Would anyone dislike a zero-expense investment fund?

[Peter Gulia]

On April 30, Empower announced the Empower S&P 500 Index Separate Account, a zero-expense fund to track the S&P 500® index. It’s available to a retirement plan (but not a § 403(b) plan) that’s an Empower Workplace recordkeeping customer.

If a plan is a target of this offer and has an S&P 500 index fund in the plan’s investment alternatives, is there any reason a plan would not want this zero-expense fund?

 

[Paul I]

On the surface, of course there is no reason a plan would not want a zero-expense fund S&P 500 Index fund.  But your question was is there any reason a plan would not want this zero-expense fund?  This is another way of asking, cynically, what's the catch?

From an AI point of view, "Essentially, the "free" thing is being offered in exchange for something valuable to the provider, usually your personal data or attention."  Examples are free checking accounts, free shipping, free breakfast with an overnight stay... i.e., something that builds a recurring relationship.  

Empower is offering this as an "Institutional Separate Accounts" which their information says are "(also known as insurance company separate accounts are an insurance company version of a collective investment trust (CIT). Like a CIT, institutional separate accounts pool assets from more than one retirement plan to achieve economies of scale and pricing."  https://docs.empower.com/empower-investments/pdf/isa/Institutional-Separate-Account-Platform-Brochure.pdf and https://docs.empower.com/empower-investments/pdf/isa/Institutional-Separate-Account-Platform-Brochure.pdf

With this offering, Empower is one-upping Vanguard in a proverbial "race to the bottom" on plan administration and investment fund expenses.

I applaud Empower for recognizing that investment fund fees are an irritant for many plans, and for coming up with a creative solution bolstered by great marketing.  

Plan fiduciaries and their advisors still need to do their due diligence and this includes considering the totality of the relationship.  If their conclusion is Empower offers the best services for their plan, they should give this fund serious consideration.

[Peter Gulia]

Thanks. Yes, Empower’s zero expense offer would be a fit only for a retirement plan that, with other factors, already has Empower as its recordkeeper and prudently considers it likely that the plan will continue with Empower.

[david rigby]

2 minutes ago, Peter Gulia said:

... and prudently considers it likely that the plan will continue with Empower.

@Peter Gulia identifies a generic issue, relevant to any relationship with a vendor.  That is, does a plan sponsor want to take an administrative action that "binds" it (the sponsor/plan administrator) even if such "binding" is only slight?   Obviously, the corollary is, "So what? We can change it later if needed."  The answer(s) might be related to the sponsor/PA perception of risk tolerance and/or whether there is a potential fiduciary risk.

[Peter Gulia]

A plan’s group annuity contract states, for each insurance company separate account, a “distribution threshold”. If the contractholder’s withdrawal is more than the specified percentage of the separate account’s assets, the insurer need not pay money and has a right to deliver portfolio securities.

For many retirement plans, that provision likely is inconsequential, at least regarding a widely held separate account.

For a mega plan, it can be a mild friction—but one such a plan’s fiduciary can manage by winding out of the investment over time, or by causing the next service provider to absorb the delivered portfolio securities.

[Artie M]

I don't know anything specific about this fund but Fidelity has been offering Zero funds for a while now.  Essentially, they are loss leaders intended to get participants in the door.  So, I am guessing that is what Empower is doing.  As noted, participants have to buy it off the Empower platform, and if they do buy into it, they are likely stuck with Empower.  

[Peter Gulia]

Empower’s offer aims at plan sponsors.

A near-term aim is to get plan sponsors looking at Empower’s insurance company separate accounts. These enable retirement plans to get access to investment management one otherwise might have obtained through an SEC-registered mutual fund. A subaccount’s fee might be more than the fee Empower pays its subadviser, but less than a plan would pay for the least expensive shares of the same-strategy mutual fund.

Another aim is setting up a sticking point for a plan not to change service providers. For example, if a request-for-proposals shows a competitor recordkeeper is a contender but not unquestionably better than the incumbent, a plan sponsor might think twice about moving if the competitor doesn’t offer a similar no-expense fund for an important US large-cap-blend slot.

A mega plan has plenty of ways to get low-expense investment management. But for some other plans, even a one-basis-point difference might be meaningful.

It also matters how closely a fund can follow its index.