Plan Sponsors Show Concerns About Using White Labeled Funds

Plan sponsors participating in a recent PLANSPONSOR forum especially expressed concerns about transparency issues.

The concept of “white labeling” investments is actually one of the simpler topics one comes across when discussing the latest trends impacting the way defined contribution (DC) retirement plans present investment options to participants.

In basic terms there are two main strategies for white labeling DC plan investments. The first is to take a singular fund and make the name generic in plan participant communications, such that instead of, say,  listing the “BlackRock U.S. Aggregate Bond Index” as an investment option, the fund would be presented to participants as “the U.S. Bond Index fund.” The second strategy is more akin to a fund-of-funds approach, when a plan sponsor offers a single option to participants that includes several underlying funds or strategies—very much like the approach taken with the typical target-date fund (TDF).

Besides streamlining the core menu, the use of white label funds can also improve the ongoing maintenance and rationality of a defined contribution plan, experts agree, for example by forcing participants to think beyond brand names and potentially misleading style labels when picking investments. Tied to a quality communication and education campaign, white labeling can be even more effective. 

Hearing of these virtues, one might expect white labeling to be a major trend among U.S. plan sponsors, but anecdotal and survey evidence suggests otherwise. According to data provided by Aon Hewitt, still only about one-quarter of large- and mega- plan sponsors have embraced white labeling. Sixty-four percent of the large companies that white label DC plan investments told Aon Hewitt they opt for this approach to make it easier to change fund managers, the firm explains, and 71% of employers choose to white label in order to combine multiple managers under one fund. Important to note, these findings come from a relatively small survey of 75 large employers.

Among small and micro plans the use of white labeling is much rarer, a fact made evident during a recent PLANSPONSOR focus group event held in New York. Among small and even mid-sized plan sponsors—who were brought together for frank peer-to-peer discussions on a variety of pressing topics—there was actually a lot of uncertainty about the concept of white labeling and why the strategy would be used. Many small-plan sponsors seemed to have only a basic understanding of what “white labeling” entails.

NEXT: Hesitation among small plans 

More than a few plan sponsors suggested they feel that the concept of white labeling could more or less cut directly against the wider trend of pushing for more transparency and clarity on the investment menu. Investment product providers would probably object to that characterization, but a handful of sponsors seemed downright hostile to the notion of “not telling participants where their money is going.” 

Interestingly, a few small plans in the group PLANSPONSOR spoke with did strongly espouse the values of white labeling, suggesting for example that it may be especially helpful in preventing plan participants from making investment decisions based solely on brand name recognition, which is a big issue in the eyes of some plans.

Many in the skeptical group seemed to wonder: “What would be the point of white labeling when we know that target-date funds and managed accounts are doing a solid job of helping people invest properly?” Even if a sponsor simplifies the label of the funds on the core menu, building an efficient risk-adjusted portfolio on one’s own is still a difficult task for most participants.

Insights shared by Michelle Rappa, managing director and head of DCIO marketing for Neuberger Berman, offer some important context here. She explains that white labeling can in fact fit well with plan sponsors’ desire to simplify and streamline their investment menus—and that white labeling can complement the offering of TDFs or managed accounts.  

“Obviously usage of asset-allocation solutions, TDFs or managed accounts is one way to solve the challenge of participants being novice investors,” she notes. “But in reality it’s still only roughly a quarter of DC account assets that are held in target-date funds. That leaves a big portion of money in the core menu, so it is the responsibility of plan sponsors to make sure their core menu is in fact easy to use.”

Participants just don’t know how to interpret traditional names for investment options, she warns. “White labeling can make it much easier for a participant to construct their own approach.”

NEXT: White labeling transparently  

Experts stress that using white label funds (or indeed other types of custom asset-allocation solutions) does not, by itself, limit the amount of information to which plan participants have access. Simply put, white labeled fund investors must still be given access to all the information about their underlying holdings that would be required if each single fund was offered as stand-alone option. White labeling does not reduce the reporting burden for plan sponsors or investment managers, in other words.   

“Participants can make one allocation decision while the plan sponsor determines the asset classes, weightings and investment managers to include in the fund,” Rappa says. “For plans with the appropriate scale, resources, and expertise bundling the options together can help participants increase diversification but not overload the plan menu with investment options.”

Her firm has recently put out an analysis that argues, unlike TDFs, which group all employees with a common anticipated retirement date into the same fund, white labeling is actually “designed to help participants make more informed investment choices tailored to their individual needs and objectives.”

“Descriptive titles are assigned to each white label fund to make the underlying investment objectives easier for participants to understand,” the firm explains. “This reduces the number of investment options, further simplifying choices for participants who lack investment expertise.”

Of course, to ensure participants have all the information they need, plan sponsors will have to work with recordkeepers and investment managers diligently, and they will have to strike an ongoing balance between simplifying participant communications and meeting their own transparency obligations as fiduciaries.

“Information will need to be compiled, including data provided by the underlying investment managers, likely through tools provided by recordkeepers or other service providers,” the firm concludes. “As more retirement plan service providers, such as recordkeepers, are able to provide the services needed to support this option, it may become more available and more appealing to mid-size and smaller plans.”