Will You Pay $43,000 in Fees?
By Bob Moeller
WEAC Member Benefits
April 2003
Financial
Planning Seminars
Achieving
Financial Independence
It is very frustrating for people to lose money due to the
fact that the stock market is down. Some won’t even open their statements.
If you are frustrated, you may have been looking for alternatives to the
stock market. I have recommended some income alternatives in previous
articles, but now want to discuss a separate factor in the mix. Many of
you would gladly accept a “safe” 3% or 4% today, yet in pursuing
that goal you give up a good portion of your return to someone else, either
in management fees or in commissions. Let’s look at some math.
If you invest $500 per month in a Tax-Sheltered Annuity
for a 25-year career and earn 6% average per year, you will end up with
$329,187. If you have an additional 1% extracted from your account for
fees, etc., your 6% return drops to 5% and your value drops to $286,362.
In other words, expenses associated with your product choice cost you
about $43,000.
Many members justify not questioning expenses connected
to their investments by feeling they have someone they like who helps
them and they “don’t know anything about finances.” So,
they just accept without question whatever is proposed. I have to admonish
you a little here; you can’t afford to “not know about finances.”
Rather, take the simple attitude that “this is my money and I’m
going to need it some day, so I’d better learn about it.”
Due to the stock market drop, financial institutions are
hard at work thinking of ways to increase their fees. They want a bigger
piece of your money. In a recent Wall Street Journal article, U.S. Rep.
Michael Oxley (R-Ohio), chair of the House Financial Services Committee,
said mutual fund fees and expenses “are going up … as stock
fund holders have seen their retirement accounts shrink month after month.”
The first step to avoid giving up your money in fees, commissions
and other charges is to understand just what you are paying now. Write
a letter to each fund you own, each TSA you have, each insurance company
you have an annuity with, and each broker you deal with and ask that they,
“Please inform me in writing, in simple terms, exactly what total
fees or commissions I am paying or have committed to pay in the future.”
Yes, you want it in writing.
What do you look for? The typical mutual fund may have sales
charges, deferred sales charges, withdrawal fees, management fees, or
12-b-1 fees. The typical life insurance company tax-sheltered annuity
might have contract fees, mortality (life insurance) and expense charges,
sub-account management fees, annual charges, surrender or transfer penalties,
and others. Many brokerage houses will have high commission schedules,
“wrap” type annual fees, inactive account fees, account transfer
(out) fees, and others.
Just one example of a totally useless fee: The Aetna Plus
(now ING Insurance) TSA has a life insurance fee of 1.25% each year. What
do you get for this? Nothing. According to Morningstar services, you are
guaranteed that if you die you get your account value, that’s all.
As indicated in the first paragraph, if you were earning 6% a year on
your investments in this product, your actual earnings are reduced by
1.25% to 4.75% a year. Using the same $500 per month for a 25-year investment
example, this totally useless charge costs you $59,000. Even at $200 per
month, it costs you more than $23,000.
What can you do to take control of your money? Again, say
to yourself, “this is my money.”
- Find out what your fees, etc., are now.
- Subscribe to a good personal finance magazine like Money, Kiplinger’s
Personal Finance, or Smart Money.
- Try a discount broker. The magazines above will have ads giving what
services they offer, and what costs they charge.
- Deal with 100% no-load mutual funds as much as possible.
- Transfer your TSA investments, (or 401k or 457) to non-life insurance
company products after your transfer penalties are reduced.
- Make your own decisions about your own investments.
Remember, it’s YOUR money.
Quick Note: The Wall Street Journal reports that even though the
Vanguard Funds are warning investors “against piling into bond funds,”
investors still are doing so.
Vanguard’s Web site notes that the value of a long-term – repeat,
long-term – bond fund might drop 20% if there is just a 2% rise in
interest rates. Be careful. Short-term bond funds (average maturity two
or three years) are much less likely to drop and will drop a much smaller
percentage.
Posted April 4, 2003