What’s Old Is New: White-Labeling Trends In The DC

What’s Old is New: White-LabelingTrends in the DC MarketplaceModeratorWinfield Evens, CFA Director of HRO InvestmentSolutions & StrategiesAon HewittSpeakersJeffrey S. Coons, Ph.D., CFA President, Co-Director ofResearchManning & NapierKendall FrederickSenior Manager, FinanceIntegrationHanesbrands, Inc.David HeinyDC Practice LeaderArtisan PartnersErik LinvogManager Benefit InvestmentsDaimler Trucks North America1

Poll of the Audience What is your DC plan’s approach to White Labeling?1.) We do it today2.) We have considered it, and may do it in the future still3.) We have considered it, and have rejected the approach4.) We have not formally considered the approach yet5.) I am not sure what you mean by White Labeling2Special thanks to our diamond sponsor:2

White-Labeled Plan Lineup—OverviewTypical ApproachWhite-Label ApproachFull Fund Name UtilizedPlan-Specific Fund Name Utilized PIMCO Total Return—AdministrativeVanguard Institutional Index—Plus SharesAmerican Funds EuroPacific Growth—R6JPMorgan SmartRetirement Blend 2030—R6Bond FundU.S. Stock Index FundInternational Equity Fund2030 Retirement FundFull transparency can beprovided via fund fact sheets,as shown on following slides33

Participant CommunicationsTypical Mutual Fund Branded ApproachWhite-Labeled Approach44

Participant CommunicationsWhite-Labeled Examples55

Fund-of-Funds—OverviewExample—Combine three subadvisors into a single plan optionLargeCapValueLargeCapBlendBenefits Include: Results in a streamlined set ofinstitutional funds Easier for participants tounderstand and utilizeLargeCapGrowth Easier for the plan sponsor tomanage and optimizeLargeCapEquityApproach common with large plansOver 40% of Aon Hewitt’s RK clientsutilize at least one fund-of-funds66

Plan Structure—Illustrative SpectrumTypical Brand NameApproachWL—Asset StyleApproachVanguard Prime Money MarketMoney MarketGalliard Stable ValueStable ValueLord Abbett Short Duration IncomeShort-Term BondPIMCO Total Return—Admin.Core Bond--ActiveBlackRock US Debt IndexCore Bond--IndexGoldman Sachs Strategic IncomeEnhanced BondTempleton Global BondInternational BondVanguard Inflation-Protected Sec.TIPSBlackRock Strategic CompletionReal AssetsDodge & Cox StockLarge-Cap ValueVanguard Institutional Index—PlusLarge-Cap IndexFidelity Growth CompanyLarge-Cap GrowthNWQ Small-Mid Cap ValueSmall/Mid-Cap ValueSSgA Small-Cap IndexSmall/Mid-Cap IndexWells Fargo Advantage DiscoverySmall/Mid-Cap GrowthArtisan Global Opportunities—Inv.World EquityAmerican Fds. EuroPacific GrowthInternational EquityDFA Emerging Markets—IIEmerging Markets EquityWL—Asset ed StrategiesCapitalPreservationU.S. Core PlusBondIncomeNon-U.S. BondInflation ProtectionInflationProtectionU.S. Large-CapEquityU.S. Small & MidCap EquityGrowthNon-U.S. Equity77

Thinking Outside the Box with White-Label CustomizationUtilizing a white-label approachallows for customized investmentstructures that reflect the mostcurrent institutional thinking, despitebeing outside the traditional assetallocation methodology.4.54.0Annualized Excess Returns (%)1991-20104.03.53.02.42.5One such example is globalizedequity exposure. In an environmentwhere active management has beentested, institutions are spending theiractive risk budgets in categories thathave earned their spot.2.01.41.51.01.00.50.0Purely Global8Mainly Global with Mainly Regional withSome RegionalGlobal OverlayInputsPurely RegionalSource: Russell Investments. Balkema, Rob. “Finding the fertile hunting ground: What type of global equity managers succeed, and whymulti-manager makes sense in global equities.” February 2011. Past performance is not indicative of future results. Excess returns vs.MSCI World Index. The universe used is INTWORLD, the Russell Global Equity Universe.8

Manager Changes Can Lead to Unintended ResultsThe Challenges With Changing ManagersThe BenefitYears after manager changeYears before manager changeFlexibility to make managerchanges with minimalparticipant disruption12%10%The ChallengeThe desire to always have the“best” manager may lead tohiring and firing managers,often times, based on shortterm performance resultsCumulative Excess Returns(manager change occurs)8%6%4%2%0%-2%321fired firm123hired firm9Source: “The Selection and Termination of Investment Management Firms by Plan Sponsors.” Goyal, Amit and Sunil Wahal, 2008.9

Multi-Manager Portfolio ConstructionHypothetical exampleActive Share: Effective Tool for Evaluating Managers and Structuring PortfoliosThe Benefit80%Diversify the categorywith institutionalinvestment managers70%67.0%64.0%60%53.5%The Challenge50%Active Share %Combining managers ina complementary way toavoid the potential for overdiversification and index-likereturns66.4%40% 30% 20%10%0%Large Cap Fund #1Large Cap Fund #2Individual FundsLarge Cap Fund #3Multi-ManagerLarge Cap FundAggregate PortfolioData shown is for illustrative purposes only. Active10share can range from 0% to 100%. A high active share indicates that a portfolio’s investments significantly differ from thebenchmark, while the investments of a portfolio with a low active share largely mirror the benchmark. Please note that diversification does not assure a profit or protect against lossin a declining market.10

Pursuing Retirement ObjectivesThrough Complementary ApproachesHypothetical exampleThe ChallengeCombining managers in acomplementary way to helpavoid the potential for overdiversification and index-likereturns and allow for flexibilityto manage risk in a changingmarket environmentPotential SolutionIncorporate an allocation toan active, flexible(non-benchmark-centric)investment approach6%U.S. Small Cap8%U.S. Mid Cap50%36%U.S. Large CapObjectives-Based U.S.Equity Manager11Data shown is for illustrative purposes only.11

Pursuing Retirement ObjectivesThrough Complementary ApproachesPortfolio Objective:To seek long-term capital appreciation while mitigating downside risk through investments in the U.S. Equity marketObjectives-BasedManager Mandate:Benchmark-CentricManager Mandate:To meet the portfolio objective through activeinvestment in the broad, U.S. Equity market.This manager will be enabled to seek resultsin line with the portfolio objective by adjusting theportfolio in accordance with the risks andopportunities presented by the prevailing marketenvironment in a benchmark-agnostic manner.To deliver market (passive) or above-market(traditional active) returns based on the opportunityset presented in the stated market benchmark, overa full market cycle. These managers attempt tominimize risk relative to the benchmark bymaintaining similar profiles as their statedbenchmarks, and can include a style, capitalization,sector, and security constraint perspective.12Approved SMA-SEM044 (2/15)12

Prevalence of White-Labeling24%11%1%3%All FundsAll Core FundsAll Premixed,No Core5%3%Some Core, NoPremixedAll Premixed,No CoreSource: Aon Hewitt Pulse Survey in Summer, 20141313

White-Labeling—Pros & ConsAs Noted by Plan SponsorsWhat are the barriers preventing adoption of whitelabel funds?What are the factors for selecting a white-labelapproach?Lower total feesEase of participantcommunicationsEase of changingmanagersCombine multiplemanagers into one fund43%57%Communicationchallenges23%Concern over negativeemployee reaction23%Wish to retain name offund provider64%Have not considered theapproach71%37%53%1414

Final Thoughts Implementation requires thoughtful coordination between the:– Plan sponsor– Investment consultant– Plan administrator– TrusteeThe white-label approach provides plans with a variety of benefits, including:– Simplified decision framework for participants– Better diversification– Improved active management– Opportunities for cost reductions1515

International Equity Fund 2030 Retirement Fund. Full transparency can be provided via fund fact sheets, as shown on following slides. 3. 4. . Galliard Stable Value. Lord Abbett Short Duration Income. PIMCOTotal Return—Admin. . 60%. 70%. 80%. Large Cap Fund #1. Large Cap Fund #2. Large Cap Fund #3. Multi-Manager Large Cap Fund .