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.