Default Investment Option Addresses Longevity Risk

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.