PLANSPONSOR - October/November 2021 - 33

PLAN BENCHMARKING | INVESTMENT TYPES
FINER AND FINER MEASURES
T
he number of indexes and the investments they track
have grown considerably since the Dow Jones Transport
Average appeared in 1884 and tracked 11 companies' stock
prices. Last October, the Index Industry Association (IIA),
reported that the overall number of indexes increased by
roughly 3% to 3.05 million. The search for index-licensing
profits is driving the expansion. According to Burton-Taylor
International Consulting, index providers' revenues exceeded
$4 billion last year, almost a 10% increase from 2019.
Some investment indexes use capitalization weighting in
which the individual components, such as the included stocks,
are assigned a weight in the index according to their market
cap. Others use price-based weighting or equal weighting.
Some indexes, such as the FTSE RAFI [Financial Times Stock
Exchange Research Affiliates Fundamental Index] U.S. 1000
Index, use different inputs. That index uses four fundamental
measures of firm size: book value, cash flow, sales and
quarterly benchmarking of investment
fees to its 3(21) clients. The firm also
asks every investment manager used in
a client's defined contribution (DC) plan
whether the plan could access a lower-cost
product that fits its current strategy.
How to Select a Benchmark
A fund's type-balanced, target-date
fund, etc.-influences the selection of its
benchmark. With balanced funds or riskbased
funds, the selected benchmarks
tend to be more standard, says Browne.
With a 60/40 balanced fund, for example,
the equity index is often the MSCI ACWI
[All Country World Index] or the S&P 500
with the Bloomberg Barclays Aggregate
Bond Index-the " Agg " -for fixed income,
she says. Fund performance is usually
measured as alpha over the benchmark for
balanced funds, but, with target-date funds,
" the peer ranking really is the predominant
driver, just because the benchmark tends
to be a little more complicated in terms of
the underlying investment, " she adds.
Target-date funds with long time
horizons aimed at younger investors tend
to have similar investment allocations
dividends. The 1,000 U.S. equities with the highest fundamental
strength are weighted by their fundamental scores.
The benchmarking industry began " to measure the performance
of active managers because 30 or 40 years ago,
people had no idea what a reasonable rate of return was, "
says Wes Crill of Dimensional Fund Advisors (DFA). " There
hadn't been enough time spent trying to calculate what the
rate of return was for the stock market. And then, over time,
you had this proliferation of benchmark indices that could
add some transparency to performance evaluations. "
The growth in both broad and sub-market indexes led
to the realization that some active managers were underperforming
the benchmark indexes, Crill notes. One result was
an " if you can't beat the index, join the index " mentality and
the rise in index funds. " That's an interesting aspect to me
because the funds themselves are tracking things that were
not originally intended to be investment vehicles. " -EM
that are heavily skewed toward equities,
says Bransby Whitton, product strategist
for target-date funds, also in PIMCO's
Newport Beach, California, office. As
funds approach their target year, though,
the glide paths begin to differ more
substantially. A fund's glide path has
an important role in benchmarking, he
says. With passive strategies, the key is to
match the expected glide path very closely.
For active strategies, the goal is to see " a
meaningful sort of pickup in returns
over the glide path and understand where
those returns came from, " Whitton says.
Similarly, a blended approach should hew
closely to glide path but still provide a
pickup in returns.
Thiemann cautions against heavy reliance
on peer group ratings for TDFs. She
notes that some TDF providers build their
glide paths with an objective of replacing
consumption. Others may emphasize
asset protection, while still others focus on
continued post-vintage-date asset growth.
Measuring one's fund against a peer fund
or a group of peer funds can, therefore,
be an apples-to-oranges comparison. This
can be dangerous because " you may have
picked apples for a very specific reason, "
Thiemann says. The result can be skewed
comparisons that lead to different conclusions
than a more direct comparison would
have produced.
Managed accounts add another
layer of benchmarking complexity, says
Thiemann. In theory, every participant
who uses a managed account should have
a unique portfolio, but the reality is there
are a limited number of unique portfolios.
Managers may use only several hundred
portfolios, which are still too many to
benchmark in a meaningful way, she says.
It is slightly easier to benchmark
investment performance in hybrid plans
where the participant has shifted from a
TDF to a managed account, particularly
if the asset allocation remains relatively
stable, post-transition, Thiemann says.
But, with managed accounts, the stated
goal often is to provide more holistic
financial advice beyond investments,
and the actions taken as a result, such as
increasing contributions to health savings
accounts (HSAs) or implementing a taxoptimized
withdrawal strategy, can be
benchmarked, she says. -Ed McCarthy
PLANSPONSOR.COM October - November 2021 33
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PLANSPONSOR - October/November 2021

Table of Contents for the Digital Edition of PLANSPONSOR - October/November 2021

INSIGHTS
INDUSTRY ANALYSIS
RULES & REGULATIONS
UPFRONT
To Attract and Retain
2021 DC Plan Benchmarking Survey
Investment Appraisal
The Evergreen Discussion
Retirement, by Auto-Pilot
FIDUCIARY FORUM A Useful Gauge
INSIDE ANGLE ESG for Fiduciaries
PLAN PROFILE Picture of Health
PLANSPONSOR - October/November 2021 - Cover1
PLANSPONSOR - October/November 2021 - Cover2
PLANSPONSOR - October/November 2021 - 1
PLANSPONSOR - October/November 2021 - 2
PLANSPONSOR - October/November 2021 - 3
PLANSPONSOR - October/November 2021 - INSIGHTS
PLANSPONSOR - October/November 2021 - 5
PLANSPONSOR - October/November 2021 - INDUSTRY ANALYSIS
PLANSPONSOR - October/November 2021 - 7
PLANSPONSOR - October/November 2021 - RULES & REGULATIONS
PLANSPONSOR - October/November 2021 - 9
PLANSPONSOR - October/November 2021 - 10
PLANSPONSOR - October/November 2021 - 11
PLANSPONSOR - October/November 2021 - UPFRONT
PLANSPONSOR - October/November 2021 - 13
PLANSPONSOR - October/November 2021 - 14
PLANSPONSOR - October/November 2021 - 15
PLANSPONSOR - October/November 2021 - 16
PLANSPONSOR - October/November 2021 - 17
PLANSPONSOR - October/November 2021 - To Attract and Retain
PLANSPONSOR - October/November 2021 - 19
PLANSPONSOR - October/November 2021 - 20
PLANSPONSOR - October/November 2021 - 21
PLANSPONSOR - October/November 2021 - 2021 DC Plan Benchmarking Survey
PLANSPONSOR - October/November 2021 - 23
PLANSPONSOR - October/November 2021 - 24
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PLANSPONSOR - October/November 2021 - Investment Appraisal
PLANSPONSOR - October/November 2021 - 31
PLANSPONSOR - October/November 2021 - 32
PLANSPONSOR - October/November 2021 - 33
PLANSPONSOR - October/November 2021 - The Evergreen Discussion
PLANSPONSOR - October/November 2021 - 35
PLANSPONSOR - October/November 2021 - Retirement, by Auto-Pilot
PLANSPONSOR - October/November 2021 - 37
PLANSPONSOR - October/November 2021 - FIDUCIARY FORUM A Useful Gauge
PLANSPONSOR - October/November 2021 - INSIDE ANGLE ESG for Fiduciaries
PLANSPONSOR - October/November 2021 - PLAN PROFILE Picture of Health
PLANSPONSOR - October/November 2021 - Cover3
PLANSPONSOR - October/November 2021 - Cover4
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