Putting a White Label on 401(k) Investments

De-branding funds by only using generic asset-class wrappers has advocates and critics

By Joanne Sammer Apr 28, 2015

If you can sell white-label generic chicken soup, why not white-label investment funds for 401(k) and other defined contribution retirement plans? The rationale is the same: a comparable product for a lower price and a simple name describing what it is and what it does. However, not everyone is sold on white labeling, including many employers.

White-label investments are presented to 401(k) participants under a generic asset-class wrapper, with no brand names or indications of belonging to specific investment fund families. Typically, they carry only a descriptive asset-class name such as “Large-Cap Growth Fund” or “Small-Cap value Fund.” In effect, some plan sponsors are de-branding their 401(k) menus.

Proponents of white labeling contend that it helps keep retirement plans running more smoothly. For example, because white-label fund investment managers labor in anonymity (as far as participants are concerned), it is much easier for the plan sponsor to remove managers or funds for underperformance or to improve fund diversification without disrupting the plan or its participants.

Plan sponsors can more easily change the underlying funds within those generic labels because participants haven’t chosen to invest in, say, “Fidelity Magellan,” but “Large-Cap Blend” as determined by the plan sponsor. So if a substantially similar fund with a lower annual fee becomes available, a switch can easily be made.

While any reductions in investment fees paid out of plan assets are to the benefit of participants, white-label funds can also reduce administrative costs for the plan sponsor. For instance, by using white-label funds, plan sponsors do not have to pay plan administrators to reprogram record-keeping systems when funds change.

Moreover, plan participants’ priorities may be skewed by overly complicated fund options, leading them to focus too much on fund selection and not enough on whether they should increase their contribution rate, recent survey findings suggest.

Two Types

Originally white-label funds represented—and many still do represent—a single fund and management team. This type of white labeling simply uses an existing investment fund and places a generic white label name on it. Recently, however, some white label funds have become more sophisticated.

“Some companies are combining many different funds into one fund and giving it a white-label name,” said Rob Austin, director of retirement research for Aon Hewitt in Charlotte, N.C. “This is more of a ‘fund of funds’ approach. This type of white labeling is similar to what is happening to target-date funds” that bring together many different types of investments to achieve the fund’s objective.

Use of White Labels: By the Numbers

An Aon Hewitt survey of large U.S. employers conducted in July and August 2014 found that 24 percent use a white-label approach to retirement plan investment funds. The 76 percent of surveyed employers that do not use white-label funds cite several reasons for their decision: 52 percent have not even considered doing so, 37 percent prefer to use funds’ brand names, and 23 percent are concerned that employees could react negatively to such a change and that using white label funds will create communication challenges.

The employers using white-label funds say they do so to combine multiple investment managers under one fund (71 percent), to make it easier to change managers if needed (64 percent), to simplify participant communications (57 percent) and to lower total fund fees (43 percent).

Of the companies using white-label funds, 54 percent use white label funds for only part of their funds’ investment options and 46 percent use white label funds for their 401(k) plans’ entire fund lineup.

The Right Thing to Do?

Not everyone is a proponent of white labeling 401(k) plan investments. “White-label funds lead to less transparency in an environment that is moving toward offering more transparency,” cautioned Robert Lawton, president of Lawton Retirement Plan Consultants in Milwaukee.

He noted that using white labels could also lead to participants becoming less engaged with their investments because they don’t recognize the names of any of the funds offered by the plan, and can't read independent analysis of the funds at investment research sites such as Morningstar.com. “If an employer wants to help participants understand their benefits more completely so they can appreciate them more, I think white labeling hinders that,” said Lawton.

Lawton goes as far as to suggest that using white-label funds represents a breach of the plan sponsor’s fiduciary duty to plan participants. “When decisions are made that are primarily in the best interest of the corporation and not employees, I would consider that to be a fiduciary breach,” he said. (White label proponents counter that generic labels can deter participants jumping in and out of “hot” funds, which is to the participants’ advantage.)

Lawton also argued that reducing investment fees “does not have anything to do with white labeling because plan sponsors can use low-cost funds” without using white-label funds.

Not for Every Plan

White labeling also may not be appropriate for or available to some employers. For example, smaller employers may prefer to have name-brand funds from well-known fund families like Vanguard, Fidelity or Pimco as a way to bring more credibility to a smaller plan.

Even if small or midsize companies wanted to use white labeling, they may not have the critical mass of plan assets necessary to leverage these funds.

For the most part, “fund-of-funds” white-label funds are limited to large 401(k) plans because each fund requires roughly $100 million in assets to create, said Austin. He noted that plans with fewer assets have the option of pooling their assets with other smaller plans to increase their purchasing power and increase available asset sizes. However, doing so requires a trust vehicle to hold the assets and record-keeping to keep plan administration in order. Therefore, plan sponsors would have to work with a consultant or other expert to set up this arrangement.

This may be too complicated an undertaking just to set up white-label menus, and Austin urged plan sponsors to think carefully about whether this approach is worth the time and expense involved. “It takes a little bit of time to do this,” he said. “There may be other areas that an investment committee would rather focus its energy and time.”

Of course, there is a simple way to white-label investment funds without setting up trusts and pooling assets: Simply change the name of the funds in the plan. “Employers that do not want to completely overhaul their plans can use a white label guide that lists (each fund’s) real name and the white label name,” suggested Michael Clark, a certified financial planner in Orlando, Fla. “This way all the disclosures and all the plan communications do not need to be modified with the white label names. The white label guide can just be a helpful resource for the employee.”

If considering this, plan sponsors should first check any contracts or legal agreements to make sure there is no legal reason why they cannot white label the plan’s funds.

Joanne Sammer is a New Jersey-based freelance writer.​

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