The Negatives of White-Labeling By: Roland SalmiMBA, AIF® 2015.02.19

PIMCO Total Return had a record outflow in 2014 of $103 billion. December had $19.4 billion in outflows and January held $11.6 billion in outflows. This was the 20th straight month of outflows for the fund. PIMCO has been struggling to slow the outflows in their funds after months of internal strife with their CEO Mohamed El-Erian leaving last year and co-founder and PIMCO Total Return manager Bill Gross leaving in September 2014. This leads to another issue not only for PIMCO but retirement plans that use PIMCO’s Total Return Fund as a common staple in their investment menu line up. There are people in the retirement industry that are using this as a chance to draw the benefits of white-labeling investment funds. White-labeling is where a company will produce a product or service and then have it re-branded by another company to make it appear to be their own. Are clients not to know what they are investing in? White-labeling does not make sense and does not measure up as a good fiduciary standard for the following reasons: transparency, participant understanding, fund changes, continuing to follow-up, and super-star managers. Let me expand on these a bit.

Transparency. White-labeling funds hides the identity of the investments in a fund that are dispersed either across the entire market or a particular asset class. Supporters of white-labeling believe that by masking a fund or its management that participants will invest with more confidence of reaching their goals just by the said objective of the fund. This goes against that fiduciary standard of making retirement plans more transparent. As a participant you have a right to know what you are investing in to determine your best choice.

Participant Understanding. This is where white-labeled funds have a mixed acceptance. These white-labeled funds may be great for a defined benefit (pension) plan where participants don’t bear the investment risk or responsibility of performance. However in defined contribution (401k) plans white-labeling is misleading and confusing to participants, anything that can help participants better understand their options and selections should be embraced. Even using mutual fund companies that participants quickly recognize will help them become more comfortable with the investment offerings in their plan.

Fund changes. Many believe by white-labeling their investments it creates an easier fund change process where you can change the funds without notifying participants. This is another red flag with this practice. If you were a participant that was invested in a fund and a change is made why wouldn’t you want to know? It only seems logical that you notify participants when you are making investment changes so they have an option to rethink their strategy or asset class.

Continuing follow-up. White-labeling washes away the opportunity for participants to follow up their investment with their own monitoring. Most white-labeled fund are not possible to find on Morningstar for example.  

Super-star managers. The departure of a super-star manger can significantly change that fund’s future investment prospects. This is a change that should be shared with participants rather than be hidden from them.

With all of these points being made there is no doubt that this is the easiest way for those administering the plan but most likely a breach of fiduciary responsibility. Retirement plans are in place to benefit the participants and the Department of Labor is there to enforce its standards and fine those that are negligent. It is all about transparency and the best result for the end user, the participant.


Roland C. Salmi

Roland is an Associate Analyst at Westminster Consulting, where he executes performance analysis, client projects and investment support for senior consultants. Roland brings research knowledge, industry trends, and a commitment to client success to the Westminster team.

Prior to joining Westminster...

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