De-branding the 401(k) fund menu - SHRM Online

De-branding the 401(k) fund menu

The departure of arguably the leading fixed income investment manager of all time from the company he founded has a lot of sponsors and plan fiduciaries reconsidering their current fixed income fund commitments. And, not surprisingly, they are getting "ambulance chaser" calls from competitors, urging them to change.

Mike Barry, President, Plan Advisory Services Group

Basic principles

For defined benefit plans, the choice whether to stay or move ? may be relatively straightforward. Internal investment staff and outside consultants will want to review the current situation, consider the alternatives and make a decision. The sponsor's objectives and its views of the firms involved will, at a well-run plan, be generally well understood and will ultimately drive that decision.

The process is more awkward for defined contribution plans that have included a brand name, superstar-managed fund in the plan fund menu. Those sponsors face more than one dilemma. Consider: What happens if the sponsor decides to replace the current fund, and then that fund outperforms other options (including the replacement)? What if the sponsor sticks with its current fund and it underperforms? And what about the inevitable participant complaints that the sponsor did the wrong thing, even if there is no clear fund performance winner?

These issues point up the problems DC sponsors face when they make a significant commitment to a "brand name" fund ? especially when it is the only investment option for a specific asset class. We're all familiar with the argument that brand name funds carry regulatory and marketing overhead that makes them inappropriate for institutional buyers, although many brand name providers have found ways to reduce that overhead to the point where it may be immaterial. Less obvious are the employee relations challenges.

In a situation like the current one, many sponsors may experience participant dissatisfaction and disruption no matter what they do.

And the process of switching out funds may be particularly cumbersome for plan fiduciaries. If you're a sponsor-fiduciary, you should check your investment policy statement (IPS). If you want to remove a fund, do you need to put it on a watch list first? If the fund is conforming to IPS objectives, is there a basis for removing it? Do you have to, in effect, do an RFP to replace it? What do you tell participants about this process? How much notice do you need to give them in order to make a change? What will swapping funds cost in additional record keeping and communications fees?

All of this raises the question: What is gained by having a brand name fund in the 401(k) plan's fund menu? Let's take a step back and consider how fund "brands" function in the retirement investing market. Brands aren't a bad thing; they communicate, in shorthand, what a particular fund is promising. A strong brand generally represents the delivery of consistent, high value over an extended period of time.

Brands are, however, generally retail tools. When 401(k) plans first became popular, 401(k) investments were viewed as retail transactions between the fund providers, the plan, and the plan participants. Over the last 10 years, however, sponsors have started moving away from that model.

Russell Investments // De-branding the 401(k) fund menu

DECEMBER 2014

Most participants don't want to choose from among 50 different mutual funds. Current best practice is to provide a relatively limited core fund menu with a default to a target date fund. A logical consequence of this evolution is the current trend toward the institutionalization of 401(k) plan investments. And a logical consequence of institutionalization is the "de-branding" of the plan's investment menu. Hence, the trend toward white-label funds.

Institutionalization also reflects the more complicated process of finding additional value by more accurately targeting investment strategies. Any fixed income manager of a large, well-managed DB fund will tell you that she is deploying assets among a variety of sub-strategies and a variety of managers, that change over time as market conditions and fund objectives change. In a sense, an investment fund "brand" is a dumbed-down version of that complex of investment strategies. "Dumb" in the sense that, with a brand, you are locked in to one manager and one mix of strategies for all comers. And since the strategy is the brand, it's hard to change, even as conditions change.

When you de-brand (go to a white-label fund), you are no longer limited to one mix of strategies and one manager. You are able to implement changes as circumstances dictate, without incurring additional record keeping and communications costs. That is what a white-label, multimanager strategy offers.

There is one more virtue to "de-branding" the 401(k) fund menu. Not infrequently, chasing a brand is little better than chasing returns. We're all familiar with investors who stuck with "hot" funds long after their above-market returns were history. Of course there is an appeal ? your participants can read about their fund in Money magazine or the Wall Street Journal or see a star manager on TV. Offering access to hot funds may teach them to chase a brand and think about investing in terms of personalities.

A white-label, multi-manager strategy, on the other hand, teaches participants to focus on fundamentals. We know that asset allocation decisions are the key determinant of performance. Not which superstar to pick.

Thus, the disruption of investment fund menu strategies that results when superstar investment managers change teams presents an opportunity for sponsor-fiduciaries to rethink their commitment to a brand-based investment fund menu. The alternative ? a white-label, multi-manager strategy ? can often reduce costs, improve returns, diversify risk and encourage participants to focus on fundamentals. As a bonus, plan fiduciaries won't have the headaches of explaining to participants what they are doing about the latest change in manager superstars and going through the (often tedious and slow) process of eliminating/adding brand-name funds.

ABOUT RUSSELL INVESTMENTS

Russell Investments provides strategic advice, world-class implementation, state-of-the-art performance benchmarks and a range of institutional-quality investment products, serving clients in more than 35 countries. Russell provides access to some of the world's best money managers. It helps investors put this access to work in defined benefit, defined contribution, public retirement plans, endowments and foundations and in the life savings of individual investors.

Plan Advisory Services provides resources to plan sponsors to help them deal with the challenges presented by federal regulation of retirement plans, covering legislation, regulation and litigation.

FOR MORE INFORMATION:

Call Russell at 800-426-8506 or visit institutional

Important information

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. The opinions expressed in this material are not necessarily those held by Russell Investments, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group. The Russell logo is a trademark and service mark of Russell Investments. Copyright ? Russell Investments 2014. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty. First used: December 2014 USI-21058-12-17

Russell Investments // De-branding the 401(k) fund menu

DECEMBER 2014

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