Fidelity Investments' move to impose an additional fee on Vanguard Group assets is going to test plan sponsors' loyalty to the index-fund giant, according to retirement plan advisers, as employers are forced to choose between sticking with a trusted low-cost brand and paying less money for a similar investment product from a different provider.
Advisers and other observers believe Vanguard's brand power won't be enough to overcome the extra cost in many instances.
"Will this deter flows into Vanguard funds in Fidelity plans? The answer is 100%, exclusively yes. Tremendously," said Richard J. Cawthorne Jr., president of Alpha Pension Group Inc., an advisory firm overseeing roughly $2 billion in defined-contribution-plan assets.
"The fact of the matter is we've commoditized index funds," he added. "Why pay anything extra for the same thing?"
Fidelity is the largest retirement-plan record keeper, administering more than $1.6 trillion in assets, or roughly 23% of the overall DC market. On Monday,
InvestmentNews
reported that the firm will begin charging employers a 0.05% fee on all assets held in Vanguard funds. The fee applies to smaller plans — those with less than $20 million in assets.
Vanguard, the largest money manager in the DC market, is a retirement-plan titan in its own right. It manages more than $900 billion and enjoys a coveted spot as the largest manager of target-date mutual funds, which have skyrocketed to popularity in 401(k) plans.
More than 45% of 401(k) plans use a Vanguard fund, according to BrightScope Inc., which tracks a database of more than 53,000 plans. The most popular is the Vanguard Institutional Index fund, with more than $107 billion in 401(k) assets.
Observers say the 0.05% asset-based fee is the first of its kind among record keepers, and could amount to several thousand extra dollars each year for employers, depending on the size of their retirement plan.
Vanguard is in retirement plan advisers' top tier of preferred asset managers for several different 401(k) asset classes, according to Sway Research, which studies asset-management distribution. In 2016, it was the No. 1 preferred manager of target-date funds, and No. 2 in U.S. equity, U.S. fixed income, and emerging-market stocks and bonds.
"The question is, how many intermediaries and plan sponsors are loyal to Vanguard?" asked Edmund F. Murphy III, president of Empower Retirement, one of the largest DC-plan record keepers.
All things being equal — fund metrics such as fees, performance and risk-adjusted return — plan sponsors and advisers could look to different providers to offer index products, he said.
"I just couldn't imagine it wouldn't have some impact, assuming an apples-to-apples comparison," Mr. Murphy said.
Advisers point to other popular index providers that sponsors could turn to instead of Vanguard to offer a comparable product for a similar price.
Fidelity, for example, recently launched a share class of index target-date mutual fund with an average asset-weighted expense ratio of 0.12%, which is 1 basis point cheaper than Vanguard's mutual funds, making it the cheapest TDF option, according to Morningstar Inc.'s 2017 TDF report.
Charles Schwab also launched an index TDF suite in 2016 with an average asset-weighted expense ratio of 0.13%, on par with Vanguard's, according to Morningstar. The company has since reduced its pricing to 0.08%.
"I think it causes all of us to think about things differently," David Hinderstein, president of advisory firm Strategic Retirement Group Inc., said of the Fidelity fee.
"Does that cause a plan committee to take out a Vanguard fund and replace a passive
index fund with a Fidelity product, which are priced very similarly?" Hinderstein asked. He said that could be a likely outcome.
Fidelity decided to impose the 0.05% fee on employers because Vanguard is the only fund company that doesn't pay fees for the administration and distribution of its funds, which it says amounts to tens of millions of dollars for Fidelity every year.
Vanguard spokeswoman Laura Edling said the fee is at odds with the progress on costs the industry has made over the past two decades. Vanguard expects employers to continue using its funds nonetheless, she said.
"This news notwithstanding, we certainly expect that sponsors and participants will continue to embrace our low-cost, broadly diversified funds as the vehicle of choice for hard-earned retirement savings," Ms. Edling said.
Jason Chepenik, managing partner at Chepenik Financial, doesn't believe Vanguard will be affected too much by the additional fee, but said other record keepers could follow Fidelity's lead.
"I think there are other companies whose eyes are opening up," he said. "Other record keepers will now look at their own model."
