Mutual Fund Fees: Look at the Total Picture

Why should you care about mutual fund fees? Because when fees are deducted from your account balance, they reduce your total return and, ultimately, the size of your nest egg when you retire. Consider how just a one percentage point difference in fees - for instance .5% vs. 1.5% - could affect your account over time. Assuming an average annual return on a hypothetical account bearing 7%, that 1% could make the difference between a plan participant retiring with $298,301 vs. $402,608 after 35 years of investing.¹ 

All About Fees
When evaluating redemption fees, it's important to understand how they fit into a fund's overall fee structure and the services you receive in return for the various fees you pay. Redemption fees are different from other mutual fund fees in that they are incurred only as a result of redemption action taken by an individual investor and therefore are applied only to that investor.

Management fees are used to pay for the ongoing expenses that keep the fund operating, such as the portfolio manager's salary, the fund's prospectus, etc. Management fees vary significantly depending on the nature of a fund's investments. For example, actively managed stock funds in which portfolio managers conduct extensive research may have higher fees than passively managed funds that track a particular index. 

So-called 12b-1 fees cover fund marketing and distribution expenses. These include expenses such as broker and trading commissions, advertising, and various service fees. 

Total operating expenses combine management fees, 12b-1 fees, and other miscellaneous operating expenses into one figure often called the total expense ratio. The total expense ratio is a fairly accurate estimate of how much a shareholder may pay annually as a percentage of his or her total investment in a fund. Total operating expenses are deducted throughout the year from the fund's NAV (Net Asset Value) and in effect, reduce the return an investor would otherwise receive.

Regardless of what mutual fund(s) you are considering, it is important to fully understand the variety of fees that may apply. The fees associated with funds can have a considerable effect on your long-term financial portfolio as you prepare for retirement.

Jeffrey Thatcher is a CERTIFIED FINANCIAL PLANNER ™ and director of HVFCU Financial Services, the investment division of the Hudson Valley Federal Credit Union, which is based in Poughkeepsie. 

Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.

¹Source: Standard & Poor's. Example assumes beginning balance of $25,000 and continuous contributions of $100 a month. This example is for illustrative purposes only. Investment results
will vary.

© 2010 Standard & Poor's Financial Communications. All rights reserved.

Securities and advisory services offered through LPL Financial, a registered investement advisor. Member FINRA/SIPC. Insurance products offered through LPL financial or its licensed affiliates. Hudson Valley Federal Credit Union and HVFCU Financial Services are not registered broker/dealers and are not affiliated with LPL Financial.

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