“White Label Funds” Facing New Pitfalls and Liabilities

Over the past decade, many large governmental defined contribution plans have replaced traditional mutual funds and retail commingled trusts with “white label funds.” These funds evolved as popular alternatives to retail mutual funds for a number of reasons:

  • Lower expenses (in most cases)
  • Ease of changing underlying managers without eliminating the entire fund
  • Focus participants on asset class and style rather than retail name or specific manager
  • Benefits of “multiple managers” in a common fund, rather than one manager

For the most part, many in the industry believe that white label funds have delivered the four benefits outlined above.  However, as these funds have matured, and the market has changed, there are a couple of issues which are not only raising concern among some plan sponsors, but have now resulted in legal action.

Cost Advantage Has Diminished As Traditional Managers Make Changes

When the concept of white label funds began to take off with large plan sponsors, the fee difference between these new funds and traditional retail mutual funds could be quite significant.  However, as more fund managers developed low-cost funds and commingled trusts, the fee difference has diminished.

In addition, many large fund managers have adopted “multi-manager” approaches to their retail and institutional funds, particularly in the target-date and risk-based asset allocation funds.  Depending upon the size of the plan and structure, the fee advantage for white label funds is no longer a guarantee.

Conflicts Have Emerged Which Create Liabilities for Plan Sponsors

When a plan sponsor creates custom white label funds, they are (in effect) becoming competitors to traditional fund managers.  However, they are still liable as fiduciaries to manage,  select and monitor investments in the best interests of plan participants and beneficiaries.  What if one or more of your white label funds does not measure up to alternatives available from other retail or institutional managers?

That question is one of the issues in a recent lawsuit where participants allege the plan sponsor eliminated top-performing retail mutual funds and replaced them with brand new funds with no track record.  They also allege that, over time, the white label funds have lagged performance of the funds they replaced.

Objective Evaluation

The white label fund concept has been further challenged in situations where the plan consultant now also serves as the manager of some or all of the white label funds.  In this situation, who oversees the fund manger when the consultant and fund manager are one and the same?  As you might have guessed, this very issue is one of the complaints included in a recent lawsuit.  If your consultant recommends investment options that are managed by them or one of their affiliates, the plan sponsor may be liable for failing to ensure that all investment options are objectively evaluated.

We have previously discussed this type of conflict in the February 5, 2014 article titled “Does Your Consultant Have a Conflict of Interest?”  This article may be found in the archives below.

White label funds will continue to be popular in large governmental defined contribution plans, and for good reasons.  However, the pitfalls identified above have emerged as legitimate concerns that could land plan sponsors and consultants in court.  Plan sponsors are encouraged to continue to objectively evaluate if white label funds are still your most prudent plan design option.  Or, has the market evolved to the point where other options are more appropriate?

If you conclude that white label funds are still best for your participants, then what steps can you take to remove the conflicts and potential liabilities discussed above?

May 18, 2018

Copyright Gregory Seller Consulting, LLC

The items discussed in this article are for educational and informational purposes only.  It is not tax or legal advice.  Parties contemplating action on this or other information should seek legal and tax advice from qualified professionals.