Lessons learned can provide insights to improve the concept.
- Many defined contribution plans are adopting white‑label offerings—unbranded portfolios that may have single or multiple managers, asset classes, or styles.
- When properly designed and constructed, white‑label offerings may help plan sponsors balance competing objectives such as diversification and plan simplicity.
- First‑generation white‑label programs may not have achieved desired results. Problems have included poorly designed offerings that failed to meet objectives.
- T. Rowe Price believes there is an opportunity for plan sponsors to improve the design of their white‑label offerings—a concept we call “White Label 2.0.”
In their efforts to simplify their investment lineups while preserving diversification, a growing number of defined contribution (DC) plan sponsors are creating their own “white label” investment solutions—unbranded offerings that can include single or multiple portfolio managers, asset classes, and/or investment styles.
A number of DC plan sponsors have looked to white‑label solutions to:
- simplify their plan’s investment menu and reduce choice overload for participants;
- employ more sophisticated portfolio construction techniques;
- embed additional potential sources of value, such as tactical asset allocation, in their offerings;
- provide exposure to niche asset classes without the need for dedicated investment options;
- leverage their plan’s size and buying power.
However, many DC plan sponsors have experienced mixed results with their initial white‑label offerings. The first generation of white‑label portfolios have not always fully achieved the results that plan sponsors expected.
We understand that it is up to each plan’s investment committee to decide whether the benefits of adding white‑label options to their lineup will justify the additional fiduciary oversight responsibilities, potential resource needs, and administrative costs involved. Every plan’s situation is unique, and there is no single “right” answer.
(Fig. 1) Some Large DC Plan Sponsors Are Adopting White-Label Offerings
Does your plan currently offer white-label investment options?1
Survey data as of April 2017.
Source: Institutional Investor Institute for Defined Contribution.
1For midmarket plans, “Considering” (20%) combined responses “No, but are in progress to implement them within 1 year” (4%) and “No, but we are talking about whether to do so” (16%). For large‑market plans, “Considering” (23%) combined responses “No, but we intend to” (3%) and “No, but we are talking about whether to do so” (20%). Totals may not add to 100% due to rounding.
However, if plan sponsors do believe that the white‑label approach is appropriate, we think there are ways to build on what has worked in white‑label design while refining those areas that may have presented challenges. We call this opportunity to revisit and potentially enhance the white‑label concept “White Label 2.0” and believe it offers a way to streamline the investment options that are offered to participants.
T. Rowe Price’s ongoing partnerships with DC plan sponsors have made it possible for us to assess the investment structure of a number of initial white‑label offerings. These examinations have produced some valuable lessons and uncovered potential opportunities to improve portfolio design.
In this paper, we will discuss best practices in portfolio design for consideration by those offering or considering white‑label portfolios.
Reevaluating White‑Label Strategies
White‑label vehicles can reduce the number of investment choices participants face while still providing diversification opportunities. White‑label offerings also can give sponsors the flexibility to align their plan offerings with either traditional or thematic investment strategies:
- Traditional investment strategies may focus on broad asset classes, such as diversified fixed income or global equity, on sub‑asset classes or sectors, such as U.S. large‑cap or emerging market equity, or incorporate multiple assets and styles.
- Thematic offerings can be designed to prioritize specific investment objectives, such as inflation protection, long‑term portfolio growth, diversified income, or volatility management, as examples.
However, DC plan sponsors have faced numerous challenges when implementing white‑label strategies. These challenges, outlined in Figure 2, suggest that DC plan sponsors and their investment advisors may want to consider refining the areas that may have presented problems in the first generation of white‑label programs.
An Enhanced Approach to Portfolio Design
Analyzing first‑generation white‑label portfolios has shed light on opportunities for enhancement. Our research has shown that the first step toward realizing the full benefits of a white‑label portfolio is enhancing the approach to portfolio design. Figure 3 outlines the three elements we believe are essential to achieving this. By setting purposeful portfolio objectives, leveraging comprehensive portfolio construction techniques, and setting success metrics that are then regularly evaluated and monitored, we believe that plans can take a step toward achieving White Label 2.0 status.
The first step in the portfolio design process should be defining clear and plan‑appropriate portfolio objectives. Plan sponsors should continue to reflect upon first‑generation considerations such as desired asset class exposures, but it is also important that they weigh additional factors such as targeted portfolio characteristics including risk and fee budgets, the target benchmark, and the role of each white‑label portfolio within the plan’s full investment lineup.
Once clear and purposeful objectives have been determined, attention can be turned to portfolio construction. What underlying investment strategies are best suited to achieving the plan’s objectives? And how should those investment strategies be sized? Given how critical these questions are to the success of a white‑label mandate, this analysis should be conducted in a very thorough manner. In our view, a thorough analysis requires the use of multiple analytical techniques to ensure that no single set of assumptions or modeling methodologies determines the portfolio’s design.
(Fig. 2) Challenges in First‑Generation White‑Label Implementation
|Potential Missteps||Potential Consequences|
Some first‑generation white-label portfolios have failed to take advantage of the full investment opportunity set.
|Over-diversification||Redundant and/or suboptimal portfolio exposures have lowered return potential and raised costs for some offerings.|
|Misalignment With Objectives||Poorly defined objectives have resulted in mis-specified investment allocations for some plans, leading to disappointing results.|
|Concentrated Risk Exposures||Excessive or undesired portfolio risks may have produced outsized or unexpected investment losses.|
Source: T. Rowe Price.
(Fig. 3) The Three Essential Elements to Enhanced Portfolio Design
Source: T. Rowe Price.
- The robustness and durability of the plan’s offerings. Multiple analytical techniques and stress tests should be incorporated in the design process to avoid potential biases from any one approach. By analyzing the interaction of portfolio assets across a variety of market scenarios, plan designers can seek to ensure that the portfolio will not be dependent on a single market environment to deliver acceptable results. However, this also requires plan sponsors and their advisors to continually revalidate the appropriateness of portfolio design through time.
- The need to assess investment components both individually and collectively. A proposed allocation should be validated both on its own merits and in terms of the potential benefits for the total portfolio. This requires a careful examination of whether each proposed strategy adds value to the total white‑label portfolio. The key goal is to avoid design flaws such as naïve diversification or over‑diversification. See Figure 4 for additional information about this.
Finally, an important lesson learned from the first generation of white‑label portfolios is the need to continually assess and validate the portfolio over time. Success metrics need to be determined and a plan developed for ongoing monitoring of the investment structure.
(Fig. 4) The Impact of Diversification in a Hypothetical White Label Offering1
As of March 2021.
Source: T. Rowe Price.
1 The above analysis uses fixed assumption values and considers a hypothetical scenario combining individual strategies that each have a 1.0% expected excess return, a 3.0% tracking error, and constant correlations to each other. The correlation assumption was varied across the 3 scenarios (0.8, 0.4, and 0.2, respectively) to illustrate the diversification benefits and considerations. The results do not represent the performance of any specific indexes or investments.
(Fig. 5) The T. Rowe Price Approach
We use a wide range of analyses to assess the suitability and sizing of the strategies within our white-label portfolios.
|Examples of Questions T. Rowe Price Asks||Some of the Analytical Tools We Use|
|How do we expect the strategy to interact with other investments?||
|Can the strategy potentially provide a diversified source of return and/or alpha?||
How do we size the strategy in relation to the other investments in the portfolio?
Source: T. Rowe Price.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of anynature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarksor registered trademarks of T. Rowe Price Group, Inc.