PLANSPONSOR - August/September 2018 - 49

Outcomes can improve as well, she
adds. " A plan might have multiple equity
core options-U.S. large cap growth, value
and core, for instance. Put those three
together into one white label option and
you have created a better diversified equity
investment that will likely reduce volatility
over time, and simplified the choices
participants have to make. "
From the sponsor perspective, once
inside the white label structure, there is
greater latitude in managing the fund.
" Say a plan offers the ABC Growth Fund,
but its star portfolio manager leaves and
the sponsor decides it's best to hire a new
manager, " says Brad Smith, a partner
in the Atlanta office of consulting firm
NEPC. " If ABC Growth is a stated fund in
the plan, the recordkeeper has to notify the
participants of the change in advance, and
the best case scenario is three months-
often six months-to communicate that
to participants and get it out of the plan.
With a white label product, participants
are investing in Sponsor XYZ Growth
Fund rather than ABC Growth directly,
and the sponsor can replace the underlying
fund the next day. "
Collective investment trusts-also
known as collective trust funds, commingled
funds, and by several other names-
are an alternative to mutual funds.
Morningstar reckoned the universe of
CITs relevant for defined contribution
plans at about $2.4 trillion at mid-year-
large indeed but dwarfed by the U.S.
mutual fund world of $16 trillion.
CITs operate in a simpler regulatory
sphere than do mutual funds, making for
reduced operational expenses. They are
regulated by the Office of the Comptroller
of the Currency and not the Securities
and Exchange Commission (SEC) as
mutual funds are.
More important, however, is their
ability to vary the investment management
fee rate for a particular investment
vehicle based on the client-as opposed
to charging the uniform fee rates mutual
funds are required to, regardless of investment
size. CITs also can accommodate a
greater variety of assets than can mutual
funds, including illiquid alternatives, and
are likely candidates for white labelling.
From a participant perspective, CITs
are traded and priced daily and closely
resemble mutual funds.
Although once the province of the
largest plans, CITs have become available
to smaller employers. " In an ideal structure,
those who maintain CITs[-typically
trust companies-]are sensitive to
both large and small sponsors, " says Greg
Ungerman, defined contribution practice
leader at financial consultants Callan LLC
in San Francisco.
" The asset manager deals with one
pooled investment account, which might,
for example, have share classes for investments
of zero to $50 million, $50 million to
$100 million, and above $100 million-all
at different fee rates-and a negotiable fee
for accounts larger than that, " Ungerman
says. A sponsor of the last size plan might
engage a CIT's manager for other strategies
in its DC or DB plan. " These strategies
come in various forms and with managers
that are responsive to sponsors' needs; they
can be a win for everyone, " he says.
" There is a real value to structures
that combine white labeling and collective
trusts, " Lieb observes. One case is multiple
plans at one sponsor arising from acquisitions.
" Acquired plans likely have different
investment menus and assets on different
scales. With a white label approach, a
sponsor could assign each plan the same
investment lineup-and, through a collective
trust structure that invests for all of
the plans, at the same costs regardless of
KEY POINTS
* A white label investment option bears a name of the sponsor's choosing,
typically to identify the option with its investment objective rather
than the brand name of an investment manager; this creates a more
diversified fund, potentially reducing volatility over time.
* CITs are an alternative to mutual funds, providing greater flexibility
on fees and operations plus more efficient management of the assets.
* The highest expression of 401(k) design is likely the custom TDF,
which incorporates both CITs and white labelling.
PLANSPONSOR.com August-September 2018 49
size. The same investments at the same
costs-for a sponsor, that's nirvana.
" When the sponsor does act to consolidate
the plans in the future, " Lieb adds,
" having just one investment lineup makes
that far easier. All plans are mapped to
one recordkeeper, and the participants
continue to see the same investments. "
The highest expression of 401(k)
design is likely the custom target-date
fund (TDF), which incorporates both CITs
and white labelling. Lieb recalls a client
that had an unusual benefit structure and
an employee base that tended to retire
earlier than an off-the-shelf target-date
fund would anticipate.
" The employer had a generous ESOP
[employee stock ownership plan], so, as
a group, the employees had built up an
inadvertent concentration in equities. We
proposed a white label target-date fund
that incorporated a lower equity beta, and
customized the glide path to meet their
average retirement age of 61, " Lieb says.
" [The company] also simplified the core
menu with about 50% fewer choices of
white label options, a mix of mutual funds
and collective trusts-wherever we found
the most efficiency. "
In the past, white labelling and CITs
have mainly been the province of only very
large plans, but the DC industry is always
evolving and bringing greater sophistication
to smaller plans. Incorporating these
options will likely involve substantial work
for DC plan committees, but will likely
pay off with more tailored investments at
lower cost-and a better set of retirement
outcomes. -John Keefe
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