Fidelity Investments, Boston, will adopt a new retail pricing structure that levies annual charges on mutual fund accounts with less than $2,500.
At the same time, the firm is halving to $2,500 the minimum fund account size required in order for investors to be exempt from $10 a year charges on individual retirement accounts And Keoghs.
Most of Fidelity's larger competitors do not have such charges on regular accounts, although some do have charges on IRAs and Keoghs, which are custodial accounts and therefore have higher costs. But the change in policy by the country's largest mutual fund company could enable other direct-marketed fund companies to follow suit.
Fidelity fund accounts valued at less than $2,500 as of Nov. 10 will be charged a $12 annual maintenance fee, up to a maximum of $60 per customer per year.
Chris Doyle, a spokesman for Twentieth Century Funds, Kansas City, Mo., said: "Our feeling is any move that encourages investors to save more is ultimately good for the investor. People who open low balance accounts and fail to make additional contributions are doing themselves a disservice.
"The big question is what is the best way to get people to save more? Do you use the carrot or the stick method? Our approach has been to use the carrot." Twentieth Century waives its $2,500 initial investment minimums for automatic monthly investment accounts of as little as $50.
The Vanguard Group, Valley Forge, Pa., the second largest fund company after Fidelity, which prides itself on its rock-bottom fund expense ratios, charges $10 a year in portfolio transaction fees on purchases of 14 index funds out of its repertoire of 92 mutual funds. The charge applies to accounts with less than $10,000, according to John Woerth, a Vanguard spokesman.
Vanguard also charges $10 a year in account maintenance charges for IRA/Keogh accounts of less than $5,000.
Vanguard's portfolio transaction fees "are only on a selected number of index funds; not on regular actively managed stock and bond funds. (Fidelity's) is across the board," Mr. Woerth said.
Vanguard's account maintenance, transaction and redemption fees are used to help foreign index funds defray their higher brokerage costs without increasing their expense ratios and making it more difficult for them to track the index, Mr. Woerth said.
Janus Funds, Denver, has no account maintenance charges on regular accounts. On IRAs, there is a $12 per account to a maximum of $24 per year, per customer (by Social Security number). Customers may also pay $100 covering all account charges for the life of their IRA, a Janus spokeswoman said.
Janus has a $1,000 account minimum for regular accounts and $250 for IRAs or accounts established under the Uniform Gift to Minors Act. Automatic monthly investment plans can start at $50 a month.
Fidelity's new fees are intended to encourage investors to consolidate smaller funds or start automatic investment programs.
Teri Kilduff, a Fidelity spokeswoman said: "a vast majority of customers won't pay the fees. There are a lot of ways to get around them. They were designed to allocate costs more equitably across our customer base. The change is revenue neutral to Fidelity."
Some 19% of Fidelity accounts had less than $2,500 when the new fee structure was announced and the firm is already seeing a decrease as customers take advantage of various fee waivers.
For instance, customers with an aggregate balance of $50,000 or more in Fidelity retail funds are exempt from the new charges. Also, exempt are participants in automatic investment programs, with a minimum investment of $100 every quarter or every month.
She said, under the old system, "low-activity, low-balance accounts were paying less than their fair share."
Steve Norwitz, a spokesman for T. Rowe Price Associates Inc., Baltimore, said the firm does not charge any fees on accounts below a certain size, but the firm does periodically write to customers with accounts below $1,000 asking them to bring the accounts up to the minimum of $2,500 ($1000 for IRAs/UGMAs) or begin automatic investment programs. "If they don't, we redeem them out of the fund."
"I presume (Fidelity's) doing it to recover the costs of servicing smaller accounts," he said.
Fidelity's new fees might not get a warm reception.
In Vanguard's experience, "people have more difficulty paying an out-of-pocket expense than they do paying more through an expense ratio. People just didn't like paying a $10 fee by check or automatic deduction from the account," Mr. Woerth said.
"We did come across some resistance. People paid it; they just didn't like it," Mr. Woerth said.
Now that the top two mutual fund companies charge account maintenance fees of one sort or another, will other no-load fund companies be next in line?
Mr. Norwitz doesn't expect other firms to follow Fidelity's lead, at least not yet.
But Mr. Woerth thinks they will. "It's a cost issue; as costs become more of a competitive issue I'm sure others will follow suit."
The net effect of account maintenance fees: "The individual investor has to look at overall costs: expense ratios, account maintenance fees, sales commissions, to gauge what they're actually spending relative to their account size. The addition of these fees makes that a little more difficult," Mr. Woerth said.