Plan Sponsor Profile | Published in May 2017

Retirement Security In a DC World

A 401(k) plan with lifetime income as the QDIA

By Judy Faust Hartnett | May 2017
PS517_Portrait_Profile_Chris-Buzelli.jpgArt by Chris Buzelli On June 1, 2012, United Tech­nol­ogies Corp. (UTC), headquartered in Farmington, Connecticut, added a lifetime income strategy to its defined contribution (DC) plan.

It was not just added, however, it was selected as the qualified default investment alternative (QDIA). Making this bold decision was a culmination of years of thoughtful plan design by the plan sponsor, working with AllianceBernstein L.P., the company’s investment manager.

“We were interested in lifetime income after closing our traditional defined benefit [DB] plan to new entrants in 2002, and our cash balance plan overall in 2010,” says Kenneth Levine, executive director, global benefits strategy and planning for UTC. “We knew we needed a retirement income solution and that a defined contribution plan was going to be our primary retirement vehicle.”

The plan had adopted an off-the-shelf target-date fund (TDF) close to the time it added automatic enrollment, in 2006. Later that year, post-Pension Protection Act, UTC “transitioned from the TDF to a custom TDF solution. In 2011, that was enhanced into the UTC Lifetime Income Strategy that has been in place for the last five years,” says Kevin Hanney, senior director, pension investments non-U.S. pension and savings plans at UTC.

Levine explains the fundamentals of the fund: “It has the simplicity of a TDF and eliminates the biggest risk participants have: outliving their assets.

“There are three key components—an equity sub-fund, a bond sub-fund and a secure income sub-fund—that are managed for participants over their lifetime,” Levine continues.

Hanney further explains, “Starting at age 48, the Strategy transitions from a traditional investment-only portfolio into the secure income sub-fund. The secure income sub-fund purchases units of group annuity contracts from high-quality insurance companies, which in turn hold the assets in separate accounts invested approximately 60% in equities and 40% in bonds. When invested in this fund, assets are automatically allocated into these components in certain percentages based on the participant’s age. It slowly increases the level of income protection from zero at age 48 to 100% at age 60. So at 60, all of your retirement income is protected in the Lifetime Income Strategy.”

According to Hanney, “We’ve streamlined the user experience so participants see only one option, which is the Lifetime Income Strategy, and everything that is complex is under the hood.”

The Lifetime Income Strategy appears on the 401(k) plan menu alongside a list of investments including what UTC calls Target Retirement funds, Mix & MonitorSM Core Passive Options (including six fund types), UTC Common Stock and Employer Stock Fund—what the UTC match and company contribution is made in—a mutual fund window, and recently-added Inflation-Sensitive Assets Fund and Multi-Market Risk Parity Fund.

Despite all of the industry discussion about DC account decumulation and replacement income, such adoption of a lifetime income investment option is still relatively rare. Levine says plan sponsors are concerned about compliance and risk, but “we’ve hired insurance companies, which UTC has used for years and have proved their value, to purchase these products, and it’s the insurance carriers that are offering the guarantees.”

On top of that, Hanney says, “We believe LIS is in the best interest of our participants, and that’s why we decided to offer it. We certainly support an even stronger safe harbor from DOL [Department of Labor], but we don’t believe the current regulatory environment creates undue risk or provides a compelling reason not to do what’s best for our plan participants.”