Can the lowly 401(k), the great white hope of the retirement world, be given a custom makeover to give it all the thrilling appeal of the once-prominent (and much more worker-friendly) pension plan?
A New York Times article relates the story of Hartford, Conn.-based United Technologies and its somewhat inventive use of annuities in its 401(k) plan to create that lifetime stream of income that employees most miss from the pension days.
While the 200,000-plus employees of the company once had a full-fledged pension plan which was closed a couple of years back, United Technologies has opted to supplement its defined contribution plan – which mostly uses target-date funds – with annuities, making it one of the first large employers to do so.
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"They are breaking new ground," said EBRI president Dallas Salisbury, to the Times. "There are several other plan sponsors sitting and waiting to watch what their experience is."
While employees are still responsible for the bulk of their own retirement savings efforts – plus a match from the company – the major difference is that the company's retirement planners, working in association with AllianceBernstein, have figured out how to move most of those savings into variable annuities, beginning at age 48 for most employees.
At that point, the company sells its stock and bond funds and puts the money into a "secure income fund," made up of variable annuities. By age 60, all of the employees' holdings will be moved into the annuity account.
Employees who want to stick with the more traditional 401(k) holdings are also free to do so, picking stocks, bonds, TDFs and the like as they please.
"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 United Technologies CIO Robin Diamonte, to the Times.
"The offering is undoubtedly good from the participants' point of view – to have the offering. But whether or not the participant decides whether it is the best thing to do, given their age, their tenure and their plans, becomes an individual question."
Those variable annuities allow the opportunity for participants to gain equity in times when the market is doing well but still have their investments protected if the market drops.
The younger the employee is when the fixed portion of the annuity is purchased, the higher the payout rate: 4.8 percent for those employees buying in at age 48, versus 3.86 percent for those aged 60. Fees in those annuity accounts add up to 0.13 percent a year for younger workers, plus a flat 1 percent of assets invested each year goes toward insurance for the guaranteed insurance fund.
Those annuities are examined quarterly, with three different carriers – Nationwide, Lincoln Financial and Prudential – bidding on the company's business.
The math involved in making the choice between the annuity accounts or the traditional 401(k) investments can be tricky, the company admits.
"My concern about all these products is that they are complicated and have opaque charges," said Anthony Webb, a research economist with Boston College's Center for Retirement Research. "Given the information in the brochure, my Ph.D. in economics leaves me ill-equipped to way whether this is a good buy. I have no idea how the average UTC worker would be able to work out what to do."
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