December 22, 2016
The Road To Retirement Is As Important As The Destination
White-Label Portfolios as a DC Menu Option
Authored By: Kristen Colvin
If you use the GPS map application Waze then you know that there are usually multiple routes to a destination, and that each could provide an experience remarkably different than the others. You could follow the easiest route and make it to your location on time and without stress, but you could also get stuck in heavy traffic, because you choose “shortest route” on the app instead of “fastest route.” Or, seeking to save time, you could choose the fastest route but find yourself in a confusing maze of one-way side streets littered with potholes.
Employees participating in defined contribution retirement plans also take different routes to a common destination — retirement — and have different investment experiences along the way. A primary driver of a plan participant’s experiences is asset allocation, and the widespread adoption of target date and other default strategies used for that purpose is well documented. What is surprising, however, is that even with the proliferation of Target Date Funds (TDFs), more than three- quarters of retirement plan assets are still invested in individual core menu options, as shown below in Exhibit 1. This has motivated some plan sponsors to enlist “white label” strategies for help. White label strategies contain one or more funds that are stripped of company and fund brands and replaced with generic asset class names or investment objectives such as “income” or “capital preservation,” among others. These solutions aim to improve core allocations (by making plan choices simpler), create more diversified portfolios and be more cost effective.
You can take a white label strategy a step further by aligning the type of investment experience the strategy will deliver with factors like participant perceptions of investing and plan demographics. In other words, you can build investment strategies that make the journey to retirement a bit more pleasant. The general characteristics, or “DNA,” of participant bases can vary greatly. Many DC plans, for example, have growing numbers of millennial workers (those born between 1980 and 2000) among their ranks. Having started their savings years with the bursting of the tech bubble followed by the global financial crisis, millennials tend to be conservative investors and concerned about losing money despite their long-term investment horizons. They have the same amount invested in cash and fixed income assets as older generations do. Plans with a significant millennial participant population should consider options that aim to limit losses in challenging market environments while still providing the growth opportunities critical for younger investors, given their long journey to retirement ahead.
By tailoring white label investment options to the characteristics and unique needs of a particular demographic or work force, the solutions can be optimized to deliver an investment experience that can drive better long-term outcomes for participants.
How can you determine what type of investment experience is most appropriate for a given population? Exhibit 2 provides some examples of factors plan sponsors can consider when evaluating the best approach for their plan. White label solutions incorporating these factors may help participants stay invested through various market conditions.
For most, there isn’t a perfect route to retirement. There are inevitable bumps and detours along the way. You can find ways to make the ride easier and less anxiety-provoking, however. Since plan demographics, behavioral beliefs and investment committee dynamics vary from plan to plan, these factors can play a role in determining the appropriate investment experience for a group of participants.
Demographic considerations such as age, employee turnover and the presence of a Defined Benefit (DB) plan are important drivers, while behavioral factors including loss aversion, engagement and professional profile are also important. Additionally, you should consider investment committee beliefs around expressing investment views and the role of a core menu. Taking all of these factors into consideration can help you optimize white label portfolios for your participants. While getting participants to their retirement destination is critically important, you can’t ignore the journey they will take to get there.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.
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