Lockheed eyes future with DC plan revamping

Although Lockheed Martin Corp.'s defined contribution plans are blessed with a strong participation rate and healthy participant investing, executives wanted improvements in the investment lineup and plan design to create simplicity, encourage retirees to keep their retirement assets in the company plans and make the company more attractive to prospective employees.

"We are in a war for talent," said Paul M. Colonna, president and CIO of the Lockheed Martin Investment Management Co., Bethesda, Md., which handles investments for the company's seven DC plans with $50.2 billion in assets. "We must do our part for retention and recruitment."

Last month, Lockheed Martin put its strategy into action, which included removing eight stand-alone investment options that accounted for less than 10% of total DC assets. Having studied participants' investing activity, Mr. Colonna advocated a "less is more approach."

He started his DC review soon after joining Lockheed Martin in January 2019, replacing Christopher Li, who had retired. Before Lockheed Martin, Mr. Colonna was executive vice president and CIO of fundamental equities for State Street Global Advisors. Before that, he was president and CIO for public investments at General Electric Asset Management.

His review involved discussions with participants, Lockheed Martin benefits officials and asset managers. In ex- amining the DC lineup, Mr. Colonna asked, "Is it doing everything we wanted it to do?" The investment-plan design restructuring is identical for seven Lockheed Martin DC plans, most notably the Lockheed Martin Corporation Salaried Savings Plan, which accounts for more than 90% of DC assets and covers more than 90% of approximately 200,000 DC participants.

The review began just as the company was changing record keepers to Empower Retirement from Voya Financial Inc., a process that started before Mr. Colonna joined Lockheed Martin.

Historically, Mr. Colonna explained, the company had focused on getting employees to participate in the plans. "Participation rates were not the issue" for the DC restructuring. The average aggregate participation rate for the Lockheed Martin Corporation Salaried Savings Plan and three other DC plans for which employees make contributions is about 93%. (Three other DC plans are funded through employer contributions).

"Our cost profile was strong compared to our peers and our contribution rates are good," he said. The average deferral rate — excluding a company match — for the Lockheed Martin Corporation Salaried Savings Plan is 11%. The company match for the largest plan is 50 cents on the dollar up to 8% of annual pay. There is no vesting period for the match. The three other employee-contribution DC plans have varying match formulas.

Mr. Colonna's review also led to some additions. Lockheed Martin added an actively managed bond fund, and it added three asset categories — global equity, defensive equity and private real estate — to the underlying investments in its custom target-date series. The target-date enhancements were aimed at providing a more growth-oriented structure to appeal to younger participants and to offer greater diversification, such as the adding of the real estate component, said Mr. Colonna, whose unit manages the underlying investments in the target-date series.

The investment lineup changes took place as Lockheed Martin's defined contribution assets continue to outpace the company's DB assets.

Total DC assets overtook total DB assets in 2016. By year-end 2020, total DC assets were $47.6 billion vs. $37.8 billion for DB assets. As of late April, total DC assets had climbed to $50.2 billion.

The six DB plans are unaffected by the recent changes. Lockheed Martin Investment Management Co. manages the investments for them, too.

Mr. Colonna said asset retention was an important goal in the DC restructuring. Most participants, he added, thought they had to leave the plan when they retired.

Although he examined retirement-income options such as annuities or guaranteed minimum withdrawal benefits embedded in a target-date fund, he decided now is not the time. "We will look at it in the future," he said. "We need a significant amount of analysis."

In addition to describing the various DC plan changes in a 22-page brochure, the company used the document to outline potential benefits to retirees for keeping assets in the DC plans, such as institutional pricing that is "often lower" than retail pricing.

"If you're thinking about moving your money to another retirement account option, be sure to compare fees," the brochure says.

The plans also allow choices for accessing money in retirement — lump-sum distributions, installment payments or a combination of the two. An Empower website and interactive tools helps participants decide how to draw down their funds in retirement.

The brochure also offered a timeline for participants to act, and it describes the reasons for the various changes.

For example, the brochure illustrated the changes in the target-series glidepath, which represents a collaboration between Lockheed Martin and AllianceBernstein, and how it affects different age groups. It uses a "through" approach with the roles of equities, bonds and diversifiers — such as high-yield bonds and private real estate — changing until age 80. The target- date series offers differing investment strategies in five-year increments.

For the youngest participants (ages 25 and 30), for example, the total equity component represents 90.2% of the asset allocation, which is higher than the previous equity allocation. By the landing point (age 65), the equity component is 33%. At age 80, it's 20%.

The category of core bonds, Treasury inflation-protected securities and stable value, starts at 5% for the youngest participants, grows to 38.8% at the landing point and settles at 68.3% at age 80. In between this category and the equity group are diversifiers, which reach allocation peaks just before, during and just after the landing point.

About 16% of aggregate DC assets are invested in the target-date series, which represents one tier in the DC lineup. The other tiers are geared to participants who want to take an active role in fashioning their investment strategy:

A passive core group featuring a selection of four white-label index funds: The Large Cap Equity Index Fund; the U.S. Small & Mid-Cap Equity Index Fund; The Global Ex-U.S. Equity Index Fund; and the Broad Market Bond Index Fund. They correspond respectively to the S&P 500, the Russell 2500, the MSCI ACWI ex-U.S., and the Bloomberg Barclays U.S. Aggregate Bond index.

An active core group featuring a selection of three investments: an equity fund, a stable value fund; and the new actively managed bond fund. Each of these funds, as well as the target-date fund, are white label funds, too. They were rebranded with the name LMIMCo. Lockheed has used white label funds for more than a decade, but the rebranding took place in April.

Specialty options: With the removal of eight stand-alone funds, only two choices remain: a self-directed brokerage window and company stock.

Mr. Colonna said less than 5% of aggregate DC assets are in the self-directed brokerage. He declined to discuss the company stock holdings. The most recent 11-K filing with the SEC, for the 2019 year, showed company stock of $12.4 billion, or about 28% of assets in the defined contribution master trust.

The removed specialty funds were a mixture of passive and active investments including equity, fixed income and diversifiers such as commodities.

Participants could transfer these holdings to other investments in the menu. If participants didn't act, their investments were mapped into an age-appropriate target-date fund.