Fidelity Axes Sales Fees on Retirement Vehicles

Mutual fund companies long have encouraged people to place their money in individual retirement accounts and other tax-sheltered vehicles.

Now, industry leader Fidelity Investments is dangling a very specific type of carrot in front of potential buyers by waiving sales charges of up to 3% on certain stock funds purchased for retirement accounts.

Fidelity’s load-waiver offer is a good deal for investors who like the company’s funds but aren’t willing to pay a sales charge. Unfortunately, critics say, it doesn’t go far enough.

“If Fidelity can do this for retirement accounts and some funds, why not all?” asks Ken Weber, editor of Weber’s Fund Advisor newsletter in New Hyde Park, N.Y.

Still, the load-waiver offer should make a lot of investors sit up and take notice. That’s because Fidelity, home of the celebrated Magellan Fund, has one of the best teams of portfolio managers and analysts anywhere.

For example, the Boston-based behemoth emerged as the top mutual fund family for growth portfolios in a Money magazine study conducted earlier this year by Lipper Analytical Services of Summit, N.J.

The survey measured performance over three two-year periods dating back to 1986.

The load-waiver offer might even persuade some people to transfer more of their investments into retirement accounts--a sensible move anyway.

At a minimum, IRAs and other retirement vehicles feature tax-deferred compounding of capital gains and interest--sometimes with tax deductions and employer contributions thrown in.

The move to waive loads on retirement accounts, which Fidelity hasn’t said is permanent, could cost the company in the short run but might prove profitable over the long haul. That’s because fund companies earn the bulk of their revenue from management fees, not loads.

It also stands to make Fidelity more competitive in one of the fund industry’s hot growth areas.

“Time and time again, retirement planning comes up as the No. 1 savings goal in our market-research studies, with college planning a strong second,” says Kathryn Hopkins, a Fidelity senior vice president of marketing.

Effective Nov. 1, Fidelity waived sales charges on 19 stock-oriented funds with combined assets of more than $22 billion, provided the funds are held for retirement purposes.

The list of 19 funds is in addition to another 70-odd stock, bond and money-market funds at Fidelity that had been no-load all along, and remain so.

However, the load waiver doesn’t extend to Fidelity’s 36 Select sector portfolios and a handful of other funds, most notably the famed Magellan.

Investors continue to pay a 3% charge to buy shares in Magellan or the Select products.

Jack Bowers, editor of the independent Fidelity Monitor newsletter in Rocklin, Calif., says he welcomes the company’s decision to drop sales charges and encourages investors to take advantage of retirement accounts generally.

“Tax-deferred compounding leads to higher growth long term, especially if you reinvest your distributions,” he says. “Over time, you will come out way ahead, even after taking a tax bite when you withdraw the money.”

Bowers says he is disappointed that Fidelity didn’t drop sales charges on the sector funds but isn’t too concerned that investors won’t be able to buy Magellan--the industry’s largest fund at $21 billion in assets--on a no-load basis.

“We have a buy recommendation on Magellan, but I like Contrafund and Trend better,” he says.

Weber also likes Contrafund and Trend, along with Fidelity Asset Manager. Trend and Asset Manager have been no-load all along, but Contrafund’s sales charge has come down from 3% on retirement accounts.

Contrafund, by the way, is one of 23 Fidelity stock and bond portfolios that have outperformed Magellan over the last five years, according to Lipper.

Any time that Fidelity, the industry giant, unveils a significant marketing innovation, competitors have to take notice.

This latest move puts Fidelity on a more equal footing with such no-load groups as Vanguard, T. Rowe Price, Scudder, Twentieth Century, Janus and Invesco/Financial Programs in battling for the hearts and pocketbooks of investors who aren’t willing to pay sales commissions.

But don’t look for many other fund companies to duplicate Fidelity’s waiver of sales charges on retirement accounts only, if only because few competitors have the same odd mix of low-load and no-load products.

Move Over, Magellan

Fidelity Investments, the nation’s biggest mutual fund complex, recently waived sales charges on 19 stock-oriented portfolios if purchased for tax-sheltered retirement accounts.

Some of these funds actually sport a better recent track record than Magellan, which was long Fidelity’s (and the industry’s) undisputed performance leader.

With the exception of Magellan, which still levies a 3% sales charge, all of the following funds now can be purchased on a no-load basis:

Fund Name 1-Year Results 5-Year Results Fidelity Contrafund +14.7% +109.3% Fidelity Convertible +19.3% +84.4% Fidelity Growth Company +1.9% +79.6% Fidelity Growth & Income +10.5% +74.7% Fidelity Balanced +12.6% +74.5% Fidelity Magellan +9.5% +70.3%

Total returns, compiled by Lipper Analytical Services, are for periods ending Sept. 30, 1992.