Protect Your Nest Egg From a Deluge of Fees

EDITOR'S NOTE: This article was originally published in the November 2011 issue of Kiplinger's Retirement Report. To subscribe, click here.

They're stalking you at the ATM and at the supermarket checkout. They even follow you on overseas vacations.

They're the pesky fees that are inflating your bills and shrinking your bank account. New fees are popping up for checking accounts, paper account statements, and other products and services that were once free. Even worse, poor disclosure -- or deliberate obfuscation -- makes some new fees tough to detect. Unauthorized charges on your phone bill, for example, are easily overlooked but can cost you hundreds of dollars a year.

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The fee frenzy comes at a bad time for retirees, who are already struggling with paltry interest rates and poor investment returns. But while you can't control the stock market's direction or the Federal Reserve's next move, you can wade through product disclosures' fine print to find the fees that are nibbling away at your nest egg -- and save yourself a bundle of money. "As consumers we have to be more proactive about seeking out better deals," says Greg McBride, senior financial analyst at Bankrate.com.

When you do your research, you'll likely discover fees you never knew existed. The disclosure documents for checking accounts, for example, run a median length of 111 pages and include dozens of fees, for everything from foreign check clearing services to "large amount of coins deposited," according to the Pew Charitable Trusts' Safe Checking in the Electronic Age Project.

Bank accounts. Today, just 45% of non-interest-bearing checking accounts are free, down from 76% two years ago, according to Bankrate.com. And in recent months, a number of major banks have cut back or eliminated debit-card rewards programs and experimented with new monthly fees for customers using debit cards to make purchases. Banks retreated from debit-fee plans only after a widespread consumer backlash.

Banks say the new charges have been prompted by regulatory changes. Banks can no longer charge overdraft fees on ATM and debit-card transactions unless the customer opts in to the bank's overdraft services. And new rules that took effect in October reduce the amount that merchants have to pay banks to process debit-card transactions. So banks are trying to recoup the lost revenue by charging consumers directly.

Even seniors who are comfortably retired are rebelling against new fees. Tom Walrod, 61, from Independence, Ore., has the leisure to spend six months each year in southern California and says he doesn't mind spending money "if it's warranted." But when Wells Fargo informed him a few months ago that it would soon charge him $3 a month to use his debit card for purchases, he started searching for a better deal. It turned out a regional bank where he already had an account offered a free debit card -- so he signed up for that card instead. Wells Fargo "was certainly getting energetic at fee collection," he says.

In response, Wells Fargo spokeswoman Lisa Westermann said in an e-mail: "We regularly review our pricing and take into account the needs of our customers, industry trends, the market competition and our cost of doing business." The bank in late October said it was canceling its planned five-state pilot test of debit-card fees "as a response to customer feedback the bank has received."

In many cases, monthly checking-account fees will be waived if you maintain a certain minimum balance or sign up for direct deposit of a paycheck or Social Security benefit payments. But the fees are growing, and the hurdles to avoid them are getting higher. The average monthly non-interest checking account fee is $4.37, up from $2.49 last year, and the balance required to avoid it has more than doubled, to $585, according to Bankrate.com.

If you can't find a free account at your current bank that fits your needs, shop around at competing institutions. Many community banks, credit unions and online banks still offer free checking.

And it's still possible to find no-fee checking accounts at major banks. In late September, USAA Bank announced that it remained committed to free checking. Also keep an eye out for special seniors' checking accounts. TD Bank, for example, offers an interest-bearing checking account to customers age 60 and older that comes with some discounts and fee waivers.

Bank customers hoping to sidestep fees must also resist the hard sell for services they probably don't need. After the new overdraft rules kicked in last summer, banks did "a lot of very aggressive marketing" of overdraft services, which allow transactions that overdraw your account to go through but also allow you to get hit with a fee, says Susan Weinstock, director of Pew's Safe Checking project. And the average overdraft fee set a new record at nearly $31 this year, up 1% from last year, according to Bankrate.com. The best approach for most consumers is to not opt in for overdraft services. That way, if you happen to overdraw your account, your ATM or debit-card transaction will simply be declined -- and you'll avoid the fees.

Credit cards. Given the growing fees and dwindling rewards for checking accounts and debit cards, consumers who are disciplined about paying balances in full each month might want to reach more often for a credit card.

Credit cards' rewards programs tend to be more generous than debit programs, and a law that took effect in 2009 is helping to rein in credit-card fees and rates. The Credit Card Accountability, Responsibility and Disclosure Act, known as the CARD Act, prohibited arbitrary interest-rate increases and placed new restrictions on penalty fees, such as those for late payments. This year, 95% of credit cards surveyed by Bankrate charge no annual fee, up from 90% last year.

Credit-card users still have to step carefully to avoid some fees. Many consumers with strong credit are receiving offers of 0% interest rates on transferred balances. But those deals often come with balance-transfer fees of 4% to 5% of the balance, rather than the 3% that was once standard, McBride says.

Foreign transaction fees are also increasing or being applied to more types of transactions, McBride says. Traditionally these fees have been charged on foreign-currency transactions made outside the U.S. But now the fees may apply to any transaction outside the U.S., even if it's in U.S. dollars.

One major issuer that does not charge such fees is Capital One. Frequent travelers might also consider rewards cards that waive these fees and let you rack up points that can be redeemed for hotel stays, flights and other perks. The PenFed Premium Travel Rewards American Express Card, for example, charges no annual fee or foreign transaction fees, and card holders earn five points for every dollar they spend on airfare purchases.

401(k)s and mutual funds. Regulators are shining some light on the bewildering world of 401(k) plan fees. Under new U.S. Department of Labor rules, 401(k) participants next year will start receiving annual disclosure of plan administrative expenses, such as record-keeping fees, that are charged to their accounts. Workers also will receive a chart showing the expenses for each investment option both as a percentage of assets and a dollar amount for each $1,000 invested.

When workers see the new fee disclosure, "it will be a surprise how many hands are in their account," says Ryan Alfred, president of retirement-plan research provider BrightScope.

To get a sense of whether your plan fees are high or low, check out the free Personal 401(k) Fee Report at BrightScope.com. Once you've identified your 401(k) accounts and investment holdings, the report shows how your fees stack up against low-cost plans of comparable size -- and the impact any excess fees may be having on your retirement balance.

If your fees are on the high side, you can focus your investments on the plan's cheapest options. You can also lobby your employer to include more low-cost funds or even to switch to a cheaper plan provider -- a move that could create big administrative cost savings for all plan participants. If you have left the 401(k) behind at a former employer, it often makes sense to roll the money to an IRA, where you can choose from a universe of low-fee options such as index-tracking mutual funds.

When selecting mutual funds, take a look at the fund's expense ratio, which is the percentage of assets deducted each year for management and other costs. Since they take a direct bite out of fund returns, expense ratios are strong predictors of fund performance. Investment-research firm Morningstar analyzed mutual fund performance over various time periods ending March 2010 and found that in every asset class, over every time period studied, the cheapest 20% of funds outperformed the priciest 20%.

To see how fees will affect your own fund investments, check out the Financial Industry Regulatory Authority fund analyzer at www.finra.org (click on "Investors"). Also, Morningstar's new "fee level" data show how a fund's expenses compare with those of similar funds. A large company no-load fund, for example, will be compared against other large company no-load funds. To see the data, type your fund's ticker symbol into the quote box at Morningstar.com. If the fee level is listed as "low," the fund is among the cheapest 20% of comparable funds.

Phone bills. It's not exactly a page-turner, but your phone bill is required reading if you're hoping to avoid some insidious fees. Unauthorized or deceptive charges on customers' phone bills are known as "cramming" -- and they're running rampant. The charges are often initiated by third parties, and may be for anything from Web hosting to horoscopes. Phone companies place more than $2 billion worth of third-party charges on customers’ bills each year, and a substantial chunk of those charges are unauthorized, according to a recent report from the Senate Commerce Committee.

Cramming may appear on your bill as relatively small charges, say $2 or $3 a month, listed under labels such as "service fee" or "voicemail." Often, companies initiating the charges are not offering legitimate services but are able to enroll "customers" using widely available information such as phone numbers, according to the Commerce Committee report. Telephone companies get fees for allowing the third-party charges onto customers' bills.

Unauthorized charges are also a growing concern for cell-phone customers. More than 20% of cell-phone bills include third-party charges, according to Validas, a Houston firm that analyzes wireless billing. Those charges tend to appear as fees for downloads or premium text services.

If you want to avoid unauthorized fees, "scrutinize your phone bill for odd little charges, often less than $10 and not round numbers, from companies you've never heard of with cryptic names," says Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group.

If you see an unauthorized charge, call the company that charged you or your telephone company to ask that the charge be removed. To file a complaint with the Federal Communications Commission, go to www.fcc.gov/complaints or call 888-225-5322.

Travel. Your best bet to avoid fees on your next vacation: Travel light.

U.S. airlines collected $3.4 billion in baggage fees in 2010, up 24% from a year earlier, according to the federal Bureau of Transportation Statistics. And the fees aren't always limited to checked bags. For carry-on bags that don't fit underneath the seat, Spirit Airlines charges $30 at booking or $35 at check-in.

While many airlines now charge roughly $25 to check a bag up to 50 pounds on a domestic flight, "the overweight charges are what really get people," says George Hobica, president of Airfarewatchdog.com. Major carriers such as American Airlines, Continental Airlines and United Airlines now charge roughly $400 or more to check bags over 70 pounds on some international flights.

For some trips, it may be more economical to ship your bags via FedEx or United Parcel Service. "You can save money, and the tracking is better and the insurance is better," Hobica says.

Some airlines also charge for booking flights over the phone, advance seat selection or even showing up at the airport without a boarding pass printed at home. New U.S. Department of Transportation rules require airlines to prominently disclose on their Web sites the fees for baggage, meals, upgraded seating and other optional items.

Online tools to help you compare fees before booking include the flight-search tool at TripAdvisor.com, which has a "fees estimator," and FareCompare.com, which offers charts comparing airlines' fees for baggage, pets, seat selection and other items.

Total fees and surcharges collected by U.S. hotels, meanwhile, are set to hit a record $1.8 billion this year, predicts Bjorn Hanson, dean of New York University's Tisch Center for Hospitality, Tourism and Sports Management. "Resort fees" of, say, $20 per person, per night, are often not included in the advertised rate. The resort fee is meant to cover various amenities such as use of the pool or business center, but guests generally get hit with the fee even if they don't use these services.

And it's becoming more common to see fees for holding luggage after checkout, commonly $2.50 per bag, and mini-bar restocking fees of $2.50 to $5.95, Hanson says. When booking a room, he suggests, ask about any automatic fees or surcharges, and jot down the reservationist's name and number -- in case of any surprises at checkout.