A new study finds many U.S. employers are replacing single,
stand-alone investment options with multi-manager, “white-labeled” choices that
can be easier for participants to use and understand. According to the Towers
Watson 2014 Defined Contribution Survey, many plan sponsors are also
implementing custom target-date fund (TDF) solutions and outsourcing some or
all of their daily 401(k) plan oversight.
Other recent industry research has shared similar findings
regarding so-called white-label investment options, which are built in one of
two ways. The first is simply to take a singular fund and make the name generic
on the investment lineup presented to participants. For example, instead of
listing the “BlackRock U.S. Aggregate Bond Index,” the fund would be presented
to participants as the “U.S. Bond Index fund.” The second strategy is more
robust and involves working with an adviser or investment manager to build a
fund-of-funds approach, through which a plan offers participants a pre-mixed
fund option, for example, one called the “Large-Cap Equity fund.”
According to preliminary results from the Towers Watson DC
survey, 40% of U.S. employers surveyed feel that using a multi-manager,
white-labeled investment strategy is a more efficient approach to active
management than relying on a larger number of single, standalone active
options. Additionally, about half of the employer-respondents “see the value of
custom TDFs,” Towers Watson says.
Walton adds that the survey results suggest plan sponsors
are increasingly reluctant to offer their participants extensive and complex
lineups of investment options. Instead, employers are looking at investment
strategies that promote fewer options with much greater built-in diversity.
Walton says the white-label fund-of-funds approach makes sense when considering
the general lack of investing expertise and engagement among workplace
retirement savers.
According to the Towers Watson survey, 22% of plan sponsors
have already implemented a custom TDF solution, while 27% say they will
consider implementing one at some point in the next few years. As the firm
explains, a custom TDF allows a plan sponsor to unbundle key features of the
TDF for better alignment of the glide path and portfolio allocations according
to participant demographic needs.
Lorie Latham, also a director in Towers Watson’s investment
business, says the firm believes the Department of Labor’s release of TDF
tips has influenced plan sponsors to evaluate custom TDF solutions as a
viable alternative.
According to the survey, a growing number of plan sponsors
are outsourcing the oversight of their DC plans. One-third of respondents currently
delegate either all or a portion of their plans’ oversight, or may be
interested in doing so. Towers Watson says these findings are based on a
preliminary review of the DC survey responses.
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