Selecting the Optimal QDIA

With so many assets flowing into target-date funds (TDFs), it is imperative that plan sponsors diligently select the glide path most appropriate for their participants. Chief Investment Officer (CIO) for Hearst Corp. Roger Paschke and David Blanchett, head of retirement research for Morningstar Inc. offered a research-based case study—which involved the two companies—on selecting a qualified default investment alternative (QDIA) for defined contribution (DC) plans, at the 2018 PLANSPONSOR National Conference (PSNC), in Washington, D.C.

Hearst Corp.’s 401(k) plan until 2008 was like many other corporate plans—simply part of the benefits package, not an asset that needed to be managed with the same scrutiny as the defined benefit (DB) plan, which closed in 2011. At that time, according to Paschke, Hearst Corp. felt it was incumbent on the company to make the 401(k) a great plan that would maximize participants’ savings when they reached retirement.

“We started by looking at the heart of the plan—how the target-date funds were working—and found three issues: the funds’ investment performance, the high cost that participants were paying, and the complexity of the TDF options. We then examined the glide paths of 20 active and passive TDFs, representing 99% of [all target-date funds]. Using three Morningstar indexes as the standard to evaluate what was working, we looked at the entire history of each fund manager and found that none had outperformed the Morningstar indexes.”

Blanchett said, “By going through this analysis, Hearst knew that it needed an investment vehicle with a glide path such as the Morningstar indexes. The company approached us, asking if we’d be willing to make the indexes investable, with the guarantee that Hearst would use these TDF funds as the plan’s QDIA.”

Morningstar created the funds in conjunction with UBS Global Asset Management as the trustee and investment manager. The Lifetime Income Fund series was launched in July 2015. Paschke said, “The cost of these index options plummeted. We ran modest assumptions for a period of 35 years and figured that the cost savings from the reduction in the expense ratio would save a typical employee at least $200,000.”

The Hearst Corp. plan has existed for 40 years and has current assets of $1.6 billion, with 19,000 participants.