Listen To Your Participants: Don’t White Label 401k Investment Funds

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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Plan sponsors, if you would like to frustrate, annoy and confuse your 401k plan participants, then white label your 401k plan investment funds.

“White labeling” is the process of renaming the investment funds in a 401k 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.

PLANADVISER recently published a well-written piece titled “Does White Labeling Conflict With Transparency Trends?” The answer is “Yes!” 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 401k 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 401k plan.”

Lack of understanding leads to a devalued plan

Making sure participants understand their 401k 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 401k 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 401k 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 is no question that white labeling makes investment fund administration and communication easier for plan sponsors. However, 401k 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.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Investment Advice That Will Pass Time’s Test

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I hope you had a wonderful weekend! Today is “National Chocolate Chip Day!”

LRPC’s Monday Morning Minute for this week, “Investment Advice That Will Pass Time’s Test” (presented below) comes to you courtesy of Bob Seawright, Chief Investment Officer, Madison Avenue Securities. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week.

I read a lot of articles on how to invest. This is one of the better ones I have read recently.

Have a wonderful week!

_______________________________

Investment Advice That Will Pass Time’s Test

By Bob Seawright, Chief Investment and Information Officer, Madison Avenue Securities

Every year Wall Street’s strategists offer careful, nuanced and even compelling investment advice for what will happen in the markets and in our world in the coming year. But whenever I look back at how those various predictions turned out, I have found that they are like August humidity in the South — consistently and astonishingly dismal. Moreover, when one of them does get a forecast right or almost right, that performance quality is not repeated in subsequent years.

My friend Morgan Housel, a columnist for Motley Fool, looked at the average Standard & Poor’s 500 stock index forecast made by the 22 chief market strategists of the biggest banks and brokerage firms from 2000 to 2014. On average, these annual forecasts missed the actual market performance by an incredible 14.6 percentage points per year (not 14.6%, but 14.6 percentage points!).

Alleged experts miss on their forecasts a lot and miss by a lot, a lot. Let’s stipulate that these alleged experts are highly educated, vastly experienced, and examine the vagaries of the markets pretty much all day, every day. But it remains a virtual certainty that they will be wrong often, and often spectacularly wrong. On account of hindsight bias, we tend to see past events as having been predictable and perhaps inevitable. Accordingly, we think we can extrapolate from them into the future. But the sad fact is that we can’t buy past results. We cannot predict the future.

The market predictions offered by experts (and others) and the thought processes underlying them can be very entertaining. They are indeed the engine that drives much of what pretends to be financial and business television. But none of us should take them seriously. Your crystal ball does not work any better than anyone else’s.

Sadly, such dreadful forecasting performance is indicative of dreadful investment performance. The vast majority of investment strategies are predicated upon the ability to forecast the future. These results are no better than the forecasts. As longtime chair of the Yale Endowment Charles Ellis outlines it, research on the performance of institutional portfolios shows that after risk adjustment, 24% of funds fall significantly short of their chosen market benchmark and have negative alpha, and 75% of funds roughly match the market and have zero alpha, while well under 1% achieve superior results after costs — a number that is not statistically significantly different from zero, largely because of fees.

Hedge failures

To pick one particularly egregious example, hedge funds — despite (and partly because of) enormous fees — have badly underperformed. Since 1998, the effective return to hedge-fund clients has barely been 2% per year, half the return they could have achieved simply by investing in Treasury bills.

Thus, per Nassim Taleb, successful managers have risen “to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions.” In other words, we desperately pull money from our latest poorly performing strategy to put it into some new approach that has been doing great, only to see the same pattern repeat itself.

Sound familiar? John Paulson achieved great notoriety for betting against the real estate markets ahead of the 2008–09 financial crisis and accumulated billions of investor dollars into his hedge fund as a result, only to get crushed in 2014, losing 36% in his Advantage Plus fund despite a very strong market environment.

Not only is it really hard to beat the market overall, but when you do make a smart investing move (purchasing an investment that will actually outperform, however, you define that), its impact is reduced every time somebody else follows suit. It is axiomatic in the investment world that as an asset class becomes more popular, it suffers from both falling expected returns and rising correlations. Crowding occurs because success begets copycats as investors chase returns. General mean reversion only tends to make matters worse.

In other words, the more smartness there is in the aggregate, the less you can profit from it. Michael Mauboussin describes it as the paradox of skill: “As skill improves, performance becomes more consistent, and therefore luck becomes more important.” Accordingly, those (very) few funds and managers that have a successful long-term track record end up outperforming their peers by precious little indeed.

On the other hand, the impact of bad decision-making stands alone. It isn’t lessened by the related stupidity of others. In fact, the more people act stupidly together, the greater the aggregate risk and the greater the potential for loss, which grows exponentially. Think of everyone piling on during the tech or real estate bubbles. When nearly all of us make the same kinds of mistakes together — when the error quotient is really high — the danger becomes enormous.

Perhaps worst of all, the returns achieved by investors are even lower than those obtained by managers because we are enslaved by our emotions and poor decision-making. When something isn’t right (or doesn’t seem right), our default response is to do something. And what we do is to insist on buying what was just hot and selling what has just underperformed, guaranteeing that we buy high and sell low, which is exactly what we shouldn’t do.

Reducing mistakes

We all want “high leverage” ideas — the ideas that will make the biggest impact on our portfolios and our lives. But the best ideas available are not still more investment recommendations about hot sectors, hot funds, hot strategies and hot managers. There is no reason to think anybody can do that anyway.

The best ideas I can offer relate to our besetting mistakes, mistakes we make over and over again. My high leverage idea for this year and beyond is to get off the merry-go-round of the next new thing and to eliminate obvious mistakes first and foremost. As Charley Ellis famously established, investing is a loser’s game much of the time, with outcomes dominated by luck rather than skill and high transaction costs. Thus if we avoid mistakes we will generally win.

To paraphrase the philosopher Immanuel Kant, the first task of reason is to recognize its limitations. Every rational person acknowledges having made many errors. Even so, nobody offers current examples. We all want to think that our mistakes are in the past, that we’ve learned from them and that now we’ve set things right.

We desperately want to believe that our new approach, new strategy or new portfolio will — finally — be the magic elixir that will make us very good, if not great, investors (or at least that we can find those great investors).

Best ideas

Since we can’t forecast the future, it is imperative that our investment approaches resist the temptation to build our investment platforms on future forecasts. Accordingly, here is a quick summary of my top investment ideas for this year (or any other year), none of which is dependent upon prophecy.

1. Einstein wisely advised that we keep things as simple as possible, but no simpler. Overly complicated systems, from financial derivatives to tax systems, are difficult to comprehend, easy to exploit and possibly dangerous. Simple rules, in contrast, can make us smart and create a safer world.

2. Out of our general fear, we all too frequently bail on our investments and our plans and fail to invest altogether. But if we’re going to succeed, we need to invest, continue to invest and stay the course. Multiple studies have shown that those who trade the most earn the lowest returns. Remember Pascal’s wisdom: “All man’s miseries derive from not being able to sit in a quiet room alone.”

3. The Uniform Prudent Investor Act stated: “Because broad diversification is fundamental to the concept of risk management, it is incorporated into the definition of prudent investing.” Fortunately, a well-diversified portfolio captures most of the potential upside available with much lower volatility. On the other hand, a well-diversified portfolio will always include some poor performers, and that’s hard for us to abide. Do it anyway.

4. The idea that an investor ought to be aware and nimble enough to avoid market downturns or simply to find and move into better investments is remarkably appealing. But nobody does it successfully over time. We’ve all seen and done this: we find a hot new approach or hot new manager and, because what we own hasn’t been doing so well, we switch, only to find that the hotness that caused us to buy has cooled. We need to get off that merry-go-round.

5. The leading factor in the success or failure of any investment is fees. In fact, the relationship between fees and performance is an inverse one. Every investor needs to count costs.

6. Multiple studies establish what we should already know: a manager who has a significant ownership stake in his fund is much more likely to do well than one who doesn’t. Make sure to look for “skin in the game” from every money manager you use.

7. Don’t be afraid to ask for and get help. American virologist David Baltimore, who won the Nobel Prize for Medicine in 1975, once told me that over the years (and especially while he was president of Caltech) he had received many manuscripts claiming to have solved some great scientific problem or overthrown the existing scientific paradigm to provide some grand theory of everything. Many prominent scientists have drawers full of similar submissions, usually from people working alone and outside the scientific community. As Dr. Baltimore emphasized, good science is a collaborative, community effort; crackpots work alone.

A smart investor looks for what can be done that offers the greatest opportunity to achieve success in the markets. Finding and implementing these best ideas is deceptively easy conceptually yet monumentally hard to put into practice. Let’s start by systematically eliminating our most obvious mistakes. The more we do that, the better this year can turn out to be, irrespective of what the markets do — no predictions required.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Should 401k Plans Offer Only Index Funds?

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By Robert C. Lawton, President, Lawton Retirement Plan Consultants, LLC

A number of retirement plan experts believe that 401k plan participants should only be allowed to invest in index funds. They say the additional cost that participants pay for actively managed mutual funds is not justified by better performance. Some 401k plan sponsors have agreed, offering only index funds in their fund lineups. Is that a good idea?

Arguments For Using Only Index Funds

[Read more…]

Six Keys To Investment Success: T. Rowe’s Brian Rogers Reflects

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I hope you had a wonderful weekend! Remember Valentine’s Day is tomorrow!

LRPC’s Monday Morning Minute for this week, “Six Keys To Investment Success: T. Rowe’s Brian Rogers Reflects” (presented below) comes to you courtesy of ThinkAdvisor. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week. This is a short piece I believe everyone can read in less than 60 seconds.

As his retirement approaches, Brian Rogers, Chairman and CIO at T. Rowe Price, shares his knowledge gained from 35 years working with investments.

Have a wonderful week!

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Six Keys To Investment Success: T. Rowe’s Brian Rogers Reflects

By Emily Zulz, Staff Reporter, ThinkAdvisor

On Brian Rogers’ desk at T. Rowe Price is an engraved cube displaying the reminder, “Doubt everything. Believe nothing.” “And I think those are good things for investors to do,” as well, Rogers said

As the time nears for him to step down from his current roles as chairman and CIO at T. Rowe, Rogers is taking time to reflect on his career. “One thing that really struck me” in 1982 when he joined T. Rowe, he recalled at the event, is how “passive was making increasing inroads into our business.” In addition, he said, “fees were under cyclical pressure in 1982. Fast forward to 2016 and it feels like the same two trends are in place, and will continue.”

Recently, T. Rowe Price announced that Rogers will retire as chairman and CIO on March 31, 2017, after nearly 35 years at the firm. While he will stay on as a non-executive chair, his role as CIO will be taken on by six senior investment executives. Recently, Rogers shared six keys to investment success he’s learned over his career. [Read more…]

Six New Year’s Resolutions 401k Plan Sponsors Should Make

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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

I hope that 2016 was a great year for you and that 2017 will be even better!

A few changes can make your good 401k plan into a great one. To help your 401k plan achieve greatness, consider making the following 401k plan improvements by year-end: [Read more…]

The Five Deadly Sins Of Investing

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I hope you had a great weekend! Time’s running out for you holiday shoppers!

LRPC’s Monday Morning Minute for this week, “The Five Deadly Sins Of Investing” (presented below) comes to you courtesy of ThinkAdvisor. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week. If you are short on time, make sure you take a look at each of the five headings below.

Sometimes the best way to improve how you invest is to learn what not to do. This week’s article outlines some of the biggest investing mistakes all investors should avoid.

Have a wonderful week!

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The Five Deadly Sins Of Investing

By Daniel S. Kern, appearing in ThinkAdvisor

One of my friends in school was renowned for frequently telling us: “I aced that test!” He was never shy about sharing his answers after a test. His certainty about the answers made me question whether my answers were correct.

I eventually realized that he was wrong more often than right, and he became notorious for misplaced self-confidence. When he joined an investment firm after graduating from school, some of us joked about starting a “contrarian” fund to bet against his stock picks. Overconfidence is one of the “deadly sins” highlighted in studies of behavioral economics.

The investment industry is filled with confident people similar to my friend, who may be well-meaning but who also pass along bad ideas that become accepted as conventional wisdom. Here’s my top five list of investing mistakes that become deadly sins of investing: [Read more…]

Socially Responsible Investing Ratings Can Boost Your 401k’s Value

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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Recently Morningstar, creator of the Morningstar Star Ratings for mutual funds, introduced Sustainability Ratings to gauge an investment’s adherence to SRI principles. 401k plan participants, millennials especially, have become interested in socially conscious and impact investing. A recent U.S. Trust survey found SRI factors are important to 93% of millennials when making an investment decision. Your 401k plan can have greater value to your employees if you begin sharing Morningstar’s Sustainability Ratings for your 401k investment options. [Read more…]

Did You Hire The Right 401k Investment Adviser?

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PSI Newsletter and Website Header 10.2.15

By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

As a 401k plan sponsor, you are probably aware that there are some new fiduciary regulations going into effect in April of 2017. You probably have spent some time wondering (worrying?) whether these regulations affect your relationship with the investment adviser or investment advisor who works with your 401k plan. They might. Here’s how to tell. [Read more…]

How To Hire A 401k Investment Adviser

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By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

Employer plan sponsors often ask me which investment adviser credentials are most important to look for when hiring a 401k investment adviser. As a 401k investment adviser myself, I have observed a number of plan sponsors hiring the wrong advisers because they aren’t looking at the right investment adviser credentials and are using an incorrect set of criteria to judge who is best.

Following are some universal, common sense criteria that plan sponsors can apply when hiring a 401k investment adviser along with important investment adviser credentials to evaluate. The information is divided into what I would consider the three major categories plan sponsors should evaluate: Fiduciary Responsibility, Firm and Background. [Read more…]

What Plan Sponsors Need To Do NOW In Response To 401k Money Market Fund Rules

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PSI Newsletter and Website Header 10.2.15

 By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

The large mutual fund families are doing everything possible to keep you from moving your 401k money market investments away. BlackRock, Federated, Fidelity and Vanguard have all announced changes to their money market fund offerings which they hope will allow them to retain existing 401k money market balances. These changes are in response to the Securities and Exchange Commission (SEC) 401k money market fund reform rules outlined below. [Read more…]