The majority of Americans have bank and investment accounts. However, they grossly underestimate the costs of doing so, by up to $1 million per year, according to NerdWallet’s new analysis.
The Harris Poll conducted a survey online of over 2,000 adults in the United States to compile NerdWallet’s June 2018 analysis. The survey asked Americans about their bank and investment accounts, any unexpected fees, how they responded, and what they expect to pay in fees throughout their lives.
Nearly 9/10 Americans (87%) keep money in a bank account and 3/5 (58%) keep money in an investment account. Americans estimate that they will pay $2244 per year in banking and investment fees. According to NerdWallet analysis, they could end up paying more than $369,000 for lifetime fees in their workplace retirement, IRA checking, and savings accounts.
Fees are only a fraction of the loss. These fees would have a total value of $1.1 million if they were invested. This is assuming a return of 6%.
Nearly 7 out 10 Americans (68%) claim to have paid a fee for an investment or bank account. Nearly half of those (48%) said they had incurred an unanticipated fee. Over 25% of those who have paid any fees (27%) prefer to pay it than take action.
Millennials between 22 and 37 are less likely than boomers (aged 54-72) to have money in bank accounts (80% vs. 95%), or investments accounts (47% vs. 67%), but they are more likely to say that they have paid a fee for an account (73% compared to 64% for boomers).
Americans believe they will pay $2.2K in lifetime fees
53 percent of Americans don’t know what fees they will pay to manage their investment accounts and bank accounts. NerdWallet estimates that they will pay $2,244 on average. This is less than 1% of the $369,000. A majority of Americans believe they won’t have to pay any fees. 15% estimate they’ll pay less $500. This is despite the fact that it’s impossible for any person who has invested any amount of their savings to avoid paying fees.
Although the analysis did not include all fees in total lifetime costs it covered major fees such as 401(k), checking, savings and IRA fees. These are the fees that it covered and what consumers might be paying for them:
401(k), account fees: According to the analysis, 401(k), fees could amount to $206,753 per lifetime. We included administrative fees and mutual fund expense ratios as common 401k account fees in our analysis. NerdWallet’s calculator for 401(k), which estimates how much you are paying in employer-sponsored retirement accounts costs, can be used to estimate your actual cost.
IRA fees: This analysis showed that IRA fees could amount to $144,633 per lifetime. This number includes mutual fund transaction fees, mutual fund expense ratios and mutual fund sales loads.
Most IRA fees can be avoided if investors choose the best account provider and invest in the right investments. However, mutual fund investors cannot avoid expense ratios which are a significant portion of this lifetime total. They can be reduced by selecting low-cost funds.
Bank account fees: These fees are common for checking accounts and include overdraft, maintenance, and ATM fees. A monthly maintenance fee is charged for savings accounts. Over a lifetime, these fees totaled $13,941 & $3,720. NerdWallet’s calculator calculates how much you will pay for checking and savings accounts fees over the course of your life.
These fees, especially the investment-related ones, can make investing seem intimidating or too expensive. However, investing in the wrong way can result in a much higher investment cost. The potential compounding effect means that the lifetime cost of investment and bank fees can be more than three times higher than the actual fees. What is the best thing consumers can do? Reduce or eliminate fees wherever possible, pay any fees that you can avoid, and then invest your money for the long-term.
Nearly half of Americans have been hit with an unexpected bill
Unexpected fees on bank or investment accounts are a common occurrence in America. Nearly half of Americans (48%) have experienced an unexpected fee, with 40% for bank accounts and 19% for investment accounts. More than two-thirds (68%) of respondents also said they had incurred an unexpected fee on these accounts.
This is a list of American actions when they are charged fees:
It’s clear that more than 25% of Americans who have paid an investment/bank fee (27%) just paid it.
Arielle O’Shea is NerdWallet’s retirement and investing specialist. She says that in general, asking about unexpected fees is worthwhile. “Companies are known to waive fees for loyal customers and it’s always possible that a charge was applied by mistake span>
Many Americans have had to pay completely unnecessary checking fees in addition to unexpected fees. Americans used ATMs that cost them an average of 2.2 times over the last 12 months. They also used ATMs outside the United States 0.7 times, and used debit cards at least once during an international trip.
Millennials have less money saved or invested than they do to have incurred fees
Millennials are less likely to have money in investment accounts and bank accounts than they are for baby boomers (80% vs. 95%). However, 73% of millennials say they have paid a fee for an investment or banking account, while 64% of boomers are less likely.
Each generation likely pays some fees for financial products. It’s almost impossible to avoid fees, especially when it comes investment accounts. Millennials might be more aware of their account costs than the other generations.
The millennials underestimate fees the least, but it happens to every generation
On average, millennials believe they will pay less to manage their investments and bank accounts than any other generation. One-third of millennials believe they will pay less than $500. On average, millennials expect to pay $1,811 per year. This compares with $2,573 cited post-millennials (18-21), $2.479 cited Gen Xers 38-53, $2.522 cited baby boomers (age 73-90 span>).
Post-millennials believe they will pay $2,573 over their lifetime. However, this is a significant underestimation compared to NerdWallet’s analysis of the fees consumers might encounter. It’s crucial for Americans of all ages to be realistic about the cost of maintaining different financial accounts. This will allow them to understand how to minimize these costs and not let the inevitable expenses deter them investing.
Avoidable fees are more common in younger generations
It is more common for younger generations to be charged unexpected or avoidable fees than those of older generations. Our survey found that millennials used ATMs twice as often as boomers over the past year (3 vs. 1.5), and have paid three times as much in unexpected fees on their bank accounts (0.6 ).).
O’Shea says that even though a fee isn’t going to break your budget, over time even small fees can add up to make it difficult for you to have a habit of avoiding them whenever possible. It pays to be consistent in avoiding fees .”
Takeaways for Consumers
Be aware of unexpected fees and ask questions. O’Shea says, “Account statements are sent for a reason. Read them.” You’ll usually find the fees that you are paying there. If you find a fee, especially one that you didn’t expect, don’t hesitate to ask the reason for it and if it can be refunded .”
Switching bank or investment accounts can help you save money over the long-term. If you are constantly being charged fees for having bank accounts, it may be worth switching to an online credit union or bank. Bonus: Savings accounts with online banks typically offer higher returns, which means you will save money on fees while earning more interest. Online brokers are the best in today’s market, offering competitive pricing and ongoing fees reductions.
You can minimize or eliminate fees but you must be realistic about the unavoidable expenses. While you may be able avoid bank fees, investment accounts will still have costs.
Learn how to reduce investment fees and accept any fees that you cannot avoid. Do not allow fees to stop you investing. You’ll pay more in long-term returns than the investment cost.
The mutual fund expense rate is an annual fee that is charged as a percentage from your investment. If you have $500 invested, and an expense ratio of 1 percent, the annual fee is $5. Although a 1% expense ratio may seem small, it can have a significant impact on your financial health. If you have $1,000,000 in your 401(k), and are charged 1% annually, that would be a cost of $10,000.
O’Shea says that a 401(k), typically has a limited selection of mutual fund options. This means that employees cannot reduce costs easily — there may only be one or two options for each category. Employees with high-fee plans need to contribute enough to qualify for their employer match. After that, they should consider opening an individual retirement account. While IRA funds still have expense ratios, the greater selection allows you to shop around for the best .”
Administrative fees are an annual fee. They can be either a flat fee or a percentage. You can’t do much about the administrative fees in your company’s retirement plan 401(k), however it is important to know how much your investments cost.
Brokers charge trade commissions when you purchase or sell investments. Mutual fund transaction fees are very similar to trade commissions. You can choose the best mutual funds for your IRA by selecting from a variety of funds that have no transaction fees.
A mutual fund sales charge is a fee or commission that applies to some mutual funds. It is paid to the person selling the fund, such as the broker or salesperson. You can avoid sales loads by choosing no-load mutual funds.
Bank account fees
For the privilege of owning a checking account, a monthly maintenance fee will be charged. There are several ways to avoid this fee. There are many ways to avoid the monthly maintenance fee. You can get a certain amount of money direct-deposited each month, or keep a minimum balance daily. Many banks offer free checking accounts, such as online-only banks or certain credit unions.
Overdraft fees are when you spend more money than you have in your bank account. Overdraft protection can be turned off. If you don’t opt in, and then attempt to use your debit cards without sufficient funds available, the transaction will be rejected.
ATM fees may apply to ATMs that are not affiliated with your bank. According to our survey, Americans have used ATMs that charge fees on average 2.2 times in the last 12 months. These fees are something you should avoid if you pay them regularly. You can also take advantage of free ATMs provided by your bank or switch to one that reimburses ATM fees.
Monthly fees are charged for having a savings account. There are several ways to waive this fee. Banks may require that you maintain a minimum daily balance or that your savings account be automatically credited to your checking account. Many banks also offer savings accounts for free.
Other avoidable charges to be aware of
The fees that are included in our lifetime total don’t include all of them, as we have already stated. These fees may apply to your investment and banking accounts. With a little knowledge, you can avoid them.
Inactivity Fee: Avoiding the inactivity fee on checking accounts that you haven’t made deposits or withdrawals for a set period of time can be done by making regular use of your account and closing any old accounts you don’t use anymore.
Exceed activity fee: A fee may be charged by your savings account that is not an inactivity fee. It’s called an excess activity fee. If you make more than six withdrawals or transfers from your savings account within a month, you may be subject to a fee. You can’t avoid this by switching to a different bank account. These limits are federally set. You can limit how often cash is transferred, but you cannot control it. Limit this to six per month.
Transfer fees or account closing fees: If your investments are transferred to a new broker you will likely have to pay transfer fees or account closing fees. You can reduce these fees by keeping account transfers low-cost. If you don’t think that transferring will reduce fees in the long-term it is a good idea not to do so.
Instant transfer fees: Venmo and PayPal offer instant transfer. This means that money can be transferred to your account in minutes, instead of days. Our survey found that Americans used instant transfers 2.5 times per month on average. You can avoid the instant transfer fee by waiting to make the transfer longer, but it is a low-cost fee so it might be worthwhile to get your money quicker.
Credit card processing fees: This is a P2P fee you absolutely shouldn’t pay. In the last 12 months, Americans used their credit cards to pay people with P2P accounts 1.6 times on average. Paying someone using your P2P account with a debit card or checking account will save you this fee.
The Harris Poll conducted this survey online in the United States for NerdWallet between June 6-8, 2018. It included 2,036 U.S. adults aged 18 and over. The online survey does not use a probability sample, so it is impossible to estimate the theoretical sampling error. Julianne Rowe can be reached at [email protected] for more information about the survey methodology including weighting variables, subgroup sample sizes and other details.
We assumed that the starting age to open bank accounts was 18 and for investment accounts, 22. Based on the CDC’s 2016 average life expectancy, 78.6, we used a life expectancy for 79 years. We retired at 67 years old, which is the full Social Security retirement date for people born after 1959.
According to the National Association of Colleges and Employers, our starting income was $51,022, which is the average starting salary for the class of 2017. Our income was assumed to have increased by 3.5% per year, 2% inflation, and 1.5% real earnings growth.
Calculating 401(k), fees was done by taking a 6.2% contribution rate and a 50% employer match of 6%. Both of these assumptions were taken from Vanguard’s 2017 How America Saves Report. Starting at 67, we assumed a withdrawal rate of 4%.
The Investment Company Institute reported that our expense ratio was 0.48%. A survey by Deloitte found that the flat rate is the most popular way to pay an administrative fee. The median annual participant fee is $50.
The average 2017 IRA contribution was $4,241. We used this assumption to calculate IRA fees. We assumed a 4% withdrawal fee starting at age 67, just like the 401(k). Based on 2016 data from Investment Company Institute, we used a mutual fund expense rate of 0.63%.
Assumed Americans buy or sell three stocks or exchange traded funds each year and are charged $5 on average per trade. One transaction fee mutual fund transaction per year was assumed. The $19.99 transaction cost was $19.99. We assumed that the average of both the transaction-fee mutual fund loads, which could vary between 3% and 8.5%, would be 5.75 %.
When calculating the impact on fees of compound interest, we assumed that investing returns would be 6%.
We used the median fees of five of the largest commercial banks to calculate checking and savings account maintenance fees — Chase, Wells Fargo Bank of America Bank of America Citibank and Bank of America Bank. These banks charge a median monthly maintenance fee of $12 for checking accounts, and $5 for savings accounts.
According to a 2014 report from the CFPB, the average American has to pay around $34 per overdraft. Your bank will charge you $2.01 for withdrawals from ATMs that are not in your network. The ATM operator may also charge a fee. According to Informa Research Services 2016 data, the average fee is $2.75
Other fees that could be avoided are $62.50 for account closing/transfer fees. We analyzed the data from brokers. Venmo charges $0.25 for an instant transfer. The amount transferred is usually around 3%. Credit card processing fees are typically around 3%.
NerdWallet, Inc., is an independent publisher and comparison website, and not an investment advisor. This information is provided solely for informational and independent purposes. This information is not intended as investment advice. They are not guaranteed to be accurate or applicable to your particular circumstances. These examples are only for informational purposes and are only hypothetical. For specific financial issues, we encourage you to seek the advice of qualified professionals. Our compound interest estimates are based upon past market performance and do not guarantee future results.