Sunday, November 6, 2016

Retirement Investing and Fees: What are "loads" and "expense ratios"?

I don't know about you, but I've been wanting to deal with investing my money for some time (both creating new investments and tending to old ones), and admittedly, I have been dragging my feet a bit because there are a few things I've felt I didn't completely understand.  One thing is fees and expenses that come with buying stocks, mutual funds, etc.  Your money can quickly get eaten up by fees.

I've been doing my research for several months now because I feel the need to take a more active role in my investments.  Right now, I have a Roth IRA that is invested in the stock market (mutual funds), and a 401K from a previous employer.  I should probably roll the 401k over and would like to move the Roth IRA into a different investment.

9 years ago, my father passed on, and left me a small amount of money.  I immediately made an appointment with an investment consultant at my financial institution and put the the money in a Roth IRA, in an investment that they recommended (a mutual fund).  My money has doubled, so I can't complain there, but I'm not sure this is the BEST choice for me.  You see, the investment I was placed in was an "A fund."  While this isn't the end of the world, it isn't great.  In order to explain more clearly, let me tell you what I've learned about fees that come with this type of investing.

Since I am the kind of person that will invest a certain amount per month, I should be going with a no-load mutual fund (lump sum investors should consider EFT's--more on that in the future).  When buying a mutual fund, one type of fee is called a "load."  A "load" is a commission or sales charge.  These are charged either at the time of purchase or at the time you sell.

An "A-fund" charges a load at the time you purchase the fund.  So, if the load is 5%, and you invest $1000, only $950 actually gets invested.  You've basically lost $50 before you've even started.

A "B-fund" charges a load at the time you sell the fund if you sell within a certain period of time.  Frequently, they will charge you the load at different rates if you leave within a certain number of years.  Maybe it's 5% if you leave the first year, 4% if it's the second, etc.  They also have higher expense ratios (another type of fee), so I would say "B-funds" are the worst choice.  Just avoid them.  Go for what is called a "no-load" and avoid this issue.

You will not, however, be able to avoid the "expense ratio."  An expense ratio is the annual fee you pay for an EFT or Mutual Fund.  It covers administrative and management costs.  Everyone pays it.  You can't get out of it.  So, ideally you want this to be as low as possible.  It will be expressed as a percentage typically.

I just used a Fund Analyzer that helps you to compare funds.  A side by side comparison shows that the fund I am in has an expense ratio of 1.18%.  I chose a no-load mutual fund (an index fund) as a comparison, and see that it has a .15%.  It also showed me how much money this would mean over time.  This make my decision making process really clear!  Even if you are not ready to pull the trigger yet, please log into this Fund Analyzer and play with it, just so you can practice reading it.  Compare your 401K funds or IRA funds, just for practice.  It's made my decision pretty clear!

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