Low-cost pressure hasn’t erased fund-fee variation

In a perfect world, the low-fee pressure that’s permeating throughout the investment industry would create a universal lift, generating healthier returns in investors’ portfolios. Ideally, the movements of large providers like Fidelity, BlackRock, and Vanguard would be a cue for all players to implement across-the-board cuts.

But in reality, plenty of factors aside from fund fees — administration fees, the growth of more exotic products, and so on — get in the way of that outcome. And even within the traditional fund space, some products and providers persist with their higher fees, leaving fee-savvy advisors and investors frustrated and confused.

“[B]oth research firm Morningstar Inc. and the Investment Company Institute (the fund industry’s professional association) note that investors overall are paying lower fees these days,” reported the Wall Street Journal. Citing a Morningstar study released last month, the piece noted that US investors saved US$5.5 billion from lower fees in 2018 alone.

But a look at the index-fund space shows significant variation. According to the Journal, US investors in S&P 500-tracking funds face fees as low as 0.02% for the Schwab S&P 500 Index Fund (SWPPX), or as high as 2.33% for the Class C shares of Rydex S&P 500 Fund (RYSYX). Some say higher-cost products or share classes come with associated benefits — asset-allocation advice, online account access, and record-keeping services, for example.

Still, fee differences come with gaps in returns. For instance, Morningstar data show the Fidelity 500 Index Fund (FXAIX) comes with a 0.02% net expense ratio and returned 13.48% in the 12-month period ending in April, and its three-year return was 14.86%. The Rydex fund, on the other hand, managed just 10.65% and 12.10% over the same one- and three-year periods.

Referring to data from Broadridge Financial Solutions, the Journal said assets in the lowest-cost index funds have risen to reach US$2.23 trillion at the end of April. But more than US$121.16 billion remains in index funds with fees in excess of 0.5%. One explanation: such higher-cost funds are often used in group retirement plans, which are offered by companies that are often too small to get access to lower prices. Fees to cover back-office costs such as record-keeping also tend to get offloaded to employees.

“It can get tough for these smaller employers to offer a plan, and offer a match, and still pay for record-keeping and other paperwork,” said Andrew Houte, director of retirement planning at Next Level Planning & Wealth Management.

The wide fee discrepancies can also be found in non-index funds. One example is the Washington Mutual Investors Fund, offered by Capital Group’s American Funds: it’s reported to have at least 17 different share classes with annual operating expenses ranging from 0.29% to 1.42%, which are paid for by distribution, commission, or other service fees that go on top of performance-related costs. Fidelity Investments reportedly offers three target-dated strategies — all ending in 2045 — that each come with a different fee.

In a statement to the Journal, Fidelity said: “The pricing differences for our three strategies (Freedom, Freedom Balanced and Freedom Index) reflect the different index allocations and investment flexibility” in each, with the least expensive option offering only low-cost index strategies.

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