How hidden fees can crack that nest egg

Most people understand the basics of retirement planning. You set aside money to invest and save every month, and you keep daily expenses in check. Sounds pretty simple, right?

Not exactly. Even with a plan in place and the best intentions, you could be one of millions of Americans giving up hundreds of thousands of dollars in hidden fees. But how do you know? If you're saving for retirement with one of the leading brokerage firms, the answer is that you're probably losing retirement income to fees.

Cracked eggs
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According to research from the Securities and Exchange Commission, over a 20-year period a 0.5 percent annual fee could reduce a $100,000 portfolio by $10,000. A 1 percent annual fee reduces that portfolio by nearly $30,000. Day to day, these fees don't sound like much. Over time, though, they hurt the return you make on your portfolio, eating away up to a third of your retirement savings.

Now take a minute to calculate how many more years you'd have to work to replace that money. I'll assume that you'd rather be on a beach sipping a drink with a little umbrella in it at 65 than working another decade.

So how and why does this happen? Financial institutions charge clients a variety of fees on investment accounts. Fees cover things such as opening accounts, service and maintenance, trading and advisory services, and there are onetime fees for new investment transactions.

Firms downplay the impact of fees by hiding them in fine print, generalizing language about investment practices and embedding them within mutual funds — so much so that many investors are completely blindsided by the long-term impact fees can have on the nest egg they need for a happy retirement. And why wouldn't they be, when they're conditioned by brokers to think that this incremental fee is simply the "privilege to invest"?

This used to be the normal course of business, but it's time to create a new normal in the cost of investing — a cost that's in line with the actual value added by financial institutions.

"You wouldn't buy a car without competitive research; apply the same scrutiny when shopping for financial advice."

Good news for investors arrived recently when the Department of Labor issued a final rule imposing new fiduciary obligations on advisors to 401(k) plans and individual retirement accounts. It's an effort to hold investment advisors to stricter standards when advising on IRA or 401(k) accounts.

The rule would require advisors to give advice (not push product) that is in the best interest of their clients, not just what's "suitable" for that investor. Sadly, the standard adhered to by far too many brokers has been what was in their own best interest.

Having spent 25 years in financial technology, I'm elated to see this regulation come into play. It's a critical step toward protecting millions of Americans' retirement savings. We've evolved past the point where high — and hidden — fees are justifiable. Investors should demand better.

Here are some things an investor can do:

  1. Demand the best advice. It's time for investors to have transparency in, and ownership over, their finances. That means making sure that financial advice is in your best interest, not your advisor's. Anything other than that isn't advice — it's pushing product. Ask advisors how they are being compensated. Are they fiduciaries for your money?
  2. Understand fee schedules. You have the right to know where your money is going, so have a conversation with your advisor to analyze fees together. You'll get a better understanding of your fee schedule and how the amount can vary monthly. You may be shocked to see how high the fees are, so ask your advisor how to reduce or completely eliminate them (this can be an option). In some cases, consider increasing your investment to break even on fees.
  3. Compare your options. Remember to shop around before you commit. You wouldn't buy a car without competitive research; apply the same scrutiny when shopping for financial advice. Do a cost-benefit analysis to make sure you find real value with your current broker or financial adviser. Ultimately, if the fees aren't worth what you're getting out of the relationship, go elsewhere.

The bottom line is that investors need to be informed, engaged and vocal. This is your retirement money, so take control of it in the journey toward a better, more secure financial future.

— By Bill Harris, founder and CEO of Personal Capital