PSNC 2010: Fund Benchmarking

August 3, 2010 ( – When it comes to benchmarking a plan’s fund menu, it’s all about keeping up with the Joneses.

But it’s also a matter of making sure the funds are doing what is laid out in a plan’s investment policy statement (IPS), said panel members at the PLANSPONSOR National Conference.

Hal Bjornson Vice President, Head of Investment Services Group, J.P. Morgan Asset Management, explained that the benchmarking process begins by comparing a fund’s performance to that of its capitalization size and investment style peers. This is typically done over a three-year and five-year period and focuses on issues such as risk/return characteristics and style consistency, with many plans relying on data provided by Morningstar or Lipper, he said.

Bjornson was quick to caution attendees that it is advantageous for a successful fund benchmarking process to have investment committee members who understand the financial basics.  “It is very helpful when conducting an investment review to have folks who understand the importance of this stuff,” said Bjornson, adding that those representatives could be from a company’s finance unit or even outside consultants.

Because it can be important in a fund benchmarking process, Michael W. Kozemchak, Managing Director, Institutional Investment Consulting, an NRP member firm, urged those in the audience to make certain their IPS reflects the company’s current thinking on its retirement programs. Sponsors should not forget to include in the IPS the committee membership and a process by which those representatives will reach decisions.

Also, they should not forget to have it reviewed by plan counsel. “It’s one of the first documents that will be requested as part of discovery by plaintiffs counsel who will know the document very well and make you feel like you haven’t been acting in accord with that document,” Kozemchak asserted.

Mark T. Ratay, Corporate Retirement Director, Morgan Stanley Smith Barney, said it is important for investment committee members to pay careful attention to more “exotic” choices such as emerging markets funds because employees may not properly understand the notion that short-term performance does not necessarily mean long-term dominance.

“When you do start adding those investments that are a little more exotic, the problem is 90% of participants really don’t know what they are doing,” Ratay said. “They look at the performance numbers when they get their statements and say ‘Emerging Markets, oh that’s cool.  I want 45% (return). Eight percent is not good enough.”

Bjornson added a caution: “At the end of the day, this is the company plan and I think many committees lose sight of that. You decide what gets in and what gets out and ultimately you’re on the hook for that lineup if there’s a problem.”

The audio of the panel discussion is here.