At the dawn of the 401(k) era, the options for investment were fairly few and simple: often a guaranteed investment account, backed by an insurance company, that paid a fixed annual return, plus one equity fund and a stable value fund. In the 30 years or so that followed, the industry decided that broader investment choices were desirable, and sponsors turned to investment managers, which gladly supplied mutual funds investing in all the world’s markets.
Subsequent results revealed that most participants responded with little enthusiasm, or had little acumen, for investing on their own. Moreover, mutual funds turned out to be an expensive investment vehicle. Thus, the last 10 years have seen plan sponsors exercise greater control of their defined contribution (DC) plans, and one tactic growing in importance for a broad range of plans is the white label fund. To participants, they offer a straightforward means for investment; to sponsors, they allow more effective plan governance, greater portfolio sophistication and a route to lower costs.
The white label concept is fairly simple: A plan sponsor, through its custodian establishes an investment option, granting it a simple name such as “Employer ABC Equity Fund.” Within that white label wrapper, the sponsor can insert vehicles such as mutual funds, collective trusts (CTs) or separate accounts, investing in one or several asset classes, and having management provided by one or more investment firms.
Daily valuations on white label funds are not published in newspapers, as are ’40 Act fund prices, but the technology of recordkeeping platforms provides just as much transparency and information, says Michael Cagnina, vice president and managing director of North American sales at SEI Institutional, in Oaks, Pennsylvania. “Today, that is no longer a rational argument for not using a white label option,” he says. SEI oversees $5 billion white label funds for clients.
As with most financial innovations, white label programs were at first dominated by large defined contribution plans and dedicated to equities in the U.S. market. Smaller plans are, today, adopting the idea. “Now white label funds are all over the map,” observes David O’Meara, senior investment consultant in the New York City office of consultants Willis Towers Watson. “The consolidation of plan lineups into fewer funds has provided sponsors and asset managers with greater scale in portfolios, and we’ve seen [white labeling] move from U.S. equities to the international markets, and fixed income as well.” White label programs are also many sponsors’ choice for custom multi-asset portfolios and target-date funds (TDFs).
One compelling reason for going white label is lower and more straightforward costs: Collective trusts and separate accounts do not carry the legal and regulatory overhead of conventional mutual funds, so sponsors pay managers for investment advisory services only. Moreover, unlike with a mutual fund structure, managers have flexibility on fees.
Expenses for auditing, recordkeeping and other administration services are paid separately, “so sponsors know what they are paying for each piece,” notes Sabrina Bailey, global head of retirement solutions at Northern Trust Asset Management, in Chicago. Northern Trust has custody of $320 billion of defined contribution plan assets, of which 86% have white label portfolios; a vast majority of those invest through collective trusts or separate accounts.
Portfolio management can also be more efficient with collective trusts. Cash flows into a fund dedicated to a defined contribution plan tend to move less than those of retail mutual funds, reducing trading activity and costs, and requiring lower holdings of idle cash to meet liquidity needs.
“But it’s not just a race to the bottom on fees,” O’Meara points out. “Sponsors can look for the highest-quality managers and best outcome for their participants.” He adds that investment managers are now more open to the white label and collective trust model.
White labeling is not a panacea, however, observes Lori Latham, senior DC strategist at T. Rowe Price Group, Baltimore. “It requires more oversight from the sponsor, and there are administrative costs and factors to layer in: setup to be done with the recordkeeper, paying the custodian to strike a daily NAV [net asset value] for the fund, and creating fact sheets for the custom funds.” Her firm runs a book of roughly 60 collective trusts with over $70 billion in assets, most of that amount in target-date funds.
On the investment front, white labeling allows sponsors to tailor portfolios to their participants’ specific needs, such as unique demographics that call for a custom glide path in a TDF. For core menu choices, multi-asset and multi-manager funds bring greater flexibility in choosing managers. “You can match up managers that look at the world differently, and create diversity within the fund in management style,” O’Meara notes. “That can make for a more robust portfolio—one that performs well over the long term, with less noise in the interim.”
Managing the managers is simplified as well. As an example, “One of our large clients offers a core-plus fixed-income strategy of $650 million within a $12 billion plan,” says Cagnina. The portfolio has primary exposure to core investment-grade bonds and a smaller portion in high-yield bonds; a manager at SEI makes the decision on how much to allocate to each. “Underneath that, there are multiple outside managers on both the core and high-yield portions,” he adds, “and, in the last few years, two managers were taken out and two added. That all happened behind the scenes, with no blackout period.”
Changing managers readily is not the only flexibility white label arrangements can bring. “We know there will be changes in the markets,” Cagnina says. “White label vehicles give sponsors the ability to introduce better ideas—tactics to keep up with market events and risk-management techniques that would help in a certain environment.”
“We hear a lot about the likelihood of low returns in the future. What does that mean for people’s retirement?” says Anne Ackerley, head of the U.S. and Canada group at BlackRock, in New York City. BlackRock is a U.S. industry leader, managing over $650 billion in DC assets, of which the bulk resides in separate accounts and collective trusts. “The flexibility of multi-asset portfolios, possibly incorporating illiquid asset classes—and white label structures—is going to be part of how we help participants enhance their returns,” she says.
“For some time, this market has been driven mostly by plan sponsors wanting to lower fees and having to jump completely to passive to do so meaningfully,” O’Meara says. “But now the fund management community is more familiar with the structures and [the] banking relationships [those] need, and with meeting sponsors at the table, saying they don’t have to move entirely to passive to create plans that are more efficient and earn returns better than the market.
“We’re seeing everyone in the industry getting more comfortable with these strategies,” he adds. “Within 10 years, I wouldn’t be surprised if collective funds and white label programs have pushed mutual funds aside almost entirely.”