All About Mutual Fund Loads

December 23rd, 2008  |  Published in Fees  |  3 Comments

I avoid mutual funds with loads at all costs.

A load is just another term for a sales commission or sales fee for a mutual fund. It’s paid by the mutual fund to a broker whenever they sell shares of that mutual fund, it’s exactly like a sales commission. It’s a perfectly legitimate way for a broker to make money and many brokers often offer advice free of charge to clients because they can get paid for some recommendations. One of the reasons many people suggest you find a fee-only financial planner or adviser, who charges you by the hour, is because an adviser’s recommendation may be seen as tainted based on who pays the highest commission. Whether you agree or not, I think you can make the argument that someone being paid for their time and not from a fund is more likely to give an unbaised opinion. A commissioned broker isn’t precluded from giving unbiased advice, but play the numbers.

Just so you’re armed with the best information, here are the various types of loads (these all come from the SEC’s list of mutual fund fees):

Sales Loads

Sales loads refer to the commission the mutual fund pays brokers for selling shares of their fund. The SEC doesn’t regulate sales loads but FINRA (Financial Industry Regulatory Agency) limits it to 8.5%, which is lowered if there are other charges. Sales loads come in two varieties, front-end and back-end. Front-end sales load means the investor pays the fee when they purchase the fund. A deferred or back-end sales load is one paid when shares are sold/redeemed.

Beware No-Load Funds

One thing to be wary of with no-load funds is that they may hide it by calling it something else like a redepemption fee (which is just like a deferred sales load), exchange fee, account fee, or purchase fee.

Lower Fees With Larger Balances

September 4th, 2007  |  Published in Fees  |  Comments Off on Lower Fees With Larger Balances

As your retirement assets grow, you’ll start getting better treatment from the brokerage houses in the form of reduced fees and it’s something you should take advantage of. The reason for this is because they 1) want to keep your business; 2) the amount of work they do, which they charge in their fees, won’t proportionally increase with each dollar you put in, so they pass on those savings to you.

Fund investors with $25,000 or $50,000 invested may pay reduced commissions on broker-sold “A” shares. Favor no-load funds? If you have $100,000 in a Vanguard Group fund — or $50,000 and you’ve been invested 10 years — you can qualify for the firm’s lower-expense share class. Similarly, Fidelity Investments offers lower-cost shares to index-fund investors with a $100,000 fund balance.

So, the lesson of the day is that if you have numerous accounts across multiple different brokerages, consider consolidating them into fewer accounts so you can take advantage of lower fees.

Source: Wall Street Journal Online

Vanguard Changes Fee Structure

May 21st, 2007  |  Published in Fees  |  3 Comments

Recently Vanguard did away with all those small fees they charged for low balances, custodial charges, etc; and went with one fee for every fund in which you don’t have a balance over $10,000. If you don’t have $10,000, you can always opt for going all-electronic (or having over $100k) because that will get you out of the $20 fee as well! You save the environment and $20 all at once.

Here is the text of the new replacement fee:

For nonretirement accounts, traditional IRAs, Roth IRAs, UGMAs/UTMAs, SEP?IRAs, and education savings accounts (ESAs):

Vanguard charges a $20 annual account service fee for each Vanguard fund in which you have a balance under $10,000 in an account. You can eliminate this fee by registering for account access on Vanguard.comĀ® and establishing electronic delivery of statements, reports, and other shareholder materials through Vanguard?s e-service package. This fee does not apply if the account owner?s total Vanguard assets (including IRAs, employer-sponsored plans, annuities, and nonretirement accounts) total $100,000 or more.

March 23rd, 2007  |  Published in 401K, Annuities, Fees  |  1 Comment

These are Things Six through Ten of the Ten Things Your 401(k) Provider Will Not Tell You courtesy of those brilliant folks over at Smart Money.

6. “…but you still aren’t diversified.”
One interesting tidbit out of the article was the fact that the two most popular holdings in 401(k)s are stable-value funds and company stock – which basically means you’re really conservative and really risky at the same exact time. In fact, they found that one in five 401k participants holds more than 50% of their balance in company stock… Yikes! Stable-value is way too conservative and putting so much into your company stock is a risk too.

7. “If you quit your job, you’ll have to pay to keep your 401(k) here.”
This one was hard to believe because of all the articles out there discussing the benefits of rolling over your 401(k) into a rolleover IRA, a process I just went through. A lot of folks seem to think the paperwork is a hassle but consider the payoff, if you think your options are limited and could cost you money, magnify that by the number of years until retirement and you’re talking serious money. Would you take $200 to go through the process? It’s likely that making the move, if your current options are limited, will result in a difference, in your favor, of at least that much. At the very least, you can roll it into your new job and save yourself the hassle of managing two accounts.

8. “You’d be better off in a Roth 401(k) — too bad your plan doesn’t offer it.”
This is something you can’t really control because the Roth 401(k) is optional, your employer doesn’t have to offer it. However, a Roth 401(k) isn’t necessarily better than a regular 401(k) because the two are two totally different animals. One offers tax deferred investing (regular 401k) and one offers tax free investing (Roth 401k), you should have a good mix of both. Unfortunately, it turns out only 5% of company plans give their participants a choice… which is a travesty.

9. “You want to see some outrageous fees? Try a variable annuity 401(k).”
This only applies to a limited set of folks because a lot of 401k’s don’t offer the opportunity to invest in variable annuities, which is good because its an expensive option. Why? “The insurance company slaps a fee on top of the expense ratio you pay for the mutual funds in the annuity.” Should you be in a variable annuity? Probably not, there are other options out there that are cheaper and possibly better.

10. “Your nest egg could be a whole lot bigger.”
This one is a little bit sensationalistic but it revolves around the fact that people don’t pay attention to their fees and don’t realize how much of a difference a few fractions of a percent in fees makes. “Consider this: Brent Glading of the Glading Group, who used to sell 401(k) plans for Merrill Lynch and Dreyfus but now negotiates better plans for company clients, typically can shave 0.20% to 0.40% off a plan’s expenses. That doesn’t sound like much, but it can translate to $100,000 per employee over 20 to 30 years.” Wow… $100k? That’s huge.

Source: Yahoo Finance

Ten Things Your 401K Provider Won’t Tell You, Part 1

March 22nd, 2007  |  Published in 401K, Fees, General, Investing, Mutual Funds  |  5 Comments

I love Smart Money’s series, Ten Things Your [Insert Someone Here] Won’t Tell You, because it really opens your eyes to some of the shady practices of some operations you may otherwise think are being honest and above board. In the latest installment, Smart Money takes a look at 401K’s and the little things that go on that they just won’t tell you about.

1. “We’re making a mint on your 401(k) — even if you’re not.”
I think this is the most egregious of the ten things and it revolves around the fact that the provider is being paid on a percentage of the money its managing and not for their performance. A lot of their fixed costs are instead charged on a percentage basis, such as administrative costs, and while the assets may increase, the administrative (and other fixed costs) aren’t likely to increase on a one to one basis. Luckily these sort of things are coming under the scrutiny of state attorney generals, such as Eliot Spitzer of New York.

2. “You’re buying wholesale, but we’re charging you retail.”
If you buy a fund all by yourself, it’s understandable that you’ll be paying retail because you’re not talking about millions of dollars (or perhaps you are, in which case could you send some my way?). If you buy a fund through your 401k, it’s conceivable, based on how large your company is; that the administrator is moving around millions and you should get some sort of discount on the retail fees – and many times they do. The disconnect is when they pass the charges off to you, they don’t merely divide what they pay and pass it through, they charge retail fees for something they paid wholesale for. That should be illegal.

3. “No one in his right mind would buy these funds — given a choice.”
When you sign up to the 401k, you’ll likely be limited to which funds you’ll be allowed to buy. Unfortunately, sometimes this means that you get to pick from lackluster or under-performing funds because your plan administrator, someone in HR perhaps, doesn’t know what he or she is doing. Also, Smart Money warns that sometimes the funds can’t handle a huge influx of money (the reason why some funds close) because it’s harder to make the same rates when you have so much more to invest.

4. “Our ‘target-date funds’ may miss the target.”
This isn’t a 401k specific issue but one about the target-date funds themselves, some may be incorrectly allocated based on expert opinion, especially if your administrator (and not a large brokerage) sets it up. That’s not to say the big brokerages have perfect target retirement funds, it’s just that they have more minds on the problem which hopefully reduces the problem. There isn’t event agreement on allocation, I did a review of target retirement funds and found the allocations were all over the board.

5. “We offer tons of investment options. Too many, in fact…”
Just as #3 (too few funds) can be brutal, too many options muddy the waters. A survey showed that the average number of funds in a 401k was 19, but that 10-12 was the ideal number, anymore and the investor was “paralyzed.”

Things six through twelve will be forthcoming.

Source: Yahoo Finance

Review Your 401K Plan Fees

March 18th, 2007  |  Published in 401K, Fees  |  2 Comments

Some companies are large enough that they have their own institutional funds to offer their employees in the 401K, some companies aren’t and thus rely on the offerings of a large brokerage house like T. Rowe Price, Vanguard, or Fidelity. Either way, it’s crucial that you review the fund fees of the funds you’re invested in so that you understand how much you’re paying per year to a manager to handle your money. When you do, remember that index fund mirroring most benchmarks for performance, usually the S&P 500, can be bought with expense ratios of less than half a percent (Vanguard’s 500 Index Fund has an expense ratio of 0.18%!).

So what do you do if your company has ridiculous fees? First, I would decide on which funds are cheapest and offer the right performance, both in terms of asset allocation and past performance (past performance is not indicative of future returns), and then I’d consider where I could move the funds to. If your company offers a self directed 401K, where you can buy individual stocks, consider moving your funds there and buying a mutual fund elsewhere.

Whatever you decide to do, it’s crucial to understand how much you’re paying because it can eat into your returns.