Should you really have to pay extra to have a certain fund family available in your 401(k) plan menu? Fidelity, the country’s largest 401(k) plan recordkeeper apparently believes so, based on their recent announcement that all new recordkeeping clients must pay an additional five basis points (.05%) on any assets invested in a Vanguard fund. Fidelity claims that nearly every other fund family pays this fee to them for administrative services they provide for those fund families. Vanguard is an outlier in their refusal to do so.
We’re suspect of Fidelity’s justification. This new fee will be billed to the Plan Sponsor, not participants, leading us to surmise that Fidelity’s counsel determined that this fee doesn’t meet the “reasonable and necessary” requirement for charging it to plan participants. If it isn’t reasonable and necessary in the case of a Vanguard fund, why is it reasonable for participants to be paying it via the fund’s expense ratio for fund families that do currently pay Fidelity? If most other fund families pay this fee, isn’t it simply revenue sharing? Let’s call it what it is. We could get wrapped up in legal arguments forever, and we’re sure Fidelity has a larger legal team than we have, but rising above the legal argument, what about the ethical argument? How many people can look at this carefully and come to the conclusion that it is ok?
CDM Retirement Consultants continues to offer access to all fund families on an equal and open basis and if that appeals to you, we are open for business. We’ll tell you what we are going to charge you and send you an invoice. We think everyone in our industry should operate this way because let’s face it: one fund family’s investments are not worth more than another fund family’s investments – at least not at the plan level. The only reason we can see is that the provider has adopted the philosophy of the title of Frank Zappa and the Mothers of Invention classic third album: We’re Only in It for the Money.