Fidelity Rattling the Cage with Big 529 Fee Cuts

Fidelity Investments is escalating the cost war in the college savings universe by cutting fees by almost 50% on some college savings portfolios. The mutual fund giant is slashing fees the most on its direct-sold 529 index portfolios in New Hampshire, Massachusetts, California, Arizona, and Delaware. Fidelity is reducing its program management fee to 15 basis points (0.15%), down from 30 basis points, and the total annual asset-based fees range from 25-35 basis points (down from an already reasonable 50 basis points).

This isn't the first time Fidelity has shown it has been willing to compete on price with rivals. In recent years it has slashed index fund fees to grab share from Vanguard and others.

Although not as dramatic, the cost-cutting extends to its direct-sold actively managed 529 portfolios. Those portfolios (in the same five states) will have a 10-basis-point program fee reduction and will have total annual asset-based fees that range from 59 to 104 basis points--roughly a 10-basis-point reduction. And in the broker-sold version of the plan (offered only in New Hampshire and California), the all-in fee cuts range between 6 and 10 basis points (which at an upper end--148 basis points--could still stand another haircut).

Fidelity's recent move comes on the heels of other 529 plan cost-cutting. The biggest move lately has been in Colorado's direct-sold CollegeInvest plan, which last Friday announced it was cutting fees on all its 529 options from 75 basis points to 52 basis points (a 31% reduction) on Dec 1. Other states have made less dramatic cuts, such as Kentucky and Iowa, which have trimmed around 5 basis points off the bottom line on their respective 529 plans.

All told, with a total of $14 billion of 529 assets under management, Fidelity's move is the most far-reaching and affects more portfolios than any other cost-cutting move to date. The price cuts and the fact that many experts, such as PIMCO's Bill Gross, are predicting rather meager future returns over the next decade, will likely put pressure on other program managers to take a hard look at cutting their fees in order to stay competitive.

Investors will benefit from the cost-cutting. Morningstar and others have consistently found that costs are the best predictors of mutual funds' long-term success. And for investors with index-centric portfolios, price is paramount. The lowest-cost index 529 portfolio is virtually guaranteed to be the long-term winner over time.