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With retirement funds, the higher the fees, the more money you lose.

Let’s look at a basic example. Let’s say you have $100,000 in a fund earning 5% annually. If you’re paying a 1% fee, you lose $30,000 over 20 years compared to another fund charging only 0.25%. Here are three ways you can cut that annual expense and boost your bottom line.

Invest in funds that charge less.

 

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Not all mutual and exchange-traded funds charge the same fees. Funds that are actively managed charge 1% or more, but there are passively managed funds that charge 0.25% or less. There’s even an index fund lets you own the entire S&P 500 of U.S. stocks for 0.09% a year.

Avoid funds with sales charges.

When you buy shares in an ETF you pay a commission, but if you go through deep-discount brokers or mutual fund houses you can save a lot. Plus, many of their ETFs are commission free. One fee you should never pay though is a sales charge, sometimes referred to as a “load.” These sales charged don’t improve investments and only reduce their value. Keep an eye out for “noload” equivalents. This applies to insurance policies as well.

Stay away from anything with hidden fees.

One way you can do this is by investing in funds through an employer-sponsored plan, like your 401(k). You’re always going to pay administration and management fees and sometimes you’ll see “revenue sharing” which is compensation for brokers, but your employer is legally obligated to tell you what their funds charge. Stay clear of vehicles with “wrap,” “12b-1,” or “rider” fees, and always look closely at variable annuities because they are the worst hidden fee offenders.

Consulting a financial planner

Part of a financial planners job is to help you understand where to find these hidden fees. It’s one of the things financial planners do best. Hidden fees can cost you thousands of dollars. Consult a local financial planner and let them show you how they can protect your principal and keep more money in your pocket. Remember that a financial planner works for you. Your interests come first. The financial planner will sit with you and walk you through your portfolio step by step to help ensure that nothing gets missed.

What is carried-interest?

Carried-interest is a form of performance-based compensation paid to principals at privateequity firms and hedge funds. Creating trusts in their estate plans allows them to transfer this compensation as a gift to their heirs while largely minimizing federal gift and state tax liabilities.

Why does the strategy work?

Carried-interest is a popular vehicle for gifting because it has a low initial value that grows with the fund’s returns and allows the general partner to share the investment fund’s profits.

How is carried-interest compensated?

Often the general partner of a fund is partnership of investment managers. They manage the fund’s assets and charge 2 fees: a management fee worth 2% of the assets and if they earn a return past a certain point, called a “carry,” they collect 20% of profits past that point, or “carried-interest.” The investment managers pay taxes on these fees individually.

What kind of trusts need to be created?

Tax attorneys most often utilize one of two categories of trusts to reduce or eliminate federal gift and estate taxes. The first variety of trusts are certain forms of grantor retained annuity trusts. The other is called a sale to a defective grantor trust. Trusts set up when funds are seeded are most likely to succeed because the carried-interest has such a low value to begin with.

How do you transfer the carried-interest to the trust?

Carried-interest transfers need to be undertaken with an acute attention to detail as the IRS code is not easy to navigate here. Frequently, tax planners will use the “vertical-slice” strategy to sidestep Section 2701 of the tax code. Basically, the carried-interest is never transferred; only the growth on that interest is, so as the asset grows, the value of that growth is given away to heirs.

If you live in the Everett, WA area and are interested in finding out more. Consult a local retirement planning Everett, Washington service.

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