How One Employer Successfully Guaranteed Lifetime Income for Its Employees

Plan sponsors are often hesitant to offer in-plan retirement income solutions, fearing litigation and large fees. RTX Corporation— one of the first to implement such a solution—can be a model for how to create a guaranteed stream of income for participants in retirement, while also allowing for flexibility and control over one’s assets.

When United Technologies Corporation, a provider of technology products and services to aerospace industries worldwide, saw peer companies shutting their defined benefit pension plans and cash balance plans to new entrants in 2002, the company saw a need for a new guaranteed lifetime income solution.

Kevin Hanney, the former senior director of pension investments at what is now RTX, says the company started working on the RTX Lifetime Income Strategy in 2006 and the product officially went live on June 1, 2012.

In April of 2020, United Technologies merged with the Raytheon Company to form Raytheon Technologies. The company then changed its name to RTX in July 2023 and has now has three subsidiaries: Collins Aerospace, Pratt & Whitney and Raytheon.

RTX’s Lifetime Income

The RTX Lifetime Income Strategy essentially functions like a managed account that has an insurance component, providing each participant a set income amount that will last throughout their retirement regardless of market or economic conditions—similar to monthly payments one would receive through a traditional pension plan but with more flexibility.

RTX calls this portfolio the “Secure Income Portfolio sub-fund.” Money in this portfolio is insured through multiple group insurance contracts.

“Think of it as a cross between a managed account that’s built for each individual participant and a target date fund that has one uniform glidepath,” Hanney says.

When a participant at RTX’s plan is approximately 15 years from retirement, they have the option to start regularly allocating a portion of their money to the Secure Income Portfolio, which will provide income for the rest of their life—and this payout process happens automatically.

Since it was introduced in 2012, the lifetime income strategy has been the qualified default investment alternative, and any new hire at RTX is eligible for the plan. Lifetime Income Strategy includes a default glidepath that includes an increasing allocation to the Secure Income Portfolio as the participant gets closer to retirement. This happens for virtually everyone in Lifetime Income, unless they opt out by reducing their Secure Income Portfolio to 0%, or if they transfer their money out of Lifetime Income entirely.

Enhancing for Flexibility

Hanney described this version of the lifetime income strategy as “version 1.0.” On September 25 of this year, RTX rolled out two enhancements to the lifetime income solution.

In “version 2.0,”  participants can choose a target retirement age (between 60 and 70), and a Secure Income Level (between 0% and 100%).  

“By doing that, it expands the number of glidepaths that a participant can use by like 120-fold,” Hanney says. “So we go from one to over 120 glidepaths.”

The original version of the strategy assumed that most people retire around the age of 65 and that those who put their money into the guaranteed income portfolio would want all of the money they invested to protect their income by investing it in the variable annuity contracts.

Hanney explained that version 2.0 is much more flexible in terms of when a person would like to retire, and it allows a participant to only invest part of their money into the income solution, as opposed to all of it.

“Let’s say you’ve got access to a pension, maybe through a spouse, and you’re thinking, ‘well, based on my genes and my personal health history, I may not make it to 100 years old,’” Hanney says. “In that case, if you want, you can put only half of your money, or 70%, into [the lifetime income solution]. That will change the glidepath so that whatever your target level of protection is, that’s how much money will go into the variable annuities, and the rest will remain invested in a fully diversified investment portfolio.”

AllianceBernstein is RTX’s asset allocation manager, which will automatically adjust a participant’s portfolio over time, growing more conservative as they age.

After Hanney left RTX a little over a year ago, Ken Levine, the executive director of global retirement strategy at RTX, moved over from the HR benefits area of the company into the pension investments group and took over Hanney’s role. Levine has been at the helm of “version 2.0” of the lifetime income strategy.

“For a couple of years we’ve been saying we need to switch to the latest version and give participants more flexibility,” Levine says.

Levine explains that participants can play with the modeling tools provided by AllianceBernstein to better understand how much secure income they may need in retirement before they start purchasing the insurance component.

In addition, RTX offers Morningstar Investment Management’s retirement manager as a tool to participants. Morningstar can make a recommendation on how much of a participant’s balance should go into purchasing guaranteed income.

For the future, Levine says he is focused on moving toward more electronic communications and targeting communications to certain sections of the employee population. When a participant is approaching 15 years prior to retirement, Levine says they will receive an email that has links to different educational resources and videos about how the lifetime-income solution works.

He says he also plans to inform participants who are leaving the company that they can keep their money in the lifetime income strategy and that they can still activate it when they are ready to retire.

“AllianceBernstein did some recent research [and found that] people that do engage and do some retirement planning and use the tools actually ended up saving more; they contribute more to the 401(k) plan,” Levine says. “We definitely want to keep the engagement up. Just because we have the defaults doesn’t mean we want people to just sit back and do nothing. If they do, we default them to a place where we think they will have a good retirement outcome, but we always encourage them to engage.”

Levine added that out of RTX’s 215,000 total participants, with 150,000 active employees and 65,000 former employees, many of those who have left the company still remain in the plan.

“One thing we need to improve upon is getting the people who have left their money in the plan, and are now at retirement age, to go ahead and activate their benefit,” Levine says. “They don’t always do that and leave the money sitting there. We need to do a better job communicating that.”

He says the company is also looking into making benefit activation automatic, potentially at age 70, if a participant has not yet activated.

Zooming Out: Plan Sponsor Retirement Income Trends

Jessica Sclafani, senior defined contribution strategist at T. Rowe Price, says she sees the plan sponsor community as evolving from more of an “exploratory” stance on retirement income to a “decision-oriented posture.”

“Part of the impetus for plan sponsors exploring retirement income is the fact that we have an ageing workforce,” Sclafani says.

In a survey conducted in the fourth quarter of 2022, which surveyed 160 DC plan sponsors, Sclafani says T. Rowe found that 66% of plan sponsors preferred to retain retired participants in the plan.

“We have shifted from a mindset of literally kicking participants out of the plan upon reaching retirement age as recent as a decade ago to now thinking about how we can actually keep them in the plan.”

The survey also found that 59% of plan sponsors said they are seeing more retired participants keeping assets in the plan.

“That’s really where the rubber meets the road,” Sclafani says. “Because we can create the most complex in-plan retirement income solution that we want, but if participants aren’t staying in the plan through retirement, then what is it all for?”

Sclafani says when plan sponsors are asked what they are doing to keep more retirees in plan, they often do not have answers.

“It behooves plan sponsors to take as comprehensive a view as possible, understanding that if they would like to reposition the plan to serve retired participants, it will probably be an iterative, multiyear process that includes offering an array of investment solutions, those that are non-guaranteed and guaranteed and it will probably need to include some access to personalized advice,” Sclafani says.

On the positive, Sclafani says more employers are supporting participants in taking a lump sum of savings and converting that into a predictable stream of income in retirement.

“Generally speaking, it seems like the way to begin your retirement income journey as a plan sponsor is to focus on recreating that paycheck-like experience,” Sclafani says.

David O’Meara, head of contribution investment strategy at WTW, says it takes more than one education session to get plan sponsors to understand what in-plan guaranteed income is and how it operates. He says WTW consultants are having more conversations with clients who are getting serious about wanting to put a solution into their plan.

“What many of our clients are starting to really focus in on is determining what their objectives are for the plan and what [are] the available solutions in the marketplace,” O’Meara says.

He says employers are asking questions like, “If they had their druthers, what would [a retirement income solution] look like? What would be a fit for their participant base? What kind of employees do they have? What do their employees want? And what kind of benefits does the employer want to deliver?”

O’Meara says it is important to answer these questions before looking for a specific product.

While many plan sponsors are fearful of in-plan annuities, for example, because of litigation concerns, Hanney says he would encourage plan sponsors to “embrace the fact that they have a safe harbor.”

“[Plan sponsors] are not going to be held to a standard of perfection or omniscience,” Hanney says. “As a fiduciary, we’re always making decisions under uncertainty. Our job as a fiduciary is to perform appropriate levels of due diligence… There are many protections in place for a plan sponsor that has good intentions and has good process for evaluating options and making a selection that they put into their plan.”

Challenges of Getting Participants to Buy Into Guaranteed Lifetime Income

While most workers say they desire a steady stream of income in retirement, employers face a variety of challenges when it comes to actually offering guaranteed income solutions and motivating people to participate.

David O’Meara, head of defined contribution investment strategy at WTW, says the benefits of having a guaranteed income stream are straightforward—the stability of income and longevity protection. When offered in-plan, plan sponsors can provide solutions at institutional prices while also providing flexibility.

“The difficult part is getting the right participants into the right solution,” O’Meara says. “Insurance and annuities in general, especially when you think about a product that pays out benefits over decades, are difficult for individuals to put a value on. So it is challenging to get participants to self-select into a guaranteed income product or to facilitate participants to make use of any income guarantee appropriately.”

Kevin Hanney, the former senior director of pension investments at RTX Corp., echoes O’Meara’s concerns and says that if a guaranteed income solution is not part of a plan’s qualified default investment alternative, it is not likely that a large percentage of participants will proactively move their money into it.

“Having all the experience I do with these plans, participants have never moved their money into one single option in large percentages, without it being something like a household name,” says Hanney, who now works as the founder and president of CapitalArts Global LLC, a professional pension trustee and consulting services firm.

RTX’s Lifetime Income Strategy, essentially an in-plan annuity, has been the QDIA for any participants enrolled in RTX’s retirement plan since it first went live in June of 2012, Hanney explains. Because employees are automatically enrolled into the Lifetime Income Strategy, unless they choose to opt out, Hanney says there is significant participation.

At RTX, all new eligible hires are enrolled in the Lifetime Income Strategy 45 days after their hire date with a before-tax contribution rate of 6% invested in the Lifetime Income Strategy. When a participant reaches approximately 15 years from retirement, that participant has the option to start regularly allocating a portion of the account balance to the guaranteed lifetime income portfolio.

“When you think about people that add a lifetime income alternative as an option to their investment venue, and they expect participants to move into it, like mass migration, that’s not a reasonable expectation,” Hanney says. “It would be unreasonable to expect that of any other kind of option that you just add to the core menu. … It’s not the type of choice that human beings are naturally inclined to make on their own.”

O’Meara notes that there has been a big focus among provides and plan sponsors on the “participant experience” and providing enough choice to participants to improve their financial wellness without overwhelming them with too many options.

He says it is particularly difficult to offer one packaged solution when asset managers and insurance companies, who offer these products, need to work with the recordkeepers who actually administer the income strategy.

“Just packaging that solution all together to make it … one voice [and] one set of communications out to participants is challenging,” O’Meara says.

But before a plan sponsor fully commits to a guaranteed solution, O’Meara says the plan sponsors should first determine if the plan design facilitates participants to transition into retirement. He says many plans still force complete distribution of participant balances at retirement and do not allow for partial distributions or systematic withdrawals.

“So that’s an easy one: Allow for partial distributions [and] allow participants to take a small part of their balance out each year instead of having to take all of it out and roll it over,” O’Meara says. “Recordkeepers can certainly facilitate participants staying in the plan and taking partial distributions and sending communications out to those participants. Those would be kind of first steps if there are plan sponsors that don’t want to necessarily take that leap into offering a guaranteed income solution.” —RS