A one-percent assets-under-management fee can sound almost trivial. But percentage-based fees grow as the account grows, and the dollars used to pay those fees are dollars that no longer remain invested.

Why one percentage point matters

The SEC’s Investor.gov explains that investment fees reduce the amount of money left in a portfolio to compound. In its current fee illustration, a hypothetical $100,000 portfolio growing at 4% annually for 20 years ends at about $208,000 with a 0.25% annual fee, about $198,000 with a 0.50% fee, and about $179,000 with a 1.00% fee.

See the SEC’s Understanding Fees illustration.

The fee is not just the check you write

There are two effects to consider. First, the fee itself leaves the account. Second, the removed dollars no longer participate in future gains. Over a long retirement horizon, that lost compounding can become as important as the visible fee.

AUM fees can pay for real services

This is not an argument that every advisory fee is bad. A financial professional may provide portfolio management, planning, tax coordination, withdrawal strategy, behavioral coaching, estate coordination and other ongoing work. The useful question is whether the service being received is worth the total cost being charged.

The Department of Labor makes the same broader point about retirement-plan costs: compare the services received with the total cost, and do not assume that cheaper is automatically better.

Ask whether the fee applies to every dollar

Many advisory arrangements charge a percentage of assets under management. If the account grows, the dollar fee generally grows too. That makes it important to ask whether every asset in the account actually requires ongoing management at the same level.

Compare AUM costs with annuity costs correctly

Annuities should not be described as universally fee-free. Different annuity types can have very different economics. A MYGA may have no annual advisory-style fee but can have a surrender schedule. A fixed indexed annuity may include optional rider charges and crediting limitations. Variable annuities can include insurance charges, rider charges and underlying investment expenses.

The right comparison is not “fees versus no fees.” It is what am I paying, what am I receiving, what am I giving up, and what risks remain?

Related: AUM Fees vs. Annuity Costs.

Five questions to ask about any retirement fee

What is the total annual cost in both percentage and dollar terms?
What services are included?
Are there additional fund, platform, rider or plan expenses?
Does the cost rise automatically as the account grows?
What would have to improve in planning, returns, risk management or income strategy for the fee to be worthwhile?

Want a second set of eyes on the retirement-cost picture?

King Life can help you organize the insurance and retirement-income side of the comparison so guarantees, liquidity, fees and income needs are evaluated together.

Request a Retirement Income Review

Educational information only. King Life does not provide individualized securities, tax, legal or investment-advisory advice. Investment returns are not guaranteed. Insurance guarantees depend on the claims-paying ability of the issuing insurer.