Investing September 18, 2017

White Labeled Funds Attract More Plan Sponsors

Willis Towers Watson makes the case for white label funds in a new paper.

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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.”

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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.

Benefits September 18, 2017

Employers Bracing for Increase in Health Benefits Costs for 2018

Employers are looking at various cost-controlling strategies such as partnering with Centers of Excellence and offering telemedicine services.

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Employers expect health care benefits costs to rise by 4.3% in 2018, marking the highest increase since 2011 when costs rose by 6.1%, according to a study by Mercer.

The global consultant says the spike is being fueled by the rising costs of pharmaceuticals, which will increase more than 7% next year as spending on new specialty medications skyrockets. Respondents to Mercer’s survey reported that spending on specialty drugs rose by about 15% at their last renewal.

In response, many employers say they plan to raise deductibles and switch carriers. But they are also exploring alternatives that can keep costs down without pushing a large burden onto employees.

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For example, employers are looking toward network strategies such as Accountable Care Organizations and Centers of Excellence. In addition, several employers are trying to keep employees healthy and as far away from the hospital as possible through wellness programs that incentivize employees to make healthier life choices. Other studies have also indicated rising use of Health Savings Accounts, which allow employees to save for current and future medical costs through tax-preferred investing.

Mercer notes employers are also “moving away from traditional fee-for-service provider reimbursement toward new payment models that reflect the value of the services provided rather than just the quantity.”

“There are ‘real world’ examples of how these strategies can work,” Tracy Watts, senior partner and Mercer’s leader for health reform. “For example, Mercer Health Advantage, an enhanced care coordination and support service for employees with very serious health issues, greatly improves the patient experience while saving an average of $3.30 for every dollar spent.”

The global consultant notes that cost-reducing strategies will be crucial in light of the impending “Cadillac Tax.” Because Congress was unable to adopt a new health care bill, the Affordable Care Act stands and the excise tax is slated to go in effect in 2020 unless the ACA can be repealed and replaced.

Watts says “The excise tax creates pressure to generate immediate cost savings though cost-shifting or other short-term fixes. But employers are also making good progress with longer-term strategies that address the root causes of high cost and cost growth.”

She adds, “Employers find the challenge of juggling cost-management objectives and affordability issues for employees gets harder every year. Consumerism has a role in addressing rising costs, but there are many factors that drive costs, separate and distinct from relative generosity of the plan design.”

These findings are taken from preliminary responses to the National Survey of Employer-Sponsored Health Plans 2017 by Mercer. More information can be found at Mercer U.S.

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