Fidelity bucks trend, cuts fund fees

By Tom Petruno
Los Angeles Times

Mutual fund giant Fidelity Investments turned the debate over industry fees up another notch by slashing shareholder costs on five of its stock market index funds.

The move is a direct challenge to other fund companies and also to so-called exchange-traded funds, the low-cost stock portfolios that have become popular with investors in recent years.

Boston-based Fidelity said this week that the annual expense ratio of its Spartan 500 Index fund, which tracks the blue-chip Standard & Poor's 500 index, would fall by nearly half, from 0.19 percent of assets to 0.10 percent.

The expense ratio is the proportion of fund assets used to cover the costs of running the portfolio and can vary widely from fund to fund.

Fidelity also cut the management fee on the retirement-plan version of the Spartan 500 Index fund 50 percent. And it pared back the expense ratio to 0.10 percent on its Spartan-brand funds, which track the broader Wilshire 4,500 and Wilshire 5,000 indexes, and on its international index fund.

Mutual fund fees have been in the spotlight as a result of industry scandals over the past year. New York Attorney General Eliot Spitzer, who last September exposed widespread trading abuses in fund shares, has contended that fees charged by many fund companies are indefensibly high.

Several of Spitzer's settlements with fund companies over improper trading allegations have included agreements by the firms to reduce shareholder fees.

Fidelity — which hasn't been implicated in the trading scandal — didn't make its decision in response to the industry's image problems over fees, said Jeff Carney, president of the firm's personal investments arm.

He said Fidelity had been making an "aggressive effort" over the past 18 months to cut shareholder costs on various investments and services in an effort to lure investors from competitors.

Assets in Fidelity's stock index funds total about $40 billion, and "we'd like to have more of that," Carney said.

The company manages more than $1 trillion in all.

By contrast, archrival Vanguard Group has about $300 billion in index-fund assets and manages about $730 billion in all.

Fidelity's expense-ratio cuts, amid the uproar over industry fee levels, put many of its rivals in an awkward position, said Geoff Bobroff, head of fund research firm Bobroff Consulting in East Warwick, R.I.

Investors in other stock index funds, particularly those that track the S&P 500, may wonder why they're paying substantially more for the same basic product, Bobroff said.

Including marketing fees and broker-servicing costs, some S&P 500 index funds take more than 1 percent of assets for expenses each year. That cost is deducted directly from shareholders' returns.

The Securities and Exchange Commission is known to be looking at whether some index funds charge excessive fees.