United Technologies Corporation's announcement last summer that it was launching a lifetime-income strategy as the default investment fund for new hires garnered a lot of attention. For Natalie Morris, UTC's director of employee benefits and HR systems, the level of interest was surprising on the one hand, and yet not so surprising on the other.

"We thought we were on to something in that if we did it well, it really could make a difference," she says.

Morris says UTC, from a benefits perspective, generally prefers to be middle of the road and let other companies go first. But in this case, "because of all the due diligence and work we did, we felt really comfortable being amongst the first of large employers to implement a lifetime income solution."

In 2010, UTC closed its defined benefit plan to new hires. "That changes the game, and it changes the game for a population that isn't focused on retirement," explains Morris. "In the DB days, that was fine, because they'd have that DB annuity waiting for them as they approached retirement. But that's not the case anymore."

It was important to the company that for those new hires who are automatically enrolled in the plan, even if they never pay attention to their retirement at all, "there was a predictable income stream in retirement for this next generation of employees," says Morris. "That's why we made it the default."

Making this type of strategy the default is "pretty new in the industry. We've seen plan sponsors pick it up as an opt-in option but making it a default option is pretty new," says Gordon Tewell, principal with investment consulting and wealth management advisory firm Innovest.

UTC's new default investment option is based on a design by AllianceBernstein and is built to provide the simplicity of a target-date fund with the security of lifetime income. It essentially looks like a target-date fund up until the participant reaches age 48, then the income starts getting secured. Employees can opt out at any time if they decide it's not the right option for them.

As part of a multiyear plan, UTC first developed a custom target-date fund with the primary motivation of using its current investment options and customizing the glide path relative to their employees. The next phase was introducing lifetime income inside that lifecycle investment. "The whole role of annuities or secure income is [it is] really just another asset class," says Mark Fortier, head of product and partner strategy at AllianceBernstein Defined Contribution Investments. "It appears as a radical concept, but it's really just another evolution in the space."

 

Employee reaction

"From what I would deem our current employees, those not in the new hire category, this [lifetime-income strategy] really wasn't designed for them per se," says Morris. "They were not the target audience, although we'd maintain lifetime income [strategies] can play a role for almost anyone."

Current employees received a lifetime-income strategy kit outlining the new investment and providing examples of how it could work. "We had relatively small uptake of current employees opting in to it as a menu option on the savings plan," says Morris. "Reaction in general has been quiet because, again, this was not necessarily our target audience."

New hires, meanwhile, receive information on the lifetime-income strategy as part of their onboarding process. "I'm not going to say they digest all of it right away, but they do know if there's something they don't like, they can opt out," says Morris.

And while a common refrain among plan sponsors is that they just don't want the liability of being tied to a particular insurer for a long period of time, Morris is confident in UTC's due diligence.

"We're not tied to any one insurer. Our platform is a flexible and scalable platform," she explains. "We do quarterly polls, that's how the rates are set. We only put the request-for-proposal out to the highest grade insurers, and we have three presently but that could change; we could have four or five if the need ever arose."

And because rates are set quarterly, "we get a quarterly market review of how [the insurers] are doing as a company, and we have the ability - within certain parameters - to drop an insurer or add insurers."

Says Fortier: "The initial products that came out were a bit version 1.0. They lacked upgradeability, they lacked sustainability, and they lacked extensibility, so you heard a lot of plan sponsors say, 'Gee, if I put all my eggs in one basket with one insurer, what happens if ...?'"

But the multi-insurer platform gives the plan sponsor the ability to reduce its biggest risks, which are, Fortier says, price and capacity - not insurance company solvency - risks.

"First-generation products were more 'if we build it, they will come,'" says Fortier. "I think the second generation is more 'we have to build it with them in order for them to come.'"

Morris encourages other employers to look at lifetime-income solutions.

"I think once you understand how they work and benchmark companies like us and others who've done something similar, there are ways to work through all of the obstacles that one might encounter or have heard about," she says.

And while it's still early days, "I don't think we've had a moment where we've sat back and thought 'gee, I wish we'd done that differently,'" says Morris, who notes the company does have plans to delve further into employees' perceptions of the lifetime-income strategy during its biennial benefits focus groups.

Tewell believes the adoption of lifetime-income strategies and annuities within 401(k) plans by plan sponsors will increase. "From a participant standpoint, there's a lot of interest," he says. "On a broad level, a lot of plans out there have a fear of being an early adopter; they're waiting for the next generation [of products]."

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