The Retirement Fee Racket

An investment in knowledge pays the best interest. – Benjamin Franklin

In the real world, price is an important factor in our purchasing decisions. But in another world, a strange place called Wall Street, folks don’t always know what they’re paying, especially when it comes to fees. Institutions make their fee structures intentionally opaque — brokerages hide the details in the fine print, and mutual funds embed fees within the fund.

Can you imagine if things worked that way in the real world? Imagine walking into a store and seeing something you liked, but finding no price tag.You’d scratch your head and wonder how much it cost, and maybe ask the shopkeeper for help. Imagine not being able to get an answer, and needing to go to several locations or make numerous phone calls to get to the bottom of it. In the real world, this wouldn’t be acceptable. On Wall Street, it’s business as usual.

Fees aren’t just an issue because they make it so tough to understand what you’re paying for your investments. When you actually figure fees out, you may be shocked to see how high they are. Even worse, those fees add up over time. The United States Department of Labor (DOL), a government agency currently working to make saving for retirement more transparent and fair, recently found that a 1% increase in fees would reduce your account balance in retirement by 28%, after 35 years of saving. That’s nearly one-third less, for fees alone. Now take a second to think about how many more years you would have to work to make up the difference.

At Personal Capital, we’re focused on giving investors the transparency they need to make informed decisions about their long-term financial lives. As part of this effort, we analyzed 11 leading brokerage firms to uncover how much they’re actually charging in advisory and fund fees, so we could understand the impact those costs have on the earning potential of retirement investments. Turns out, investors with current average account sizes of $500,000 will, over the course of 30 years of investing, lose between $500,000 and almost $1 million to fees — each.

In our study, we looked at the following brokerages, listed here in order of highest average total fees to lowest:

• Merrill Lynch
• Ameriprise
• TD Ameritrade
• Wells Fargo
• Morgan Stanley
• Charles Schwab
• E*TRADE
• UBS
• Fidelity
• Scottrade
• USAA

Huge retirement savings losses used to be accepted as the cost of investing, but it doesn’t have to be that way anymore. Investors shouldn't be penalized for their lack of knowledge about brokers' intentionally opaque few structures. As an industry, we’ve evolved to the point where high — and hidden — fees are no longer justifiable. Investors have more options now, and they should demand better.

What’s being done to fix this? Besides more companies using technology to provide insight into all aspects of investors’ financial lives, DOL, as I mentioned, is also working on behalf of retirement savers. They are proposing a “conflict of interest” rule that aims to bring greater transparency to investors by requiring financial advisors and brokers who deal with retirement accounts to provide advice in the best interest of their investment clients, not the investment funds they serve. DOL held hearings last month to debate the rule, and many expect discussions to escalate this fall.

Between efforts like our report and the work DOL is doing, I’m hopeful that someday soon shopping for investments on Wall Street will be more like shopping at your favorite store — where the shopkeeper tells you the price and if you don’t like it, you can simply choose to go to another store or select another item. If we're able to access this level of information when it comes to buying a television or car, is it so much to ask for the same transparency about the investments we need to secure a safe financial future? At Personal Capital, we think the answer to that question is yes.

To learn more, check out our white paper, “Financial Savings Report: The Real Cost of Fees,” here.