A failed ETF strategy, 401(k) fees and runaway side businesses are among the challenges faced by Abby Johnson. So writes Reuters reporter Tim McLaughlin. But McLaughlin might be wrong.

McLaughlin rests much of his analysis on the following:

Now, new rules requiring the disclosure of fees to account holders may allow rivals to reduce Fidelity's lead in the administration of workplace 401(k) retirement plans.

But is this true?

Fidelity's [profile] plays with the mid, large and Fortune 1000 401(k) plan sponsors. It has little presence in the very small and small plan markets where retirement plan advisors call the shots.

Paychex, Principal, Nationwide and John Hancock all beat Fidelity in these markets. Vanguard doesn't attempt to play in those markets. Historically, it has turned away plans with fewer than $25 million in assets, although last year it partnered with Ascensus on a small plan platform.

Increased regulation of the retirement account business will allow more accurate comparisons of plan providers. That is likely to help those who charge lower fees than Fidelity, such as Vanguard, according to analysts at Moody's Investors Service.

Despite what Moody's says, Vanguard is not even in the market that will be shaken up by fee disclosure. So, fee disclosure poses a risk to insurers that administer smaller plans — the large plans market that Fidelity and Vanguard focus on is actually seeing a shift to flat, per-participant fees.

Tellingly, McLaughlin colors Abby's 2005 reassignment from Fidelity's "flagship" mutual fund business to the "more mundane" retirement plan business as a demotion, when in fact the retirement plan services are the heart, lungs and stomach of what Fidelity does.

McLaughlin also argues that Johnson's challenges include developing an ETF line and convincing her father to ditch the firm's side businesses. Those include home-building supplier ProBuild and "a tomato farm in Maine."

These side businesses, along with Boston Coach, a ferry service and many other businesses together lost $1.28 billion from 2007 to 2009, according to McLaughlin.

The article is critical of Fidelity's tardiness in getting on the ETF bandwagon, "a big decision Fidelity whiffed on," in the words of an anonymous insider, that continues to "haunt" Johnson.

Further, McLaughlin's specific details about Fidelity's financials undercut his argument about the firm's economic health. Fidelity Financial Services last year earned $3.33 billion on revenue of $12.8 billion last year, a 26 percent margin that belies the article's claims that Fidelity faces dire challenges to its profitability.

The peek into Fidelity's mutual fund culture is also interesting. McLaughlin says that Johnson will have to work on Fidelity's management of PMs, which he argues has been shaky over the years. He writes:

Johnson's use of technology to reduce costs and quantitative analysis to identify portfolio managers who aren't very good may be critical weapons in battling back. Insiders say the fund unit suffered from a compensation system that rewarded mediocre performance.

See the full story for more anonymous quotes from "former senior Fidelity executives" and the ever-reliable Jim Lowell, CIO of Adviser Investments. 

Edited by: Chris Cumming


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