Excessive Fees

Today's Charlotte Observer had an article titled "Lawsuits over 401(k) fees on the rise." It is written by Walter Hamilton of the Los Angeles Times. Here is a short paraphrase of the article and my view on this issue.

Employees of Edison International won a victory when a federal judge, U.S. District Judge Stephen Wilson, ruled that the company's 401(k) fees were excessive and employee's were entitled to recover over-charges. This is one of more than 2 dozen lawsuits filed against U.S. employers, including Wal-Mart Stores Inc., in recent years. The basis for the lawsuit is that the employer selects high-cost investments in exchange for reducing the administrative costs paid by the employers themselves.

This lawsuit claims that an average Edison International employee paid more than $300 per year in unnecessary fees, this does not include foregone investment gains on that money. The Labor Department reported that over a worker's career an extra 1% a year in fees could reduce the eventual value of a 401(k) account by 28%

Perhaps you think this is just in a few 401(k) accounts and you need not be concerned about this issue. This is a very important issue and pays a key role in determining you final account balance. Most investors pay higher fees than necessary and do not even realize it. A 28% reduction in an account balance when you retire is a really big deal.

Here are some ways you can significantly reduce these fees and put more money in your pocket:

1) Buy a no-load mutual fund instead of a Class A, B, or C mutual fund. If you see the word Class it means you will be paying a load.You can easily pay 1% higher in fees with loaded funds. If you see the word Class in a mutual fund, just say no. A load is just a sales charge, view it like a sales tax. Perhaps you are like me and would rather shop during a tax-free weekend and not pay 7.5% in tax.

2) Buy a mutual fund directly from a Mutual Fund Company, like Fidelity or Vanguard, instead of from a bank or insurance company. Ever seen a bad looking bank or insurance company? They get their money from customers, aka investors. Buying wholesale is always lower in cost than buying retail.

3) Do Not Buy a mutual fund made up of mutual funds. An example of a fund of funds is a target fund like a 2020 fund because you pay the fee twice, once for each fund and then for the composition.

4) Only Buy a mutual fund that you can find on the internet at a site like finance.yahoo.com or Fidelity.com. If you can not find it, it normally means that it is a composition of mutual funds. An example is a Growth and Income fund composed of a growth fund and an income fund.