Recently, most plan sponsors were forced to make a decision about keeping a particular fixed income fund in their line-up that many participants feel is the anchor to their 401(k) plan investment strategy. When Bill Gross left PIMCO, plan sponsors needed to consider whether PIMCO's flagship Total Return Fund should remain part of their investment menus. Many observers have used this situation to outline the benefits of white-labeling 401(k) plan investment funds. I don't believe that white-labeling makes sense, for the following reasons:
- Transparency. The process of white-labeling obscures the true identity of the funds that underlie a particular asset class. Proponents of white-labeling believe that if participants don't know what the fund is and who is managing it they will invest with more integrity based on their overall investment strategy. Unfortunately, white-labeling flies in the face of the overall movement in retirement plans towards transparency. Don't participants have a right to know what fund they are investing in and shouldn't that be a major consideration in determining whether they invest in it?
- Participant understanding. Participant understanding of 401(k) plans is paramount. Use of unbranded or white-labeled funds is great for a defined benefit plan where participants do not bear the investment risk or responsibility. But, with 401(k) plans, white-labeling can be confusing. Anything that helps participants better understand their plans should be embraced. Without question there are investment funds and mutual fund companies that participants quickly recognize, helping them become more comfortable with the investment offerings in their plans.
- Fund changes. Many experts believe white-labeling facilitates an easier fund change process. Funds or strategies can be changed without notifying participants. This is another activity that seems to lead to less transparency rather than more. Also, if a change is being made to an asset class I am invested in as a participant, why wouldn't I want to know that the change is being made? It would seem logical to alert plan participants to give them the opportunity to re-consider whether it makes sense to continue to invest in that asset class or strategy.
- Continuing follow-up. Using branded funds makes it possible for participants to obtain objective, unbiased information about their investment funds from many sources. White-labeling washes away this benefit since it is not possible to find publically available information about white-labeled funds from sources like Morningstar, for example.
- Super-star managers. Supporters of white-labeling believe that participants can become distracted when a super-star manager leaves a fund that they may be invested in. Since white-labeling hides the names of the investment funds from participants, many may not be aware of management changes. Shouldn't they be? The departure of a super-star manager can significantly affect that fund's future investment prospects. It may also alter the future path of that fund family. It would seem that a change like this should be shared with participants rather than hidden from them.
There is no question that white-labeling makes investment fund administration and communication easier for plan sponsors. However, 401(k) plans are not run for the benefit of plan sponsors. Rather, they are required to be run by the Department of Labor for the benefit of plan participants.
Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at firstname.lastname@example.org or 414.828.4015.
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