Scottrade ticked off a lot of people when they added a $17 fee for purchases of mutual funds that aren’t included in their No-Load, No-Transaction Fee (NTF) Fund List. There is a way around most of the $17 fee but it requires systematic purchases or redemptions of at least $100, for which Scottrade will charge $2 per transaction. At first glance, $2 doesn’t seem like that big of a deal. But, with a $100 investment, it represents a 2% front-end and back-end load.
Since the $2 is charged PER transaction, one route to go would be to simply save up the $100 per month and then invest $600 twice a year or $1,200 once a year. This would cut the fee percentage way down ($2 ÷ $600 = 0.33% compared to 2.00% for a $100 transaction). The problem with this strategy is that the money really isn’t working for you during the months while you are saving it up and it also defeats the purpose of dollar-cost-averaging, which is to invest consistent sums over long periods of time in order to decrease risk.
One way around this fee is to simply invest directly with the mutual fund company. You will give up some freedom of choice but most people’s needs could be easily met with a company like Vanguard or T. Rowe Price. Vanguard does have a $3,000 minimum initial investment for their IRAs, which may be a bit steep for someone just starting out. Vanguard also charges an account fee of $10 per fund for IRAs with balances of less than $5,000. Remember that fee is PER FUND, so if you have 2 funds (like the Vanguard Total Stock Market Index and the Vanguard Total International Stock Index Fund) inside your IRA and your account balance is under $5,000, you will be charged $20 per year. This might be a reason to stick with ONE fund until your account has reached $5,000. T. Rowe Price has a $1,000 minimum initial investment for IRAs. They also charge $10 per year PER FUND for IRAs with balances of less than $5,000, which is similar to Vanguard’s policy. Their mutual fund expenses are somewhat higher than Vanguard’s but still low compared to the average mutual fund. And, T. Rowe Price has an excellent reputation.
There are other choices out there and I’m not necessarily saying that you should go this route. No matter what you decide, the most important thing is to GET STARTED saving for retirement.