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.”
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.