Mutual Fund Loads, Fees, Charges and Hidden Costs

I may not have got all Mutual Fund fees and charges but you should be horrified by the list of the ones I have found. The Mutual Fund industry has found many ways to part you from your money with their loads, fees, charges and hidden costs. They do this slowly with small percentages over time so you don’t notice. MER’s or Expense Ratios are for their great looking prospectus. But many fees and charges may not be included in the Expense Ratios. So you may have to hunt down or demand your financial planner make a full written disclosure on each fund you are invested in.

You should be alarmed by the figures in the table below. it is from the excellent site Retire Early Home Page by John P. Greaney. It clearly shows when you are accumulating a nest egg what effect fees have on the final amount of your nest egg after 40 years. As you can see fees of 3% result in your nest egg being less than 50% ($427,219) compared to fees of 0.02% ($968,249) after 40 years of saving. That money is paid to your financial planner over that 40 year period. Whether you are in the USA with an IRA or in Australia with a Superannuation Fund the fees take the same toll on your retirement nest egg.

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Note this is when you are accumulating your nest egg and are still working. Keeping the same fee structure as you draw a pension can send you broke very quickly.

My research has found we can class the fees and charges under several headings. Not all the charges apply to all countries but it should give you enough information to find out what applies to you and start asking the right questions.

Mutual Fund Load Types:

  • Front End Loads – Paid up front and can be as high as 8.5% but usually from 5% on $10K invested to 0% for $1M invested.
  • Back End Loads – Paid on redemption and often called a contingent deferred sales load. It may start at 5% of the initial amount invested and reduce by 1% for each of the next 4 years.
  • Redemption Fee – Limited to 2% by the SEC it can be charged to defray fund costs associated with the redemption process.
  • Level Loads – They charge a small up front fee and what they call a level load every year after that. It appears they can be quite expensive!

Fees and Charges:

  • Exchange Fees – If you change exchange (transfer) from one fund to another in the same group you may be charged this fee.
  • Account Fee – Some funds charge this separately as an account maintenance fee. It is often assocaited with small accounts.
  • Purchase Fee – This fee can be charged when shares are purchased for you in the fund. It is in addition to a front-end load fee.
  • Management Fee – This is paid to the investment adviser to manage the portfolio.
  • Other Expenses – These include shareholder service expenses, custodial expenses, legal expenses, accounting expenses, transfer agent expenses and other administrative expenses.
  • Marketing Expenses – Many funds charge fund holders for the marketing expenses of the fund. You are paying the advertising costs of your fund. Often called a 12b-1 fee it is meant to be used for marketing but often is used to pay brokers fees.
  • Expense Ratio – This is the fee mentioned in the prospectus and may include some or all of the fees and charges listed above.
  • Trading Costs – These are the commissions to buy and sell stocks and the bid asked spread on every trade. Overtrading my fund managers can make these greater than the Expense ratios according to John P. Greaney of Retire Early Home Page.
  • Turnover Rate – This is the Percentage of a Funds holdings that are changed each year. Some can be as high as 125%. The higher to percentage the more you are paying in brokerage. So much for buy and hold!
  • Soft Dollars – This is the way mutual funds get services without paying for them. The charge is hidden in the trading costs. It is estimated to be as high as $10Bn annually in the USA. The point is you can’t see them to see how much it is costing you.

Many of these fees and charges are hidden because they are taken from the mutual funds invested assets and are therefore not visible to you in your account. The share/unit price is worked out after the deductions so you don’t see the real cost to your fund.

You may recall the video I posted a few days ago – Hidden Fees Thirty Times more than expected in Your 401(k). It showed how the 401(k) fund stated the fees were $400 a year when in fact they were $14,000 per year. This can and is happening everywhere – not just in the USA.

I strongly urge Baby Boomers to insist their financial planner or employer fund manager make a full disclosure of all fees and charges levied on the funds. They have a fiduciary responsibility to do this. If need be employ a fiduciary professional to audit your investment portfolio and report back to you all fees and charges he finds. Make sure you tell your kids to do the same so they don’t wait 40 years to find out over 50% of their retirement funds were paid to their financial planner.

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  1. […] fees and charges of up to 30 times declared costs eating into retirement […]

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