Retirement savings doomed by high fees

(Money Magazine) -- Question: I have a company managing my IRA, they charge a high fee - up to 2.5 percent depending on the account. I see in their quarterly report that they often don't beat the Lipper averages for certain sectors. With such a management fee, should I expect to consistently beat the averages?

The Mole's Answer: Unfortunately, no. With those fees, you are likely to continue to underperform the Lipper averages. The good news is that I can offer you an easy solution.

You'd be forgiven for thinking that paying an expert to pick mutual funds should lead to great results. And that the best managers would charge the most.

However, in the investing business, you don't always get what you pay for. In fact, the more you pay, the worse your performance is likely to be.

Your fees are "up to 2.5 percent," which means you are paying this amount annually for advice. In addition, it is possible that you are paying hidden fees such as turnover costs within the mutual funds your expert is selecting for you. Those fees don't have to be disclosed.

The Lipper averages you refer to come from Lipper Analytical Services and reflect the average level of performance for all mutual funds in a given category.

Sounds like you have set the bar for your results at average performance, and then systematically failed to hit the bar because of high management fees. At least your manager shows you the comparison - many managers try to bury such disclosures.

Well, if I haven't totally depressed you, let me say that you are not alone. Most of my clients come to me with similar expensive and underperforming portfolios. I often have to tell them to sell out of the expensive funds, potentially triggering an unfortunate tax hit.

With you, however, I have some great news.

Since the funds you inquired about are in an IRA account, you can roll the funds over to a custodian that has far lower costs, without having to pay a dime of taxes. My advice is to do a direct rollover, meaning that the funds go directly from your current management company to a new custodian that will hold your IRA.

Pick one that has access to low-cost mutual funds and will not try to sell you on their market-beating expensive strategy. Custodians I've had great success with include Vanguard, Fidelity, and Scottrade.

You can then build a portfolio using either low-cost index funds or ETFs from Vanguard, Fidelity, or iShares. Alternatively, you can use no-load low-cost active funds from Dodge and Cox or T. Rowe Price. I'm happy to say that you should be able to reduce that 2.5 percent annual fee down to 0.2 percent - 0.5 percent.

You can find many low-cost options in Money Magazine's list of best funds and ETFs (Money 70).

If you need advice on how to construct the portfolio, a financial planner can certainly help. I recommend you use an hourly financial planner (a commission-based planner will encourage too much trading; those who charge a percentage of assets will end up costing too much).

Recommending a portfolio mix should take no more than an hour or two which might cost you $200 - $500.

I also recommend that you design this IRA portfolio as part of your overall portfolio. Too often, we just look at each individual account without taking a step back and looking at the whole picture.

Shifting your paradigm away from the money pit of expert advice on the market to this low cost alternative, is likely to dramatically improve performance and, in the long run, beat the average mutual fund.