In a perfect world, defined contribution (DC) plan participants decisions would be consistently logical. They would evaluate each investment option’s potential role in meeting their financial goals, risk tolerance and overall asset allocations.
In reality, though, research has shown that participants’ decisions be influenced by: 1) the size of the investment menu; 2) the prevalence of certain asset classes in the menu; 3) fund names; and 4) the ease of pronouncing a fund’s name, among other factors. Given DC plans important role in participants’ financial wellbeing, it makes sense for consultants and sponsors to consider these “illogical” factors in plan design, if possible.
A recent white paper from the TIAA Institute, “White-labels, Brands and Trust: How Mutual Fund Labels Affect Retirement Portfolios,” extends the research of factors that influence participants’ investment decisions. Dr. Julie R. Agnew from the Raymond A. Mason School of Business at The College of William and Mary and a TIAA Institute Fellow co-authored the paper with Angela Hung, Nicole Montgomery and Susan Thorp. The authors’ curiosity about whether the introduction of white label funds into retirement plan menus might alter individuals’ portfolio choices motivated the paper. “We also heard from industry experts that companies were seeking guidance regarding whether to brand their white label funds with their names or not,” Agnew says.
Theoretically, if two funds on a plan’s platform are both index funds with identical investments and no fees, one fund should not be more popular than the other, nor should the participants’ expectations about returns and risk be different just because of a difference in name, she explains. However, behavioral research has shown that individuals’ investment decisions can be influenced by unexpected factors, such as cosmetic name changes or the composition of the investment plan menu. “This led us to question whether the introduction of these white label funds into retirement plan menus would lead to unexpected portfolio allocations and, if so, why?” Agnew explains.
The Trust Factor
The researchers designed and fielded two online experiments with 940 currently employed retirement plan participants from the University of Southern California’s Understanding America Study panel. Participants made incentivized investment allocations—choosing among white-label funds, branded funds and funds labelled with an employer’s name—and predicted investment returns using a graphical interface called a distribution builder.
The research examines how brand trust—how dependable the brand is perceived to be—influences asset allocations and risk/return expectations. The hypothesis is that individuals will be more likely to invest in funds with brand names they trust. Because plan sponsors often attach their company’s name to white label funds, the study also tests whether “branding” the white label fund with the company’s name makes a difference. “Depending on the employee’s relationship with the firm, and how that translates into trust in his or her employer, the inclusion of the employer’s name could also affect fund inflows,” says Agnew. “One goal of our research is to determine whether a participant’s brand trust in a fund provider or his employer is something plan sponsors should consider when constructing investment menus.”
Brand trust affects asset allocations. In both studies, brand trust plays a large role in asset allocations. Participants allocate significantly more to trusted brands when choosing between otherwise equivalent investment options. Specifically, in the first study, options showing highly trusted brand names are more attractive than equivalent white-label options, and the reverse holds for poorly trusted brand names.
Employer trust affects asset allocations. In the second study, options showing the names of highly trusted employers are more attractive to plan participants than equivalent white-label options.
Perceptions of expected return and risk affected by brand trust. Both studies find evidence that participants expect higher risk-adjusted returns and lower risk from options that display the name of a highly trusted brand or highly trusted employer. While the effects in study two (employer brand) are not as consistent, nor as strong, as in study one, they suggest that brand trust may influence these expectations, and more research is needed to confirm or refute this finding.
Implications for plans
I asked Dr. Agnew how consultants and sponsors might incorporate the research findings in their plan platform design. She had several suggestions. First, brand trust, as defined in the research, is another factor plan sponsors should consider when constructing their fund menus. Second, it follows that highly trusted brands could capitalize by displaying their names on investment options, while less-trusted brands could consider generic labelling. Her third suggestion: “Plan sponsors could consider adding the names of trusted employers to white-label options if their goal is to increase fund flows to these options.”