What you need to know about common investment fees
Learn about how investment fees can affect your overall investment return, what fees you’re likely to pay when you invest, and where to get information about investment fees.
What are investing fees, and why should you care about them?
Most investment options have fees. Most accounts that hold those investments also have fees. Those investment fees are expenses taken out of your investments to pay for the operation and continuous management of each investment. Fees are a necessary part of investing, but they are something you should pay close attention to because they reduce the return of your investment and can affect the performance of your individual holdings and account overall. While you typically can’t avoid fees entirely, it’s important to know what you’re paying for.
How can investment fees impact your investment value?
Investing fees are typically expressed as a percentage of your account balance. That percentage is what’s then deducted from your account. Here is a generic example of how your balance can be affected by different fees.
Portfolio value from investing $100,000 over 20 years
The difference between annual fees of 0.25% and 0.50% seems tiny. On a $100,000 investment the difference is just $25 to start. But as the graph shows over the next 20 years at an annual investment growth rate of 6%, the difference between 0.25% and 0.50% could add up to $10,000. That money comes directly out of your investment fund or managed account.
What influences which fees you’ll pay when you invest?
There are a variety of fees associated with investing; the ones you’ll typically see for your own investments will vary for a few different reasons. Here are some of the variations that you could see:
Type of account
You might see different fees depending on what type of account you invest in. Some fees are usually found more frequently within employer-provided retirement plans. Other fees might be more commonly seen in an account you’re managing with a financial professional or on your own that isn’t associated with your employer. And some fees apply to both.
Active or passive management
Your fees will also vary depending on whether you’re using an active or passive investment management strategy, or a combination of both.
- Actively managed investment options have a specific objective like investing in certain types of companies or emerging markets. These investments generally cost a bit more because the managers of the investments spend time and effort to find the right investments to meet a specific goal.
- Passively managed investments that track an index like the S&P 500. These investments are generally more cost-effective and provide exposure to a specific asset classes. They only do one thing—invest in the same companies that make up an index that the investment tracks and their returns are expected to move in line with how that index performs.
For example, if you want a simple investment strategy that follows the ups and downs of the stock market and a specific index, you can choose a low-fee index investment or an exchange-traded fund (ETF). (ETFs are more frequently found in IRAs.) If you want a more sophisticated investment that helps you achieve a specific investment objective or one that seeks to perform better than the index it tracks, you can choose an investment that uses a more active hands-on approach, but you’ll generally pay a higher fee for that service.
There are also other considerations or asset classes; for example, international or global investments are typically more expensive than domestic large cap or mid/small cap investments for a variety of reasons. As an investor, you will have to decide which type of management and strategy (asset classes) are best for the goals you have set.
You may also pay a fee if you decide to work with a financial professional to help you figure out your investing strategy, select investments for your portfolio and provide other services. (You can work with a financial professional regardless of whether you’re investing in actively or passively managed investments.)
What are different types of fees?
There are a variety of fees associated with investing. The types below are among the most common, but you might see other fees not listed here based on the products you have and where you are invested.
Operating fees are paid to the fund company for work done on behalf of shareholders, such as buying and selling shares within the fund.
Account fees typically cover the administrative costs to maintain your account and offer services such as record-keeping, statement preparation and online account access. You pay account fees when you open or enroll in certain types of investment accounts, including 401(k)s or similar workplace retirement plans. Account fees may be a flat fee deducted from your account value or a percentage of your total return. They are separate from operating fees charged by a mutual fund.
Think of it this way: You pay operating fees for each of the mutual funds you hold in your retirement savings account, then you pay an account fee on the total value of all the investments.
You may not be able to control operating and accounts fees, but you can comparison shop based on fees (among other criteria).
Transaction fees are paid directly to a broker/dealer for services when you buy or sell a fund. They can include flat fees for things such as the cost of mailing a check, trade execution, overdrafts, debit card transactions and more. They are more common when you have an individual investment outside of a retirement plan.
How to find information on fees
As noted above, investors pay operating fees annually to cover the costs of keeping an investment up and running. Operating fees are expressed as an annual percentage (for example, 0.45%) of the investment’s average net assets over a year. Here’s how you can figure out what those fees are.
Where to get information on operating fees
You can find a summary table of these fees like the one below in a fund's prospectus or annual report. The Total Annual Fee Operating Expenses after Expense Reinbursement line tells you how much in fees you'll pay.
|Distribution and/or service (12b-1) fees||0.25%||1.00%||N/A||0.35%||0.30%||0.25%||0.10%||N/A|
|Total annual fund operating expenses||0.82%||1.65%||0.47%||1.33%||1.20%||1.02%||0.83%||0.71%|
|Total annual fund operating expenses after expense reimbursement||0.82%||1.65%||0.47%||1.33%||1.20%||1.02%||0.83%||0.71%|
Things to remember about investment operating fees
- Seemingly small fees could have a significant impact on the long-term value of your investment.
- You can control transaction costs by carefully selecting investments that fit with your overall investment strategy and taking a long-term perspective on your investment portfolio.
- You can compare different investments by evaluating their fees, but keep in mind—as with everything—funds with lower costs aren’t automatically a better value. Factor in what level of service you get for your fee to determine the true value to you.
Interested in learning more about investing?
- Talk to a financial professional if you want help selecting investments based on your personal financial goals (as mentioned already they will likely charge a fee).
- Now that you’ve learned the basics about fees, check out 11 investing acronyms you need to know to manage your money.
- Do you have a retirement plan through work or an IRA? Learn more about your investment options.
The chart is for illustrative purposes only. The assumed rate of return in this chart is hypothetical and does not guarantee any future returns nor represent the returns of any particular investment. Amounts do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Small and mid-cap stocks may have additional risks including greater price volatility. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.
Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.