of excess return requires risk taking. In the context of an overall portfolio, each manager must generate enough tracking error to create excess return, but not so much that it leads to a concentration of risk that reduces the plan's ability to add other sources of excess return or degradation of their information ratios. PLAN SIZE: IMPLEMENTING SEPARATE ACCOUNTS VERSUS COMMINGLED VEHICLES Plan size has a significant impact on what type of investment vehicle should be considered for an investment program. Logically, the largest, most sophisticated programs typically use separate accounts to implement investment policy, as their large asset size gives them access and fee scale to the most sophisticated investment managers. Furthermore, separate accounts facilitate customization, allowing investors to specify custom guidelines. Many investors think about guideline customization in the context of sector exposures (e.g., exposure to Japan must be 10 percent around benchmark) or social restrictions (e.g., no sin stocks). However, there are other important examples of customization. For example, in certain contexts one of the key benefits of a separate account is that investors can specify customized tracking error targets in the investment guidelines. While most managers have a standard process that leads to a given tracking error and we are not advocating changing a manager's inherent investment philosophy, we are highlighting how separate accounts allow for hands-on specification of risk parameters that in some cases will allow a manager to dial up or down risk. Such adjustments are not available to investors who participate in commingled vehicles. Consistent with the need to create a thoughtful overall risk budget, separate accounts can allow for adjusting manager risk so that the total mix optimizes return in the context of the overall balanced risk budget. Customization has its implementation drawbacks, however. Specifically, large numbers of separate accounts require significant oversight, as each manager must be monitored on a stand-alone basis and in the context of the overall plan. This oversight, described in detail in Chapter 15, requires significant human and technological resources. Moreover, asking a manager to create a customized product that is not a standard part of his or her process can create implementation risks on the part of the manager. For those plans that do not have the resources to select and monitor a large number of investment managers there is an abundance of commingled vehicles that provide different kinds of investment solutions. The simplest commingled vehicles are single-manager mutual funds that provide investors, especially small and medium-size programs, with access to high-quality active management. It is important for investors in these mutual funds to understand the fund's objectives, guidelines, and benchmark. Similar to separate accounts, mutual fund performance can be measured in the context of excess return, tracking error, and information ratio. These statistics can, in turn, be included in the program's risk budget. Single-manager mutual funds are not just for smaller plans; many medium and large plans use mutual funds to cost-effectively satisfy allocation to smaller asset classes. One