If you actually think the Hamburglar is eating into your retirement funds, I'll give you another free guess.
Answer: Mutual Fund fees which include management fees, advisor trailer fees and commissions.
Management Expense Ratio (MER)
In Canada, we pay some of the highest fees in the world for mutual funds. Management Expense Ratio (MER) fees are taken off each fund in your portfolio and can be 2% to 3% per year. To put this in perspective, for a portfolio of $100,000 with an average MER of 2.5%, that's $2,500 per year in fees! What's even more frustrating is that those fees are taken from your mutual funds whether the funds have been going up or down. If a mutual fund lost money in a given year for example, then the fund still took 2.5% in fees. Likewise, assuming the mutual fund is able to capture the same returns as the 'market', a 6% market return would mean a 3.5% return to you!
The Compounding Effect of Fees
Many people in the financial industry talk about the power of compound interest. As you earn interest, that earned amount is compounded and so on and so forth. Many use this to illustrate how your investments will grow over time due to the compounding effect. This compounding effect however, also works with fees. Each year, that 2.4% fee is taken off your portfolio and now will NOT be able to compound since it's gone! See below for an illustration from the Toronto Star on the effect of fees on your portfolio.
This chart assumes a deposit of $6,000 per year into a portfolio and 5% return.
Actively Managed Mutual Funds Don't Consistently Beat the Market
Some might look at the 2.5% fees and say "well if i'm paying them 2.5% a year, i'm betting on them getting better performance than their fee". The problem is that there are numerous studies that show that as an aggregate, actively managed funds do not beat their benchmark market over the long term. In fact, as a whole, these funds under perform the market by roughly their fees! See this Vanguard Article about actively managed funds and their inability to beat their benchmark. There's also a recent Morningtar study that showed that the only proven predictor of mutual fund performance is their fees (not asset allocation, not management style, not strategy). Another way to look at it is that if the market were to return 6% per year, your mutual fund has to get 8.5% per year in order to JUST get market returns or break even with market. It may be possible in the short term, but if you're looking over 20 years, that is highly improbable.
What can I do about these fees?
You can embark on an indexing type investing strategy using low cost index funds. Index funds follow a particular market or benchmark. They do not try to outperform the market as active funds do. You can use Index ETFs to build a Passive Portfolio to achieve market returns at an MER as low as 0.2%. Or you can use a Robo-advisor to help you build and manage an ETF portfolio for a small additional fee.
Safeguard your Retirement Funds
The bottom line is that high fee mutual funds are stealing your retirement funds. By becoming aware of what you are paying in fees and by taking a strategy towards reducing these fees, you can allow your retirement funds to grow without the burden of a 2.5% drag per year. If you are unsure about what you are paying in fees and what the total make-up is of your portfolio, I would suggest hiring an objective financial planner to conduct a Portfolio review.