Fidelity Channels Their Inner Frank Zappa

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 thinks 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 almost every other fund family pays this fee for administrative services they provide for that fund family, and that Vanguard is an outlier in their refusal to do so.

We’re not buying 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 does not meet the “reasonable and necessary” requirement to charge the plan participants.  If it isn’t reasonable and necessary in the case of a Vanguard fund, why is it okay for participants to pay 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 can be sure that Fidelity has a significantly 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 okay?

Northwest Plan Services continues to offer access to all fund families on an equal and open basis.  If that appeals to you, we are open for business.  We will tell you what we are going to charge you and send you an invoice.  No hidden fees or kickbacks.  We think everyone in our industry should operate this way, because let’s face it – recordkeeping fees are driven by the number of participants, not asset values.  Nothing about our work changes based on asset values, so why should recordkeeping fees and kickbacks be based on assets?  The only reason we can see is 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.