United Technologies Corporation was ahead of its time when it came to employee retirement benefits.
The Fortune 500 company — the parent to Otis, Pratt & Whitney, UTC Aerospace Systems and UTC Climate, Controls & Security— made a point of offering its employees an in-plan guarantee of retirement income well before the topic of lifetime guarantees in 401(k) plans took center stage in the national discussion.
Five years ago, the company decided to revamp its retirement plan, and worked with Prudential Retirement to offer an in-plan retirement income solution to its employees. Now it's hoping its success story will act as an example to other companies that can’t afford to offer pension plans, but would still like to see their employees have a stable retirement.
Kevin Hanney, senior director, pension investments, for United Technologies, started with the company in mid-2005. At the time, UTC already had a relationship with Prudential. Hanney told the company’s Prudential representative at the time that he was happy with the retirement plan the company had, but was interested in ideas that would help develop the “retirement plan of tomorrow.”
Prudential came back later that year with an idea that would “take the best elements of the pension plan of the 20th century and combine it with the 401(k) and savings plans that were available at the time to offer the pension for the 21st century,” Hanney says. “That’s ultimately where we landed. If you think about how traditional pensions work, it’s pretty much on auto-pilot. Virtually everything is done for the employee who is in a traditional pension, apart from getting the job and coming to work every day.”
In the modern day 401(k) plan, almost every action is on the shoulders of the employee. The Pension Protection Act, which was passed in 2006, allowed companies like UTC to start incorporating some automatic features into its 401(k) plan, like automatic enrollment and automatic escalation to try and encourage employees to save more for their retirement without them having to do anything about it.
“They don’t have to make a decision about whether they should participate,” Hanney says. “We also enroll them at a 6% contribution rate that maximizes the company matching contributions we put into the plan on their behalf as well.”
As long as employees don’t opt out, the company’s automatic escalation provision will increase an employee’s contribution rate from 6% to 10% over a four-year period.
“We give the employee every opportunity to opt out of our automatic features but we also signal to them that this probably makes sense so they don’t have to take a lot of actions on their own,” he says. “They aren’t required to decide what the optimal savings rate is. And, on top of that, the default option that we enroll them in today is our lifetime income strategy, which includes auto features and provides a secure income in retirement, while still maintaining all the freedom and flexibility that is already available in the 401(k).”
The company matches 60% of the first 6% of employee contributions, which works out to 3.6% for eligible employees who contribute 6% or more to their retirement savings plan. In addition to matching contributions, UTC offers automatic contributions for most employees based on their age. Those under 30 would receive an additional 3% in automatic contributions and those over age 50 receive an additional 5.5% in automatic contributions.
Srinivas Reddy, senior vice president, full service investments for Prudential Retirement, says that UTC had done everything possible to make sure its workforce would be in good shape financially by the time they retire — but there was something missing.
“Most plan participants, when they have a sizable balance, don’t know how much to take out or sustainably take out over time,” he says. “No one can predict market returns and nobody knows how long they are going to live. We play off the averages.”
What makes the Prudential lifetime income option work so well is that it “takes the mortality risk away from individuals and, because there’s guarantees, they can take on even more equity exposure to help fight off inflation or keep pace with inflation,” Reddy adds. Another advantage of a lifetime guarantee is that a client can save 20% less and still have the same income in retirement. A person doesn’t have to have as big of a financial safety net in place.
At the end of February, there were more than 27,000 plan participants in UTC’s lifetime income option and close to $950 million allocated to it. The average age of the plan participants in the program was about 52 years old.
“The way we know that average age is this is a personalized portfolio,” Hanney says. “We aren’t just sticking them into the 2025 vintage off the shelf target date fund. We’ve developed a glide path that’s implemented for each individual participant based on their exact age.”
He adds that the company built the strategy to be flexible enough so if someone goes into this at an earlier age or a later age, it shouldn’t make a material difference to what the final outcome is because it will all be based around savings patterns. Virtually all of that is on auto pilot.
“We think it is critical to preserve the freedom and flexibility that is available in the 401(k) plan. We don’t know what uncertainty each one of our plan participants will face but we’re virtually certain every one of them will face some form of uncertainty,” Hanney says. “The design is flexible enough they can opt out or if circumstances change, where they need even more guaranteed income, they can increase their level of contributions. That’s something you didn’t have in a traditional pension. We think what we’ve done is created an exceptionally flexible design that responds without the plan participant needing to take a lot of proactive decisions and making those choices, although the choices are available if they want to make them.”
Reddy says that Prudential has been working with lifetime income guarantees in 401(k) plans for a decade now, and in that time it has found that people with a guarantee in their plan find value and merit to the guarantee even before it turns to income. People who have a guarantee are 40% more likely to stay the course. “They don’t make erratic decisions based on market volatility,” he says.
The Great Recession was a great testing ground for the program. People who participated in the program at other companies did not make any rash decisions about their investment portfolios during the market crash. Instead, they did nothing. They continued to focus on the long term, Reddy says.
The UTC program is set up in such a way that younger employees contributing to their retirement plan won’t be paying for the income guarantees. Only after age 48 do employees begin paying additional fees to trigger the plan’s lifetime income feature. Slowly, the money in an employee’s account will shift over to variable annuities that provide guarantees. And since most people don’t retire at age 60, the product is designed so that employees can continue to work and contribute to the plan as long as they are able and their level of guaranteed income in retirement will continue to grow.
Employees are able to remain in the UTC 401(k) plan even after they leave the company. They are also able to continue transferring money into the plan after they leave.
“We think it is critical for it to be a lifetime solution for anybody in it, not just the active workforce,” Hanney says.
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