The more an investor pays in fees, the less is available for investing and compounding over time. Investors can minimize fees by shopping for a low-cost custodian for their IRA and searching for low-cost investments.
When choosing mutual funds, be aware of the expense ratio, which encompasses all of the fees that will be scooped out of the fund's assets on a yearly basis.
According to a June 2011 report from the mutual fund trade association Investment Company Institute, the asset-weighted average expense ratio paid by 401(k) investors in 2010 was 0.71 percent.
It sounds like a petty amount, but compounded over 40 years, those fractions of a percent make a big impact.
Whether you use an active or passive investing strategy, focusing on low-cost funds is the best place to begin. Research by Morningstar in 2010 found that expense ratios are the most reliable predictor of performance. Low-cost funds beat their pricy counterparts in every test.
Mutual funds can also come with a sales commission, or load, attached. Look for a no-load fund and avoid paying an unnecessary fee.