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What Is A Good IRA Management Fee?

Wednesday, June 12th 2024

Before diving deeper into IRA management fees, it’s vital to gain an understanding of Individual Retirement Accounts (IRAs). An IRA is an investment account designed to allow individuals save for retirement with tax efficiency; traditional and Roth IRAs are two commonly held accounts in this regard.

Context Behind IRA’s Fees

Traditional IRA contributions may be tax-deductible, meaning your contributions won’t incur tax until it comes time to withdraw your funds during retirement. By contrast, Roth IRA contributions are made using after-tax dollars; therefore, withdrawals during retirement should generally be tax-free. Together these tax advantages make IRAs an appealing retirement savings tool.

But the way IRAs grow over time is not solely determined by contributions you make; rather, your money is invested – often into various stocks, bonds, or mutual funds – in hopes that market performance leads to growth over time – thus necessitating management fees as an additional cost of doing business.

How IRA Management Fees Work

Management fees refer to costs associated with maintaining and overseeing an investment account such as an IRA. They cover fees such as investment advisory services fees, transaction costs and administrative charges.

Investment advisory fees are expenses you pay the advisor or firm guiding your investments, which help create an investment strategy to suit both your risk tolerance and financial goals. Transaction costs cover charges associated with buying or selling investments within an IRA while administrative fees cover administrative services like record-keeping and customer support.

Simply stated, these fees represent the price you must pay to gain the convenience and expertise provided by having someone else manage your IRA for you.

Impact of IRA Management Fees on Returns of Investment

At first glance, IRA management fees might seem inconsequential; after all, one percentage point here or there doesn’t sound like much. Yet with time comes compound interest which will have an adverse impact on returns from investment returns due to these fees’ compound effect.

Consider this: if you invest $100K and achieve an average return of 7% each year over 10 years without incurring fees or paying management fees of any sort, that amount would have become around $197,000 after 10 years – without fees at all! But paying even just one percent as management fees reduces returns to about 6% instead, leaving roughly $180,000 instead, which represents a difference of roughly $17,000 over longer timeframes.

Therefore, management fees play an essential part in your retirement savings efforts. The lower they are, the greater is your money’s chance for long-term investment growth and potential earnings potential.

What Makes Up an Ideal IRA Management Fee Structure?

Determining what constitutes an ideal IRA management fee may depend on the services you require; but as a general guideline, aim for annual fees under one percent of your account balance.

Many investment advisors charge annual management fees that range between 0.25-1 percent of assets under management and transaction and administrative fees that could add an extra 0.25 – 0.5% in transaction costs or administration.

One metric to gauge reasonable management fees is expense ratios from mutual and exchange-traded funds (ETFs). According to the Investment Company Institute, the average expense ratio for mutual funds stood at approximately 0.52% in 2020 – this can vary greatly according to index funds or ETFs (1), however.

How to Reduce IRA Management Fees

If you are paying over one percent in annual fees, there are strategies available to you in order to lower these expenses and bring costs under control:

Don’t be afraid to negotiate with your advisor; some fees may not be negotiable, but others could be flexible.

Why Higher Fees May Be Justified

Although fees play an integral part in investment returns, they should not be the defining factor when selecting an IRA manager.

Investors with specific financial objectives might find higher fees worth it if the additional services or improved performance outweigh them. For instance, certain advisors provide comprehensive financial planning, tax advice or other valuable benefits which you find important.

In addition there are funds that actively manage their money. They have surpassed their benchmarks with higher fees, yet they have consistently outperformed. However, maintaining these performances can be difficult, and past performance may not accurately predict future returns.

Conclusion

At first glance, IRA management fees might seem minor; but as we’ve shown here, these costs can have a major effect on your retirement savings. By becoming more familiar with them and striving to reduce them as much as possible, more of your money will remain working toward its goal of helping secure a comfortable retirement lifestyle for yourself and family members.

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2 Comments

  • Randy says:

    I prefer to get higher fees and great service/education/advice than cheap fees and poor service!

    • Hi Randy,

      I understand your point of view and this is how I feel as well however, fees and service are not always connected, this is why we always our readers do conduct research and consult a professional before investing.

      Happy investing!