Rollovers

What’s the best way to buy mutual funds for my IRA on my own?

While financial advisers and 401(k) providers aim their IRA rollover pitches at savers looking for help, discount brokers target the do-it-yourself crowd with a broad menu of investments and a promise of good value. At Schwab you get “access to thousands of mutual funds with no loads and no transaction fees.” TD Ameritrade touts “hundreds of no-transaction-fee (NTF) funds from leading fund families.”

While you may not pay a penny to roll your money into select mutual funds in your IRA at a discount brokerage, the upfront fee of $17 to $76 that you save is the least of your total costs over time. “Don’t get sucked in by the free trades,” says financial adviser Robert Schmansky. “They usually make that back.”

Not Free for All

While discount brokerages let you shop for nothing, they do charge fund companies to be on the free-fund menu. Earning a spot on Schwab’s OneSource list typically costs 0.4% of what’s invested, according to disclosures on Schwab’s website.

Fidelity’s discount-brokerage arm charges 0.35% to 0.4%, company documents show. At TD Ameritrade it’s 0.4%, according to Investment News. “We are encouraging investors to pick the right fund,” says Lule Demmissie, managing director of investment products and retirement at Ameritrade. “We have to cover the economics.”

These business deals create a mishmash of bargains and overpriced options. Schwab, Fidelity, and Vanguard, for instance, offer their low-cost total stock market index funds for free at their own sites.

But once you venture further afield, both in terms of investment choices and where you shop, costs add up (see the table below for how that plays out in certain alternative asset classes).

That’s because the fund companies have to make back the money they fork over to the discounters, so it doesn’t pay for funds with low expense ratios to buy into the supermarkets. “It shapes the platform in a broad context,” says independent fund industry consultant Geoff Bobroff. “Your cheaper funds are not available in all the categories.”

In addition, as a matter of policy, Vanguard and Dodge & Cox don’t pay the fees that would let you buy their funds for free. So you’ll almost never find two of the best-performing fund families’ offerings on a no-fee slate.

Instead, what you’ll often see are funds with high annual expenses. For example, the most popular emerging-markets fund is Vanguard’s $62 billion Emerging Markets Stock Index Fund, which has a razor-thin expense ratio of 0.15%. On the other hand, Ameritrade’s cheapest fee-free emerging-markets option costs 1.15%.

Fee Free

Best Moves

— Buy ETFs instead. Major brokerages also offer commission-free trades on certain exchange-traded funds. While similar promotional deals are in place as with mutual funds, the ultracompetitive nature of the ETF market today means these funds are more likely to be as cheap as any you’ll find shopping outside the supermarket.

— Exploit a loophole. Some discount firms give you a break on systematic purchases, such as automatic monthly investments. At Ameritrade they are free, even if the fund you want to buy isn’t on the no-transaction-fee list. At Scottrade those kinds of trades are just $2.

— Pay now, save later. The fee to buy whatever fund you want ranges from $17 at Scottrade to $50 at Ameritrade to $76 at Schwab. That’s a small price to pay for lower annual expenses over time. Notes Schmansky: “If I am going to hold on to the fund, it’s going to pay off quickly.”

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