Take steps to curb retirement plan fees

Distribution fees

Distribution or service fees are perhaps the most controversial of fees charged by fund firms. Designed to help mutual fund firms market mutual funds and to compensate brokers and advisers who sell them, distribution fees, commonly known as 12b-1 fees, can range from reasonable to out of control. They can eat up a significant chunk of your profits.

"Certain mutual funds come with 12b-1 fees that can run anywhere between 25 basis points (0.25 percent of assets) and 1 percent," says Bill Hayes, managing director of asset management for the Chicago Investment Group. "If you're happy with the way your account is performing, a 12b-1 fee isn't too bad to pay, but you can also opt for funds that don't have them."

Instead of forgoing 12b-1 fees entirely, Hayes recommends carefully monitoring how much you're paying in distribution fees and evaluating "no-load" investment options that don't incur 12b-1 charges.

While no-load funds generally do not charge loads, be aware that they can legally charge up to 0.25 percent in 12b-1 or shareholder service fees without losing their no-load moniker. But not all no-load funds charge these fees.

Early withdrawal and surrender charges

Another way consumers lose money is by pulling funds out early. Withdrawals from 401(k), 403(b) and IRA plans result in a 10 percent penalty if made before you reach the qualified retirement age (usually 59½, though it's age 55 in certain instances with company-sponsored plans).

It's true that from traditional and Roth IRAs, consumers can withdraw funds fairly easily to buy a first home ($10,000 limit per person), pay for college, or defray disability costs, medical expenses or health insurance premiums if unemployed. This they can do penalty free, though income taxes will be due in the case of withdrawals from traditional IRAs.

But penalty-free withdrawals from company retirement plans are allowed only under extreme circumstances such as total disability, medical expenses that exceed 7.5 percent of adjusted gross income, losing employment after age 55 or receipt of a court order to hand money over to a divorced spouse.

With 403(b) plans -- retirement plans generally offered at schools and nonprofits -- an extra caveat is warranted. These plans often hold variable annuities, insurance products that usually charge surrender fees on top of the 10 percent penalty.

"Surrender charges can be avoided if investors understand how much liquidity they can take out of their accounts and the time frame their policy requires," says Dan White, head of the Glen Mills, Pa.-based retirement planning firm Daniel A. White and Associates. "Most long-term plans allow people to withdraw up to 10 percent of their account without penalty."

White adds that while annuity restrictions vary from company to company, most contracts require holders ages 59½ and older to invest for a minimum of five to eight years, but allow them to withdraw anywhere from 5 percent to 15 percent of the account value annually without penalty. Those who pull out earlier may pay a surrender charge of up to 10 percent on top of penalties and taxes on earnings. The surrender fees recede over time, so the longer you hold an annuity, the lower the surrender charge will be at withdrawal.

Trading costs

Those who own a brokerage account or act as their own account manager by trading stocks can lose a lot of money by overpaying trading costs and brokerage fees.

"Without a broker, people should expect to pay $7 to $10 a trade," says White of Daniel A. White and Associates. "And with a broker, they can expect to pay $40 or $50 a trade. A lot of places charge $100 a trade and that's just ridiculous."

White advises those who play the market to shop around for an online trading firm that offers discounted trades. and offer trades for as low as $4.95, for example. When it comes to finding a broker, White recommends consumers comparison shop before settling.

"People usually don't start looking at how much the fees actually cost until they start losing money," White says. "That's when it really starts to hit home."

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