While anything resembling your father’s pension is unlikely to return, one large company has overhauled its 401(k) plan so workers can receive a paycheck for life.
Like many large employers, United Technologies, based in Hartford, Conn., closed its traditional pension plan to new workers a couple of years ago. The retirement plan that replaced it tries to solve one of the 401(k)’s biggest shortcomings and a thorny problem for retirees: protecting hard-earned savings from a volatile stock market while ensuring the money will never run out.
At first glance, the fix does not appear entirely new. United Technologies, an aerospace and building technology company with nearly 200,000 employees, uses target-date mutual funds — whose investments become more conservative over time — but there’s a twist: The plan also incorporates annuities that offer a guaranteed monthly payout in retirement.
In fact, the plan is one of the first by a large employer to include annuities within the walls of its 401(k), specialists say. And in an even bolder move, the company is automatically enrolling employees into the program if they do not select other options.
“They are breaking new ground,” said Dallas Salisbury, president of the Employee Benefit Retirement Institute. “There are several other plan sponsors sitting and waiting to watch what their experience is.”
Unlike traditional pension plans, the United Technologies plan keeps the responsibility on the workers to amass enough in retirement savings, though the company matches their contributions. The workers must resist any temptation to pull money out in turbulent markets — or for any other reason.
But the difference between United Technologies’ lifetime income strategy and more traditional 401(k) investment options is that about midcareer, the worker’s savings are gradually shifted into variable annuities that guarantee a minimum level of income for life, starting at retirement.
“We wanted to provide the opportunity to retire even if there was a market correction one or two years prior to when they were going to retire,” said Robin Diamonte, chief investment officer at United Technologies, who led the effort to put the plan, designed by the investment company AllianceBernstein, into place.
The program’s inner workings are complicated, and employees will probably have to read and reread the brochure before deciding whether the plan is right for them. And if it is not, workers can choose more traditional options like stock, bond and target-date mutual funds.
Here is how the new program generally works: Until age 48, employees invest their savings in something akin to a customized target-date fund, where the mix of low-cost stock and bond index funds gradually becomes more conservative as employees approach 65, when the company assumes they will retire. (Workers are allowed to retire as young as 60, though withdrawal amounts will be lower.)
Then, beginning when an employee is 48, the company gradually sells the stock and bond funds and reinvests that money into what it calls the secure income fund, which contains variable annuities that continue to hold a portfolio of stocks and bonds — but also guarantee workers can pull out a set minimum amount each year, even if the market crashes. By the time employees turn 60, all of their money in the plan has been moved into the secure income fund.
So how much annual income does this strategy guarantee? It is basically a fixed percentage of the amount in the secure income fund. If by the time an employee reached 55 the fund’s market value was $200,000 and the payout rate was 5 percent, at age 65 the worker could begin withdrawing at least $10,000 annually for the rest of his or her life. This would be the case even if the market plummeted or the account became depleted.
The amount of guaranteed income is recalculated each year on the employee’s birthday and each time she or he adds money to the fund. So as employees make more contributions or if the market does well (after all, 60 percent of the fund remains invested in stocks), the higher amount becomes the new base from which payments will be drawn in retirement. And that means the income stream will also increase, as long as the employee sticks with the program.
“If the market goes up, you win,” said Anthony Webb, a research economist at the Center for Retirement Research at Boston College. “And if the market goes down a lot, the insurance company bears the loss. From the viewpoint of the participant, you want to have this kind of fund investing in relatively risky assets to maximize the investor return in the event of it going well.”
“It’s a balance of getting the best price the market is willing to offer and getting the benefit of diversifying across insurance companies,” said Kevin Hanney, director of portfolio investments for United Technologies’ pension investment group.