Posted on Aug 20, 2013

Investment returns are important, but there’s one number that trumps even a juicy appreciation in your retirement investments:

Fees.

And the lower the fees you pay, the higher your return will be over time. Yet many investors fail to grasp that connection, says Lorrie Minor, a CFP® with LearnVest Planning Services. When investors look at a fund’s performance, they tend to focus on returns. But they should bear in mind that returns are reported after fees are deducted, so investors should closely examine those as well, because, as she says, “over time, fees can make a material difference with how much you have to live on or fund your goals.”

How much of a difference, you may ask?

A big difference. A favorite example from the Securities and Exchange Commission is the following: Say you invest $10,000 in a fund, and the fund yields a 10% return before expenses. If costs are 1.5%, your investment will grow to about $50,000 after 20 years—but increase another $10,000 if you lower your costs to 0.5%. (You can use FINRA’s fund analyzer  to figure out the impact of your own mutual fund fees over time.)

If this was your investment, wouldnt you rather have that extra $10,000? To figure out how much you’re paying for your mutual funds, follow these two steps:

Step #1: Understand Which Fees You Pay

Basically, there are two types of mutual fund costs: “annual fund operating expenses” and “shareholder fees.”

Annual fund operating expenses. for regular and recurring costs, are paid out of fund assets, meaning you arent charged separately for them. These fees include:

1. Management fees to the investment adviser or its affiliates to manage the fund’s portfolio and pay administrative fees.
2. Distribution and/or service fees (also known as 12b-1 fees) for marketing and selling fund shares; paying brokers and others who sell funds; and advertising, printing and mailing investment prospectuses and sales literature.
3. Other expenses for charges not included in the first two categories: custodial and legal help, accounting services, transfer agents and other administrative functions.

A line in your funds fee table called Total Annual Fund Operating Expenses (also referred to as the expense ratio) lists the cumulative operating expenses a shareholder pays for a fund as a percentage of the fund’s average net assets. This line does not include a category of fees called shareholder fees—which well address in a second—because those arent taken out of a funds returns.

Shareholder fees are charged directly to the investor, either at the time of the transaction or periodically. The primary cost that falls under this umbrella is a sales “load,” or commission, that a fund pays brokers to sell their funds. Depending on the fund, investors may pay a “front-end” load, meaning they pay when fund shares are purchased, and/or a “back-end” or “deferred” sales load when shares are “redeemed,” or sold back to the fund. Any sales loads must be disclosed upfront to the investor, in the funds prospectus and on the funds website under Information and Fees.

When considering investing in a fund, make sure to ask your representative or broker if there are sales loads. If there are, you may want to reconsider buying into that fund. (Of course, a financial planner may be able to give you more specific recommendations on whether or not a sales load is worth it.)

Also, while “no-load” funds don’t carry sales charges, they may charge you fees related to the actions within the fund. These fees include a redemption fee, which is deducted from proceeds when shares are redeemed (in addition to a deferred sales charge), an exchange fee, charged by some funds when an investor switches between funds in the same fund group, an account fee, if the value of an account is below a certain dollar amount or a purchase fee (charged at the point of sale), in addition to a front-end sales load. You may also be charged a transaction fee, or commission, on a per-trade basis for buying or selling no-load funds.

Now that you know which fees you might be paying and why, on to the second step: