How to spot extra fund fees
Target retirement funds are supposed make saving simpler, but some of them have higher fees than you think.
(Money Magazine) -- Question: I know target-date retirement funds have management fees, but they buy other funds (which have their own management fees). So how can I tell the total amount I'm being charged? --Lee Gehrmann, Long Neck, Del.
Answer: You know how you're supposed to read the prospectus before you invest in a mutual fund but no one ever does? Well, this is one time when you really ought to.
You're right about the expenses of target-date funds, which are designed to be no-fuss, single-fund savings vehicles for people who want to retire on or around a particular year.
Because target-date funds assemble their portfolios through other mutual funds, you have to worry about two sets of expenses: those of the underlying funds and any layered on by the target-date fund itself.
And sometimes confusion results: Google Finance says the expense ratio of the Schwab Target 2020 fund is 0.92%, while Yahoo Finance lists it as a mere 0.04%.
That's because Google's data reflect the expenses of both the parent fund and its components, while Yahoo's ignore the costs of the ingredient funds.
To be sure of a target-date fund's total expenses, consult its prospectus - but not its annual report, which may list only the parent-level expenses. (Our two Money 70 funds, from T. Rowe Price and Vanguard, don't add parent-level fees.)
No matter how fees are calculated, watch out for target-date funds with total expenses above 1%, says Morningstar analyst Greg Carlson. "Paying much more than that," he says, "is excessive."
Question: My 22-year-old daughter has a good job, and I've been urging her to put money in her 401(k) plan at work. Since she's been dragging her feet, I'd like to start an IRA for her. Can I do this or is there a better option for me to pursue --Joe Bahr, Juneau, Wis.
Answer: It's a fine idea. And it's easy to execute. The only effort she'll have to make is signing her name on the account application form.
As for what kind of IRA, your best option in this situation is likely a Roth. Being under age 50, your daughter can contribute (or have someone else contribute) up to $5,000 this year to a Roth IRA as long as the contribution doesn't exceed earned income. (The permitted size of a Roth contribution is limited if your daughter's gross income reaches $101,000, and it's phased out completely if she makes $116,000. But hey - you said that she had a good job, not a great one.)
She won't get a tax deduction on the Roth contribution. But that downside is more than outweighed by the Roth's key advantage: Unlike the case with her 401(k) or a conventional IRA, withdrawals from a Roth are tax-free.
"You're setting up an account for her that will never be eroded by future tax rates, which I believe will be going through the roof," says IRA expert Ed Slott.
To keep things simple, just invest in a target-date fund (see above.) And then be patient. Answer Guy, a dad himself, is aware that not all children are grateful for their parents' unsolicited financial advice. But when your daughter admires her Roth in a few decades, she'll see how wise you are.
How does your religion affect your finances? Money Magazine is seeking families willing to discuss the dollars-and-cents expenses involved in practicing their faith - the cost of everything from religious schools and dietary restrictions to tithing and faith-based investment limitations. If interested, please email your name, contact information and family photo, along with a brief summary of your salary, savings and religion-related expenses, to gmannes@moneymail.com. 
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