How to Lower Retirement Account Fees Using a Self-Directed IRA
The big Wall Street investment firms are very good at maximizing their own profits. Unfortunately, they are not very good at delivering market-beating returns for their own customers. This is part of the reason more people are turning to Self-Directed IRAs and other types of self-directed retirement accounts.
Say ‘No’ to the Assets Under Management Fee
If you are a buy-and-hold investor who does not trade much, and tends to hold onto investments for a long time, assets-under-management fees (AUM) can tear a chunk out of your retirement nest egg over time. If you are a long-term real estate IRA investor or you tend to hold securities for a long time, and you do not need a broker’s advice for all your trades, you may be able to save thousands of dollars by holding IRA assets with a Self-Directed IRA administrator that charges a set fee schedule for individual transactions, rather than an AUM or ‘wrap fee’.
For example, a $500,000 portfolio with a 1.5 percent AUM fee would cost you $7,500 just to keep the account open, even if you never made a trade. That is a lot of money to pay someone to send you a statement every month.
If they are not adding $7,500 worth of value to you each year, you may be better off moving buy and hold assets to an administrator like American IRA, LLC. In many cases, your total fees would be a fraction of that amount.
It may make sense to consolidate IRAs and previous employers’ 401(k)s by rolling them into a single IRA – Especially if the investment company charges you a monthly statement fee, or if the expense ratios for the funds within an old 401(k) are relatively high.
According to Morningstar data, here are average mutual fund expense ratios as of 2017:
Large-Cap Stock Funds: 1.25%
Mid-Cap Stock Funds: 1.35%
Small-Cap Stock Funds: 1.40%
Foreign Stock Funds: 1.50%
S&P 500 Index Funds: 0.15%
Bond Funds: 0.90%
If your old 401(k) is charging you much above these levels, it may make sense to roll assets over to an IRA or self-directed IRA where you have the flexibility to find assets that have comparable expected returns over time, while charging a much lower expense ratio.
Think of it: In an era where many bonds have yields of 5-6 percent on a good day, it does not make much sense to pay a Wall Street firm 15-20 percent of your yield every year.
Consolidating may also help you qualify for better pricing. For example, some investment companies waive under-minimum fees once you reach a certain threshold with them, or waive their monthly statement fee. You may be able to qualify for a better expense ratio, as well.
Eliminate 12b-1 fees
12b-1 fees are fees an investment company charges every year to pay their fund marketing costs. But they do nothing for you, the investor. These fees can range from 0.25 percent to 1 percent of assets every year. If you are paying 12b-1 fees to your current investment company or IRA custodian, it may make sense to find a better solution.
Manage your own investments
Money managers make a lot of money – at your expense. Expense ratios in mutual funds have been inexcusably high for many years. Especially when lower cost alternatives are available. Funds with high expenses, in the aggregate, have failed to even match the returns of an unmanaged index over time.
That does not mean a good advisor cannot add value: Every year, the DALBAR organization publishes a study that finds investors with professional advisors outperform those that do not, because investors that do not receive professional advice tend to get greedy or fearful at the wrong times, and make poor market timing decisions.
If you are able to be greedy when others are fearful, and fearful when others are greedy, as Warren Buffett likes to put it, you may well be ready to declare independence from Wall Street and manage your own money using a Self-Directed IRA.