assets.
Investment Fees
Management fees, sales charges, and service costs are investment-related expenses that can reduce your overall return. For pooled investments, such as mutual funds, management fees cover the costs of managing the funds’ assets. Sales charges result from investment transactions -- when shares are bought and sold. Actively managed funds that experience frequent trading typically incur higher brokerage costs than those with infrequent trades. Service costs often cover benefits such as investment advice and investor communications, such as account statements.
As you examine your investment fees, be aware of charges specific to certain types of investments. For example, annuities often charge insurance-related fees; whereas, mutual funds may charge Rule 12b-1 fees that cover fund advertising or promotion costs.
Given the range of fees and the variety of retirement plans available today, it is important to crunch the numbers. Administration costs and investment fees can have a significant impact on your overall return and, ultimately, your retirement income.
A Case Study
Let’s take a closer look at the negative impact fees and expenses can have on investment returns over time. Suppose, hypothetically, you have $50,000 invested in a retirement account that averages an annual return of 8%. Fees and expenses reduce your annual return by 2%. Over the course of 25 years, your account will grow to an estimated $223,248.
Now, suppose you invest the same amount, but your fees and expenses reduce your annual return by only 1%. In 25 years, your account will be worth an estimated $286,270. That’s $63,022 more than you would earn in the higher-cost account.
While low fees certainly sound more attractive, it is important to weigh the value of fees. For example, quality asset management that results in strong returns may be worth higher management fees. Striking the right balance requires careful research and thorough cost analysis.
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