Fidelity charging new fee on Vanguard assets held in 401(k) plans

The 0.05% fee is ostensibly a response to Vanguard's distribution model, but may also make the company's funds less attractive due to higher cost

Jan 22, 2018 @ 4:59 pm

By Greg Iacurci

Fidelity Investments, the largest record keeper of assets held in defined-contribution plans, has begun charging employers a fee on 401(k) assets held in Vanguard Group investment funds.

Starting this year, Fidelity will charge all new 401(k) clients a 0.05% fee on participant assets invested with Vanguard, which has emerged over the past several years as an index-fund behemoth as investors have moved away from active investing.

For example, a plan sponsor with $5 million in Vanguard assets would have to pay an extra $2,500 to Fidelity.

The fee doesn't apply to existing Fidelity clients and will be billed to the plan sponsor, not the plan participants.

Such a move, which observers say is the first of its kind, is ostensibly a response to Vanguard's distribution philosophy. The index-fund giant is the only fund family that doesn't pay Fidelity for shareholder and administrative services the company provides for access to Vanguard's funds.

Fidelity spokeswoman Nicole Abbott said the company is assessing the fee to address this "disparity" and provide "fairness across all its business relationships." Vanguard imposes some unique operational specs that add significant costs to administer its funds, she said.

Observers say such a fee also appears to be a competitive maneuver that will likely make Vanguard funds less attractive as a 401(k) option — especially among larger employers with big retirement plans — and could herald similar moves by record keepers beyond Fidelity. They also believe it speaks to Vanguard's overwhelming success in amassing 401(k) assets the past several years.

"I've never seen it where a record keeper has singled out one fund company and decided to put a specific fee on that fund company," said Aaron Pottichen, retirement services practice leader at the advisory firm CLS Partners. "It speaks to how dominating Vanguard is right now across the entire 401(k) landscape, and really how threatened everyone is by that."

However, Mr. Pottichen also believes assessing the 0.05% fee amounts to a smart business decision.

"Fidelity is a huge funnel of assets to Vanguard, and Vanguard hasn't had to pay any toll fees to Fidelity," he said. "Fidelity probably sees this as a free ride."

(More: Fidelity, American Century adopting new TDF fee tactic as cost pressures grow)

Fidelity provides record-keeping services for about $1.6 trillion of DC-plan assets, according to data tracked by arjuna-design sister publication Pensions & Investments. That total exceeds that of its closest competitor, TIAA, by more than $1 trillion.

At the same time, Vanguard is the largest money manager of DC assets, overseeing more than $900 billion at the end of 2016, according to P&I data. A decade ago, the top spot belonged to Fidelity; in 2007, Fidelity managed roughly $540 billion in DC assets, while Vanguard managed around $320 billion.

Vanguard spokeswoman Laura Edling said Vanguard's "mutual ownership structure and operating model inhibits us from participating in revenue sharing," and as such the firm doesn't pay platforms or brokerage firms to sell its funds.

Some firms seem to have taken more drastic action in response to Vanguard's distribution model. For example, Morgan Stanley decided to cut Vanguard funds altogether from its wealth-management platform last year.

Philip Chao, principal and chief investment officer at advisory firm Chao &Co., sees Fidelity's move to charge an extra 0.05% as "both defensive and offensive."

It's defensive because Fidelity is currently losing money administering Vanguard funds, absent Vanguard paying for distribution, Mr. Chao said. However, Fidelity is acting offensively by making funds offered by Vanguard, a big competitor, more expensive for plan sponsors.

"Some of it is legitimate," Mr. Chao said. "But primarily they're trying to fight back against losing market share."

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Use arjuna-design' to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

May 02

Conference

Women Adviser Summit

The arjuna-design Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

We are about to enter the next chapter for exchange-traded funds. What do investors expect? What do advisers wants? Jillian DelSignore of JPMorgan Asset Management offers her perspective.

Recommended Video

Channels

Latest news & opinion

These funds have gained more than 10% in just a month

And not all of the funds did it with tech stocks

As Finra elder-abuse rule takes effect, advisers will face awkward conversations

Regulation taking effect Monday requires reasonable effort to find trusted contact, allows brokers to stop fund disbursement.

As Trump prepares for State of the Union, 50% of advisers approve of his job performance

Percentage is 10.3 points higher than the general population approval rating.

As tax season gets underway, clients are looking ahead to how tax bill will affect 2018 returns

Advisers can put strategies in place now to make sure that there will be no hidden surprises this time next year.

Independent broker-dealers are stepping up their game on recruiting from the wirehouses

Independent broker-dealers have narrowed the gap between themselves and the wirehouses and are able to attract more quality brokers from the Big Four.

X

Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting arjuna-design.com? It'll help us continue to serve you.

Yes, show me how to whitelist arjuna-design.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Last News

is cash value taxable pimco high yield instl ira to 401k rollover teamsters ups 401k plan oppenheimer gold and special minerals fund neuberger berman high income bond how much is h&r block charge 2015 current fdic insurance limits missouri 529 plan mid term afr rates ssdi rules cola calculator international wells fargo short term investment fund for congress to override a presidential veto of a bill delaware diversified income fund class a are financial planning fees tax deductible dodge and cox stock fund price jpmorgan investor growth & income fd cl a what does the grandfather clause mean how much is bobbi christina worth vanguard total stock market index fund investor shares vtsmx the collapse of lehman brothers case study filing for social security spousal benefits how much does motley fool one cost retired military tricare cost health savings account contribution limits 2014 best mutual funds to invest in 2015 top vanguard index funds health care reit wiki form 1099 r distribution code 2 qualified dividends tax rate what age to withdraw from ira vanguard international index funds value of a 1943 copper penny