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The next step

United Technologies’ DC plans to add lifetime income option

United Technologies
Marine One, a variant of the Sikorsky SH-3 Sea King helicopter manufactured by United Technology Corp.

United Technologies Corp. plans to introduce a lifetime income option for salaried and union workers in the second quarter of 2012, making the Hartford, Conn.-based manufacturer the largest sponsor to employ a such a product embedded within a 401(k) plan.

The decision, affecting the two plans with a combined $15 billion in assets, concludes several years of study that led to UTC restructuring its plan investment lineups and trying to help employees prepare for a steady stream of retirement income.

“We were looking for ways to enhance our defined contribution plan as the primary source of retirement income,” said Kevin Hanney, director of portfolio investments.

He described the lifetime income option as an insured withdrawal benefit, adding that it “does not use traditional immediate or deferred annuities. It's a material difference between the income feature that we ultimately selected and the alternatives that we did not.”

The lifetime income option is especially important for new employees, executives said, because they are not eligible for UTC's $17.6 billion defined benefit plan. That plan was closed to new employees at the end of 2009.

The company revised its two 401(k) plans for salaried and union employees in January, reducing the number of investment options and investment managers, changing record keepers, replacing actively managed equity funds with passive ones and cutting fees (Pensions & Investments, May 30).

“We have demonstrated we can manage big projects,” said Natalie Morris, director of employee benefits and human resources systems, referring to the investment lineup overhaul which affects 102,000 participants. Installing the lifetime income option is a complex project, too, but it “is the next right step” for participants, she added.

UTC is still putting the finishing touches on what the company calls its Lifetime Income Strategy program. The investment aspect is delivered through a target-date portfolio “constructed and maintained specifically for each participant based on their individual dates of birth,” Mr. Hanney said.

This approach differs from traditional target-date funds in which participants choose a fund based on their expected retirement date, said Robin Diamonte, chief investment officer. The UTC target-date portfolio is the qualified default investment alternative, and the lifetime income option “is likely to be the new QDIA once added to the plan lineup,” she said.

Beyond providing a benefit for its employees, UTC's action is a significant event within the defined contribution industry for several reasons.

First, defined contribution consultants and providers of annuity products and other lifetime income products for 401(k) plans have bemoaned the fact that “everyone wants to be second.” Many have predicted that once a giant DC sponsor embraced an embedded lifetime income product, other big peers would will follow.

UTC's DC assets are more than double those of the next biggest plan with an embedded lifetime income option. Based on available information, the largest such plan is sponsored by Prudential Financial Inc., Newark, N.J. It uses IncomeFlex Target, a Prudential annuity product tied to target-date funds within the company's $5.98 billion 401(k) plan that has 45,880 participants.

Tough to persuade

In recent years, several providers have offered lifetime income products in 401(k) plans via annuities or managed accounts, but they haven't been able to persuade the giant corporate DC plans (P&I, Feb. 21).

Also, UTC is moving ahead without waiting for the Labor and Treasury departments to issue guidelines, field assistance bulletins or proposed regulations governing the use of annuities or other lifetime income options within defined contribution plans. Although the two departments issued a request for information last year, received nearly 800 public comments and held two days of hearings, they continue to evaluate the comments.

The DOL is working on a proposed rule “that would require or facilitate the presentation of a participant's accrued benefits — the participant's account balance — as a lifetime income stream of payments in addition to presenting the benefits as an account balance,” Michael Trupo, a DOL spokesman, said in an e-mail. “The goal is to issue this proposal early next year.”

Defined contribution consultants have said repeatedly that their giant clients remain squeamish about launching lifetime income options embedded within 401(k) plans without guidance from the DOL about fiduciary duties as well as administrative and other legal concerns (P&I, Feb. 21).

“We feel we've performed extensive due diligence” to feel comfortable with current regulations governing lifetime income options, Mr. Hanney said.

And the UTC insured withdrawal benefit will be guaranteed by multiple insurers, using an approach pioneered by AllianceBernstein (AB) LP (AB), New York. Last year, AllianceBernstein unveiled a series of target-date funds, called Secure Retirement Strategies, with an embedded annuity supported by three insurance companies. Other providers of annuities within 401(k) plans have the support of a single insurer (P&I, Nov. 29, 2010).

AllianceBernstein executives have said the multiple-insurance approach addresses some concerns by sponsors relying on single insurers — the risks of inadequate capacity or an insurer suffering financial difficulties and the lack of sponsor bargaining power in establishing a price for the product.

Unbundled version

Although UTC is using some elements of the AllianceBernstein (AB) model, the company is, in effect, offering an unbundled version of it.

UTC is still negotiating with unnamed insurers to support the insured withdrawal benefit, said Mr. Hanney, who declined to provide details other than to say several insurers would participate. UTC also is negotiating with unnamed investment managers. Mr. Hanney declined to comment on whether any of the insurers or managers used in the AllianceBernstein offering would participate in the UTC program.

“Working with multiple insurers allows UTC to take advantage of competition,” said Mr. Hanney. “With oversight from UTC, AllianceBernstein will coordinate and administer a quarterly, competitive bidding process on behalf of UTC's plans.”

Also, AllianceBernstein will manage the personalized target-date portfolio used in UTC's Lifetime Income Strategy program, making changes in asset allocation, controlling the glide path and acting as co-fiduciary, he said. Aon Hewitt, Lincolnshire, Ill., is the record keeper.

UTC started examining the role of lifetime income options in 2007, looking at the various products and how plan sponsors and participants responded, Ms. Diamonte said. However, sponsors offering annuities either embedded in 401(k) plans or offered outside the plans “weren't seeing much interest on the part of participants,” she said. “The take-up rate was low.”

UTC executives were drawn to the AllianceBernstein model because of the multiple-insurer support as well as the plan design. AllianceBernstein offers a guaranteed lifetime withdrawal benefit, which establishes a withdrawal amount that will last for a participant's lifetime and is guaranteed by insurers, even if the stock market plunges or a participant's assets are depleted.

In UTC's customized plan, a participant invests in a target-date option. By age 48, some of the money, in increasing amounts over the years, is accrued in the guaranteed lifetime withdrawal benefit. By age 60, the accrued benefits account for 100% of the target-date option. AllianceBernstein will collect and aggregate the benefits purchased by the participants.

“With traditional annuity offerings, participants convert their final 401(k) balance into an irrevocable guaranteed income stream,” Ms. Diamonte said. “At age 60, our participants also have a guaranteed income stream but additionally have a portfolio still invested in growth assets with potential upside, and they keep control of their assets. We think that these two additional features will make this option much more appealing to participants.”

UTC participants can invest in the Lifetime Income Strategy “at any time and must remain invested in it to enjoy the lifetime nature of the income benefit,” Mr. Hanney said. “However, they can take their remaining assets at anytime without being charged additional fees. These two features are critical aspects of the program's benefits.”