Fidelity undercuts Vanguard's target date funds

Mutual fund giant getting aggressive in the low-cost battle

By Jason Kephart

Dec 4, 2013 @ 2:44 pm (Updated 3:39 pm) EST

target-date funds, mutual funds, basis points, vanguard, fidelity investments, low cost, index funds, actively managed funds

Fidelity Investments is becoming aggressive in the low-cost battle against index fund giant Vanguard.

Fidelity has lowered the fees on its Fidelity Freedom Index Funds to just 16 basis points, or $16 a year for every $10,000 invested, from 19 basis points. It's not a big cut in real dollars, but it does make the Freedom Index Fund lineup slightly cheaper than The Vanguard Group Inc.'s target date funds, which charge 18 basis points.

The Freedom Index Funds, like the Vanguard target date offerings, use index funds as their underlying holdings. That allows the target date funds to charge lower fees than ones that rely on actively managed mutual funds as their underlying funds. The Fidelity Freedom Funds, for example, use actively managed funds and charge 69 basis points.

“They're taking the fight to Vanguard on its turf,” said Jeff Tjornehoj, a senior research analyst at Lipper Inc., adding that it behooves Fidelity to start competing with Vanguard on the low-cost front now.

“They need to establish a presence with advisers, who are particularly sensitive to providing low-cost solutions to clients,” Mr. Tjornehoj said.

Vanguard has closed the gap between it and Fidelity, the largest provider of target date funds, over the last five years.

Vanguard's target date funds have grown to $148 billion as of the end of October, up 393% from 2008, according to Lipper. Fidelity's target date funds, including both the Freedom Funds and Freedom Index Funds, have grown to $175 billion, up 160%, over the same time period.

Nicole Goodnow, a spokeswoman for Fidelity, did not return calls seeking comment.