United Technologies Company last month took the plunge into providing its employees a steady stream of retirement income. The 199,900-employee Hartford, Conn.-based firm added the Lifetime Income Strategy, a customized age-based default investment program designed by AllianceBernstein, into its $14 billion 401(k) plan.
The special sauce in the Lifetime Income Strategy plan is the product's multi-insurance providers including The Lincoln National Life Insurance Company, Nationwide Life Insurance Company and Prudential Retirement Insurance and Annuity Company. AllianceBernstein provides the fiduciary support including asset allocation services, the open architecture platform and the participant service support necessary to manage the Lifetime Income Strategy.
"What we did was we help address the risks of price competition and capacity that they were worried about," said Mark Fortier, Head of Product and Partner Strategy at AllianceBernstein Defined Contribution Investments.
So what's the key to the success of the plan option?
Defaulting UTC employees into the option, according to Fortier. "That is one of the keys to all of this working because it is also one of the key benefits to the insurers."
Fortier added the fact that participants are defaulted into the option is a boon for the plan and insurers, which are now guaranteed a more diversified age and asset base "because if you look at any of these solutions sold on a retail basis, they're typically bought by the mass affluent."
"Helping sponsors decrease risks in their DC plans but with similar benefits to their defined benefit plans is really what we're doing. It's moved away from just about helping people to helping the company help their people," he added.
For its part, officials at UTC tout the new retirement income program as a customized, cost-effective and efficient option for its participants.
"It was critical that the Lifetime Income Strategy preserved the flexibility and control our participants have come to expect from their defined contribution plan," said Robin Diamonte, UTC's Chief Investment Officer. "As the plan sponsor, we wanted a multi-insurer solution to promote price competitiveness and greater capacity."
The UTC 401(k) plan is the largest plan to date to embrace the otherwise unpopular plan option. Why? In general, plan sponsors have been reluctant to adopt retirement income products because there is additional liability for entering such arrangements and [their] participants have not demonstrated any interest, according to David L. Wray, president of the Plan Sponsor Council of America, a national, non-profit association of companies that sponsor profit sharing and 401(k) plans.
"The importance of this is that a lot of companies will be watching to see their experience and how their participants react," he said.
An executive at a West-coast asset management firm added that: "While the [Department of Labor] and Treasury have been very encouraging and supporting innovation of annuities within 401(k)s, there are no safe harbors at this point, or even fiduciary guidelines for how sponsors select insurance partners."
MetLife last month issued a retirement survey, which echoes the executive's sentiments. Specifically, the survey, which polled 12 defined contribution plan record-keepers that service primarily Fortune 500 companies and 215 plan sponsors, reported that eight in 10 sponsors' (79%) fiduciary liability concerns are discouraging them from more widespread offering of income annuities within their DC plan(s) -with at least one commenting that their company "tends to shy away from offering options that expose [them] to greater fiduciary liability."
More than half of plan sponsors (56%) also believe those concerns are dissuading their record-keepers from more widely offering these products on their platforms.
For their part, the record-keepers believe plan sponsors are "waiting for the Department of Labor to issue fiduciary safe harbor guidance" and they are "somewhat unlikely to add these [products] unless there is a regulatory change that provides the plan sponsor with some fiduciary protection," according to the survey.
Retirement income products aside, sponsors are seemingly gun-shy to provide their participants with retirement income projections. The survey revealed that only one-third of plan sponsors (33%) and the six record-keepers report that they include retirement income projections on participant statements. Eight in 10 plan sponsors (81%) say that their plan participants have the ability to model how much retirement income they could expect based on their current account balance.
Unfortunately, the majority of record-keepers surveyed estimated that 25% of plan participants or fewer have made the effort to project their retirement income.
More guidance from regulators on adding monthly retirement income projections to DC participants' statements would be helpful, according to Judy Mares, chief investment officer at Alliant Techsystems Inc., which houses a $1.6 billion 401(k) plan supporting 21,000 participants.
"As a plan sponsor, our concern with coming up with our own rate is that it may be considered an implicit promise to a participant-that they are guaranteed a certain monthly income or that they can buy an annuity at a particular rate,'' she said. "Plan sponsors need assumptions and a method to say, 'It's OK to do this.' "