Following the long-awaited publication of the Department of Labor’s tips for target date fund fiduciaries in 2013, the core investment menu seemed to fall off the radar for many plan committees. But even with the remarkable growth in target date funds since then, the core menu is still home to 66 percent of plan assets.1
White label investments in 401k and similar defined contribution plans are not a new phenomenon. Large defined contribution plans have used them for many years, and until recently, the primary focus was on the mechanics.
Now that white labeling is more common, many of the operational difficulties have been addressed. There are also consultants, asset managers and record keepers who can help with pieces of the puzzle.
Beyond the operational aspects, there are more important questions for plan sponsors to consider:
- Should the options be organized by objective or asset class?
- What are the appropriate risk targets?
- Do we re-enroll participants or map assets from existing investment options?
- What do we name them?
These questions, and many more, fall under two key areas that are critically important for plan sponsors to consider—strategy and communications.
Strategy
When planning a transition to white labeling, it’s important for a committee to develop a high-level set of goals for the core investment menu. Before this discussion can begin, leverage data from the plan’s recordkeeper. Some of the key data points should include:
- Percentage of plan assets residing in the core menu
- Investment concentrations
- Average levels of risk and expense experienced by different groups
- Demographic patterns
Once the data have been collected and analyzed, the committee can begin to formulate a strategy for the white label options. For example, some plan sponsors have expense reduction as their number one goal, while others are focused on reducing the number of investment options.
The next big decision is whether to pursue an asset-class approach or one that is more objective-based.
Another important consideration is the existence of a DB plan. This may alter the risk level that you target in the core menu. For example, since a pension benefit behaves much like fixed income in a participant’s overall portfolio, it might make sense to target a higher risk level in the core menu equity options. Another factor is employee demographics.
Lastly, plan sponsors may consider outsourcing the white label options to a 3(38) fiduciary. This is becoming more common and it may ease the complexity of — but not remove — the governance required on the investment options. There are consultants and outsourcing specialist firms that are willing to take on this role.
Communications
When introducing white label funds, participant communication is critical. All of the work, good intentions and advantages may be completely misunderstood by participants if the rollout isn’t communicated thoughtfully. Participants may also become less engaged if they don’t recognize the names of the funds.
Invesco’s ongoing financial language research—which encompasses more than 50 focus group sessions and several national surveys—shows that participants are deeply skeptical of “new” plan features. And who can blame them? When it comes to employer benefits, participants tend to associate the word “new” with adverse changes.
Based on our research, there are three steps to successfully introducing white label options:
- Acknowledge participant goals and how the new options can help meet them.
- Explain why the investment menu is changing and the benefits.
- Provide a straightforward summary of the fees.
Our research has also found that it’s important to relate a new investment to one that is already known and has a more established level of familiarity. For example, explain to participants that white label options operate in a similar way as mutual funds.
Investments costs should be crystal clear. If there’s a reduction in expenses, it’s important for sponsors to highlight that benefit. Surprisingly, our focus group participants indicated that unexpected or unexplained fees were even less desirable than underperformance.
Terms that didn’t resonate with participants in our studies include highlighting “institutional quality” or “best in class” managers. Finally, to make sure your communications hit the mark, consider holding your own participant focus groups to explore these issues. Plan sponsors like the City of Los Angeles—featured in a previous issue of this publication—have been conducting focus groups for years, gathering valuable information along the way.
Bottom line
Simplifying your investment menu, improving diversification and lowering costs for participants are noble pursuits. However, understand that the decisions and planning involved with implementing white label funds take time.
Even if you are only exploring the possibility for your plan, it’s worthwhile to begin talking with your committee about some of the high-level considerations. There are plenty of expert partners who can help you along the way including consultants, recordkeepers, asset managers, and custodians.
Greg Jenkins, CFA, is head of Institutional Defined Contribution with Invesco.
1 Source: Callan Associates, The Callan DC Index, 4th quarter 2016