How United Tech­nolo­gies re­vamped its re­tire­ment plan


United Tech­nolo­gies Cor­po­ra­tion was ahead of its time when it came to em­ployee re­tire­ment ben­e­fits.

The For­tune 500 com­pany — the par­ent to Otis, Pratt & Whit­ney, UTC Aerospace Sys­tems and UTC Cli­mate, Con­trols & Se­cu­rity — made a point of of­fer­ing its em­ploy­ees an in-plan guar­an­tee of re­tire­ment in­come well be­fore the topic of life­time guar­an­tees in 401(k) plans took cen­ter stage in the na­tional dis­cus­sion.

Five years ago, the com­pany de­cided to re­vamp its re­tire­ment plan, and worked with Pru­den­tial Re­tire­ment to of­fer an in-plan re­tire­ment in­come so­lu­tion to its em­ploy­ees. Though at the time, Kevin Han­ney, United Tech­nolo­gies’ se­nior di­rec­tor, pen­sion in­vest­ments, says he was happy with the re­tire­ment plan the com­pany had, he was in­ter­ested in ideas that would help de­velop the “re­tire­ment plan of to­mor­row.”

Pru­den­tial came back later that year with an idea that would “take the best el­e­ments of the pen­sion plan of the 20th cen­tury and com­bine it with the 401(k) and sav­ings plans that were avail­able at the time to of­fer the pen­sion for the 21st cen­tury,” Han­ney says. “That’s ul­ti­mately where we landed. If you think about how tra­di­tional pen­sions work, it’s pretty much on auto-pi­lot. Vir­tu­ally every­thing is done for the em­ployee who is in a tra­di­tional pen­sion, apart from get­ting the job and com­ing to work ev­ery day.”

In the mod­ern day 401(k) plan, al­most ev­ery ac­tion is on the shoul­ders of the em­ployee. The Pen­sion Pro­tec­tion Act, which was passed in 2006, al­lowed com­pa­nies like UTC to start in­cor­po­rat­ing some au­to­matic fea­tures into its 401(k) plan, like au­to­matic en­roll­ment and auto- matic es­ca­la­tion, to try and en­cour­age em­ploy­ees to save more for their re­tire­ment without them hav­ing to do any­thing about it.

“They don’t have to make a de­ci­sion about whether they should par­tic­i­pate,” Han­ney says. “We also en­roll them at a 6% con­tri­bu­tion rate that max­i­mizes the com­pany match­ing con­tri­bu­tions we put into the plan on their be­half as well.”

As long as em­ploy­ees don’t opt out, the com­pany’s au­to­matic es­ca­la­tion pro­vi­sion will in­crease an em­ployee’s con­tri­bu­tion rate from 6% to 10% over a four-year pe­riod.

“We give the em­ployee ev­ery op­por­tu­nity to opt out of our au­to­matic fea­tures but we also sig­nal to them that this prob­a­bly makes sense so they don’t have to take a lot of ac­tions on their own,” he says.

The com­pany matches 60% of the first 6% of em­ployee con­tri­bu­tions, which works out to 3.6% for el­i­gi­ble em­ploy­ees who con­trib­ute 6% or more to their re­tire­ment sav­ings plan. In ad­di­tion to match­ing con­tri­bu­tions, UTC of­fers au­to­matic con­tri­bu­tions for most em­ploy­ees based on their age. Those un­der 30 would re­ceive an ad­di­tional 3% in au­to­matic con­tri­bu­tions and those over age 50 re­ceive an ad­di­tional 5.5% in au­to­matic con­tri­bu­tions.

What makes the Pru­den­tial life­time in­come op­tion work so well is that it “takes the mor­tal­ity risk away from in­di­vid­u­als and, be­cause there are guar­an­tees, they can take on even more eq­uity ex­po­sure to help fight off in­fla­tion or keep pace with in­fla­tion,” says Srini­vas Reddy, se­nior vice pres­i­dent, full ser­vice in­vest­ments for Pru­den­tial Re­tire­ment.

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