How United Technologies Revamped its 401(k) Plan

Plenty of employers offer 401(k) plans because it seems like a good idea. Maybe the competition does it. Maybe employees like them. Perhaps the boss wants one.

United Technologies Corp., a global manufacturer that generated $57.7 billion in revenue in 2012, has bigger ambitions for its 401(k). As Kevin Hanney, the company’s director of defined contribution plan portfolio investments, explained at the 2013 SVIA Fall Forum, one of United Technologies’ goals is to create a secure retirement benefit for the vast majority of its employees for whom the 401(k) is their only retirement plan. But it also wants that plan to be flexible enough to provide opportunities for attractive investment returns for other workers using it to supplement a defined benefit plan. And, for those employees investing in the plan’s stable value fund, they want to be sure that fund delivers a steady crediting rate that helps them to maintain their lifestyle in retirement.

To achieve those goals, United Technologies began thinking in 2006 about how it wanted to revamp its plan, Hanney said. In 2011, it streamlined the plan’s investment menu, reducing the number of investment options, replacing actively managed equity funds with passively managed alternatives and reducing fees. In 2012, it introduced a lifetime income option within the plan, delivered through a target-date portfolio. For plan participants who choose that option, the retirement income is guaranteed by insurance contracts, which combine a guaranteed income floor with upside potential, liquidity, and optional joint life and beneficiary features. The total cost, at about 119 basis points, is about one-third what a similar income guarantee would cost in the retail marketplace, Hanney said.

The United Technologies plan uses custom target-date funds as the default investment option for participants who don’t select investments on their own. While it still has a relatively streamlined menu of low-cost, core investment options for people who wish to construct their own investment portfolios, Hanney said it will be adding two additional options in 2014: a multi-strategy real asset fund and multi-manager risk parity fund.

“In a nutshell, what we are now offering through our 401(k) is a pension plan for the 21st century,” Hanney said. “We embraced the idea that a 401(k) plan can be a pension plan.”

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