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United Technologies DC plan redesign sheds options, managers

United Technologies Corp. overhauled its two 401(k) plans, simplifying investment options and cutting investment option fees.

UTC, Hartford, Conn., has $16 billion in DC assets — $14 billion in a plan for salaried workers and $2 billion in a plan for union employees. Both plans have the same investment options, and both were revamped.

Executives at UTC cut investment options to nine from 19, reduced the number of investment managers, replaced actively managed mutual funds with passive ones, and hired Aon Hewitt, Lincolnshire, Ill., as record keeper, replacing Fidelity Investments, Boston.

“Simplicity was a high priority,” said Natalie Morris, director of employee benefits and human resources. “We conducted employee focus groups and heard that the choices under the prior design were confusing. Several behavioral economic studies show that fewer choices can lead to more active participant involvement.”

As is the case at other DC plans, investment options are arranged in tiers: a target-date fund series for people with the least experience in investing; a group of core funds for those with more investing experience; and a self-directed brokerage window of mutual funds for participants who say they are more active, savvy investors.

Making changes in a system that serves 105,000 participants — about half of whom are active employees — didn't happen overnight. “It was a multiyear process of thinking and planning, and one year of actual implementation,” said Robin Diamonte, director of pension investments.

The number of investment choices had been increasing over time, as had the number of investment managers. “We were accumulating ideas over time on how we wanted to change the investment lineup,” Ms. Diamonte said. “We wanted the lineup to be simple, even lower cost and get the participant to focus on the asset allocation decision — which is the key driver of investment returns.”

A catalyst for restructuring its DC plans was the company's decision to stop enrolling new employees in its defined benefit plan starting in 2010. “For new employees, the sole company retirement vehicle is the 401(k) savings plan,” Ms. Morris said. “We wanted to help them — and existing employees — achieve their personal financial goals.”

(The $17.5 billion U.S. defined benefit plan is unaffected by the changes in the DC plans, and the company continues to contribute to the DB plan, Ms. Diamonte said.)

Under the 19 options of the old system, UTC offered funds from seven managers including Fidelity,Vanguard Group Inc. and Northern Trust Corp.

Now, State Street Global Advisors, Boston, manages five core funds, all of which are index funds. “We don't disagree with active management, but we thought that for simplicity's sake, passive was the best way to go,” Ms. Diamonte said.

The biggest change involved U.S. equity funds. Previously, UTC offered 11 domestic equity funds, both active and passive. Now, it offers two index funds: one tied to the Standard & Poor's 500 index and another tied to

the Russell Small Cap Completeness index, which measures the performance of the Russell 3000 index companies excluding those in the S&P 500.

“The vast majority of the savings (in the new design) come via the lower expense ratios on the new funds,” Ms. Morris said. “These savings are direct to the participants based on their investment elections.”

For example, in a document sent last year to participants, UTC compared the expense ratio of the new S&P 500 index fund managed by SSgA to the six funds — indexed and actively managed — in the old design that were mapped into this SSgA index fund. The expense ratio for the SSgA fund is 0.02%. The ratios for the other funds ranged from 0.02% to 1.02%.

SSgA also manages portfolios of the custom target-date fund series whileAllianceBernstein (AB) LP (AB), New York, is responsible for the asset allocation strategy. The target-date fund series is counted as a single option, just as it was under the old system in which Vanguard was the manager. SSgA and AllianceBernstein are both new to UTC's investment lineup.

One carryover is a stable value fund managed by UTC. Another is the opportunity for participants to purchase company stock. Fidelity Management Trust Co. was the previous manager; State Street Bank and Trust Co. is the current manager.

Company stock accounts for about 28% of the aggregate assets in the 401(k) plans. Although there is no limit on how much company stock a participant may own, Ms. Morris said UTC officials educate participants about the benefits of diversification, including sending them an annual notice as well as more frequent reminders, she said. The documents tell participants that “many investment professionals advise against holding more than 10% to 20% of your portfolio in a single stock.”

And when a participant tries to purchase company stock for a 401(k) account through the plans' website, the participant will be informed if the purchase pushes the amount in his or her account past the 20% level.

In the self-directed brokerage window, which wasn't available in the old design, UTC decided to offer only mutual funds, and not individual stocks and exchange-traded funds. “We thought about it, but we wanted to stick with diversified portfolios,” said Ms. Diamonte. “We didn't want people day-trading.” The brokerage window is offered through a subsidiary of Aon Hewitt.

Since the new lineup took effect Jan. 5, UTC official continued financial planning sessions it had offered and began to conduct employee focus groups. “One of the areas of questioning is, how well did they understand the new design. We will evaluate next steps based on the information we gather from the focus groups,” Ms. Morris said.

She said it is too early measure participants' response to the new investment lineup. “We plan on monitoring contribution rates, participation rates, investment diversification and whether employees take advantage of the full company match,” she said.


Category: Savings

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