Zero-fee IRAs can carry more than $1,400 in hidden annual costs

A zero-fee IRA can still cost a participant more than $1,400 a year once the charges buried in the arrangement are counted, according to a PensionBee Inc. white paper reported by PLANADVISER. PensionBee models a $107,000 account balance. Even under low-cost assumptions, annual costs run between $160 and $340. The paper argues that zero-fee platforms have six ways to make money: cash sweep spreads, securities lending, payment for order flow, fund building blocks, administrative and service charges, and advisory fees tucked into fine print.

Cash sweeps matter most. Idle cash often sits in low-yield accounts while the platform keeps the yield. IRAs are especially exposed, the paper says, citing Vanguard research that nearly 30% of rollover balances stay in cash for at least seven years. Providers typically use bank deposit sweeps or money market sweeps. The bank model lets a provider keep the spread between what the bank pays and what participants receive; the money market model charges a management fee. The paper finds providers are moving toward bank sweeps because they are more profitable.

PensionBee founder and CEO Romi Savova says plan sponsors should weigh cash sweep spreads when choosing IRA providers, especially during M&A and automatic rollovers. "We've seen cash spreads upwards of 3.5%," she told PLANADVISER, "which is a hidden fee that the plan sponsor might not be aware of."

For retirement advisers, the white paper doubles as a vetting checklist: ask how cash is swept, who earns the yield, and whether the participant gets most of the return. The paper's own prescription is to keep cash intentional and invest in products where the saver captures the gains. The white paper arrives as advisers and sponsors push for more fee transparency in provider selections. For anyone evaluating a 'zero-fee' product, those questions are worth asking before the account is opened.