Benchmarking Managed Accounts
A critical question for advisers to ask when suggesting managed accounts to a plan sponsor client is whether it will be possible to benchmark the performance of potentially numerous different managed accounts in a consistent way across the plan population.
Because each managed account will be customized for an individual participant, taking into consideration the person’s risk tolerance, account balance, compensation, deferral rate and outside assets, the process of benchmarking managed accounts can get quite complicated.
As Kendrick Wakeman, president of investment analytics firm FinMason, puts it, “A managed account is designed to take into account a participant’s specific tolerance for risk and his financial situation to determine how much investment risk he should have in his portfolio.” Given the wide range in individuals’ financial circumstances across any employee population, it is reasonable to assume there will be some diversity in their managed account construction.
Jason Grantz, director of institutional retirement consulting at Unified Trust Co., says it is important for managed account providers to understand what sponsors would like to see their plans accomplish. “For instance, if the goal is to replace 70% of income in retirement and [participants] are starting out at a 40% level, measuring how that improves is a good way to benchmark the progress of a managed account.”
As a managed account is really a service rather than a product, Grantz says, it makes no sense to benchmark the account’s performance against an index. “If you are invested in a large-cap core fund, you do want to benchmark it against a large-cap core index to see if it is hugging the index,” Grantz says. “But a managed account is a customized service, and it should be measured against the participant’s stated objective.”
Anton Honikman, CEO of managed account provider MyVest, agrees. “The traditional concept of benchmarking a mutual fund is inappropriate for a managed account due to its customization. If you are personalizing an investment solution, you are doing so to meet the plan participant’s goals, including having a certain amount of money saved.