Fidelity vs. Vanguard: Comparing 401(k) Providers

Reviewed by David KindnessFact checked by Michael RosenstonReviewed by David KindnessFact checked by Michael Rosenston

Fidelity and Vanguard are among the largest fund companies in the world, and both offer 401(k) plans as parts of their services. Since 401(k) plans operate under the same tax laws and regulations, there are three main areas of comparison: the companies themselves, the funds offered, and provider features.

Key Takeaways

• Both Vanguard and Fidelity offer 401(k)s alongside other retirement accounts.
• Their offerings differ based on what they offer, though both feature low fees.
• The companies themselves also differ: Vanguard is client-owned, for example, while Fidelity is not.

Company Structure

Vanguard is owned by the clients who invest in its funds; it is similar to a customer-owned credit union in that regard. Since there are no external owners hoping to make profits, the fees are set just high enough to carry the actual operating expenses and keep the company healthy, but no more than that.

The Fidelity ownership structure differs. Fidelity is 49% owned by the founding Johnson family and 51% owned by employees. This fundamental difference explains why Vanguard fees consistently undercut the market average by a wide margin. However, Fidelity is by no means a high-cost company. Many of its funds are considerably cheaper than the market average, even beating Vanguard in a few notable instances.

Comparing the Funds

As of October 2024, worldwide, Vanguard offers 423 funds (208 in the U.S.), while Fidelity has over 450 mutual funds and 71 ETFs. Fidelity also runs a fund network with access to over 10,000 funds from hundreds of different providers.

The main strength of Vanguard is its razor-thin fees, especially for its index funds, which helps the bottom line for investors. A fee difference of 0.5% may seem insignificant at first blush, but many years or perhaps even decades of compounding makes the size difference of the nest egg quite significant in the end.

Meanwhile, Fidelity has a knack for attracting talented fund managers and has several exceptionally successful actively-managed funds. The fees may be higher, but they may be worth it for niche sectors and regional expertise.

Who has the better offering boils down to what kind of investor you are. An active trader who likes to sniff out bargains and undervalued sectors will appreciate Fidelity’s vast selection. By contrast, a passive investor who merely glances at the annual statement once a year may be better served by the slimmer but cheaper selection of fundamentals offered by Vanguard.

Features

Both companies offer plenty of educational material about retirement savings, asset allocation, compounding returns, and fund basics on their websites. Vanguard has more tailored resources for specific situations, while Fidelity has a cleaner interface, making navigation a breeze.

Each offers one-on-one phone consultations and assistance for starting new accounts, and each offers an easy rollover option for dormant 401(k) capital from previous employers.

Fidelity maintains a number of investment centers in most metropolitan areas and runs free investment seminars on everything from financial basics to advanced income diversification strategies in retirement. Vanguard offers personal advisors who maintain client profiles and can be reached by phone or email for investment consultations.

Do Financial Institutions Have to Disclose 401(k) Fees?

Yes. A set of disclosure rules went into effect in 2012 that make 401(k) fees considerably more transparent. Each 401(k) provider is now required to disclose every cent it charges in the annual prospectus it sends to its clients.

What Retirement Accounts do Fidelity and Vanguard Offer?

Fidelity offers 401(k)s, self-employed 401(k)s, traditional individual retirement accounts (IRAs), Roth IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and investment accounts.

Vanguard also offers 401(k)s, self-employed 401(k)s, traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and investment accounts.

What Are the Contribution Limits for 401(k)s?

The contribution limit for an employer-sponsored 401(k) in tax year 2024 is $23,000 if you’re under 50 years old. If you’re 50 or older, thanks to the catch-up contribution provision set by the Internal Revenue Service (IRS), the contribution limit is $30,500. (In tax year 2023, those numbers were $22,500 and $30,000, respectively.)

Another option is the self-employed or solo 401(k), if you operate your own business alone or with your spouse and you don’t employ other people. For a self-employed or solo 401(k), you contribute as both the employer and the employee. For this reason, the contribution limit is higher than with an employer-sponsored plan. If you’re under 50 years old, the most you can contribute to a self-employed or solo 401(k) is $69,000 in tax year 2024. (In tax year 2023, it was $66,000.) If you’re age 50 or older, you can contribute an additional $7,500 as a catch-up contribution.

What Are the Contribution Limits for IRAs?

The most you can contribute to an individual retirement account (IRA) if you’re under 50 years old is $7,000 in tax year 2024. (In tax year 2023, it was $6,500.) If you’re 50 years old or older, you can contribute $8,000. (In tax year 2023, it was $7,500.)

The contribution limits for SEP IRAs and SIMPLE IRAs are higher, just as the contribution limits for solo 401(k)s are higher than employer-sponsored 401(k)s. For tax year 2024, the most you can contribute to a SEP IRA is 25% of the employee’s compensation, or $69,000, whichever is less. (In tax year 2023, it was 25% of the employee’s compensation, or $66,000, whichever was less.)

With a SIMPLE IRA, the employer must contribute either a matching contribution of up to 3% of the employee’s pay, or a 2% nonelective contribution for eligible employees, even if the employees don’t contribute anything. This nonelective contribution is equal to 2% of the employee’s pay up to the tax year 2024 limit of $345,000. (In tax year 2023, the limit was $330,000.)

The Bottom Line

In truth, both companies provide very high levels of user-friendliness on their websites and in their services. The key as a client is to figure out what features are most important to you, what type of funds you are looking for, and what the costs are.

Read the original article on Investopedia.