Fidelity Plays Hardball

Fidelity announced that it would soon begin charging a 0.05% fee on assets invested through its institutional retirement plan recordkeeping platform into Vanguard products, including that firm’s popular suite of index-based target-date funds (TDFs) and collective trusts.

The announcement grabbed attention for obvious reasons, including that Fidelity and Vanguard are two of the largest-volume providers of retirement plan recordkeeping and investment products for defined contribution (DC) retirement plans in the U.S. It was also revealed by Vanguard that this fee was announced first to journalists and only afterward to Vanguard—catching the firm “completely by surprise,” as a representative candidly admitted.

Fidelity has since confirmed that the nominal fee “applies only to new clients,” but, given the sheer volume of business conducted by the two companies in a given year, the fee change could result in a significant amount of new revenue for Fidelity.

Fidelity is still in the process of rolling out the fee on its recordkeeping platform, said a company representative, so clients have had little time to react. However, the salespeople may soon have more information to share, the representative said.

In first announcing the fee, a Fidelity spokeswoman indicated that working with Vanguard “imposes unique operational requirements that generate extra costs for Fidelity.” She also stressed, “[We are] not removing any fund families from our platform, but we are requiring that all fund families compensate us for our services in order to remain in good standing.

“Fidelity requires all fund families to compensate us for the shareholder and administrative services we provide on their behalf,” she continued. “A small number of fund families have not compensated Fidelity for certain services, and this pricing change is designed to address that disparity, with the intention of providing fairness across all of our business relationships.”

Specific to Vanguard and leading to excess uncompensated costs, Fidelity says, is that Vanguard requires that plan-level trading activity and large-trade notifications be submitted by 3 p.m. EST, or an hour prior to market close. Fidelity says this has created increased complexity for its platform and its plan sponsor clients in that “we have had to implement an earlier daily cut-off process, ensuring the trade notifications will be analyzed, reviewed and submitted to Vanguard—minimizing any trades being rejected.”

While Vanguard may have been among the “small number” of fund families that have reportedly not compensated Fidelity for shareholder administration services, any change in fees charged on Vanguard funds is bound to affect a significant number of plan sponsors and participants. As shown by the 2017 PLANSPONSOR Target-Date Fund Buyer’s Guide, between Vanguard’s brands of TDFs and collective trusts, that firm is the largest-volume provider of TDF products to U.S. defined contribution plans. Fidelity, through its various TDF product lines, also controls a substantial portion of the market, besides its sizable recordkeeping business.

More information on any plan sponsor impact will naturally become available as the fee change is rolled out. The move by Fidelity will play out against the backdrop of a broader ongoing sea change in the way retirement plan recordkeepers and investment product providers work with and compensate one another—and in the extent to which clients receive a granular view of all of the fees they ultimately pay.