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.
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 email@example.com.
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 firstname.lastname@example.org or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
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.