Russell’s Bob Collie, chief research
analyst; Jim Gannon, director, asset allocation and risk management; and David
Phillips, senior investment strategist, give an overview of the main issues and
offer a practical view about pension plan management.
Written for chief
investment officers, chief financial officers and treasurers, the handbook is
divided into three sections: the pension plan and the corporation, pension
plan basics, and special considerations for frozen and closed
plans.
UTC
recently launched Lifetime Income Strategy, built to combine the simplicity of
a target-date fund (TDF) with the security of lifetime income. This default
investment option in the company’s defined contribution (DC) plan is based on a
design by AllianceBernstein.
The
Lifetime Income Strategy is an age-based default investment option through
which each DC plan participant has access to a target-date portfolio built
specifically for them.
PLANADVISER spoke
with Mark Fortier, head of product and partner strategy at AllianceBernstein
Defined Contribution Investments, about Lifetime Income Strategy and the
importance of dealing with longevity risk.
PLANADVISER: How does Lifetime Income Strategy work?
Fortier: Think
of this as sort of the next evolution TDF. It has the same simplicity as a
traditional TDF but in this case, the big benefit is it eliminates the biggest
risk participants have, which is outliving their assets. Starting around age
48, it starts to acquire secure lifetime income for the participant, [and] it
slowly increases the level of protection from zero at age 48 to 100% at age 60.
So at 60, 100% of your assets are protected inside the lifetime income
strategy. Lifetime income strategy looks like any other investment option to
the participant. The big difference here is it will be the default for UTC.
[The company’s default] used to be a traditional TDF.
PA: Why are
products like Lifetime Income Strategy important for today’s workers?
Fortier: The risk that sponsors are seeking to solve … is
the longevity risk. The issue that … solutions are trying to solve is planning
and savings. So in other words, the certainty of income at retirement allows
people to plan for retirement. How do you ask a participant to prepare for
retirement when you don’t know their planning horizon? So the value is it
eliminates the risk of outliving your assets, [and] it also gets them to save
prior to retirement.
PA:Do
you see an industry trend to address longevity risk?
Fortier: Risk has certainly taken a new front page for
everybody. This issue is finally just coming to the forefront.
PA: Do
participants see longevity as a risk?
Fortier: [Many people] don’t see longevity protection as
something important because [they] don’t fear living too long. Would you
consider living too long a bad thing? No. There’s the problem. To date, the
reason you buy insurance is to protect yourself against bad things. But living
too long, [people think] that’s not a problem … but it is. It’s an interesting
problem: How do I protect myself from living too long?
PA: What
other issues can a product like Lifetime Income Strategy address?
Fortier: Not only does it help with retirement confidence,
but it really helps [companies] understand when their workforce [will] retire.
The more I am empowered to have retirement confidence as an employee, the more
productive I am, the more I can plan with my employer. Now my employer can
arguably go out and seek the next generation of employees. For large
corporations, in a world post-DB, they’re all starting to realize the challenge
of managing the workforce that doesn’t know how and when they’ll retire.