Benchmarks – Why, How, and Which to Use?

Last Updated: August 19, 2015

Why you need a benchmark A common question from plan sponsors is “why do I need a benchmark?” Let’s answer this with an example. Let’s assume an investment in the small growth asset class returns 7 percent over the past 12 months. Most plan sponsors would consider a 7 percent return good. However, if the asset class small growth returned 10 percent then the investment does not look so good. It is important for plan sponsors to have a benchmark because without one they are only relying on absolute returns which can be deceptive.
How to choose a benchmark How to choose a benchmark is another concern for plan sponsors. A benchmark should be representative of the investment it is chosen to represent, the asset class. It is imperative to select a benchmark to represent an asset class, not select a benchmark to match an investment. Common benchmark choices include:
Index Benchmark Peer Group Benchmark Custom Benchmark
This is a group of securities that represent a certain segment of the market (asset class). Returns are calculated by averaging the returns of securities within the index and weighting them based on market capitalization This calculates the average performance of investment managers within different asset classes. In essence, is an investment manager beating the average investment manager (top 50%).   Common forms of peer group benchmarks include Morningstar Categories and Lipper Averages. When an investment manager cannot find a standard benchmark to represent the current investment set, a custom benchmark commonly used in asset classes that are a mixture of several asset classes (ie. balanced, allocation, or target date). The benchmark consists of combining 2 or more benchmarks.
Which benchmark to use Let’s assume a plan sponsor elects to use index benchmarks. The final question is which index benchmark to use. This is a more difficult task than one might think. To properly assess the representativeness of a benchmark a plan sponsor must know how it is constructed. As an example, let’s compare two index benchmarks that claim to represent the same asset classes: Russell Indices and the CRSP (Center for Research in Security Prices) Indices.
  • The Russell index is comprised by weighting all U.S. stocks from largest to smallest capitalization. The largest 1,000 stocks constitute the Large Cap asset class and the smallest 2,000 constitute the Small Cap asset class. The determination between value or growth is more complex, but ultimately utilizes metrics like book-to-price ratio, earnings per share (EPS), Return on Assets (ROA), and debt-to-equity.1
  • The CRSP ranks all U.S. stocks by market cap as well but does not limit the index to 3,000 stocks. Instead it sets breakpoints and bands. For example, the Large Cap represents the top 85%, Small Cap the bottom 2%, and Mid Cap representing the remaining. The growth or value metrics used include price-to-book, forward and trailing earnings/price, dividend yield, and sales/price. CRSP keeps 100% of each stock in its respective style index until it passes through a buffer zone. At that point, CRSP moves 50% from one style index to the other. The remaining half will be transferred at a later date.2
As you can imagine, the differing methodologies can result in a different mix of stocks represented in the index. If you would like more information or help with making benchmark choices, contact our Investment Services TeamInvestment Team or call 417.889.4918. We will be happy to help assist your committee in this important decision.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


Cody Mendenhall, CFP®, Executive Director



Read The First Chapter

Learn what it takes to build a successful retirement plan so your employees can retire on time and with dignity. A must read for any fiduciary.

We promise to never spam you or sell your information. For more, read our privacy policy or terms and conditions



A good plan measures
three key elements:
investments, and fees.


A good plan serves
employees and


Fiduciaries have a
responsibility to make
reasonable decisions
with their employees’
best interests in mind.

Ready to Evaluate Your Plan’s Performance?

How we can help


Speak with an adviser who can evaluate your plan in the three critical areas.


Understand how your current plan is performing.


Learn what you can do to improve your plan’s performance.