How UTC Incorporated Annuities

Robin Diamonte is the consummate innovator when it comes to corporate plans. Among the United Technologies Corp. (UTC) chief investment officer’s key strides: incorporating annuities into the company’s $21 billion defined contribution (DC) plan.

The reason for the inclusion: after UTC closed its defined benefit (DB) plan for salaried employees in January 2010, the company realized future generations would rely on the DC plan as their main source of retirement savings. Diamonte and UTC wanted to create a plan that allowed for income for life in much the same way as a DB or pension plan.  

And yet there were many challenges. A year before, UTC had revamped its plan and needed to integrate the new recordkeeper with the gatekeeping system that keeps track of insurance. It also had to find the best ways to explain the new, complex investment product and to work as a cross-functional team with its investment staff, human resources, and legal department.

Diamonte, responsible for overseeing UTC’s $55 billion in global retirement assets, including $26 billion in domestic pension plans, $7 billion in foreign pension plans, and $21 billion in the DC plan, researched best practices in 2010, and UTC introduced a new platform to employees with a goal of facilitating easy investing. The company changed recordkeepers, revamped the structure of the fund, and eliminated many of its funds while adding new ones—moving toward an all-passive structure. The new plan offered employees three tiers of options: let a professional invest for you (through mainly target date funds); manage your own investments (using core passive funds as the building blocks of a diversified portfolio), or manage your own investments with even more options (which offered a mutual fund window).

But there was something missing, and it’s become the biggest argument in the shift from DB to DC plans, according to Doug McIntosh, vice president of investments for Prudential Retirement.

“The last frontier really is income and it’s getting plan sponsors and advisors comfortable with putting in a vehicle that delivers a lifetime income stream to people,” said McIntosh.

The best part of a DB plan is its mortality pooling, and its ability to offer its employees  guaranteed income for life. UTC needed such an option for its DC plan, so in 2011, the company  became one of the only large plans to introduce a lifetime annuity option, which offered a guaranteed lifetime income strategy. The guarantee is diversified through three different insurers. Their DC plan auto enrolls and auto-escalates new employees, matches employee contributions, and provides automatic contributions from the company.“If they take full advantage of the plan, it’s a pretty robust retirement savings vehicle,” explains Diamonte. “We auto enroll them at 6% which is where our match is. We auto escalate them up to 10% and depending how they old they are, the company’s automatic contribution is another 3% to 5.5%. So, when it’s all said and done, they could easily be saving 16% to 19% of their pay.”

The cost of the target date fund is around seven basis points.

New employees are auto enrolled into the lifetime annuity option but can opt out and move into regular target date funds or other plan options. Those in a lifetime annuity strategy start gaining insurance protection  at age 48 with some of their balance funneling into something of a Guaranteed Lifetime Withdrawal Benefit (GLWB) with a variable annuity, and by the time they are 60, their entire balance is protected with an annuity. “Because the employee has a guaranteed income upon retirement, we are able to maintain a 60/40 portfolio that has further growth potential,” said Diamonte.

The guaranteed income can only increase from there. Every year that the balance goes up, the annual guarantee increases. “But the most attractive option to this strategy is that it’s not an irrevocable decision and employees always have access to their balance if their circumstances change,” said Diamonte.

The calculation is done very much like a pension fund, with the ability to add a spouse into it for life, right until both partners die. As retirees withdraw their yearly allocation, the remaining balance stays invested and can still increase. They also have the option of withdrawing their entire balance as a lump sum without any penalties—but, that, of course, means that they’ll lose the annuity option. Once they withdraw it, there are no more income guarantees.

Portrait of Robin Diamonte by Chris Buzelli

Fees

One could say that the downside of all of this is that, from the time they’re 48, employees begin paying higher fees for an insurance product. UTC prorated it based upon how much is actually guaranteed. But by the time they’re 60, an employee’s whole balance is guaranteed. Then from 60, to say, 67, the employee has paid for fees for a guaranteed income and now they’re forfeiting those fees. But the fees at age 60 are around 118bps—not a huge amount—and a bargain compared to the cost of annuities in the retail market, considering the low fees of the underlying investments.

How They Did It

UTC knew AllianceBernstein used a similar product for itself and for AXA, its parent company. AllianceBernstein worked with UTC to build a custom design, then went out to seven or eight insurance companies to explain what they wanted to do. It provided a great bidding ground; now, every quarter, UTC asks insurance companies their current guaranteed withdrawal rate from ages 48 to 65 and pits them against three other insurance companies, giving larger allocations to those with the best rate. AllianceBernstein helped to negotiate contracts with Lincoln, Nationwide, and Prudential.

UTC broke ground as the only large plan to do it in 2011. In 2018, the lifetime income strategy has $1.2 billion in assets and over 32,000 participants.

Why Others Didn’t Do It

“We are amazed that no other large plans have implemented similar options to date because guaranteed annuities are the best way to allow a person to retire with the certainty and security of knowing they won’t outlive their assets,” said Diamonte. Actually, after discussions with fellow CIOs, she found out that many firms feared they’d be sued. CIOs with large plans have become low-hanging fruit for some law firms, resulting in CIOs becoming innovation-averse lest their new ideas be framed as “risking people’s pensions.” Others were watching to see what the previous (and current) administration promoted, because the administration had considered annuities helpful to pension plans, and were considering incorporating them into a fiduciary safe harbor. It currently has bipartisan support in the House and Senate under the currently proposed Retirement Enhancement and Savings Act (RESA).

Others were less paternalistic toward their employees, especially after employees retired. Stepping out on a limb fraught with legal risks for a retiree who left the company was less important than using their resources to attract and add benefits to aid employee retention.

UTC was paternalistic enough to get senior leadership’s buy-in. The benefit to UTC is that employees have more flexibility and security at retirement and don’t have to work longer than they are able. They don’t retire at their desks, so healthcare costs are lower, and, as a result, younger people have more opportunity and mobility within the company.