A new research paper advocates changing out existing investmentoptions in defined contribution plans for white-labelfunds that it says could provide higher returns.

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

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

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

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While traditional DC plan structures have been tied to lineupscomposed of single standalone active funds with style andcapitalization biases, the paper suggests that instead plansponsors should consider more simplified lineups that containdiversified underlying structures.

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

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

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In addition, those funds may have to weather extended periods ofactive risk, with the manager underperforming. Instead, the papersuggests that this is where multimanager options come in, sincesuch custom options can “blend multiple high active risk managerswith complementary styles alongside lower-cost passive and smartbeta strategies.”

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

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They also have the potential to result in lower total plan costsby leveraging the scale of the plan to access cost-effectiveinvestment vehicles.

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Sponsors should focus “less on investment choice for the mostinvolved participants,” the paper concludes, “and more oninvestment simplicity to benefit the average participant that willrely on the plan to ensure their ability to retireeffectively.”

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