Vanguard and Fidelity Fee Arrangement Shifts, Reflecting Industry Trends

Fidelity has confirmed that it will soon begin charging a 0.05% fee on assets invested through its platform into Vanguard products.

According to a Fidelity spokesperson and a written statement from the firm, the fee “applies only to new clients and is charged directly to sponsors.”

“Fidelity requires all fund families to compensate us for the shareholder and administrative services which we provide on their behalf,” a Fidelity spokesperson confirmed for PLANSPONSOR. “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.”

The spokesperson indicated that Vanguard imposes unique operational requirements that generate extra costs for Fidelity. She also stressed the firm “is 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.”

The written statement points out that this new Fidelity fee “is not a distribution or revenue sharing fee; this fee is for administrative services that we are not compensated for.”

Among the “administrative services” that Fidelity says it performs on behalf of Vanguard—and all other fund companies—are fund set-ups, transfers, share class conversions, fund closings, communications, trading cash settlement, pricing and account valuation, dividends and distributions, reconciliation, statements and confirmations, 22c-2, tax reporting, e-Delivery, disclosures, sales reporting, and more.

Specific to Vanguard and leading to excess uncompensated costs, according to Fidelity, is that Vanguard has a requirement 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.”

The statement goes on: “Each morning, any actual Vanguard fund trading activity that is off from the prior submitted trade notifications requires dedicated Fidelity resources to work with Vanguard to analyze those trades and determine whether the variance was plan-driven or participant-driven activity. In addition to the manpower the above large trade notification and trade analysis requires, Fidelity has had to spend a significant amount on technology in order to support these custom services.”

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 impact a significant number of plan sponsors and participants. As shown by the 2017 PLANSPONSOR Target-Date Fund Buyer’s Guide, between its brands of target-date funds (TDFs) and collective trusts, Vanguard is the largest-volume provider of TDF products to U.S. defined contribution (DC) plans. Fidelity, through its various TDF product lines, also controls a sizable portion of the market, in addition to 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 compensation one another—and in the way clients are granted granular visibility into all the fees they ultimately pay.

It is informative, in this respect, to see the quoted Fidelity spokesperson point to the 5 basis point fee increase as a type of correction or adjustment—rather than the collection of a new type of fee.