The Boston behemoth wants to give with one hand but take with the other at its original fund. By Bob Frick, Senior Editor June 28, 2011 Editor's note: This story has been updated since its original publication in the August issue of Kiplinger's Personal Finance magazine. Shareholders of Fidelity’s original mutual fund, Fidelity Fund (symbol FFIDX), are being asked to add a performance-adjustment clause to the fund’s fee structure. That’s good news. The bad news is that they’re also being asked to raise the fund’s expense ratio before any adjustments by 33%, from 0.6% to 0.8% a year. (Voting on the proposal will close in July.)We like the pay-for-performance concept. It rewards a sponsor with extra pay when a fund beats its benchmark and penalizes the firm by cutting its fee when a fund lags that benchmark. Less than 10% of all mutual fund assets are in funds with performance-based fees. Fidelity leads the pack, with fees for more than half of its assets tied to results, according to an October 2010 Thomson Reuters study. Next is Vanguard, with similar fees for about one-fourth of its assets, followed by Janus, a distant third place with 10% of its assets. But don’t assume that pay-for-performance will have a big impact on actual results. A 2008 study by Lipper of performance over the previous ten years found two effects: First, funds that adjusted fees delivered slightly better risk-adjusted performance than those funds that didn’t adjust fees. Second, funds with performance adjustments tended to be slightly more volatile, perhaps because their managers were making mildly riskier bets to beat their benchmarks. Advertisement The proposal for Fidelity Fund, which began in 1930 and today holds $5.3 billion, is typical of these plans. If the fund beats Standard & Poor’s 500-stock index by one percentage point, Fidelity gets an extra 0.02 percentage point above the basic management fee (0.3% a year in the new plan). The formula is based on rolling three-year results so that Fidelity is neither rewarded nor punished for short-term swings. The maximum adjustment is plus or minus 0.2 point per year. But the adjustment is a trifle compared with the extra money -- about $10 million a year -- Fidelity would collect from the hike in the unadjusted expense ratio. From a shareholder perspective, a 0.2 point increase in the expense ratio will cost you $20 a year for every $10,000 invested. Yes, 0.8% is still below the average expense ratio of similar funds, as Fidelity points out. But since John Avery took over as manager in 2002, Fidelity Fund has beaten the S&P 500 by all of 0.2 point per year, on average. Had the higher fee been in place, Fidelity Fund would have essentially matched the S&P 500. Our advice: If you want a large-company fund with Fidelity, switch to Contrafund (FCNTX). Another solid choice is Dodge & Cox Stock (DODGX). Both are members of the Kiplinger 25, the list of our top funds.