The Markets September 18, 2017

Plan Sponsors Can Gain from White Label Funds

In a new paper, Willis Towers Watson explores some of the advantages white label funds may offer. 

Reported by

In the past two decades, investment lineups for defined contribution (DC) plans have remained largely unchanged, according to Willis Towers Watson (WTW).

The firm believes plan sponsors can gain from revamping their lineups with a focus on “reframing the design of actively managed options with an emphasis on fewer, broader investment options to ease participant decision making.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The firm explores this concept in a new paper where it makes the case for multi-manager white label funds. WTW reports that these custom options can combine several active risk managers with complementary styles as well as lower-cost passive and smart beta strategies. As a result, these funds aim to provide participants with broad exposure to multiple asset classes as well as “skilled managers potentially at a total net cost below that of many stand-alone active fund options.” Thus, these finds may be able to secure similar returns at lower risk, or higher returns at similar risk.  

WTW also points to the advantage of greater freedom to make changes to the underlining fund managers. Plan sponsors typically rely on safe harbor provisions in making fund changes which require them to deliver notices to all participants within 30 days of replacing a stand-alone fund. As for white label funds, plan sponsors can replace an existing fund with a replacement option on short notice or allocate among the rest of the underlining funds. WTW says the 30-day fund change communication is usually not required because the white label structure and the participants’ individual investment choices would remain intact. For large plan sponsors, white label funds can be especially attractive because they can allow them to leverage “the scale of the plan to access cost-effective investment vehicles with the potential to reduce total plan costs.” The firm also notes its seeing a migration from stand-alone funds to more institutional collective investment trusts.

Of course, there are specific concerns for plan sponsors regarding white label funds that will have to be considered. 

When building multimanager white label options, WTW recommends focusing on multiple levels of risk including volatility, drawdowns and liquidity risks; focusing on investment ideas where the plan can capture returns from a competitive advantage; and only use active management where the net of fee proposition is compelling.

WTW’s full study can be found at WillisTowersWatson.com.

The Markets September 18, 2017

Callan DC Index Shows Strongest Yearly Gains Since 2006

The 3% return on the standard equity portfolio measured during the second quarter pushed the decade-old DC plan investing index to a record-breaking year. 
Reported by

The Callan DC Index returned “a healthy 3.06%” during the second quarter, reflecting strong equity market performance among defined contribution (DC) plan investors.

“Combined with impressive first-quarter gains, the Index is now up 7.87% year-to-date—its strongest first-half performance since its 2006 inception,” Callan reports. This strong performance is appreciably higher than predictions made widely by firms in the last year or two, as return forecasts for the next decade were trimmed to the low- to mid-single digits.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Somewhat troubling, the index actually trailed the typical age 45 target-date fund (TDF), which gained 3.65% in the second quarter and 9.42% in the first half of the year.

“These are the TDFs that would be selected by participants age 45 and retiring at age 65—or the typical DC participant,” Callan notes. For context, the firm reports TDFs have benefited from higher exposures to non-U.S. equity and emerging markets relative to real investors; both investing categories are up sharply year to date.

“The typical DC participant has less than 1% in emerging market equity exposure and less than 6% in non-U.S. equity exposure,” Callan says. “In comparison, the typical Age 45 TDF has 5.2% in emerging markets and 20.1% in non-U.S. equity. Exposure to stocks is greater in TDFs as well, with the equity allocation of the typical Age 45 TDF coming in at 76%, compared to the typical DC participant’s 70%.”

Callan researchers explain the average TDF has outperformed DC plan investors by 76 basis points annually since they first started measuring in 2006. As a rule of thumb, due to their overall heavier equity exposure, “TDFs have tended to outperform in strong markets, and underperform in weak markets.”

Also important to note about the performance history of the index, the last quarter’s increase was almost entirely due to return growth (3.06%) rather than inflows (plan sponsor and participant contributions), which contributed just 0.13%. “Since inception, the average plan balance has grown by an impressive 7.96% on an annualized basis,” Callan says, “and nearly three-fourths of this (5.88%) is due to market performance; the rest (2.08%) is driven by inflows.”

Callan further observes how the proportion of net flows into non-U.S. equities during the quarter was the highest since late 2007. “This is not surprising as DC investors tend to chase performance,” researchers suggest. “Money primarily flowed out of stable value, U.S. small/mid cap equity, and company stock. As usual, TDFs attracted the lion’s share of net flows, with 69 cents of every dollar of flows moving into these funds. Over the Index’s history, an average of more than 50% of net flows have been directed to TDFs. These consistent inflows have solidified TDFs as the largest holding in the typical DC plan.”

The quarterly analysis also states that investor turnover reached only about two-thirds of its normal rate during the quarter under consideration, while the DC index’s overall equity allocation edged up from last quarter to nearly 70%. This is slightly above the Index’s historical average of 67%.

The full index update is available here. 

«