Vanguard or Fidelity: Which Is the Better Retirement Provider?

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VFINX Total Return Price Chart

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What separates Vanguard from peers like Fidelity, though, is how the company itself is structured. Bogle understood early on that the only advantage an index fund would have against a competing fund was being lower cost. And since these funds are built to track an index, every dollar in fees is lost performance against the index. With this in mind, Vanguard is structured in such a way that the company is actually owned by the funds it offers. In other words, the company is owned by shareholders in its funds.

This immediately removes a layer of expenses from the equation, because most investment companies are privately owned or publicly traded -- meaning they have investors and owners who expect a cut of the profits. Vanguard, since it is owned by the fund owners, is only incentivized to provide the best-quality, lowest-cost funds.

Success in active wealth management

Fidelity, on the other hand, has largely built its reputation in active mutual funds, asset management, and financial advisory services. The company also has one of the most heavily visited websites, with one of the most popular discount online brokerage s. Fidelity is also one of the largest 401(k) managers in the U.S., along with Vanguard, offering services to manage plans for employers for a fee.

A lot of Vanguard's reputation for money management was build on the success that Peter Lynch had at the company, running the Fidelity Magellan fund. During his tenure, the Magellan fund was one of the best-performing mutual funds available, consistently beating the S&P 500 by a wide margin:

FMAGX Total Return Price data by YCharts .

Fidelity continues to offer a wide array of actively managed mutual funds, and has added more passive index-based options in recent years, as well, but still emphasizes its actively managed funds, especially as a way to diversify for investors.

Which is better?

Frankly, it really gets down to what kind of investor you are, and how active you plan to be with your portfolio. If you plan to take a "hands-off approach" and invest in low-cost index funds, it's pretty hard to recommend against Vanguard. One of the benefits of investing with Vanguard directly is that you'll have access to Vanguard ETFs without paying a brokerage fee. If you're still regularly investing new money, this can be hundreds of dollars per year in commissions that you won't have to pay. Spread that over a few decades, and a few hundred bucks here and there can turn into thousands of dollars in lost returns.

But if you're taking a more active approach, especially if you're buying stocks with the majority of your investment dollars, or a mix of mutual funds and ETFs that aren't Vanguard, then Fidelity is probably the better way to go. You'll still have access to Vanguard's mutual funds at the same costs as if you went through Vanguard directly, but without the limitations on the number of low-cost stock trades you can make, and access to more secondary markets for investments like bonds.

When it comes to investment advisory services, the single most-important factor to start with is working with an advisor acting under a fiduciary standard, not a suitability standard. Simply put, people who operate under the "suitability" standard have no obligation to recommend investment products that are in your best interest, and are allowed to operate with conflicts of interest. In other words, they can recommend products their company compensates them to sell, instead of competing products that may cost you less, or offer better potential returns.

Two great companies, but "best" is about you, too

Before making a choice between these two (or even others you're considering), make sure you understand your goals and objectives, and whether you plan to actively buy stocks, or just invest in low-cost index funds and stay out of the way. You'll also need to determine whether you'll want a pro helping you along the way.

Once you understand these things about yourself, only then will it be easier to decide whether Fidelity, Vanguard, or another investment company entirely is best for your retirement funds.

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The article Vanguard or Fidelity: Which Is the Better Retirement Provider? originally appeared on

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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