Reduce Fees and Beef Up Your Retirement Portfolio

NEW YORK (MainStreet) - David Walters, a certified financial planner and certified public accountant with Palisades Hudson Financial Group, is an evangelist when it comes to retirement plan fees.

He likes to tell clients, and any others wondering why their retirement funds are held back by charges and fees, they're not "powerless" when 401(k) plans "stick employees with excessive fess."

"By making smart investment choices, you can cut your costs," says Walters.

To do that, you first need to understand the fees your plan charges, he says.

First up, knowing what kinds of fees can negatively impact your retirement plan performance is a big key, he adds. Here's what you should focus on, fee-wise, Walters explains:

- Plan-level expenses are charged by the plan administrator or custodian. These cover administrative services, such as recordkeeping, accounting, legal and trustee services.

- Fees on the underlying investments are charged by the mutual funds in your plan. Each fund charges an "expense ratio," a portfolio management fee that is charged per dollar of assets in the fund.

"Plan participants may also pay transaction costs for buying and selling funds," Walters says. "These may include trading fees and commissions that managers pay to buy and sell securities. Additionally, some funds also have 'sales charges' or 'loads.' These may be paid when you invest in a fund -- front-end load -- or when you sell shares --back-end load."

It's also a great idea to plow your plan cash into low-cost funds, Walters adds.

"Many actively managed stock funds have expense ratios north of 1% but rarely outperform the indexes consistently, so you're unlikely to get value for your money," he says. "Most index funds charge a fraction of that. Switching to low-cost index funds where appropriate can greatly reduce annual costs and in the long run can produce a bigger nest egg."

Other retirement plan experts say companies must shoulder the burden in reducing 401(k) plan fees.

"In some cases, companies can do so dramatically," says Mark Zoril, founder PlanVision, an investment services firm in Plymouth, Minn. "For example, company managers should set-up their plans so that you have an 'unbundled' arrangement," he says. "This means that your providers, such as record keepers, advisers, and investment choices -- like mutual funds -- are not the same provider or their services are not lumped together."

This unbundled arrangement can help an employer better identify how much each provider is compensated for the services it provides to the plan. As such, an employer can hold its providers more accountable over time, Zoril says.

Mark Lund, author of The Effective Investor (Stonecreek, 2010), and a retirement plan specialist located in Highland, Utah, advises both employers and plan participants to avoid investment vehicles that organically generate high fees.

"For instance, stay away from annuities within retirement plans," he says. "This just creates unnecessary fees going to the insurance company, on average 1.25%."  

Taking a balanced approach could not only lower fees; it could better protect your retirement portfolio.

"Use an active/passive investment strategy," says Larry Solomon, director of planning and investments at OptiFour Integrated Wealth Management, in McLean, Va. "Typically, 401(k) plans have an S&P 500 Index fund, and many participants will allocate some of their U.S. stock investments to it, but we advise our clients to take it a step further and utilize index funds in every asset class in their accounts."

For example, Solomon says, if a client has a moderate asset allocation that is 42% in U.S. stocks, 18% in non-U.S. stocks and 40% bonds, then he should allocate 50% of the weighting in each one of those categories to index funds.

"The reason is simple," he says. "If the average actively managed fund in a 401(k) plan has expenses of 1.20%, and the average index fund has expenses of 0.20%, then by dividing their allocation half active/half index, they will save an average of 0.50% per year on fund expenses. On a $100,000 account balance, that's a savings of $500 per year, and that savings will persist and compound year after year, regardless of market conditions."

In addition to reducing costs, studies show the active/passive approach has additional benefits of broadening diversification and smoothing overall returns, Solomon adds. "There will always be periods of time when active outperforms indexing and vice versa," he adds.


Bottomline:

Cutting fees from your retirement fund is a sure-fire way to beef up portfolio assets and drive your retirement fund higher, year-after-year. Take the steps noted above, and see your 401(k) fund perform better and your retirement's financial picture grow brighter.

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