We pay to have our money invested. If you have IRA’s, 401k’s, 403b’s or any other tax deferred investments, you are paying fees. Over the course of a year, you are paying fees, regardless if your investments go up or down.
Fees are built into the system. There’s no much we can do about them.
Maybe
I began to think about investment fees. These fees are not hidden in the sense that they are part of the required information that mutual funds must publish. But these fees are not displayed on your statements. These fees are built into the operations of the funds.
I would guess that most monies invested in 401k’s and the like are in mutual funds of one kind or another. In fact, when I was working and my 401k contributions went into mutual funds, we often had choices as to which fund custodian to invest with or which funds to invest in. I never recalled seeing the opportunity to invest in individual stocks.
Whenever I changed jobs, I immediately rolled over all 401k money into IRA’s at my preferred custodian. And there these monies sat, invested in their mutual funds.
Until
Until I started to think about fees and taxes. In recent posts, the subject of taxes for retirees has been covered and what one might do about them. This naturally led to thinking about mutual fund fees. Both taxes and fees are a drag on a retiree’s financial assets.
Of course, one simple way to reduce fees is to invest in low cost mutual funds, and funds with minimal fees. Keeping “expense ratio” fees low can be significant. Notorious among the fees are “purchase fees”, “redemption fees”, and “12b-1 fees”, all of which can and should be avoided.
If a retiree wishes to remain in mutual funds, then fees are part of the package.
Another Way?
These days, it is possible to buy and sell stocks on line without any commissions. This allows stock investing to have low friction. It can be significant when compared even to the lowest low-cost mutual funds.
As a result, I have started to invest some of my IRA funds into individual stocks using a brokerage account in my IRA. This potentially is advantageous because not only am I reducing the amount of money that is subject to a mutual fund’s expense ratio (by moving money from a mutual fund to the brokerage account), in addition I will be receiving dividends from the stock I buy. As a dividend investor, dividends rather than capital gains is my focus.
Of course, this introduces new forms of risk. When I am in a mutual fund, I rely on the fund manager(s) to pick and choose stocks, when to buy and sell, etc. Most mutual funds have enormous amounts of capital, so risk is spread out amount the dozens or hundreds (or even thousands) of companies they invest in. My buying individual stocks can never match the diversification a fund can achieve.
And the risk of falling asset prices is real. One never knows what can or will happen. For example, will the stocks I pick do well or falter? And so on.
I have focused on buying stocks in a brokerage account in my Roth IRA account, not in the traditional IRA account. Roth IRA accounts are not subject to RMDs. Since withdrawals from Roth IRA are (if some conditions are met) tax-free events, it seems it would be possible some time in the future to do an “in kind” withdrawal of these stocks. I have set these stock to reinvest dividends. Until these stocks are outside of the Roth IRA account, the stocks and their dividends grow tax free.
Mutual fund fees of interest to you? Let me know here.
The ilustration of a Chestnut Bittern is from a 1927 volume “The birds of Singapore Island” by John A. S. Bucknill, (John Alexander Strachey), Chasen, Frederick N. (Frederick Nutter), Levett-Yeats, G. A. Kloss, C. Boden (Cecil Boden), published by the Singapore Government Printer. Courtesy Biodiversity Heritage Library, Smithsonian Institution.
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