Finance theory assumes that investors maximize risk-adjusted returns when choosing portfolios. In reality, some people are also influenced by irrelevant factors, such as cosmetic changes to investment fund names.
Retirement plan menus have been changing as sponsors adopt new generic, or "white-label," funds. This study explores how plan participants react to white-label and branded investment options – specifically, how brand trust alters participants’ investment allocations. The researchers also examine the impact of brand trust on expected returns and risk perceptions. The findings have important implications for both fund providers and plan sponsors.
- Participants allocate significantly more to trusted brands when choosing between otherwise equivalent investment options.
- Options showing the names of highly trusted employers are more attractive to plan participants than equivalent white-label options.
- Participants expect higher risk-adjusted returns and lower risk from options that display the name of a highly trusted brand or highly trusted employer.