Friday, January 04, 2008

Maybe Endowment Professionals Should Manage Company Retirement Accounts

Over the past year, I have been reading articles about University endowment funds returns. Typically, the top universities have outstanding returns as reported in What Can We Learn from Yale Endowment's 28% Return? and Harvard Endowment Posts Strong Return. It seems that endowment fund managers have figured out how to regularly beat the overall stock market returns by using alternative investments - e.g. real estate, private equity and hedging.

I think the returns by endowment funds are great. I'd love to have the same returns in my accounts. In my limited experience, company retirement accounts have only a few options, with either no management or self managed by the individual. In my case, my only choice for most of my career was our company's stock. Fortunately for me, the company's stock outperformed the S&P index while I was working there. However, when a 401K part was added, I was given the choice of four mutual funds, which had OK but not stellar returns.

The endowment return articles have caused me to wonder why businesses haven't used the same approach to manage pension and retirement accounts - i.e. hire proven investment managers who are paid to beat the market. In addition, these managers could be made available to employees to manage personal funds. Having interviewed several money managers, I recognize how difficult it is to find an excellent and knowledgeable manager who delivers results. Having access to successful investment managers would be a great fringe benefit.

Note to self. If I should ever be successful in starting a major company:-), I think I will make professional management of retirement accounts and personal accounts one of the company's benefits.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC


Matt said...

Interesting idea. I think there are two things to consider, though:

1) You could argue that companies are doing exactly what you suggest when they provide you with mutual funds. After all, when you buy a fund you are essentially hiring a manager to pick stocks for you, right?

2) Companies have to be extremely careful when they provide any kind of investment advice to employees lest they open themselves up to liability. It's only been in the last couple of years that they've had any leeway to do so whatsoever.

Don't get me wrong. I'd love it if my employer could bring in David Swensen (Yale's portfolio manager) to manage my money. Of course, then I might also manage to retire in my 40s, which isn't entirely great for the company. ;-)

Super Saver said...


Thanks for your comment and excellent points.

I agree that companies thought they were doing the best for their employees by choosing mutual funds and letting employees manage their own accounts. However, the data shows individuals are regularly underperforming the indices due to frequent trading in and out of the mutual funds.

For #2, I think the company could transfer investment advice responsiblity (and liability) to the manager. After all, I don't think many companies want to be in the investment business.

Finally, I would also love having David Swensen manage my portfolio. Being able to retire in one's forties might be a attractive reason to work for a company :-)