October Three’s New Plan Design Includes Guaranteed Lifetime Income

October Three Consulting LLC, an actuarial, consulting and technology firm based in Chicago, has launched a retirement solution, O3 Prime, that aims to provide guaranteed lifetime income and a customizable design that can be tailored to an individual participant’s needs. 

O3 Prime consists of two accounts that will run side by side: the Personal Account—a 401(k) plan funded by the employee—and the Security Account —a cash balance pension plan funded by the employer. 

The reason the two accounts work together, according to John Lowell, a partner at October Three, is that they become flexible, personal and customizable for each employee and “fit the needs of a diverse workforce.” 

Lowell says about 50% of Americans are not on track to retire and that single women and people of color disproportionately struggle to stay on track.  

“We clearly have a retirement crisis in this country,” Lowell says. “People who are at the age right now where they expected to retire are typically in one of two situations: Either they have gotten tremendous amounts of wealth and have probably already retired, or if they haven’t already, it’s because they love to work. Then there are lots of other people, who are past the age when they planned to retire, who are nowhere near being able to.” 

A New Design 

With O3 Prime, the Personal Account functions like a normal 401(k), in which an employee’s contributions grow at a market rate of return and can be taken out as a lump sum or in installments. The Security Account, by contrast, functions more like an annuity. 

“For a long time, people have become very afraid of outliving their wealth, so what they want is income in retirement,” Lowell says. “We’re going to take the Security Account and offer [participants] the ability to convert it to lifetime income at a fair price.” 

With the Security Account, a percentage of employees’ contribution from each pay period will be credited to their account. That money will grow with a rate of return that will vary based on the asset return of another bucket of investments chosen by the employer. That bucket could be assets in the plan; a mix of stock index funds and bond index funds; or investments similar to those available in the 401(k) account. 

“In the Security Account, every employee will at the very least be guaranteed a return of principal,” October Three stated in a press release. “In other words, if some amount, say $100,000, has gone into their account, they will be guaranteed that their account be worth at least that $100,000 at a benefit commencement date. And if an employer sponsor thinks that a mere return of principal is not sufficient, they can even guarantee some positive return.” 

Providing that floor has a cost, however, so if plan sponsors wants to offset the cost, they can put a ceiling on returns, according to October Three. 

A Financial Incentive 

The firm also created a formula to determine how much money to allocate each year to an employee’s Security Account. The percentage allocated to a younger, newer employee will be less than the percentage allocated to an older, longer-tenured employee, but these allocations can be adjusted depending on the specific needs of the employer.  

In the Security Account, the employer will specify how the cash balance is converted to lifetime income on an actuarial equivalent basis. Lowell says employers would commit to this because it is a “fair exchange.” 

“It’s an exchange on which with ‘pooling,’ [the employer] will neither gain nor lose money over the long haul,” Lowell says. “So, they are giving employees something they value without additional cost.” 

October Three expects that these accounts will benefit employers because they can design the programs to facilitate workforce management and can provide financial incentives within the Security Accounts for employees to exit the workforce at particular ages, knowing those employees have the savings built up to head into retirement. 

In addition, when an employee decides to leave the company, as long as the employee is fully vested, the Security Account balance belongs to them. The employee can choose to take it out in cash but already has the Personal Account for that purpose. The plan is designed so that the Security Account provides guaranteed lifetime income, and the Personal Account provides supplemental savings, according to October Three. 

A Fair Deal 

As required by the IRS, both accounts will be subject to nondiscrimination testing, which Lowell expects them to pass. He says the only situation in which they would fail is if highly compensated employees at a company are predominately young, with older, low-compensated employees, but he argues this would be a very unusual circumstance. 

When a retiree wants to convert the Security Account into lifetime income, Lowell says there is no middleman involved, because the employer is fully funding the account. While there are similarities between the Security Account and typical annuity functions, Lowell points out one key difference.  

“In the case of annuities, insurance companies are managing their risk by providing annuities to a lot of people. … But they’re also in the business to make money,” Lowell says. “But [with the Security Account], a plan itself is pulling the risk, and it’s not in the business to make money. In fact, its goal is to break exactly even, so the fact that there’s no profiteering going on makes it a fair deal for the employee.” 

Flexibility and Personalization 

Lowell adds that when a participant logs into their retirement portal, the balances of both accounts will be visible. The same way the 401(k) gets valued every day, the Security Account will also be valued every day. Lowell says the portal will be available either on October Three’s website or as an outgrowth of the employer’s website.  

O3 Prime also offers a number of “bells and whistles,” that allows a participant to transfer funds between the two accounts. 

For example, a retiree decides they need $5,000 from their Security Account each month at retirement, but they receive a statement from their employer that says they will only receive $4,000 per month. To solve this, O3 Prime allows an individual to transfer money from the 401(k) account into the Security Account. This essentially buys someone additional lifetime income.  

In addition, for those who have a fear of inflation being too steep for them, they can transfer money from the 401(k) into the Security Account to buy some inflation protection up to a limit. 

“Some employees really want guaranteed lifetime income, but are also afraid to elect it,” the press release stated. “While they fear living too long without that guarantee, they also fear not living long enough to have gotten full value of the lifetime income. O3 Prime contemplates this.”