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When investors consider mutual funds, they often hear warnings about the impact of fees and expenses on returns. But these seem invisible to investors, so what really is the impact?

A mutual fund’s fees and expenses may be more important than an investor might realize. Ads, rankings and ratings will often emphasize how well a fund has performed in the past. But according to the Securities and Exchange Commission (SEC), studies show that the future often is different. Fees and expenses can be a reliable predictor of mutual fund performance.

When considering a mutual fund, one of the most important numbers is the expense ratio, which tells you how much the fund costs. The ratio shows how much of the fund’s assets are paid to the portfolio manager and for other operating expenses. Typically, a fund pays an average of 1.5 percent of assets annually.

Three things typically figure into this ratio. The investment advisory fee pays the managers of the fund, which accounts for .50 to 1 percent. Then, administrative costs cover services such as record keeping, mailing and maintaining a customer service line, which can range from .20 to .40 percent. And often a fund will charge a 12b-1 distribution fee, which covers marketing, advertising and distribution services. This ranges from .25 percent to 1 percent of assets.

The upper range of these fees shows how high an expense ratio can be. And even though the fee seems to be just a few percentage points, it is charged in down years, when it can represent a significant slice of the return. Also, over time, the fee can cut the ultimate return by nearly 50 percent, according to one analysis. With an initial $10,000 invested after 30 years of 10 percent returns (a bit optimistic, perhaps), the fund has made $174,494, but with a 2.5 percent expense ratio, it has lost $86,944, according to an analysis by Moolanomy.com.

But even that isn’t the bottom line. There are still transaction fees incurred by the buying and selling of assets in the fund that go unreported, and that can double or triple the cost, according to Richard Kopcke of the Center for Retirement Research at Boston College.

Of the 100 largest stock funds held in defined contribution plans as of December 2007, trading costs averaged from 0.11 percent of assets annually in the quintile with the lowest costs to 1.99 percent of assets in the quintile with the highest costs, with a median of 0.66 percent, Kopcke found. But it is difficult for average investors to determine this percentage, he said.

The SEC has not been able to develop ways to report this percentage in the same way an expense ratio is reported, partly because fund managers say the number is too difficult to determine. One way to get an indication of the percentage is the fund’s turnover. The percentage of turnover shows at what rate stocks in the fund have been replaced. A high turnover rate would mean more fees.

The SEC last year required fund managers to disclose one year of turnover at the front of a prospectus in addition to the already required five years of turnover disclosed in the financial highlights section, according to a March 1 Wall Street Journal article. Turnover of more than 100 percent can indicate trading costs may be high, the Journal reported.

When people are working, they might not realize how big an impact taxes will have on their retirement lifestyle. Taxes end up being among the most significant expenses seniors face.

Once you start tallying up the federal, state and local taxes, you can see you have to be aware of how to mitigate the impact. One way is to choose a place to retire that does not have onerous state and local taxes.

For example, nine states have no state income tax, according to the Federation of Tax Administrators. They are  Alaska, Texas, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming. (In New Hampshire and Tennessee, income tax is limited to dividends and interest income.)

According to the Tax Foundation, the states with the highest tax impact are Maine, New York, Ohio, Minnesota and Hawaii. The ones with the lowest are Alaska, New Hampshire, Delaware, Tennessee and Alabama. The foundation also says that Americans will pay more in taxes in 2010 than they will spend on food, clothing and shelter combined. Another factor to consider, if you have a large inheritance to leave, is whether the state has an estate tax.

If you move, the good news is the tax impact of selling your home is less these days. That’s because Congress changed the rules in 1997. According to the book The New Retirement, by Jan Cullinane and Cathy Fitzgerald, “Some or all of the gain on the sale is not taxable as long as the taxpayers owned the house as their principal residence for at least two years during the five-year period ending with the date of the sale. The amount of gain that is not taxable is limited to $250,000 for a single taxpayer (or a single taxpayer limited separately) and $500,000 for a married couple filing a joint return. Significantly, unlike under the old law, this gain is eliminated from taxable income and is not deferred to reduce the tax basis of any replacement residence.”

Cullinane and Fitzgerald also wrote that the sellers do not have to buy a replacement principal residence, so it especially benefits those wanting to downsize.

New investors will quickly run across the terms small-, mid- and large-cap companies, and they might wonder why a company is wearing a cap – of any size.

The term means market capitalization – the market value of all of a company’s existing shares. It is basically a company’s shares multiplied by the current market price of one share. Investors gauge a company’s price by this rather than by sales or assets. It is also an effective way to see how the economic downturn of 2008 affected the financial world. The total market capitalization was as high as $57.5 trillion in May 2008, slid to $50 trillion in August and then went down to $40 trillion in September 2008, according to the World Federation of Exchanges.

There are no hard rules about the values of each designation. One gauge says small-caps are less than $2 billion in value, mid-caps are up to $10 billion and large-caps are more than $10 billion. Others say mid-caps start at $5 billion and small-caps start at $1 billion. And still others have added more categories: mega-caps, more than $200 billion; micro-caps, $50 million to $300 million; and nano-caps, below $50 million.

The size makes a difference in investor expectation. Small-cap stock values can grow or shrink quickly. The gain may be great, but so is the risk. These companies can grow into mid- and large-cap companies, taking investors along for the ride. But they also have less to fall back on when times are tough. They can drop in a hurry, again taking their investors with them.

Large-cap companies, which make up half of total market capitalization, tend to be steady in their performance. They are usually the companies that dominate their industry and are not likely to grow any more enormous by percentage, or to shrink, for that matter. These entities are often devoted to maintaining their position. So the investments are usually steady.

Mid-caps are considered a mix of small-cap and large-cap. They often have ambitions to grow into a large-cap, but that drive can also lead them to take risks. The companies are still substantial and are not likely to take ill-advised risks.

Investors should assess their risk tolerance before deciding to invest in stocks. Then they can determine which class of companies to put their money into. Many mutual funds specialize in different groups, so investors can take advantage of company size characteristics but spread the risk at the same time. The funds that track indexes such as the S&P 500 focus on large- or mega-cap companies, which offer stability and slower growth. They usually stumble only in significant downturns such as those after the 9/11 attack and the financial meltdown of 2008.

An IRA account can be passed on by its owner to a spouse or a non-spousal beneficiary when the owner dies. But the treatment of the two types of beneficiaries is different, and knowing the differences can mean significant tax savings. Advisors recommend making a plan to handle an IRA account inherited from someone other than a spouse.

One main difference between an IRA account inherited by a spouse and one inherited by a non-spouse is that the spouse can roll it over into either an existing or a new IRA account and continue contributing to it. If the spousal beneficiary is below the age of 59½, he or she can take funds from the inherited IRA without paying a 10 percent penalty for early withdrawal.

Previously, non-spousal beneficiaries had no other option but to take a lump sum distribution from an inherited account and pay the tax consequences. This is no longer the case. Under the Pension Protection Act, a non-spousal beneficiary can also roll over an inherited account, but only directly (trustee-to-trustee transfer) to a new IRA account. The non-spousal beneficiary will not be subject to taxes on the inherited IRA until he or she receives distributions from the account.

However, the new account cannot be in the non-spousal beneficiary’s name, and the beneficiary cannot make any contributions to the inherited IRA. For instance, the new account could be in the deceased IRA account owner’s name: John Smith, deceased, IRA f/b/o Jane Anderson (beneficiary).

The direct rollover must take place by Dec. 31 following the year of the death of the IRA account holder. However, if the inherited IRA has a stretch option, the rollover can occur anytime after the account owner’s death  —  as long as the non-spousal beneficiary took out the required minimum deductions.

In the case of a non-spousal beneficiary, any required minimum distributions made by the deceased owner are deducted from the total amount that may be rolled into the new IRA. If the owner of the IRA died before making the required minimum distributions, the IRS may use either the five-year rule or the life expectancy rule to determine how much must be taken out before rolling the remainder into the new IRA.

The IRS rules that apply to inherited IRAs and rollovers are complicated, and it’s best to consult an accountant or financial planner.

Men and women are not equal when it comes to retirement risk. Women face a higher chance of outliving their assets and experiencing poverty in old age because they have longer life expectancy, exhibit lower risk tolerance and make less income than men.

On average, a woman’s life expectancy is three years longer than a man’s, and 30 percent of women now age 65 can expect to reach age 90. That means women need to save more to fund a longer retirement.

Women are more likely to spend some of their retirement years on their own as they outlive their spouses or because of divorce. This makes retirement more expensive. Almost 40 percent of older women living alone depend on Social Security for almost all their income. If their Social Security benefits were taken away, more than 50 percent of older women living alone would be living in poverty.

Some of the challenges that women face in retirement can be traced back to their working years. Women have less income than men, earning an average of 77 cents for every $1 earned by men. This translates to a loss of more than $300,000 over a lifetime.

Women also spend fewer years working than men. In a 15-year time frame, women spend twice as much time as men outside the work force because they interrupt their careers, says management expert Marcus Buckingham. This leads to lower employer-based retirement plan benefits.

In fact, 50 percent of women workers hold relatively low paying jobs without pensions. Those who do have pension benefits receive just 50 percent of the average pension benefits received by their male counterparts, the Women’s Institute for a Secure Retirement reported.

Because the odds are stacked against women, WISER recommends the following strategy to help address gender-based retirement risk:

Consider a guaranteed source of retirement income that cannot be outlived, such as lifetime annuities.

Delay claiming Social Security benefits to increase the level of both spousal and widow’s benefits.

Purchase long-term care insurance.

Plan for an income stream that will continue in the event of a spouse’s death, through life insurance and joint and survivor annuities.

The typical employee welcomes the open enrollment season with as much enthusiasm as he or she would a documentary chronicling the life cycle of a garden slug. Too many employees – 60 percent, according to a survey conducted by Hewitt Associates – don’t bother to study their options and do nothing at all during this time. This forces their employers to sign them up for what they had the previous year. This year, however, may be a little different.

The number of large employers that will introduce consumer-directed health plans (CDHPs) this year went up sharply to 20 percent, from 14 percent last year, according to Mercer, a firm specializing in employee benefits. In fact, some large-employer clients that had previously considered launching CDHPs within the next three to five years will implement them in 2010, says a consultant with Towers Perrin.

Like it or not, it’s time to grasp the basics of CDHPs and Health Savings Accounts (HSAs).

CDHPs are a broad range of health plans that allow their members to use personal HSAs to directly pay qualified medical expenses. The idea behind a CDHP is that employees will act more judiciously, like consumers, comparing health care quality and costs, and negotiating lower prices. Because plan participants are spending their own dollars for health care, it also discourages unnecessary utilization such as emergency room visits for nonemergency care.

An HSA is the most common account under a CDHP, which may also offer Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs).

The HSA is set up in conjunction with a high-deductible health plan (HDHP). Members must be enrolled in an HDHP in order to set up an HSA. Annual HSA contributions are used by individual and covered family members to pay for the cost of the deductible, out-of-pocket expenses and any other qualified expenses. In 2010, employees will be able to set aside as much as $3,050 in an HSA for individual coverage and $6,150 for family plans. Employees over age 55 can also make increased payments until they reach Medicare eligibility.

The funds contributed by the employer and the employee to the HSA are not subject to federal income tax at the time of deposit. The account is owned by the employee and can be used to pay for qualified medical expenses at any time without federal tax liability. HSA funds not used within a calendar year stay in the account, where they earn interest and can be accessed for future use.

The legal and tax information contained in these articles is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning your particular circumstances.