Gerald Schneider earned a good income. He was an engineer from Portland, and every month, he faithfully contributed to his company’s 401(k) plan.

By retirement age, he was looking forward to cashing in a $1.5 million nest egg—more than enough to see him safely through his retirement years.

But Gerald was in for a shock. At the age of 62, instead of the $1.5 million he had been counting on, there was only $450,000.

His money manager had bled a million dollars from his account with outrageous—but legal—annual fees. Those fees were as high as 4% per year.

By the time Gerald realized what was going on, he was paying over $14,500 per year in fees.

Gerald had been the target of a 401(k) retirement “scam.” And he’s not the only one falling victim to this legal “financial crime”…

Here at the Daily, our goal is to make you a little bit richer every day. And today’s idea might be the most important one you read all year. If Gerald had read this 30 years ago, he could have saved himself nearly $1 million.

Hidden Dangers in Your Nest Egg

In today’s issue, we continue to highlight the dangers of owning mutual funds.

We know mutual funds aren’t the most exciting topic. But by some estimates, more than half of U.S. households own them. We suspect most of our readers do, too.

Mom-and-pop investors like mutual funds because they’re an easy way to buy a collection of securities that might be difficult to recreate in your own portfolio.

These funds can be a good place to grow your nest egg. Nevertheless, you should be aware of the hidden dangers lurking in these popular retirement vehicles. As we pointed out yesterday, some funds contain unexpected tax liabilities that could surprise you.

The hidden danger we’re revealing today could have even worse implications for your retirement than surprise taxes. We’re talking about fees.

There’s nothing sexy about fees. In fact, they’re downright boring. But understanding them could be the most important thing you do to ensure a dignified retirement.

Jack Bogle, the founder of investment management firm Vanguard, put it best when he called the mutual fund fee structure, “a system where you put up 100% of the capital, you take 100% of the risk, and you get 30% of the return.”

That was true for Gerald Schneider. He only got $450,000 of the $1.5 million that should have been his. Wall Street got the rest.

Higher Fees Don’t Mean Higher Returns

If you’re paying higher fees, you must be getting better performance from your 401(k), right?

For example, if you’re paying 3% in fees, shouldn’t you be getting at least a 3% greater return from the mutual fund than you would from the overall market?

You should—but you’re probably not.

Up to 96% of actively managed mutual funds—the kind available in most 401(k) plans—actually underperform the market. In other words, they’re charging you exorbitant fees, but they aren’t beating the stock market averages.

A one-percentage-point difference in fees may not sound like much… But it adds up over time. And it will have a dramatic impact on your retirement account.

Take a look at the chart below…

As you can see, on a $100,000 account, the difference between paying a 1% and 2% fee is almost $700,000 by the time you retire.

Mutual funds call this a “management fee.” The higher the fee, the more you pay the fund… and the less you have in your pocket.

The same is true for “load fees.”

Load fees are ridiculous and antiquated. The fee is a percentage charge on either the purchase (front-end) or sale (back-end) of fund shares.

You can find out if your mutual fund charges a load fee by doing a Google search of the fund’s name or ticker symbol. When you do the search, Google will return a chart.

You can find the load fee in the data at the bottom of the chart (highlighted in the example below).

As you can see, this fund charges a 4.25% fee before it invests a single dollar of yours.

You’ll also notice the fund yields 4.35%. That means you’re giving up nearly a year’s worth of returns just to pay the load fee.

What to Do Instead

If a fund charges a load fee, just avoid it. As for management fees, look for low-fee alternatives. Fortunately for us, fees have dropped in recent years.

For example, the Vanguard 500 Index Fund (VFINX) charges a 0.14% fee. And the SPDR S&P 500 ETF (SPY) only charges 0.09%. That’s practically free.

These funds are probably the right move for anyone not interested in following the markets daily… or constructing their own portfolios.

Finally, check with your wealth manager to see if any of your funds have load fees. That money probably went straight to them… If so, I’d ask for a refund. If they refuse, that means they care more about themselves than about you.

I’d find a different manager…

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

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