United Technologies Corp. overhauled its two 401(k) plans, simplifying investment options and cutting investment option fees.
UTC, Hartford, Conn., has $16 billion in DC assets — $14 billion in a plan for salaried workers and $2 billion in a plan for union employees. Both plans have the same investment options, and both were revamped.
Executives at UTC cut investment options to nine from 19, reduced the number of investment managers, replaced actively managed mutual funds with passive ones, and hired Aon Hewitt, Lincolnshire, Ill., as record keeper, replacing Fidelity Investments, Boston.
“Simplicity was a high priority,” said Natalie Morris, director of employee benefits and human resources. “We conducted employee focus groups and heard that the choices under the prior design were confusing. Several behavioral economic studies show that fewer choices can lead to more active participant involvement.”
As is the case at other DC plans, investment options are arranged in tiers: a target-date fund series for people with the least experience in investing; a group of core funds for those with more investing experience; and a self-directed brokerage window of mutual funds for participants who say they are more active, savvy investors.
Making changes in a system that serves 105,000 participants — about half of whom are active employees — didn't happen overnight. “It was a multiyear process of thinking and planning, and one year of actual implementation,” said Robin Diamonte, director of pension investments.
The number of investment choices had been increasing over time, as had the number of investment managers. “We were accumulating ideas over time on how we wanted to change the investment lineup,” Ms. Diamonte said. “We wanted the lineup to be simple, even lower cost and get the participant to focus on the asset allocation decision — which is the key driver of investment returns.”
A catalyst for restructuring its DC plans was the company's decision to stop enrolling new employees in its defined benefit plan starting in 2010. “For new employees, the sole company retirement vehicle is the 401(k) savings plan,” Ms. Morris said. “We wanted to help them — and existing employees — achieve their personal financial goals.”
(The $17.5 billion U.S. defined benefit plan is unaffected by the changes in the DC plans, and the company continues to contribute to the DB plan, Ms. Diamonte said.)
Under the 19 options of the old system, UTC offered funds from seven managers including Fidelity, Vanguard Group Inc. and Northern Trust Corp.
Now, State Street Global Advisors, Boston, manages five core funds, all of which are index funds. “We don't disagree with active management, but we thought that for simplicity's sake, passive was the best way to go,” Ms. Diamonte said.