It’s among the most significant yet little noticed trends affecting larger defined contribution (DC) plans: the growing adoption of white label funds.

White labeling can simplify a plan’s core menu, promote diversification, and allow sponsors to more easily change investment managers. Adopted chiefly by $1 billion-plus plans, white label funds give sponsors the ability to offer a single, customized strategy that combines multiple, related strategies under a generic name – e.g., U.S. Bond Fund or International Equity Fund.

Precise data is hard to come by – DC plans do not have to disclose the size or allocation of white label assets on their annual Form 5500. However, PIMCO’s annual Defined Contribution Consulting Study suggests a significant evolution is underway. Indeed, we estimate that approximately 30% of assets in plans with more than $1 billion are held in white label formats, with total assets between $750 billion and
$1 trillion. The amount may even be larger, in fact, because our estimate doesn’t include white label offerings managed exclusively by a plan sponsor – i.e., without the assistance of a consultant.

Consultants’ perspective

Most consultants say they support white labeling, according to our latest survey. Nearly two-thirds (60%) strongly or somewhat agreed that white label/multi-manager strategies allow for “superior portfolios due to the broader range of investment strategies that can be included within the plan.” Put another way, consultants see value for both the sponsor and participant by combining various investment strategies in a defined manner rather than offering each separately or not at all.

Key benefits consultants cited include simplification of the plan’s core menu, increased investment diversification, and less effort in changing investment managers (see Figure 1).

Yet there are some barriers to adoption of white label funds. Specifically, consultants note greater perceived complexity relative to single mutual fund offerings, especially the requirement for customized participant communications.

PIMCO case studies

PIMCO has witnessed many larger plans successfully implement and manage white label offerings over the past few years. Here are two summaries that illustrate how plans have implemented white label structures in bonds and equities.

Bonds. A large manufacturer sought to transform its menu from passive to custom target date funds while narrowing the core menu to four objective-based funds: growth, income, inflation protection, and capital preservation. For the income strategy, they combined both active and passive investment grade bonds with securities in other fixed income sectors, including credit and emerging markets. Also included was a modest allocation to real estate. The sponsor says the plan has gained more control over its investments while simplifying the structure for participants.

Equities. A large service enterprise had already adopted a white label format but was frustrated with inconsistent performance of their active equity managers. They preferred active equity management but sought steadier outperformance. Further, they planned to consolidate certain equity options, eliminating separate value and growth funds. Using a white label format, they implemented a portable alpha equity strategy that provided both a diversifying source of alpha and more consistent performance. (The portable alpha strategy combines passive equity exposure with a potentially more reliable fixed income alpha source, providing several benefits: flexibility to help meet specific investor objectives, improved consistency of performance, and a diversified source of return.)

Pleased with the results, the sponsor subsequently implemented this strategy across other equity options, including small-cap, mid-cap, and international.

Also important to note: Despite perceived complexity, the white label format streamlines the content of participant communications by alleviating concerns of disproportionate promotion of the available investment options. This allows a sponsor to include highly beneficial investment structures that may otherwise have been excluded because of communication concerns.

A growing trend

We expect continued adoption of the white label structure. In part, this is the natural consequence of scale: With growth in size comes buying power. Meantime, those who help implement white label structures – custodians, recordkeepers, and benefit communications firms – continue to enhance their capabilities. The net result is lower pricing and easier administration for plan sponsors.

Most important, though, are the meaningful benefits that white labeling offers both sponsors and participants. As discussed, white labeling can help sponsors simplify their menus, more easily harness superior investment managers with scale pricing, better integrate strategies that they might not offer directly, and replace underperforming managers with less effort. Participants may enjoy superior performance, greater diversification, less risk, and improved simplicity in investment choice.

This combination of benefits convinces us that further white label adoption is inevitable.