Financial Fees Could Cost Americans $1.1 Million Over Their Lifetime

Most Americans use bank and investment accounts, but they wildly underestimate the cost of doing so — by perhaps more than $1 million over the course of their lives, according to a new NerdWallet analysis.

The NerdWallet analysis included a survey, conducted online by The Harris Poll in June 2018, of more than 2,000 U.S. adults. It asked Americans about the bank and investment accounts they have, unexpected fees they’ve incurred and how they’ve responded to them, and how much they think they’ll pay in fees over the course of their lives.

Key findings

• Almost 9 in 10 Americans (87%) have money in a bank account, and about 3 in 5 (58%) have money in an investment account. On average, Americans think they will pay $2,244 in investment and banking fees over the course of their lives. In fact, they could pay more than $369,000 in lifetime fees for their workplace retirement, IRA, checking and savings accounts, according to the NerdWallet analysis.

• The cost of fees is only a small portion of the amount lost. If these fees were invested, their total value would be $1.1 million, or three times the cost of the fees themselves, assuming a 6% return on investment.

• Almost 7 in 10 American adults (68%) say they’ve incurred a fee on an investment or bank account, and nearly half (48%) have incurred an unexpected fee. Among those who have incurred any fees, over a quarter of them (27%) always just pay the fee instead of taking action to get it resolved.

• Millennials (ages 22-37) are less likely than baby boomers (ages 54-72) to have money in a bank account (80% vs. 95%) or investment account (47% vs. 67%), but millennials are more likely to report that they’ve incurred a fee on an account (73%, compared to 64% of boomers).

Americans think they’ll pay only about $2.2K in lifetime fees

More than half of Americans (53%) are not sure what they’ll pay in fees to manage their bank and investing accounts over their lifetime. The other 47% estimate they’ll pay an average of $2,244, less than 1% of NerdWallet’s estimate of more than $369,000. One in 10 Americans don’t think they’ll pay any fees at all, and 15% think they’ll pay less than $500, even though avoiding fees altogether isn’t realistic for anyone who invests any amount of their savings.

The analysis didn’t include every possible fee in total lifetime costs, but it did cover the major fees for 401(k), IRA, checking and savings accounts. Here are the fees it included, and how much consumers could be paying for each:

401(k) account fees: The analysis found that 401(k) fees could add up to a lifetime total of $206,753. The two common 401(k) account fees we included in the analysis are mutual fund expense ratios and administrative fees. NerdWallet’s 401(k) fee calculator can estimate how much you’re paying in employer-sponsored retirement account costs. 

IRA fees: The analysis found that IRA fees could add up to a lifetime total of $144,633. This figure factored in median trade commissions, mutual fund expense ratios, mutual fund transaction fees and mutual fund sales loads from the top online brokers.

Most IRA fees are avoidable if investors choose the right account provider and investments, but mutual fund investors can’t avoid expense ratios, which make up a large portion of this lifetime total. However, they can be reduced by choosing low-cost funds.

Use NerdWallet’s expense ratio calculator to estimate how much you could save by choosing a lower-cost fund.

Banking account fees: Common checking account fees include monthly maintenance, overdraft and ATM fees; a common savings account fee is a monthly maintenance fee. These totaled $13,941 and $3,720, respectively, over a lifetime. NerdWallet’s bank fees calculator can estimate how much checking and savings account fees will cost you over a lifetime.

These fees, particularly the investment-related costs, may make investing seem overly expensive or intimidating. But not investing at all carries a far higher cost. As noted, the lifetime cost of bank and investment fees is more than three times the cost of the fees themselves, due to potential compounding. The best thing for consumers to do? Eliminate or reduce fees where you can, pay the minimal fees you can’t avoid, and invest money over the long term.

Almost half of Americans have incurred an unexpected fee

Getting charged an unexpected fee on an investment or bank account is a common occurrence for Americans. Almost half (48%) say they’ve incurred an unexpected fee — 40% on bank accounts and 19% on investment accounts. In addition, more than two thirds (68%) have incurred some type of fee, either expected and unexpected, on these types of accounts at some point.

Here’s a breakdown of what Americans do when they’re charged any fees:

As you can see, more than a quarter of Americans who’ve incurred an investment/bank account fee (27%) always just paid the fee.

“In general, inquiring about an unexpected fee is worth the effort,” says Arielle O’Shea, NerdWallet’s investing and retirement specialist. “Companies have been known to waive the occasional fee for loyal customers, and it’s always possible a charge was applied to your account by mistake.”

In addition to incurring unexpected fees, many Americans have been charged completely avoidable checking fees. On average, Americans have used an ATM that charged them a fee 2.2 times in the past 12 months, used an ATM outside of the U.S. 0.7 times and used a debit card at least once on an international trip 0.4 times.

When traveling internationally, it’s always best to use a credit card with no foreign transaction fees and keep ATM withdrawals to a minimum, preferably forgoing them entirely.

Millennials are less likely to have money saved or invested, but most likely to say they’ve incurred fees

Millennials are less likely than baby boomers to have money in bank accounts (80% vs. 95%) and investment accounts (47% vs. 67%). However, millennials are more likely to say they’ve incurred a banking or investment account fee, 73% compared to 64% of baby boomers.

Every generation is likely paying some fees for their financial products. Especially when it comes to investment accounts, it’s nearly impossible to avoid fees completely, so millennials may be showing more self-awareness about their account costs than other generations.

Millennials underestimate fees the most — but every generation does it

Millennials think they’ll pay the least in fees to manage their investment and banking accounts over the course of their life, on average, compared to all other generations. Around one-third (33%) think they’ll pay less than $500, and on average, millennials think they’ll only pay $1,811 over their lifetime, compared to $2,573 cited by post-millennials (ages 18-21), $2,479 cited by Gen Xers (ages 38-53), $2,522 cited by baby boomers and $2,006 cited by the Silent Generation (ages 73-90).

While post-millennials assume they’ll pay the most over the course of their lifetime — $2,573 — this is still a huge underestimation when compared to NerdWallet’s analysis of the fees consumers are likely to encounter. Overall, it’s important for Americans of every generation to be more realistic about the costs of maintaining various financial accounts, both so they understand how to reduce these costs and so the inevitable costs don’t deter them from investing.

Younger generations are more likely to incur avoidable fees

The younger generations, particularly millennials and post-millennials, are most likely to incur avoidable or unexpected fees than older generations. According to our survey, millennials have used an ATM that charged them a fee twice as many times, on average, as baby boomers in the past 12 months (3 vs. 1.5) and have incurred three times as many unexpected fees, on average, on their bank accounts (0.6 vs. 0.2).

“Even if a fee doesn’t blow your budget, over time even a series of small fees can add up and start to erode your wealth,” says O’Shea. “It literally pays to make a habit out of identifying and avoiding fees whenever possible.”

Consumer takeaways

Watch out for unexpected fees and question them. Not all fees are legitimate, and many may be unnecessary. “You receive account statements for a reason — read them,” says O’Shea. “That’s where you’ll generally uncover the fees you’re paying. Once you identify a fee — especially one you weren’t expecting — don’t be afraid to ask why it was applied to your account and whether it can be refunded.”

Consider switching bank or investment accounts to save money long-term on fees. It may be worth it to pay a transfer fee or two to get a better long-term bank or investment account. For example, if you keep getting charged fees just for having bank accounts, you may want to switch over to an online bank or credit union. (Bonus: Online banks tend to pay higher returns on savings accounts, so you’ll save money on fees and make more money on interest.) Ditto for investment accounts — all of today’s best online brokers offer competitive pricing that can reduce fees on an ongoing basis.

Avoid or minimize fees, but be realistic about unavoidable costs. While you should absolutely question fees and minimize or avoid them where possible, it’s also important to be realistic. You may be able to avoid bank fees, but investment accounts are going to come with some costs.

The best thing you can do is learn how to reduce fees on your investment accounts and accept the fees you can’t avoid. Whatever you do, don’t allow minimal fees to keep you from investing. Over the long term, you’ll more than make up for the cost in investing returns.

401(k) fees

The mutual fund expense ratio is an annual fee charged as a percentage of your investment. So if you have $500 invested and you have an expense ratio of 1%, the annual fee would be $5. An expense ratio of 1% may not seem like much, but the larger your balance, the higher the impact. For example, if you have $1 million in your 401(k) account and you’re charged 1%, that’s an annual cost of $10,000.

“A 401(k) typically offers a small selection of mutual funds, which means employees can’t easily reduce costs — there may be only one or two fund options in each category,” says O’Shea. “Employees with high-fee plans should contribute at least enough to earn their employer match, then consider an individual retirement account. The funds available through an IRA still carry expense ratios, but the wider selection means you can shop around for the lowest costs.”

The administrative fee is an annual fee that may be charged as a percentage or a flat fee. There’s likely not much you can do about the administrative fee in your company’s 401(k), but it’s good to be aware of how much your investments are costing you.

IRA fees

Trade commissions are charged by a broker when you buy or sell certain investments; mutual fund transaction fees are similar to trade commissions. There are plenty of no-transaction-fee mutual funds available, so you can avoid this expense by choosing the right funds for your IRA.

A mutual fund sales load is a charge or commission on some mutual funds, paid to the person who sold the fund, like the broker or salesperson. Sales loads can be avoided by choosing no-load funds.

Banking account fees

A checking account monthly maintenance fee is charged for the privilege of having the account. This fee can be avoided in multiple ways. Many banks that charge a monthly maintenance fee waive it if you get a certain amount direct-deposited into your account each month or if you keep a minimum daily balance. There are also plenty of banks with free checking accounts — like online-only banks and certain credit unions.

Overdraft fees occur when you spend more than you have in your account. Other than the obvious tactic of keeping your spending in check, you can also opt out of overdraft protection. If you choose not to opt in and then try to use your debit card without sufficient funds, the transaction will simply be declined.

When you visit an ATM not associated with your bank, you may be charged ATM fees. Our survey shows that Americans used an ATM that charged them a fee 2.2 times, on average, in the past 12 months. If you’re paying these fees regularly, you should aim to take advantage of your bank’s free ATMs whenever possible or consider switching to a bank that refunds ATM fees.

A savings account maintenance fee, like a checking account maintenance fee, is charged monthly for the privilege of having an account. This fee can be waived in a few different ways. Many banks require a minimum or average daily balance, or an automatic transfer from your checking account to your savings account. And plenty of banks offer free savings accounts as well.

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from June 6-8, 2018, among 2,036 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Julianne Rowe, [email protected].

For our lifetime calculations, we assumed a starting age for bank accounts of 18 and a starting age for investment accounts of 22. We used a life expectancy of 79 years, based on the CDC’s 2016 life expectancy of 78.6. We assumed a retirement age of 67, which is the full Social Security retirement age for those born after 1959.

We assumed a starting income of $51,022, the overall average starting salary for the class of 2017, according to the National Association of Colleges and Employers. We assumed income increased by 3.5% each year — 2% inflation and 1.5% real earnings growth.

We calculated 401(k) fees by assuming a contribution rate of 6.2% and an employer match of 50% of 6%, both of which we took from Vanguard’s 2017 How America Saves report. We assumed a 4% withdrawal rate starting at the retirement age of 67.

We used an expense ratio of 0.48%, the most recently reported average from the Investment Company Institute. According to a survey from Deloitte, the flat rate is the most common way to pay the administrative fee, and the median per participant fee reported is $50 per year.

We calculated IRA fees by assuming an annual contribution of $4,241, the average 2017 IRA contribution according to Fidelity. As with the 401(k) calculations, we assumed a 4% withdrawal rate starting at age 67. We used a mutual fund expense ratio of 0.63%, based on 2016 data from the Investment Company Institute.

We assumed Americans bought or sold three stocks or exchange-traded funds per year, and were charged an average of $5 per trade. We assumed one investment into a transaction-fee mutual fund per year, at $19.99 per transaction. Mutual fund sales loads may vary from around 3% to 8.5%, so we assumed the average of the two, which is 5.75%.

We assumed investing returns of 6% when calculating the impact of compound interest on the fees.

For checking and savings account maintenance fees, we took the median fees of the five largest commercial banks — Chase, Wells Fargo, Bank of America, Citi and US Bank. The median monthly checking account maintenance fee for these banks is $12 and the median savings account maintenance fee is $5.

The average American incurs 2.07 overdrafts per year, and each costs around $34, according to a 2014 report by the CFPB. The average fee charged by your bank for withdrawing from out-of-network ATMs is $2.01, and there can also be a fee charged by the ATM operator. This average fee is $2.75, according to 2016 data from Informa Research Services.

For other avoidable fees, the median account closing/transfer fee for the brokers we analyzed is $62.50. Venmo charges $0.25 per instant transfer. Credit card processing fees for P2P payments are generally around 3% of the amount transferred.