Q&A: The Agony of the Fees

Q:

I'm 43 years old, I currently have my Roth IRA and my 401K with Fidelity. I was very interested in purchasing the fund that you guys recommend (VTWSX) in my Roth. Fidelity offers it but with a $75 initial transaction fee and a $5 fee with each additional reinvestment purchase. I have automatic deposits going into my Roth out of every paycheck and my plan was to purchase additional shares of the fund every 4 to six weeks in order to maximize my dollar cost average. Obviously, a $5 dollar fee every four to six weeks will add up and I don't want to do this. Would you then recommend that I only purchase additional shares once a year? If not, is there a Fidelity fund that you know of that is similar to VTWSX that I could purchase instead?

A:

Ah, the agony of the fees (just be thankful I didn't write "da fees")! Those pesky transaction fees are the only way the brokerage firms can get paid for using stingy, low-cost funds like those from Vanguard. Fidelity does have index funds, just not nearly as many. They don't have a global equity index and seem to have almost ignored the international markets, except with their Four-in-One Index fund (FFNOX) that also include U.S. bonds.

For an equity-only portfolio, I prefer Vanguard Total World Stock Index (VTWSX) and, while the fees are a bit onerous, they are lower than most (after getting past the initial $75). After the higher pain of the first transaction, your typical additional expense from the every six week $5 fee comes to about 9/10ths of one percent on $5,000 annually. That is 3 times the internal expenses of the fund itself.

One obvious solution would be moving your Roth-IRA to Vanguard. They don't have transaction fees on their own funds. Otherwise, if you choose to remain at Fidelity, either take the hit or consider FFNOX and calculate the bond position in relation to the rest of your portfolio.