Fees matter to investor returns. A widespread reduction of them could be coming.

The financial services giant Vanguard recently announced it was cutting fees on its investment products.

The firm said the fee reductions will save its investors more than $350 million in 2025 alone, and lowering fees won’t dramatically affect investor returns since the cuts were modest.

“Well, overall, it’s overwhelmingly positive,” said Dan Sotiroff, senior manager research analyst for Morningstar Research Services, in an interview with a colleague. “It’s a direct way we can see that an asset manager is giving money back to clients at the end of the day. So overall, it’s great.”

The Vanguard news is a timely reminder: Fees matter to investor returns, especially when owning mutual funds and taking into account the cumulative impact of fund levies on long-term savings (think 401(k)s).

The Securities and Exchange Commission offers an illustration of how fees can affect returns. Let’s assume a 45-year-old saver with an initial investment of $100,000. The saver earns 4% a year for 20 years. Pay a 1% annual fee, and the saver would have roughly $179,000 after two decades.

Lower the fee to 0.25%, and everything else being equal, the nest egg would grow to $208,000 — roughly $30,000 more at age 65.

Recognizing the critical role fees play in generating long-term returns lies behind one of the biggest financial innovations of the past half century: Index funds. Indexing is commonly referred to as “passive” investing. There is no money manager actively trying to beat the market, armed with insights from knowledgeable researchers. These finance mavens are genuinely talented.

Yet index funds routinely outperform most actively managed funds because they charge fees that are much lower than the levy on comparable actively managed mutual funds.

“The average large-stock fund manager produces average returns before fees and below-average returns after fees,” wrote legendary investor Howard Marks, co-founder of Oaktree Capital Management. “So compared with after-fee returns, an index fund is superior.”

Broad-based low-fee index fund investments turned out to be a savvy choice in the 401(k) era when workers without much market knowledge became responsible for investing their retirement savings.

That said, the good news is mutual fund fees in general have been in decline. Through the past 20 years, the average fee mutual fund investors paid has more than halved, from 0.87% in 2004 to 0.36% in 2023, Morningstar calculated.

The latest Vanguard cuts should put additional pressure on the company’s main competitors to follow suit.

Chris Farrell is senior economics contributor for “Marketplace” and a commentator for Minnesota Public Radio.