A new research paper advocates changing out existing investment options in defined contribution plans for white-label funds that it says could provide higher returns.

The Willis Towers Watson paper “White label fund options for DC plans” points out that while two primary factors in achieving successful retirement outcomes within DC plans are participant savings and the return on investments, plan design features have changed over the years and are changing participants’ saving behavior.

While features like auto-enrollment and auto-escalation are boosting how much participants save—and “target-date funds [are] revolutioniz[ing] the asset allocation option in most plans,” the same is not the case for “the core lineup of the vast majority of plans,” which have not seen much change in two decades.

“We believe it’s time for DC plan sponsors to rethink these legacy investment lineups,” the study says, suggesting “reframing the design of actively managed options with an emphasis on fewer, broader investment options to ease participant decision making.”

While traditional DC plan structures have been tied to lineups composed of single standalone active funds with style and capitalization biases, the paper suggests that instead plan sponsors should consider more simplified lineups that contain diversified underlying structures.

Among its suggestions are active management in the form of multimanager portfolios, since it says that “active managers that are willing to stray farther from the benchmark have a greater likelihood of adding value over time,” and custom options created just for sponsors’ plans.

Many existing standalone active equity funds currently in DC plan lineups, it says, are “overly diversified and don’t justify their relatively high active management fees.”

In addition, those funds may have to weather extended periods of active risk, with the manager underperforming. Instead, the paper suggests that this is where multimanager options come in, since such custom options can “blend multiple high active risk managers with complementary styles alongside lower-cost passive and smart beta strategies.”

In addition, it’s easier for sponsors to change underlying fund managers under a white label fund structure, forestalling reallocations and avoiding risks to safe harbor protections.

They also have the potential to result in lower total plan costs by leveraging the scale of the plan to access cost-effective investment vehicles.

Sponsors should focus “less on investment choice for the most involved participants,” the paper concludes, “and more on investment simplicity to benefit the average participant that will rely on the plan to ensure their ability to retire effectively.”

Instant Insights /

White-label fund options could boost DC plan returns

More From HR Executive

Related Stories

Recommended For You