Some weeks ago, Fidelity made the announcement that it would soon begin charging a 0.05% fee on assets invested through its institutional retirement plan recordkeeping platform into Vanguard products, including the firm’s popular suite of index-based target-date funds (TDFs) and collective trusts.
The announcement grabbed attention for some 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.
Fidelity has since confirmed that the nominally small fee “applies only to new clients,” but given the sheer volume of business conducted by Fidelity and Vanguard 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, according to a spokesperson for the firm, so it is a little too soon to tell how clients may react. However, the firm’s salespeople may soon have more information to share, the spokesperson said.
Confirmation that the fee story is still somewhat in development/deployment comes as 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 Vanguard spokesperson candidly admits.
A look back at the announcement
In first announcing the fee, last month, a Fidelity spokesperson indicated that working with 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.”
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.”
For its part, and with a respectable amount of candor, Vanguard admits it was completely caught by surprise by this move and is still, to some extent, waiting to hear directly from Fidelity about exactly how and why the fee is being implemented—and whether it is impacting clients’ choices with respect to Vanguard product. One concern for Vanguard, left unspoken by the firm in subsequent interviews but made clear enough upon a little reflection, is that the fee hike on Vanguard products will make Fidelity’s own proprietary target-date funds and other products look marginally more appealing from the cost perspective.
Fidelity plays hardball, and Vanguard’s take
In hindsight, Vanguard’s candid admission that it only learned of this new fee through media reports, including PLANSPONSOR’s, is more than a little revealing of the way large retirement plan providers craft and executive their competitive strategies—and their marketing approaches. Notably, Fidelity explicitly told reporters on the day of its announcement that it “had been in conversation about this new fee for some time with [their] business partners.” Per Vanguard’s comments, it wasn’t included in the conversations, so it stands to reason that Fidelity was likely having these discussions with at least some of its own and Vanguard’s competitors.
Crucially, the secrecy of their pending move allowed Fidelity leadership to solely define the narrative of what the new fee is and represents. The original Fidelity statements stressed the point that “this is not a distribution or revenue sharing fee; this fee is for administrative services that we are not compensated for.”
Asked to talk freely about these developments, a Vanguard spokesperson suggests a few things have been misrepresented in other media reports in terms of describing the way Vanguard’s unique business operations lead to excess costs for Fidelity.
“One thing that I have seen in some of the articles is the statement that Vanguard does not pay third-party providers a distribution fee, but there is no context or explanation given for what this means,” Vanguard’s Laura Edling says. “Vanguard has a structure that is pretty much unique across the industry, by which I mean we are owned by our funds, and in turn by our clients who invest in these funds. Because of this structure, we feel that we cannot charge that sort of distribution fee to our funds due to a potential conflict of interest. If we were to pick and choose which platforms we paid in this way, it would potentially put all our investors at a disadvantage. It’s a subtle point, but it’s important.”
Another way to state the concern is that, in charging distribution fees to its funds, Vanguard essentially would be charging and paying itself for distribution.
Edling went on to question how Fidelity came to the 5 basis point fee figure, even supposing that it is losing some amount of revenue based on the way Vanguard structures its business. “I think some people may ask themselves if the size of the fee being charged is on par with what other providers might choose to charge in this circumstance,” Edling suggests. Especially when one looks at the volume of product that Vanguard sells on the Fidelity platform, she notes, even though this is a small basis point number, in the end this is a potentially significant new flow of revenue.
In the end, both Vanguard and Fidelity agree this development in the evolution of fees and discussion of provider payments is a positive thing for clients and the industry.
“We are seeing a steady drumbeat of the march towards greater transparency across the retirement plan industry, so in that respect, it is a good thing if this new structure makes it clearer what fees the participants are paying to what providers,” Edling agrees.