Exploring Condo Living: How Do I Find A Good Homeowners Association?

Where we live, most first-time homebuyers purchase condominiums or townhouses. (I haven’t seen any co-ops?) Besides simply finding a unit that you like, I’ve been worried about having to deal with homeowners associations, or HOAs. There are plenty of horror stories about evil HOAs out there, as outlined by this Yahoo Finance article 10 Things a Homeowners Association Won’t Tell You. They are often cast as petty and heavy with politics:

When one Virginia homeowner asked for permission to hang Christmas tree lights in 1992, the board didn’t like the idea but didn’t know how to prevent it. “We struggled with this one,” says lawyer Benny Kass, who represented the association. “But we finally concluded that the restriction against hanging lights was valid because you were pounding nails into the wood, and that was a fire hazard.” Ho-ho-ho.

…and they’re not afraid to sue you over it:

Experts estimate that in California, 75% of the homeowners associations are embroiled in a legal tangle of some kind. Chicago attorney Mark Pearlstein, who represents associations, figures that 60% of all condo boards and homeowners associations in Illinois are involved in some kind of legal suit.

…or they could simply be ineptly run:

Ron Williams, an engineer with R.J. Moore, a consulting company that specializes in reserve accounting, once worked with a Northern Virginia condominium that had a paltry $100,000 set aside. “Closer to $1.25 million would have been considered healthy,” says Williams. When power-plant equipment gave out in early 1994, the association didn’t have the $400,000 needed to replace it. The solution: A $2,400 special assessment to each of the 170 unit owners and a 22% increase in monthly dues.

It’s almost enough to make me stop looking at them at all! Instead, I’ve tried to make a list of things to try and at least screen out HOAs with obvious signs of problems:

Try to get a copy of the homeowners association agreement and recent meeting minutes. I figure if I am serious about buying a place, I would want to read about all the things I can’t do like replace the flooring, how many units are allowed to be rented out… or if I can put up Christmas lights! Also, I’d like to see in writing exactly what my fees are covering – usually water, sewer, common areas, and basic cable TV. If possible, have an attorney read through it. (It helps if you have friends that are lawyers!)

By reading about recent meetings, I can hopefully get an idea of what issues are currently being debated, and how petty they are. I’m not sure how easy this will be though – whenever I ask the listing agent about HOA-specifics, they always seem off-balance and say something about “Oh, the last owners loved living here, I’m sure they are wonderful”.

Learn about the reserve fund to avoid big assessments. One common nightmare would be to move in, only to be hit with a big assessment for fixing the pool that you’ve never even used yet. I’d want to make sure the reserve is large enough to handle expected and unexpected future maintenance costs. A friend told me you can get a list of all previous assessments if you ask, as well as any planned future assessments. Part of this is also noting the overall age of the building, as well as the existing condition of all the common areas. From the Yahoo article:

When it comes to checking up on a reserve fund, there are two good rules of thumb. First, about 20% to 25% of your dues should go toward the reserve fund, says Robert Nordlund, president of Association Reserves, a California company that specializes in reserve accounting. Second, there should be a long-term schedule for the reserve fund in the annual budget, including a projection of upcoming expenses for each common-area item: elevator repairs, painting, pool maintenance and so on. Reserve accountants suggest that the account should contain no less than 70% of the projected reserve budget. If the account is 30% funded or less, you can expect to be hit with some big assessments down the road.

Try to talk to an existing owner that’s not the seller. Usually there is someone outside playing with their kids or walking the dog. I don’t mind striking up a conversation with a potential neighbor to try and get an insider’s view. On top of HOA questions, I’d ask things like how long they’ve lived here, if it’s been getting better or worse, how good the soundproofing between units is, and if it’s a family-oriented complex.

Ask your buyer’s agent to do some research as well. You have a buyer’s agent, right? Ask if he/she has clients that either live there now or have sold a unit there in the past. If not, have them do some digging and ask their co-agents.

Are you a condo owner? I’d love to hear your experiences and tips on dealing with HOAs specifically.

Unconventional Success: Investing in Core and Non-Core Asset Classes

One of the books I am currently reading is Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen. He is a very successful institutional money manager, having guided the Yale University Endowment to over 16% annualized returns over 20 years. While he has already written a bestselling book about institutional fund management, Pioneering Portfolio Management, this newer book outlines his investment advice as tailored for individual investors. I’m not finished with it yet, but so far I am very impressed. This is one of the few people in the world who could easily say “Here’s how anyone can beat the market!”, but instead he presents a unique argument for building a portfolio using low-cost, diversified, passive components.

One of the ways he separates himself from others is his definition of “core” asset classes in which to invest. Briefly, core asset classes share three main characteristics:

  1. They rely on market-generated returns, not from active management skill (as it is a very rare attribute and hard to separate from luck).
  2. They add a valuable and differentiable characteristic to a portfolio.
  3. They come from broad, highly-liquid markets.

The six core asset classes he identifies are:

Domestic Equity
Foreign Developed Equity
Emerging Market Equity
Real Estate
U.S. Treasury Bonds
U.S. Treasury Inflation-Protected Securities (TIPS)

These are all pretty well-accepted asset classes. The surprise comes when he tells you where you shouldn’t invest. Here are the non-core asset classes which Swensen believes fail to satisfy one or more of the criteria above:

Domestic Corporate Bonds
High-Yield Corporate Bonds
Asset-Backed Securitiesl
(like GNMA mortgage-backed bonds)
Tax-Exempt Bonds
Foreign Bonds
Hedge Funds
Leveraged Buyouts
Venture Capital

Many of these asset classes are very popular! Take corporate bonds. While I can’t present the argument nearly as well here, the basic idea is that they don’t satisfy the “valuable and differentiable” requirement above. People buy corporate bonds over Treasury bonds because they can get a higher yield. But Swensen argues that the slight premium is not enough to compensate for the additional credit risk, lower liquidity, and callability of such bonds. One source of this imbalance is the fact that the interests of the bond issuer (the corporation) are inherently at odds with the bond investor. The corporation wants to minimize the cost of it’s debt, while the bond holder wants the opposite. Compare this with the situation of a stock holder, where both want the company share value to increase.

Possible Portfolio Changes? If you invest any bond mutual funds, you may want to find out what percentage of those funds are in corporate bonds and asset-backed securities. For example, the Vanguard Total Bond Index fund (VBMFX) holds almost 45% in mortgage-backed bonds and only 35% in Treasury bonds. Of course, many young folks don’t have any bonds at all, so this may be a low priority.

Personally, my small bond allocation is 100% in corporate bonds. I always thought that bond markets were very efficient in dealing with credit risk, and that duration and sensitivity to interest rates mattered more than the type of bond. I will have to do more reading on this topic, but it may be more prudent to switch to Treasury bonds/TIPS and instead take any additional risk by adding more equities exposure.

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Bank Bonuses: $100 at Bank of America, $50 at Wachovia

Could you use a new checking account at one of the big banks? Reader Susie provides some incentives for two accounts with no minimum balance or direct deposit requirements:

$100 Bonus from Bank of America for opening a MyAccess Checking account. The fine print suggests that you need a BofA credit card to qualify.

You will receive your $100 credit to your new account within 50 days of opening your new personal checking account online. […] This is a special offer to Bank of America credit card customers and only valid only for new MyAccess Checking? accounts. You must use the Offer Code CH100CTA and fund your account with the $25 minimum opening deposit requirement within 30 days in order to qualify for this offer.

$50 Bonus from Wachovia Bank for opening up a Free Checking account.

To be eligible for the offer, you must open a new Free Checking account online in good faith between 6/30/2007 and 10/31/2007 by clicking the ?Get Offer? button on this promotional landing page. By doing so, you are eligible to receive a $25 bonus for depositing at least $100 in new funds into the account as well as an additional $25 bonus for posting $100 in direct deposits into the same account, within 90 days of the account opening date.

Costco Food: How We Pre-Plan A Month Of Fast And Easy Meals In Just One Trip

The last several weeks have been very hectic, and we just managed to visit our “new” Costco after moving. It may be a horror for some to hear, but sometimes a corporate chain can really give you a nice feeling of familiarity. While pushing the cart through the wide aisles, I noticed that I missed our monthly Costco run. In particular, we seem to have developed a routine for the food that we buy. Lest you think I am some sort of food snob that actually has the energy to cook a full meal every night, here are some products that we get that provide us with quick and easy meals for weeks. Don’t expect any gourmet tips here!

Today: Eat Lunch at Costco Food Court. My wife and I usually split a Hot Dog & Coke and a Chicken Bake. The hot dog comes with sauerkraut, which is key. I forget the total now, but I’m pretty sure it’s less than $5. You can buy the hot dogs and chicken bakes in the freezer section, but for health reasons we restrict our intake of these delicacies. If you still aren’t satisfied, you can always graze on the samples that they are giving out in the aisles.

Next Week: Buy Some Hot Dishes To Go. We always leave with a rotisserie chicken and one of the spinach salads. Much has been written about the many things you can do with that chicken, from quesadillas and sesame noodles to chicken salad and quiche.

First 2 meals – Chicken breast with spinach salad
Next 2 meals – Shredded chicken inside quesadillas with cheese and salsa
Last 2 meals – Take the bones and remaining meat on the bone, and make homemade stock for chicken and rice congee.

Long Term Staples: Minimal prep, on the table in 15 minutes or less

  • Krusteaz Pancake Mix – Add water, stir, and spoon onto the griddle! Stir in chocolate chips, bananas, or berries if you got ’em.
  • Individually Frozen Chicken Tenders – Lean protein, no preservatives, just chicken and salt. Although more expensive than the breasts, the tenders are more easy to portion, and cook faster without any extra work. Just grill/broil/saute and top with something: cream of mushroom soup, cream of chicken soup, cheese, gravy.
  • Individually Frozen Salmon – Similar to chicken, just grill and add lemon juice.
  • Paradise Valley Creamy Mash Potatoes – Instant mashed potatoes, but the only ingredients are potatoes, butter, and salt. Again, no additives or preservatives. Just add boiling water and butter, and you’ve got some carbs!
  • 20 lb sack of rice – More tasty carbs via my trusty and easy-to-clean Zojirushi rice cooker.
  • Dried pasta – Usually they have some sort of variety pack of shapes.
  • Kirkland Four Cheese Ravioli – These are well-stuffed and all you have to do is boil water. Goes great with just olive oil or butter and some capers, or add some jarred sauce.
  • Kirkland Lasagna, as well as other similar pre-cooked dishes – Just heat and serve.
  • Frozen Pizza – Although we usually prefer the Trader Joe’s frozen pizza, Costco has some decent options as well.
  • Frozen or Fresh Vegetables – They often have pre-cut carrots, blue lake beans, broccoli, and spinach in addition to their bagged frozen stuff. Just steam or stir-fry with some garlic.

Mix and match as needed, and you’ve got 20 different meals without breaking a sweat! For slightly fancier ideas, check out the recipes in the official Costco Cookbook.

3 Ways I Live Frugally Without Feeling Deprived

Fellow blogger Mapgirl recently shared a list of what she does to live frugally. What I liked about it was that the list was done in a very positive light. Too often when you read about living frugally it feels like you are depriving yourself of something… I don’t buy this, I don’t buy that. I find it easier to save when I focus on the benefits of the action, in addition to saving money.

Everyone has their own way of living below their means (I absolutely refuse to give up my TiVo), but here’s a sample of things I do which don’t constantly remind me that I’m being frugal:

Buy dependable, quality, used cars. My wife and I both drive cars which were acquired when they where 3-5 years old, after most of the deprecation had kicked in, but while there was plenty of life left in them. Both have plenty of horsepower, run reliably and have never broken down, and have all the common features like keyless entry, air conditioning, and power everything. Accordingly, our cars depreciate in value by $1,000 a year or less, which keeps our total cost of ownership very low. Since the values are only about $3,000-$6,000, our insurance payments are only about $100 a month for both.

Take advantage of public parks and amenities. You’re already paying for them through your tax dollars, so why not also try to take advantage of all the public recreation opportunities available to us. For example, you could take a hike in a nearby trail, pack a bag lunch and take a picnic by a nearby lake/river/ocean, play some tennis at the park courts, or jog on the local high school track. Drive to the beach! Recently, we have also discovered the local public pool. I stopped looking for a local gym when I found that I could get a great workout by swimming laps for 30 minutes a day.

Along that same vein, I remain a huge fan of the public library and all it’s online perks.

Making cooking at home fun. Everyone knows that cooking at home is cheaper than eating out. But you can actually eat better tasting, customized food too if you’re willing to try. I buy fancy honey wheat walnut bread and make my own extra-thick peanut butter and jelly sandwiches – still less than $1 each. (I secretly like smoked turkey and peanut butter sandwiches as well.) Look up the recipe to real macaroni and cheese (not from a box!) and make it using all the cheddar you like…. so good. Buy some random veggies and try to make your own tempura. Craft a quick burger with whatever funky toppings you want – I like mine with slightly burnt onions and gobs of hot, melted blue cheese.

My next step is to get up the courage to invite my friends over to eat my cooking instead of meeting at a restaurant, I’m always afraid it’ll taste horrible but they’ll be too nice to tell me…

Did I Refer You To Sprint SERO or Scottrade?

Whenever I participate in a referral program, although it also benefits me, I am always thankful for the readers who let me refer them. So when I run out of referrals, I try to “spread the love” by directing future requests to those that allowed me to refer them initially. I have been doing this informally up until now, but I want to set up a more direct and systematic way to do this over the weekend.

Here are two programs that I can’t provide referrals for anymore. If I referred you to these referrals initially, and you are willing to release the needed information in order to fill future requests, please let me know and I will add you to the rotation. If I don’t get enough response, I will open it up to all readers. Please don’t ask for referrals in the comments, e-mail me instead. Thanks!

Sprint Referral Program – For new accounts, allows both referrer and referred Sprint wireless customers to both earn $25. I will need to share your Sprint wireless phone number.
Scottrade Referral Program – For new accounts, allows both referrer and referred to earn 3 free stock trades. I will need your full name and e-mail address, and preferably the address of your local Scottrade office.

$50 Signup Bonus For TradeKing Brokerage With Referral

TradeKing.com has a new $50 sign-up bonus expired! for new accounts as part of celebrating National Friendship Day. If you get a referral from an existing account holder, fund it with at least $1,000, and make a trade before August 30, both people will get $50. I actually opened an account several months ago for the sign-up bonus myself, and am up over 20% with my single share of VDE. 🙂

Anyways, if you’d like a referral just hoot me an e-mail, and I’ll be happy to send you one. I only need your e-mail address. This offer expires on August 9th.

For more information on TradeKing, please check out my TradeKing Broker Review.

Tip Jars Are Everywhere! Should We Fight Back Or Give In?

I was buying some snacks from a local convenience store today, and lo and behold, a tip jar! You want me to tip you for… what, taking my money and giving me change exceptionally well? Coincidentally, I just ran across this Christian Science Monitor article titled What’s up with all those tip jars? which ranted about the same thing:

I have yet to be shamed (if this is the right word) into casting my coin into the tip jar fountain. Perhaps it is the scientist in me, but I try to reason the situation out like this: I call in my order to the Chinese restaurant. I drive there to pick it up. I pay the menu price. Why on earth would I pay more than they are asking for their product? Doing so strikes me as positively un-American.

I used to be really annoyed by all these tip jars, silently making be feel bad for not tipping. You can’t even boycott places with tip jars anymore, because you’d die of hunger! But then I had a revelation. Unlike the quote above, I think it’s completely American! It’s simple capitalism – they have nothing to lose by putting it out there. However, customers have the same choice not to tip someone who is already being paid a full salary. Waitpeople are paid a lower wage because they are expected to make up their income on tips. Cashiers and food preparers are not. Still, I do put money in the tip jar on occasion. The same article above touches on why at the end:

As a teacher it had never occurred to me to put one of these jars on my desk. And so I decided to conduct an experiment. The next day, when I entered the classroom, I casually pulled a small jelly jar from my bag and placed it on my desk. On the front was a neat label, “Tips.” I didn’t do anything else to draw my students’ attention to it and ignored the low mumble that the act incited.

At the end of the lecture, as the students filed out, I’ll be darned if a few of them didn’t throw their loose change into the jar. I gave it all back, of course, but their quiet gestures did lend me a small thrill, a sense that my teaching efforts were worth more than my salary alone.

Well, I still don’t put money in tip jars, but I have put one of these jars in my son’s room. Sometimes, when he does something positive or helpful without being told, I throw a couple of quarters in. He appreciates this and looks for opportunities to lend a hand wherever he can. I think that as long as we can keep this under control, I will not have created unreasonable expectations. But mum’s the word.

To me, a tip jar is a voluntary thank you for something perhaps over and beyond what is expected. I usually only tip at pick-up or take-out restaurants where I am a regular. They may know how I like my favorite dish, always give me extra fries with my order, or simply always making me feel welcome. (Always being happy when you work in any customer service field is a great feat in itself.) But if you just fulfill your minimum job duties? I feel zero shame in not tipping.

I know you have an opinion on this. Share it below!

Vanguard Group Found To Be Leader In Client Loyalty

I know I haven’t finished my 401k rollover series yet, but whenever a family friend asks where they should put their old retirement plan assets, I always say Vanguard. They certainly aren’t the only good company out there, but they do have a lot of things going for them:

  • They are not a for-profit company, so their interests are better aligned with the common investor. For example, this way there are no shareholders who might want to raise mutual fund fees in order to increase profits.
  • They don’t pay advisors to sell their funds through load commissions or 12b-1 fees.
  • They offer a wide selection of low cost mutual funds that track many different asset classes.
  • I also put my money where my mouth is, as I have all of my IRAs there. I am always pleased at the high level of customer service that I get from them.
  • In the end, I feel they offer the best chance at superior performance and low-stress ownership over the long haul.

According to this Wall Street Journal article, Few Firms Earn Loyalty of the Wealthy, I am far from alone. Some excerpts:

Affluent investors say they’re increasingly dissatisfied with their mutual funds’ long-term performance and inconsistent returns. In fact, only 11 of 38 top fund families manage to create meaningful customer loyalty, according to a report released by Cogent Research LLC. The Cambridge, Mass., market researcher surveyed 4,000 mutual-fund investors with at least $100,000 in investable assets.

The study showed Vanguard Group with a wide lead in investor loyalty.

The average score was minus-12. The high was Vanguard’s plus-44. Second place went to Dodge & Cox with a plus-29. Schwab came in with 26 points, and T. Rowe Price had 21.

Reader Question: Pay Off Credit Cards vs. Invest Your Money?

I’ve gotten a few variations of this question recently:

I’ve only got about $5,000 in savings and about $4,000 in credit card debt. I’m not sure if I should pay off my cards first before I decide to invest or what. I’m just looking for a way to make my money work harder. – Michael, New Investor

I indirectly addressed this topic in my post titled You Have Some Money. Where Do You Put It?, where the my top 4 were listed as:

  1. Invest in your 401(k), if you have one, up until the match.
  2. Pay down your high-interest credit card debt.
  3. Create an emergency fund with at least 2 months.
  4. Fully fund your Roth IRA.

If you read through the many thoughtful follow-up comments, you’ll see that many people have differing views on this. I’ll try to clarify my own positions here, but although I will try to provide good reasons behind then, I do agree that this is all very subjective. As usual, the ultimate goal is to present all the arguments in order to help everyone better determine their own personal solution.

#1 Invest in your 401(k), if you have one, up until the match.
Many employers offer matching 401(k) contributions. So if you contribute $100 from your paycheck, your employer will also chip in $50-$100. This is an instant 50-100% return… Some would even call this free money! Unless your credit card interest rates are over 50%, mathematically you are ahead by far. In addition, you have now started your nest egg for retirement.

Exception: The benefit of this match gets a little hazy as often you have to work for a number of years before the matched amount “vests”, or officially becomes yours. You may never actually get to keep much of the match if you only work for a year or two, so take your long-term prospects into account.

#2 Pay down your high-interest credit card debt.
Here we reach one critical debate: Paying Down Debt vs. Roth IRA. On one side, we have high interest (say, over 8% right now) debt. On the other, we have the opportunity for tax-free growth.

My argument here is, again, simple math. If on one hand you have money in stocks growing (maybe) at 10% tax-free, and on the other hand you have money shrinking at 18% with no tax deductions, you’re still losing money! Therefore, I feel the best general decision is put all that money towards your debt. Yes, saving now may mean much larger balances later, but remember, here you are choosing one or the other here, and not paying off the credit cards puts you behind.

The counterargument to this is that you only get to put in $4,000 in a Roth every year and that is precious. You can’t put nothing in this year and $8,000 next year. If you are sure that your tax rate to be higher in retirement than now, and you don’t expect to have access to other similar options like a Roth 401(k) or 403(b) in the future, then I can see how putting money towards the Roth may be better.

(Now that I think of it, another reason might be that Roth IRAs are protected in case you decide to wipe out all your credit card debt in bankruptcy court…)

Exception: One should always try to lower their interest rates if possible by calling the credit card issuers directly or, if your credit is high enough, try to get a low interest balance transfer onto another card.

#3 Create an emergency fund with at least 2 months.
Here is another hard question: Where does an emergency fund play into all of this? Overall, I think people should pay down their high-interest debts as much as possible before saving up 6-12 months of emergency funds.

Why? For one thing, if an emergency does occur, many expenses can be simply be put back onto those same credit cards: utilities, food, clothing, medical bills, etc. Other things like rent can be paid via cash advance. Since it’s most likely an emergency won’t occur, you’ll be saving a lot of interest by paying off the high-interest debt now.

The reason I put 2 months down is because I wanted to designate this a “barebones” emergency fund. The actual amount needed depends heavily on the individual: How stable is your job? Do you have disability insurance? Would your parents or someone else bail you out?

Fully fund your Roth IRA.
Although you can withdraw your contributions out of a Roth if you need to, the Roth should be a last resort. Therefore, you have the “barebones” emergency fund first, and then the Roth IRA. Should a Roth be above even a barebones emergency fund? That’s a judgment call. In my mind, a barebones emergency fund is maybe $2,000. Otherwise, you’re literally living paycheck-to-paycheck, during which I would worry about now first before the future and Roth IRAs.

Exceptions: As noted earlier, the Roth IRA is really only better than a Traditional IRA or 401k if you expect your marginal tax rate to be higher in retirement than when you make your contributions. If you expect them to be the same, they are essentially equal, with the Roth taking perhaps a slight edge. Here’s the math showing why… Say you have $10,000 pre-tax income to contribute, 25% marginal income tax rate both now and in retirement, 8% annual return, and a 30 year horizon.

401k (pay tax later):
( 10,000 x 1.08^30 ) [compounding] x ( 1 – .25%[tax later] ) = $75,469

Roth (pay tax now):
( 10,000 x ( 1 – .25%[tax now] ) )x (1.08^30) [compounding] = $75,469

If your tax now > tax later, the 401k comes out ahead. If tax now < tax later, the Roth wins. Please share your thoughts in the comments, if I haven't confused you completely already...

Parental 401(k) Check-up: Do You Know All The Fees You’re Getting Hit With, Mom?

It’s time to examine my mom’s 401(k) plan. The first thing that I wanted to do was to get an idea of what kind of fees she was paying. There are three basic types of fees, according to the Dept. of Labor:

  1. Plan Administration Fees – Like the description states, this is for things like record-keeping, mailing statements, and other accounting duties.
  2. Investment Fees – Often the largest and most hidden, these are fees that are wrapped into the investment options that you are given.
  3. Individual Service Fees – These are for specific things like processing loans or for self-directed investments.

Smaller companies often can’t afford a top administrator like Fidelity or Vanguard, which can absorb most administrative costs. Instead, they must find a cheaper firm (at least for them). Guess where the costs get shifted to? The workers. Thankfully, my mom isn’t subject to any administrative fee, at least that I could find. But investment fees…

Types of Mutual Fund Investment Fees
Investment fees for a mutual fund are usually broken down into

  • Front-end loads – Also known as sales charges or just front loads, this fee is charged when you buy a share of the fund. For example, if you have a 5% load and put in $1,000, only $950 worth of shares is actually purchased. Essentially a sales commission, the $50 goes to the salesman (in this case, the plan administrator). Avoid whenever possible!
  • Back-end loads – Also known as deferred loads, this is essentially the same setup, except that it is charged when you sell.
  • Expense Ratio – Also known as annual management fees, these are ongoing fees charged by the mutual fund company for running the fund. It is usually expressed as an annual percentage of fund’s net asset value (NAV), although the fee is subtracted a little bit each day. The expense ratio may also include a sales portion, called 12b-1 fees.
  • Early Redemption Fees – Supposedly to deter market timing, such fees are usually the same as back-end loads, unless the money is direct back into the fund itself and split amongst the shareholders (instead of going to the fund managers).

What is sneaky about all these fees is that they are usually not marked on your account statements as a fee, and in the case of 401k’s I bet many investors are never told about them and how they can seriously hurt your potential returns.

Do You Know What Share Classes You’re Buying?
Now, of course by law they must give you the prospectuses for each fund. You know, those thick booklets that most people file away, never to see it again. But if you don’t know, dig them up and read them! For one, one mutual fund may have several different shares classes, with different combinations of front loads, back loads, and annual expense ratios. Don’t just assume you are buying the cheapest class, either.

For example, the only Real Estate option my mom’s plan is the AIM Real Estate Fund, Class A Shares (IARAX). I was sad to see that this has a fat 5.50% front load and a 1.29% expense ratio. The Investor Class shares of this fund (REINX) had no loads and 1.27% expense ratio. I don’t know how happy she’ll be to find out that 5% of every dollar she put in was being taken away instantly.

I still have to sort through the other details of the funds like investment objectives and asset classes, but by better understanding the fees, she can already start to choose between her available options more wisely. For instance, your 401k might offer a great International Fund with reasonable expenses, and an S&P 500 fund with horrible expenses. If so, you can buy the better fund in your 401(k) and find a good alternative for the bad one in your other brokerage accounts.