Benchmarking Managed Accounts Against Participant Goals

A critical question for advisers to ask when suggesting managed accounts to a plan sponsor client is whether it is possible to benchmark a managed account’s performance in a consistent way across the plan population.

Since each managed account will be customized for an individual participant, taking into consideration their 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 FinMason, an investment analytics firm in Boston, puts it, “A managed account is designed to take into account a participant’s specific tolerance for risk and their financial situation to determine how much investment risk they should have in their portfolio.” Given the wide range in individuals’ financial circumstances across any employee population, it’s reasonable to assume there will be some diversity in their managed account construction.

Jason Grantz, director of institutional retirement consulting at Unified Trust Company in Highland Park, New Jersey, 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 they are starting out at a 40% level, measuring how that improves is a good way to benchmark the progress of a managed account.”

Since a managed account is really a service rather than a product, Grantz says, it really does not make sense to benchmark the managed 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 in San Francisco, 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, be they to replace a certain percentage of their final income or to have a certain amount of money saved.”

NEXT: Behavioral benchmarks can be used 

There are other aspects to a managed account that advisers should assess as well in determining whether the managed account succeeds in achieving a participant’s desired retirement outcome, says Ken Verzella, vice president, innovation of investment solutions at MassMutual Workplace Solutions in Enfield, Connecticut. “To determine whether the managed account is of value, foremost to look at is fees,” Verzella says. “The adviser should look at how they are constructed, whether they are flat or tiered, and whether they decrease as assets in the account increase.”

The next is to assess the construction methodology of the managed account provider, he says. “The major providers of managed accounts make this readily available. The role of the financial intermediary is to help the plan sponsor understand the methodology because it gets very technical.”

Then, naturally, the adviser should be monitoring the funds in the plan, which are selected for each managed account, Verzella says.

“There are behavioral benchmarks associated with managed accounts, as well,” he says. “Advisers should be looking at whether managed accounts prompt participants to save more and whether they stay the course.”

However, Kyle McCauley, managing partner of City Center Financial in Troy, Michigan, believes that by determining what portion of a managed account is invested in equities, bonds or other types of investments, it is possible to benchmark the performance of each managed account against a traditional index.

“A managed portfolio can generally be benchmarked by keeping the relative allocations split between the known benchmarks,” McCauley says. “An example of this would be a managed portfolio that consists of 60% equity positions and 40% bond positions. For such a managed portfolio, you would generally be fine to use 60% of the S&P 500 Total Return Index performance and 40% of the Bloomberg Barclays U.S. Aggregate Bond Total Return Index.”

Thus, it is possible to benchmark a managed account, whether it is against a participant’s stated goals or a traditional index.