FAAF – Moving Targets

Although new solutions have recently emerged, there has been a struggle to determine the best way to benchmark asset allocation funds.

Panel members at PLANSPONSOR’s 2008 Future of Asset Allocated Funds Conference in Newport Beach, California, offered suggestions sponsors can use for building and maintaining workable benchmarks for their asset allocation solutions.

align=”center”> The Panel Audio File

Kamila Kowalke, Director, Institutional Markets, Dow Jones Indexes, acknowledged that it is easy to benchmark the underlying funds within an asset allocation solution, but that does not work for benchmarking asset allocated funds. Nevin Adams, Editor-in-Chief for PLANSPONSOR and planadviser magazines, pointed out that sponsors are used to evaluating individual funds and will want to see those results. Kowalke replied that the benchmarking solution should include that component.

Kowalke suggested two things sponsors should consider in evaluating their asset allocation funds:

  • The construction of the glide path, including the philosophy of the funds’ provider, data used in the provider’s approach, and inclusion of inflation risks in the construction; and
  • The asset class representation within the funds.

Ron Surz, Principal, Target Date Analytics LLC, added that sponsors should look at what fund managers are doing with risky assets in the funds and whether inflation protection and reserves are included. He said participant demographics and behaviors should be taken into account when determining if a glide path is appropriate.

The Series, Not a Fund

Matt Smith, Managing Director Retirement Service – Americas, Russell Investment Group, added that sponsors cannot base their choice of solutions on benchmarking one fund in the series (for example, the 2040 fund). He said sponsors should benchmark the whole series and each fund within the series should be weighted differently because risks are greater for participants as they approach retirement.

He contended that sponsors will need help and this is where plan advisers come in. He added that advisers should include monte carlo analyses of different distribution scenarios when evaluating funds.

Surz pointed out that the benchmarking options for sponsors so far include embracing a standard and comparing funds against that standard or recognizing different standards as each fund in a series has a different objective. He pointed out that some sponsors have used peer groups to benchmark.

However, Kowalke warned that peer groups suffer from biases. She concluded it will take a long time for benchmarking standards to emerge for lifecycle and lifestyle funds.