Retirement Plan Fees

How "The System" Steals Your Wealth

Written by Nick Hodge
Posted June 26, 2013

Let me show you how "the system" steals your investment dollars from right under your nose.

In this case, "the system" is the tangled network of advisors, salesmen, fund managers, and their associated costs and hidden fees.

We're going to compare the performance of the broad market against my employer provided retirement fund (as opposed to the separate IRA I manage on my own).

Here's a straightforward year-to-date chart of the Dow and S&P 500:

YTD Dow Jones

As you can see, they're up around 10%-12% for the year.

If you bought an index fund that tracked their performance, like the SPDR Dow Jones Industrial Average (NYSE: DIA) or the SPDR S&P 500 (NYSE: SPY), you'd be up by the same percentage.

Not bad. But that's only if you buy the fund on your own.

Watch what happens when we look at the year-to-date performance of my American Funds retirement account:

YTD Retirement Performance

My year-to-date return is in the red, down 0.23%. You can see it plain as day in this image I grabbed from my portfolio value history:

Retirement Rate of Return

Note also the 3.56% annualized return since September 2009, a period for which the annualized return of the Dow Jones is up around 12%.

Are you experiencing something similar? Despite the market reaching record highs, has your retirement account stagnated — or gone down?

Most people's has...

Here's why: Expenses.

 Look at the expenses for the funds in my retirement account:


Expense Ratio

New World Fund (NEWFX)


EuroPacific Growth Fund (AEPGX)


The Growth Fund of America (AGTHX)


Over the course of an investment lifetime, retirement account and mutual fund fees like these will cost the average American $109,407.

By way of comparison, the expense ratio for the Dow index fund I mentioned earlier — which would've earned you 10% so far this year (instead of -0.23%) — is only 0.17%.

Pay Them to Lose Money?

You see, instead of a straightforward fund that tracks an index with passive management, like the SPDR Dow Jones... financial companies with retirement programs have many more costs. They have to pay the salaries of fancy fund managers (the three funds in my account list around 10 managers apiece).

They have to pay administrative fees, like providing customer service, record keeping, and distributing statements, which they also pass on to you. Then they have marketing fees, like sponsoring stadiums and buying high-priced advertising spots that tell you how trustworthy they are. And you pick up the tab for those costs, too.

The real kicker, though, is that you pay that expense ratio on the full balance of your account year after year.

Take a hypothetical account with $50,000 earning an average 5% per year.

Most people think the fees only apply to what they make. If they make $2,500 in the first year and the expense ratio is 1.07%, they assume their fees will amount to $26.75 ($2,500 x 0.0107).

In reality, the fee applies to your entire balance — again, year after year — so that $2,500 actually cost you $561.75 ($52,500 x 0.1017). And you'll pay that expense every single year on the full balance of your account... even if the fund loses money.

Still, it gets worse...

They Get What?!

There are additional fees called sales charges that are not incorporated into the expense ratio.

Here's the simple definition from Investopedia:

A large number of mutual funds carry sales charges. The amount of a sales charge represents the difference between the purchase price per share paid by the investor and the net asset value per share of the mutual fund. By regulation, the maximum permitted sales charge is 8%, but most loads fall within a 3-6% range.

With funds that carry a sales charge, there are three classes of shares: A, B, and C. The letter designations indicate the timing of when the charge is paid. For Class A shares, the sales charge is paid at the time of purchase (front-end load). For Class B shares, it is due when the shares are sold (back-end load). Class C shareholders incur a sales charge on a regular basis for as long as they hold the fund.

In short, that's what the guy who comes to your office (maybe) once a year gets on every single mutual fund purchase you make. My sales charge is 5.75%, and I make the selections and fax the execution directly to the main office, completely bypassing the guy who will still get 5.75% of my money.

How these fees are calculated and charged is so complex that even the Wall Street Journal admits:

There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.

One reason trading costs go unreported is their complexity, which leaves the fund companies in disagreement about exactly how to calculate those costs. Trying to quantify a fund's trading expenses can be about as easy as performing brain surgery.

Not exactly what you want to hear about the cost of your retirement...

And your government certainly isn't doing anything to change it.

So after 20 years with that original $50,000 your retirement savings stand at over $120,000.

But it cost you over $70,000 in fees to get it, giving the financial institution just as much as you earned.

That's the American retirement system in a nutshell: One for you, one for the bank.

And that's how it's been designed. The entire system is engineered to slowly siphon off the wealth of average Americans a few pennies at a time.

The banks bury it all in the fine print, and the politicians look the other way as long as the campaign contributions (hush money?) keep rolling in.

These are the ongoing shenanigans that keep an entire class of people financially pinned down and economically immobile.

There are, however, many steps you can take to lessen the impact has on you, your finances, and your way of life...

I'll be releasing the first Outsider Club special report next week to address these issues.

Keep an eye out for it. 

Call it like you see it,

Nick Hodge Signature

Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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