Why Low-Cost Funds Fuel Nest Eggs

I decided to take a look at the top 10 fund families in 1989 compared with today. The 1989 numbers came from a presentation Bogle made roughly a decade ago, while investment research firm Morningstar is the source of the current data.

Today, Vanguard is nearly the same size as the next three largest fund families combined. Note that these are assets in mutual funds and exchange-traded funds, and doesn’t include other assets, such as in individual stocks or private investments. Gone from this list are DWS, Dreyfus, Federated, Morgan Stanley and Putnam. Franklin Templeton is only in the top 10 because it bought Putnam earlier this year. But Fidelity and BlackRock remained in the top three. 

I asked Amy Arnott, a portfolio strategist at Morningstar, to sum up the change over the last 35 years: “The evolving list of dominant fund companies reflects some powerful positive trends over the past 35 years,” she says. “The big have gotten bigger, the strong have gotten stronger and trillions of assets have flowed into lower-cost funds.” 

Of course, this also means those fund families that put their own profits ahead of investors lost market share or became extinct. This can best be illustrated by my first two index funds: Fidelity and Dreyfus. Fidelity lowered fees to match and then best Vanguard in some funds. Dreyfus did not and, outside of money market funds, faded away. Dreyfus was bought by Mellon Bank, which then merged with Bank of New York. Today, the combined funds of BNY Mellon are only $55.7 billion, barely larger than Dreyfus was 35 years ago. Investors have pulled money out of BNY Mellon funds every year over the past decade, according to Morningstar.

Many of the current largest funds are known for low fees with either indexing or other passive approaches. The American Funds are perhaps the largest outlier — they were not in the top 10 35 years ago but stand at number four today. American still has funds with sales loads. Even so, time may have caught up as Morningstar shows investors yanked $135.3 billion out of the fund family since 2022.

Saving for retirement? Think cheap

John Bogle gave investors access to low-cost funds. Morningstar and others measured performance and showed the impact of fees on returns. Then, many in the media picked up on the message and investors voted with their money – yanking from expensive funds in favor of lower fees and parent fund families that placed investor returns over short-term profits.

Investors taught the fund industry to consider their needs. We did this by rewarding fund families that placed the highest priority on investors with trillions of dollars, and by punishing companies that didn’t.

Take a look at the cost of owning each of the funds in your 401(k), IRA or other investment accounts. You can find the expense ratios on fund company websites, or check Morningstar.com or a similar site. If the expense ratio of any fund is more than 0.2 percent annually, you should consider switching to a cheaper fund with a comparable objective and performance history.

 Don’t move to lower cost funds to punish a fund family. Do it because you need the money in your nest egg more than the financial services industry.