Key Takeaways

• Employer-sponsors of Defined Contribution plans increasingly offer “white-label” funds, which are portfolios of external funds that employers assemble and re-brand based on the portfolios’ objective.
• The propensity of employees to invest in white-label funds versus manager-label funds strongly depends on their level of trust in the external managers. The effect is highest for employees with low financial literacy.
• Employers should carefully assess how they label their funds as it can significantly affect the investment decisions of plan participants.

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Motivation. Employer-sponsors of Defined Contribution pension plans increasingly create portfolios of externally-managed funds and re-brand them based on the portfolios’ objectives. These portfolios are commonly referred to as “white-label” funds. Using an experiment, this study shows how the naming of funds offered by an employer can significantly affect the investment decisions of plan participants.

Methodology. The authors study the behaviour of close to 1,000 currently-employed retirement plan participants in the US through an incentivized online survey. Survey respondents are asked to allocate hypothetical pension savings to five types of no-fee investment funds: money market, bonds, small cap stocks, large cap stocks, and global stocks. For each investment type, participants can choose between two differently labeled funds: a generic white-label fund with no identifiable branding, or a fund labeled with the name of either 1) a high-trust asset manager, 2) a low-trust asset manager, or 3) the participant’s employer. Respondents then predict the one-year expected return and potential loss for each fund using a simple distribution builder. Using this data, the authors examine how organizational trust associated with fund names influences participants’ investment choices and performance expectations.

Findings.

• The naming of funds does not impact the participants’ choice of asset allocation. However, within an asset class, pension plan participants allocate nearly twice as much to investment funds labeled with the name of a high-trust asset manager compared to equivalent funds with generic names.
• Investment funds labeled with a low-trust asset manager receive smaller allocations when compared to generic white-label funds. For example, plan participants allocate 15% to a white-label US large cap stock fund but only 11% to the low-trust manager-labeled option.
• Plan participants expect higher returns and lower losses from funds that are labeled with a high-trust asset manager.
• Employees with high trust in their employer more than double their allocations to funds labeled with their employer’s name. This result is most pronounced for money market funds, with participants allocating 20% to the employer-labeled fund and only 6% to the white-label fund. 
• The effect of organizational trust on allocation decisions and expected investment performance is strongest for less financially literate plan members.
• Selecting an investment fund based on its trusted name may expose participants to higher costs if asset managers leverage their positive reputation to impose additional fees.

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