United Technologies puts final touches on 401(k) plan overhaul

United Technologies Corp., Hartford, Conn., this week will introduce two core options in its 401(k) plans that are designed to reduce portfolio volatility and address the impact of inflation.

The introduction of a multimarket risk-parity option and an inflation-sensitive assets option to the plans' core menus completes a three-year overhaul of investments and plan design for the plans with aggregate assets of $21.2 billion, said Robin Diamonte, the company's chief investment officer.

Adding the two investment options coincides with the launch of a financial wellness campaign. “We realize there's more than just saving for retirement,” Ms. Diamonte said. “We are focusing on new employees who don't have a (defined benefit) pension. We want them to be aware so they can max out their savings rate but not max out their credit cards.”

United Technologies officials began considering restructuring the DC plans in 2009. The first big changes took place in 2011 with the offering of a custom target-date fund series, the trimming of core investment options and the adding of a mutual fund self-directed brokerage account. In 2012, the DC plans introduced a lifetime income option.

The changes were enacted after the company had closed its defined benefit plan to new employees starting in 2010, said Kevin Hanney, director of pension investments. The DB plan is still open to employees hired before 2010. It had $24.6 billion in assets as of April 30.

The DC changes affect the two 401(k) plans equally. The plan for salaried workers had $18.9 billion as of April 30, and about 95,000 active and non-active participants. The plan for union workers had about $2.3 billion as of April 30 and about 22,000 active and non-active participants.

The risk-parity option is a “natural extension” of risk-parity investing that has been done by the defined benefit plan since 2005, Ms. Diamonte said.

It was created in-house and holds units of existing investment vehicles managed by AQR Capital Management LLC, Greenwich, Conn.; Bridgewater Associates LP, Westport, Conn.; Invesco Ltd., Atlanta; and State Street Global Advisors. Each manager has a different risk-parity strategy.

“There is some overlap between the investment advisers managing risk-parity portfolios in the DB plan and the new investment option in the DC plan, but the lineups aren't identical,” Mr. Hanney said.

Ms. Diamonte and Mr. Hanney wouldn't comment on the composition of the risk-party option, but said investments could include U.S. equities and international equities, real estate investment trusts, Treasury inflation-protected securities, emerging markets debt and commodities.

“The investment guidelines of each vehicle are relatively broad,” Mr. Hanney said.

“The underlying investments are subject to change,” he added. “We may add, remove or reallocate the proportion of investments held in investment vehicles managed by any investment adviser at any time.”

Including an inflation-sensitive assets option was “something we wanted to do all along,” and certainly before inflation became an issue, said Ms. Diamonte. It is “a supplemental investment to traditional stocks and bonds. We are saying this is part of a diversified global portfolio.”

The inflation option, designed in-house, blends four collective investment trusts passively managed by State Street Global Advisors, Boston.

The four are:

• an intermediate-duration TIPS fund, benchmarked to the Barclays Capital 1-10 years U.S. TIPS index;


• a global real estate securities fund, benchmarked to the FTSE EPRA-NAREIT Developed Liquid index;


• a natural resources/commodities fund, benchmarked to the S&P Global LargeMidCap Commodity and Resources index; and


• a commodities portfolio based on the Dow Jones-UBS Roll Select Commodity index.

“Prices of commodities contracts and the value of stocks of commodities' producers demonstrate different characteristics in the presence of inflationary forces,” Mr. Hanney said. Using two commodities-related collective investment trusts is designed “to enhance the expected risk and return characteristics of the combined portfolio and increase our confidence that the portfolio will respond well across a broad range of inflationary scenarios,” he said.

Although UTC executives initially had considered offering single-topic inflation-sensitive options, they ultimately decided that an option combining several asset classes would be better. Ms. Diamonte said single-strategy funds, such as a TIPS fund, can be more volatile and less consistent than funds containing multiple inflation-sensitive strategies.

When the company executives began considering inflation-sensitive investments, they couldn't find sufficiently attractive multistrategy opportunities. They decided to wait for the “development of more effective solutions than were available at that time,” Ms. Diamonte said.

The inflation-sensitive and risk-parity options don't contain illiquid investments — and there are no plans to add any.

“Investment managers offering risk parity as a product generally focus on highly liquid investments through a combination of physical securities and derivatives,” Mr. Hanney said. “Liquid investments are preferred, at least in part, due to the ongoing need to balance the contribution of asset classes to forecasted risk of the combined portfolio.”

If a manager added illiquid investments, he added, that would “restrict the investment manager's ability to rebalance their portfolio and maintain their preferred allocation of risk between asset classes.”