No doubt, when you sat down to choose the various investment options that would be available in your program, you considered a wide variety of factors—risk, style, performance, and diversification among them. However, the key to a consistent long-term evaluation of the appropriateness of an investment manager is the ability to measure that fund's performance against a specific standard, a benchmark.
You may use that benchmark for a variety of purposes. However, your participants likely will be best able to apply it as a benchmark of investment performance. Done properly, the use of a benchmark can greatly simplify communications about fund selection, fund performance, and changes in your plan's fund line-up.
This month's Know How explores the concept of a benchmark. Unfortunately for plan sponsors, the most widely reported market benchmarks—the Dow, the 10-year Treasury, and the Nasdaq—typically are not found in your average retirement plan menu. In fact, the only widely communicated benchmark that is likely to be among your fund choices is the S&P 500.
Still, you should be able to determine appropriate benchmarks for the funds in your retirement plan and share those with workers as a way of helping them maintain a perspective on fund performance that transcends performance alone.
If the need should arise to either change or add a fund manager, the use of benchmarks can make the task of communicating that much easier.