Employers Look to Enhance 401(k) Investments

A new study finds many U.S. employers are replacing single, stand-alone investment options with multi-manager, “white-labeled” choices that can be easier for participants to use and understand.

According to the Towers Watson 2014 Defined Contribution Survey, many plan sponsors are also implementing custom target-date fund (TDF) solutions and outsourcing some or all of their daily 401(k) plan oversight. Other recent industry research has shared similar findings regarding so-called white-label investment options, which are built in one of two ways. The first is simply to take a singular fund and make the name generic on the investment lineup presented to participants. For example, instead of listing the “BlackRock U.S. Aggregate Bond Index,” the fund would be presented to participants as the “U.S. Bond Index fund.” The second strategy is more robust and involves working with an adviser or investment manager to build a fund-of-funds approach, through which a plan offers participants a pre-mixed fund option, for example, one called the “Large-Cap Equity fund.”

“Employers are taking a close, hard look at the investment structures of their defined contribution (DC) plans, given the impact plan structures can have on the retirement outcomes,” explains Sue Walton, a director in Towers Watson’s investment business. “In addition, many plan sponsors are beginning to embrace more complex and sophisticated strategies and structures as the challenge of meeting participant and plan needs increases.”

According to preliminary results from the Towers Watson DC survey, 40% of U.S. employers surveyed feel that using a multi-manager, white-labeled investment strategy is a more efficient approach to active management than relying on a larger number of single, standalone active options. Additionally, about half of the employer-respondents “see the value of custom TDFs,” Towers Watson says.

Walton adds that the survey results suggest plan sponsors are increasingly reluctant to offer their participants extensive and complex lineups of investment options. Instead, employers are looking at investment strategies that promote fewer options with much greater built-in diversity. Walton says the white-label fund-of-funds approach makes sense when considering the general lack of investing expertise and engagement among workplace retirement savers.

According to the Towers Watson survey, 22% of plan sponsors have already implemented a custom TDF solution, while 27% say they will consider implementing one at some point in the next few years. As the firm explains, a custom TDF allows a plan sponsor to unbundle key features of the TDF for better alignment of the glide path and portfolio allocations according to participant demographic needs.

Lorie Latham, also a director in Towers Watson’s investment business, says the firm believes the Department of Labor’s release of TDF tips has influenced plan sponsors to evaluate custom TDF solutions as a viable alternative.

“Plan sponsors also understand the importance of their TDF offering and know they need to get it right,” Latham adds.

According to the survey, a growing number of plan sponsors are outsourcing the oversight of their DC plans. One-third of respondents currently delegate either all or a portion of their plans’ oversight, or may be interested in doing so.

“With DC plans now requiring more time and expertise from plan sponsors than ever before, it’s not surprising to see that the outsourcing of plan oversight is gaining traction,” Walton says. “As the investment opportunity set becomes increasingly more complex and the stakes get higher for the success of DC plans, employers need to consider the right governance equation, which may include seeking third-party partnerships.”

Towers Watson says these findings are based on a preliminary review of the DC survey responses. The full survey results will be available in October.