Plan sponsors, if you would like to frustrate, annoy and confuse your 401(k) plan participants, then white label your 401(k) plan investment funds.
“White labeling” is the process of renaming the investment funds in a 401(k) plan using the asset class name they represent. Proponents of white labeling believe that attaching generic labels to investment funds helps participants make better investment decisions. They also believe it makes it easier to make changes to an investment fund lineup — I guess because it hides the fact that changes are being made from participants.
I don’t believe that white labeling makes sense, for the following reasons:
It lacks transparency. The process of white labeling obscures the identity of the fund(s) being used. Proponents of white labeling believe that if participants don’t focus on the name of the fund, the fund company 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 401(k) plans toward 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? Obscuring the identity of the fund, fund company and fund manager would seem to run counter to the trend of greater transparency.
It can cause participant frustration. I can tell you from more than 30 years of working with participants that anytime white labeling is discussed it leads to participant confusion and lack of trust. Participants often ask, “Why are they trying to hide the name of the fund?” If I answer with “It is to help you focus on the asset class rather than the fund when you invest,” they become confused. Many participants become annoyed and frustrated because they feel white labeling makes it more difficult to figure out what they are really investing in. In all my years of working with plan participants, I have never had a participant say to me, “Bob, I'm sure glad the company white labeled all of the investment funds in my 401(k) plan.”
Lack of understanding leads to a devalued plan. Making sure participants understand their 401(k) plans is of paramount importance. Greater understanding leads to greater utilization (e.g., making more contributions) and a higher level of comfort. Participants who understand their employee benefits value them to a much greater degree than participants who don’t. 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. Hiding the identity of funds and fund companies would seem to be a stumbling block to achieving better participant understanding.
It hides complex investment strategies. If you have adopted a white labeling strategy because you are using more than one fund in an asset class, or creating a unique asset class by combining funds, maybe that investment strategy is too complex. Plan sponsors should be creating 401(k) plans that participants understand, value and use. In other words, plans that are simple to explain and understand. Save all of those unique investment strategies for your corporate investment accounts.
White labeled products are generally inferior. Most individuals who understand the white labeling concept associate it with generic or inferior branding. Why would you want to take a Vanguard or Fidelity fund and lower its value by white labeling it?
It obscures fund changes. Some practitioners believe white labeling facilitates an easier fund change process. Participants don’t have to be concerned about what is happening behind the curtain because the fund name hasn't changed, just the actual investment. This is another activity that seems to lead to less transparency rather than more. Participants have a right to know and understand why a change is being made to a fund they are invested in.
It’s not a best practice. White labeling is generally not considered to be a 401(k) investment menu best practice because it is very hard to determine what benefits participants receive from a white labeling process.
It’s hard to obtain objective information. Using actual fund names makes it possible for participants to obtain objective, unbiased information about their investment funds from many sources. White labeling washes away this benefit, especially when more than one fund is used in an asset class, since it is not possible to find publicly available information about white labeled funds from sources like Morningstar.
It hides the impact of superstar managers. Supporters of white labeling believe that participants can become distracted when a superstar manager leaves a fund 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 superstar manager can significantly impact a fund's future investment performance. 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’s 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, the Department of Labor requires them to be run for the benefit of plan participants.
Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, a RIA firm helping 401(k) plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.
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