Let’s start this post with quoting someone who is smarter than me. Luckily, with the internet available to us, that is not too difficult to find.

The person we are going to quote is Tony Robbins, in his book “Money: Master The Game: 7 Simple Steps to Financial Freedom”¹. Though much of the book seems to be a sales pitch to use an investment firm he owned or had a deal with, there is a lot of good nuggets to take out of the book still.

Here is the quote: “I want you to imagine that someone comes to you with the following investment opportunity: He wants you to put up 100% of the capital and take 100% of the risk, and if it makes money he wants 60% or more of the upside to come to him in fees. Oh, and by the way, it it loses money, you lose and he still get paid! Are you in?”

I’m hoping all of you would not take that offer, but the sad thing is that many of you already have. This investment opportunity example is an example of how a large portion of the mutual fund and exchange traded fund world has worked for quite a long time. This includes inside your company 401k or other retirement program, possibly in your IRA’s, and probably with your Financial Advisor. And it all comes down to how fees have traditionally been charged inside of the accounts you are often offered.

You might be thinking, “That can’t be right, my 401k and other accounts don’t have those terms”. But, unknowingly, you very likely are within that trap, though it is outlined for you in much kinder looking words.

I am going to break these cost down for you, but regardless of whether this information seems like too much detail for you or not, I need you to understand that reading the rest of this post will likely save you HUNDREDS of THOUSANDS of DOLLARS. So, please pay attention and read this information, in detail. If you glaze over a little bit, that is fine. But make sure you understand the totality of the post.

The way that Mutual Funds and, similarly, Exchange Traded Funds (ETFs) work is they pool together people’s money (people that want to invest in certain investments) and use that money to purchase the stocks, bonds, and other investments outlined in the fund prospectus. They then charge a variety of fees to the people who invested in the fund. These fees are broken out a little more cleanly for you below. What you could see in terminology, could be:

1. Broad Annual Operating Costs – These are fees charged for maintenance and management of the fund. Fee types you may see would include-
   • Administrative or Management Fees – these are the costs of paying the fund managers, their advisors, and others. Traditionally, you will see this cost be shown as an “Expense Ratio”, which just means a percentage of your assets that get taken out for costs in this category.
   • 12b-1 fees – these are just within certain Mutual Funds, but are to cover the cost of marketing the fund to 401k and other program providers. In essence, they advertise and sell the fund and make money, but pass down the cost of marketing those funds to you instead of paying the costs themselves. Isn’t that a bunch of bull?
   • Other Fees Under This Category – You could see fees such as accounting fees, legal fees, custodial fees and more.
2. Shareholder Fees– costs to shareholder’s for being active in the fund. Fee types you may see here would include –
   • Sales Loads – Which are up front commissions or fees to put your money in the fund. Pretty much, if you want to invest in the fund, you have to pay to play.
   • Redemption Fees – Costs applied for selling the fund (traditionally within a certain time frame after purchasing the fund).
   • Exchange Fees – most often if you exchange one fund for another within the same company/organization.
   • And Other Account Fees – to maintain the account under a variety of scenarios.
3. Trading Costs – which are costs directly related to the fund manager’s trading of stocks and bonds within the fund or the sale or purchase of the fund by investors. Trading by the investors or by the fund manager’s incur costs such as trading fees and taxable gains, all traditionally handed down to the investors.
4. Employer Sponsored Plan Fees – If, on top of owning the mutual fund, you also own the fund within a 401k/403b/TSP or another vehicle such as an annuity, you will have extra costs/fees that are charged by the organization managing the retirement account. For instance, my company 401k was previously managed by Empower. Empower charged a “General Administrative Service” expense of .34%.

If that seemed difficult to read through without falling asleep, its because it is supposed to be. Just think, that was me simplifying it down. Your eyes probably glazed over during some of that even though I dumbed it down. Now imagine trying to read through all of the legally prepared documents within the mutual fund prospectus and retirement plan documents. Trying to muddle through all that legal jargon is exactly why so many people didn’t realize how much money they were paying to the funds and their retirement account manager.

According to Morningstar², the average actively managed mutual fund expense ratio (which is most often the primary component of the “Annual Operating” fees I listed above) is around 1.01% as of 2023. What that means is that for every $1000 you invest, you are paying ongoing fees of $10.10. This does not include any sales loads, Financial Advisor fees, employer retirement plan fees, or other costs. Just the expense ratio listed. If, for an example, you had a Financial Advisor that charged a 1.00% fee, plus you paid the expense ratio of that actively managed mutual fund example (1.01%), you would be paying $20.10 (2.01%) in fees for every $1000 you had invested, EVERY YEAR! Just to clarify, if you were getting close to retirement and had $850,000 invested with this fund and advisor, you would be paying roughly $17,850 each year in fees at that 2.01% fee scenario. This would still not include if you pay any other fees listed above. If, on the flip side, you managed your own investments (which I am not saying you should or should not do) so you didn’t have the advisory fees, and invested in a passive index fund that charged .20%, you would pay $1700 in fees that year. In one year, in that scenario comparison (at $850,000 in invested assets), you would lower your costs by $16,150. Hopefully that is pretty eye opening for you.

In the next part of this series, I will incorporate some charts for you to visually understand the costs that people pay. I will also show you what funds to choose inside of your 401k or employer sponsored plan to get the lowest costs, and (via another post) how to find your own mutual funds on Fidelity.com, if you would like to focus on significantly reducing your costs further.

See you at the next POST!

1. Amazon Link to Tony Robbin’s Book – Money: Master the Game ↩︎
2. https://www.morningstar.com/business/insights/blog/funds/us-fund-fee-study ↩︎

And, of course, a random picture (from space) to send you off to you day (or next post).