Kevin Hanney: The Past, Present and Future of Pensions

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Welcome to the new Retirement podcast. Today we're going to be talking with Kevin Hanney, the senior director of pension investments at United Technologies, which just merged with Raytheon, where he helps oversee about $100 billion in retirement plan assets for hundreds of thousands of U.S. and worldwide participants. Kevin has also been on the ERISA Advisory Council working for the Secretary of Labor. Today we're going to be diving into the past, present and future of pensions and retirement income in general. We're also going to be talking about lifecycle finance and whether people should be concerned about the safety of their pensions. Kevin joins us from the New York City metropolitan area. So with that, Kevin, welcome to our show. It's great to have you join us.

Thanks for having me, Steve. It's entirely my pleasure.

Yeah, I appreciate your time. So before we jump in, I would just love if, love it if you can kind of give us a kind of quick overview of kind of what you do at United Technologies and you know, what a day in life is like.

Yeah, sure, I'd be happy to, you know, usually start at the crack of dawn or sometimes before that. You know, we're global, so it's really 24 7. And we're exchanging communication with our colleagues overseas, talking about, you know, we have a big footprint in the uk Those are very traditional pensions, although there are some DC arrangements. And like every employer in the United Kingdom, we're subject to the auto enrollment rules around there. So even in the areas where our pensions are closed. And in fact, recently all of our major defined benefit plans in the UK closed to future accruals. But we've been a DC only employer offering stakeholder or group pension arrangements for the better part of the last 15 years. That was literally the very first project I did with United Technologies when I joined them back in 2005. You know, I jumped on a plane, red eye and I met my contact at King's Cross Station literally just weeks before they had the trouble over there, the terrorist attack. And you know, so we're in contact constantly around the world with many different people who are involved in the oversight of these plans, both for from an investment as well as an administrative perspective. And of course, you know, there are our strategic partners within the human resources and other parts of finance that we're constantly talking with because it really is a group effort. And with United Technologies recently merging with Raytheon to become Raytheon Technologies, that's only become even more complex where we're taking a stronger role in non qualified plans as well as VIVAs or voluntary employee benefits type arrangements. So normally we're tracking the markets, trying to see if there's any latest crisis developing and, you know, the current one that we're all facing and managing in our own way, some of us are more personally affected than others, has been quite the experience. However, I can say, you know, having the amount of time in the business that I have, that I'm very, very pleasantly surprised with how reliable the business continuity approach has been for not only us at Raytheon Technologies, but all of our strategic partners throughout the industry, whether it's an investment manager, trustee or custodian, bank systems provider that allows us to do, you know, conferencing applications like the ones that we're using right now. Steve. Right. That has been remarkably reliable in the current situation. And, you know, I'm not too far removed from what happened about 19 years ago and remembering when there were, you know, great American institutions, things that had been in place since literally the constitution of this country and those entities being unable to issue paychecks at the time of 9, 11. So what's going on right now, the consistency and the efficiency has been remarkable. It really is. So we have been in touch with a lot of people. We're staying on top of the current developments from healthcare perspective, from an economic perspective. And our job in this oversight role is to look at our strategic partners as the extension of our staff. For example, if we had an unlimited budget, we would hire all of these brilliant people directly to work for Raytheon Technologies. But what we've been able to do is outsource some of these functions and act more as a central coordinator. And in our own way, there are certain things that only we can do. And so we are very hands on with things like, well, when are we going to rebalance our investments to bring them back closer to the strategic targets in light of the extraordinary volatility that we've seen over the last eight weeks. So there's a lot of that going on.

Yeah, I would definitely love to kind of dive into that because so you're managing $100 billion for all these people and you have both people that are kind of in accumulation and then you've got people that are retired and receiving pension or other benefits. So, and I get what you're saying, which you have an important job of making sure that people get their money if they're needing their pension, paycheck and or benefit. And, you know, you've also got to manage all these assets given all the volatility. So how often Often do you rebalance and how do you approach that problem?

Yeah, and you really have to. So you can't be dogmatic about anything in the current environment. The good thing about what I do and what the team here at Raytheon Technologies does is that we're all very well trained. Whether it's MBAs or holding the CFA charter, whether it's the KAYA designation or other advanced education and professional designations, you name it, we've got it. And we can rely on that training as the starting point. But then you have to recognize that there is no playbook for the current situation that we're facing. And so we also do a fair amount of benchmarking. We will talk with our peers around the industry and look for the best ideas and to the extent possible, just steal shamelessly. We are not too proud to admit when we think somebody else has a better idea. And when the volatility in the global markets really raised its head. Let's call that maybe six weeks ago, if I'm thinking about the calendar properly, there were a lot of those phone calls just checking to make sure that the references we were relying on were still accurate. So there's an awful lot of art that has to be mixed with the science. Now when it comes to something like a defined contribution arrangement with participant directed accounts, it's a very long winded way of describing a 401k plan or a 403 or even a 457, but a procurement participant directed defined contribution plan, we're not the only one that has control over what's happening. And in many ways the control sits largely with the individual employee or even a former employee. It could be someone in retirement who's elected to remain in our plan. And we always encourage people to do that. So for the purpose of managing through this situation, a lot of what we're doing is trying to understand when we will see cash come in and go out that's outside of our control. For the large part, when you're in a defined contribution arrangement and try to include that in our projections or forecasts for where we might be after accounting for market volatility. And so I'll be a little bit more specific here. Within the default option in the United Technologies Employee Savings Plan, that default option is something we call the lifetime income strategy. We have a co fiduciary alliance, Bernstein, who manages the glide path and the day to day allocation within the lifetime income strategy. And part of what they're doing is assessing the volatility of each of the respective asset classes, they're establishing tolerance bands or triggers for rebalancing, but they're also factoring in cash flow and they're factoring in the volatility that might bring us back to target. So we're not extremely strict in saying we're going on a regular basis, maybe daily, weekly or monthly, whatever it might be, to bring it back to a precise target, because that in itself would be flawed. It would be a false sense of precision or false sense of confidence that we actually got it back to target. But because almost by definition you're going to be off your target on the next tick. And so we use a more, I'd say, deliberate and diplomatic way of approaching it, where maybe we're going to go back halfway to target, bring it within the band. And what we saw in this most recent period is that actually helped the portfolio, the investment portfolio within lifetime income strategy within our custom target date funds actually outperform its benchmark.

Thanks for the recap of what you're doing kind of day to day here. It does bring home to me kind of one of the big things that's happened with pensions and the evolutions of pensions, which is that we've essentially asked individuals with the advent of the 401 to become professional money managers, which is what you and your team do when you manage the pension. And I do want to get your opinion on this, but I just want to, for our audience, I'm just going to recap kind of like the past of pensions, because I think it's kind of interesting. So 1875, first pension was created. 1921, the internal revenue act kind of enables the growth by making contributions tax income efficient. And then by 1950, you know, 25% of private sector workers had a pension. And then by 1960 it was about half. Then we saw some pensions fail. They created the government created erisa, the ERISA act. And they also tried to secure or essentially insure pensions more with the pbgc, the Pension Benefit Guarantee Corporation, which I know you know all about. And Then around the 1980s, this is where the big risk shift happened. There was the, in 1978, the Revenue act, which created the 401k part of the IRS tax code, where it said, hey, individuals can get write offs and companies can get write offs for individual savings. And then the DC defined contribution plan was essentially created. And that is how we kind of went from essentially this great giant risk shift from companies taking the mortality risk and having to provide the cash flows in retirement to individuals having to save in their 401k and needing to also manage these assets themselves. Any thoughts on that evolution? And if you think that, you know, where, where do you fall on the pension versus dc?

I mean, no, I, I, I. First of all, that was a great recap because it really, it did, I think it started with Otto von Bismarck. German railroad employees got a pension where if you were, if you retired at the age of 65, they pay you for the rest of your life. What they kind of left out was life expectancy at the time was around 65. So it was kind of 50, 50 whether or not you'd ever get the check. But there was this nice little, you know, incentive, a carrot at and you know, over time things did develop. I'm not sure that the private sector in the US ever got to 50%. You know, there's some dispute about this. I kind of rely on what I heard from a really well known fellow who's still involved, but maybe not as visible as he was just a few years ago named Dallas Salisbury and he read EBRI for a long, long time. I'm pretty sure that it was Dallas that told me that the highest we ever saw for private sector pension, defined benefit formula, pension coverage was about one third. And the other thing that I point out is that I saw some great statistics years ago from the MetLife, the MetLife Mature Market Institute I believe is the name. And it's sort of a think tank that's sponsored by Met, but it's not part of the commercial business. And they showed us a chart that we actually used to get approval for a lifetime income strategy. And I've sort of, I've borrowed that liberally over the years for different presentations where if you look at the percent of workforce participation for people in the United States over the age of 65 and you go back all the way to say like 1900, back then the percent of participation was nearly 100%. And it's not surprising because we didn't have pensions in the United States at that time. But as pensions started to roll out and become more and more available, we did see that percentage of participation drop down. The real this nostalgia for maybe something that never was. The idea that everybody could go to college, get a job, work from the age of say 25 to 65, get the gold watch, little pat on the back and don't let the door hit you on the backside on the way out, that that picture of retirement that really only persisted for maybe the 60s, 70s, 60s and 70s, I'll say. And what happened with the state of inflation from maybe say 1969 to around 1982 was that these pensions that had been promised while at the nominal or the notional level appeared to be very, very generous. The insidious impact of inflation, the extremely high, not quite hyperinflationary, but the high inflationary period of the 70s, it reduced your purchasing power to one third of what it was when you retired, if you retired in 1969. So there's almost a misunderstanding of what the pensions, you know, the availability, the coverage, the generosity and the, the retirement adequacy. So when the tax act of 86 went through, I think that's really when 401k started rolling. I know that Ted Benna had created them maybe a little bit earlier, but I think it was that tax reform in 86 where I started to hear about it. Now I was just graduating from high school and I'm going to college. I had some friends that went straight into work to workforce and Teddy Carlson, great guy, grew up with his father, said Teddy, you got to put your money in a 401k, it'll be the best thing you ever did. Well, you know, Teddy's a multimillionaire now that never went to, he went to technical school, started fixing copiers and now he's running a company that he found. So like you Steve, I mean he's an entrepreneur and he really took advantage of the tools that were available. And here we are 35 or 30, I'm not sure how many years later, I've lost count. I'm old enough to say that where he's really seen the fruits of those labors. Now granted, everything with investments is time period specific and here we are just in the last few weeks where the longest bull run in not just my lifetime or your lifetime but several lifetimes has come to a very abrupt and painful end. What's happening in 401ks now? Well, in the traditional 401k where it is an investment only vehicle, largely participant directed like you said, where people are forced to become their own investment managers, not working out so well for some people. I'll point out though, one of the most valuable vehicles that you can get through a qualified plan is a stable value fund where you might have the full faith and credit of one or more very well resourced life insurance companies, we've got a great one in our plan and the current crediting rate on that thing is well in excess of 2%. And when you look at a 30 year treasury bond paying 113 basis points, that's a pretty good deal. But really, that's a vehicle that's been around for us since 1978. And when we think about what's going to work for the workforce of today and into tomorrow at UTC or Raytheon Technologies today, we rolled out the lifetime income strategy specifically so that people would still have all of the freedom and the flexibility that make life the defined contribution arrangement in the U.S. great. But they'd also have that security and certainty that people long for when they feel nostalgic about maybe this time that never was where everybody had a pension. And just wait till you. Till my back pension comes in. Spanky. We'll get that new, you know, cart or whatever it was. Rascals. But the, you know, the idea is, I believe that there are extremely valuable attributes of both the traditional defined benefit formulas as well as the defined contribution. And the real trick is taking the best of both worlds and making it accessible for everybody.

Yeah, And I totally want to dive into that. I want to wait a second and just talk a little bit more about what's happening with pensions today. And I think what you're bringing to the table about what actually happened with inflation and how it hurt the purchasing power is a really important lesson that we could be facing again because the government is essentially printing money and distributing it. But do you think that that's going to raise the risk for people that have pensions today or any kind of investment? What's your take on that?

Well, I like to say that I've been very early on inflation, Steve, for the better part of the last 10 years, and even a broken alarm clock is going to be right once or twice a day, depending on whether it's analog or digital. But, yeah, inflation is something that's persistent and it tends to be under the radar. And when we've worked with some of the best minds around the world on how to factor this into the equation and that really, it really is an equation, there are these different inputs with variables and unknowns, and you have to try to come up with gauges of all of them. And then you also have to recognize that the, the accuracy of the solution that you come up with is going to be modest at best. Right. And so part of what we think is really important is to try to maximize optionality. If you look at the traditional pension formula, there was one option, and sometimes you didn't even have that. The option that I'm talking about is when did you retire? Right. The formula was preset. You were automatically enrolled. All of the contributions were done you didn't even notice them. Right. And, you know, it's. I've got this anecdote where one of my siblings, one of my older brothers, my oldest brother actually called me up a few years ago and said, yeah, you know, I'm thinking about retiring. I'm going to take my pension, you know, maybe in about a year and a half, two years. So I figure I should talk to somebody about this. Really? You think it's about time? Yeah. Okay. All right. Well, you're about 10 years too late in the normal world, but actually he's a police officer, and he's a police officer in the state of New York and he's got an extraordinary pension. And when I actually read into it, then I realized why my taxes are so high. But in that kind of an environment, you do have something that's really valuable. But that being said, if you do get hit with inflation, and personally, my own assessment of what we've seen in terms of the recovery over the last few weeks, that in itself is a form of inflation. You know, depending on who's using the word, they mean different things. Personally, I think when we hear the Fed talk about it, or central banks, they're talking about wage inflation, inelastic prices, because you can't cut somebody's pay. Of course, that being said, you, you brought up the idea of cutting back on 401k contributions and workforce furloughs and pay reductions, and that's happened all around the world right now as well as here. Right. So that's very, very painful. And in the absence of a crisis like the one that we face today, not something that goes over well and has the political, you know, where you can't withstand it politically to put those types of changes through. That being said, we have tools available today, and I'm not talking about financial engineering, I'm talking about meat and potatoes, plain vanilla, insurance products and investment products. And you can put those things together. The biggest advantage that you have by marrying things that are issued by insurers to things that come from the investments is time and optionality and what usually is undervalued by our industry. Steve. And you know, I'm part of the industry, so maybe I'm part of the problem, but I am trying to be part of the solution is that people don't recognize the value of time and optionality the way they should. And unfortunately just look at things like, I don't know, time weighted rates of return, which to me, even though I hold the charter, that's kind of a fiction. There's literally 140,000 people in the UTC savings plan. There's another 90,000 people in the Raytheon Savings and Investment plan. Every single one of them has a unique economic return over their life cycle. And it's because their pattern of cash flows, whether it's money going in or money coming out, what they're invested in at what time, they're all going to have a unique experience. And it's really where you bring in the optionality and the insurance. And insurance takes many forms. It doesn't have to be a policy that's issued by life insurance company. It could be other things too. But having that at the right time and in the right corner, that's going to make the difference between somebody who is financially precarious, maybe even financially destitute, or someone who has financial stability. And I'll say it now, it's going to sound trite, but I want to say it out loud. RIS in ERISA stands for Retirement Income Security. A lot of people have lost sight of that, but I think that's what we're trying to solve for.

Totally. Yeah. You know, I mean, it's, you know, when you look, when you take a step back and you think about this, so we had pensions. They, they were good but not perfect due to the inflation issue that you raised. And they never, a lot of people imagined that they were awesome and they maybe never were that good with 401ks. Some people, like your friend, you know, who started working right out of high school and did the right things, invested, probably kept investing, you know, hopefully was diversified. Yeah. Over decades they'll end up being millionaires and, and I know several people like that. Unfortunately, the average 401k balance is I think like a hundred thousand dollars. You know, as you. Sorry for across the whole population, it's like 25,000 for people that have them. And then as you get closer to retirement when you're older, it's still only like a hundred thousand or maybe 125,000. And I think the reason is, is that, you know, we, we took this two generations of people and said, okay, do, do the right things, you know, get financially educated, you know, so the best practices, which we know, but most people don't know and don't, don't apply, are diversify, keep fees low, save over a long period of time, keep saving, market up or down, do that for decades and then decumulate the same way, kind of dollar cost, average out, and you'll probably be okay. That's hard to do because as human beings, you know, when markets are up, we are feeling good, and when markets tank, we want to run for the hills. And sometimes people sell out of the bottom, which is what, you know, retail investors tend to do. I think the average retail investor gets a return of like less than 2% in the markets because of, because they're bad behaviors. So it, it is hard to get right. And I think what you're bringing up about pensions or retirement solutions in general, they just need to be simple and they need to kind of default to best practices and people that take advantage of stuff or people that have pensions, like your brother who's a police officer, you know, it kind of things were defaulted for him, money was safe for him. He just has to just think about when am I going to retire? And granted the benefits are good and they're backed up by taxpayers, but, you know, he's probably. People that I talk to that have pensions, they love it. You know, it's great generally, if they've, if they've been in for, been in them for a while. It's just, how do you take that. And I know you're working on this and we'll talk about it, but, you know, how do you make, make that available to more people so that more people have better outcomes?

Yeah. And Steve, I think you're touching on something, but I don't know that you've really explicitly named it, but you won't be surprised when I say there's a psychology around this. And of course, you know, you got, you got guys like Dick Thaler and Kahneman and Tversky, and there's a phenomenal research out there. Jeff Brown in Illinois and Olivia Mitchell. And I'm leaving out names of people. I mean, Zvi Bodhi. Right. You know, there are traditional finance and investment people and as well as people that are coming maybe from the social sciences and they've been able to marry together these disciplines and just in the last maybe 10 years, recognize that the psychology drives a lot of this. Now, whether it was intentional or not, the choice architecture of your traditional pension used that psychology to its advantage. Right. And I like to say it's better to be lucky than good. And in my life, I'm mostly lucky. Right. So the fact that people put together these promises and maybe they thought they were getting one over when, yeah, if you make it to the age of 65, we'll pay you for the rest of your life. That's my New York, Long island cynicism there. But the reality is they Built something that was sustainable and it lasted, in the case the original pensions back in the late 19th century for over 100 years. But the promises started to get more and more generous and they got to the point where they were quite literally unsustainable. It was a deal that was too good to be true. Now when that happens in at least the US based insurance industry, regulators get involved, they step in if there is a whiff that maybe you can't pay a future claim. And with my, you know, layman's understanding of the safety net that we have in place here, while there have been numerous insurance failures, they haven't really made the headlines, at least not for the last 20 years or so. And the reason is that the safety net that's in place has been stable enough to withstand that. The real, you know, the capacity issues that we were afraid of back in 2008 because of what emanated through the global financial crisis, that, that was something that we, we avoided, thankfully. But the reliance on that industry and that safety net is going to grow over time and therefore we have to be kind of sensible about where is the money going, where is the stability coming from? Are we, are we designing something that we will be able to offer not just today, but tomorrow as well? And so there's lots of different ways you can get at that. I don't know if you want to go into the competitive dynamics or things about pricing.

Yeah, I definitely want to talk about the private sector and what you're doing. But before we do that, just to wrap up on kind of the current state of pensions and I think, you know, you're raising some, really, your point of view is really interesting here because you, you definitely, obviously think deeply about it. But you know, one of the things you brought up was like, okay, we have a regulation for private sector pensions where you're looking at the funded ratio and can you, can you make good on the obligation? How about on the public side? Is there a similar mechanic there that governs whether or not these obligations are sustainable? And I, you know, one of the things in getting ready for this, I was, you know, I visited the site called pension tracker.org and I saw this guy, Joe Nation, who, who runs it, it's out of Stanford, speak at one point and he's talking about what's the unfunded liability? He looks at it this way, what's the unfunded liability per household in the U.S. he also looks at it by state for public pensions. He started in California looking at CalPERS, but I was Just looking at the data. So using actuarial return assumptions of 7%, then the obligation is $12,700. That's unfunded per household against $1.5 trillion in obligations. Now, if you assume a lower market rate of return of 3%, that turns into 39,000, roughly $500 per household, unfunded, against $4.7 trillion in obligations, obligations higher because the rate of return is lower. So, you know that these are obligations that I guess are going to be paid by taxpayers through higher taxes over time. But you know what, do you have a point of view on public pensions? And is there a governing, like, regulator function in that, in that market?

Well, you know, it's funny. I think the opinions like mine are like certain parts of, you know, the anatomy in that everybody has them and they usually stink. Right. But I am qualified enough in this area to, I mean, no offense to Joe. I'm sure his numbers are valid. And I love actuaries. I think everybody should have one. Right. But there's a certain amount of uncertainty involved. And there's a great book out there. I don't make any money off of this. I don't know the guy, but somebody named Todd Rose wrote this book called the End of Average. And you can go and see his TED Talk. He's in YouTub and he runs the alternative Learning Lab out at Harvard. And, you know, that's an eye opener. The idea is that a lot of times the numbers that are being quoted, those are maybe the central tendency in a distribution of a wide range of outcomes, and whether or not the distribution is going to be shaped like that traditional bell curve or if it's going to have the fat tails or the smile that people talk about. And basically, for the uninitiated, that means the range and frequency of these extreme outcomes, not that we ever have those. Right. As I look out my window in quarantine, you know, those are a lot more prevalent than the numbers might suggest. So I do think there has been a lack of discipline when it comes to putting money away for a rainy day, whether that's an individual doing that on their own behalf or for their family or. Or if that's an organization or even a government doing that for these promises that they've made to people who are. It's kind of the wimpy from Popeye approach to financial security. I'd gladly pay you Tuesday if you work for me today. Right? So that's what the pension is. And they haven't necessarily tucked away enough in that rainy day. Fund to say that come he double hockey sticks or high water, you're going to get your check. Now remember, a lot of the government spending is driven by the ability to tax. Right. So I'm also a believer that you're going to get paid. You'll get the dollars that you've been promised. Those dollars might not be able to buy anything when you get them, but you'll get the dollars. And if you've got a wheelbarrow big enough to bring them down to the corner store or the pharmacy, you might be able to get your prescription filled. So, you know, I say that with a certain degree of cynicism and tongue in cheek, but yeah, I think more attention needs to be paid to this and we have to be, we, first of all, we need to be more open minded and flexible. There is no room for dogma in the world of pensions and yet it is pervasive. We also have to look at the range of options that we have available and try to use them to the best of our ability.

Yeah, you raised a great point. I mean, so you think people will get paid, but we may have inflation along the way, just like we saw before, that decreases their purchasing power. I just saw a headline that McConnell was saying, as you know, as part of this PPP and other bailouts that they're doing that, hey, we don't want to bail out any state pensions, so states should consider going bankrupt. And the governors are like, that's a crazy idea. That's not going to happen. That there's this, this issue is getting some more exposure right now as we go through the current pandemic crisis.

Yeah, it's funny though, you know, my boss is Robin Diamante. Robin and I work together for 15 years now. We were literally shoulder to shoulder in the New York Times article about lifetime income strategy. And we were just on the phone talking to somebody about what's happening right now. And at the end of last year, we actually got support from Congress for the stuff that we did. We were comfortable going forward without having the laws change. But the secure act that passed with the last spending bill, that's a sea change. And a lot of the objections that people had to doing things like the lifetime income strategy, those have been completely removed. And now on top of that, you've got the current situation where incomes have been cut off and now people are getting access to their, their retirement savings and we're taking extraordinary measures. And you know, we got to the point in the phone call with these other people where I said, you Know, I'm thinking about suggesting to Robin that we put our money together and take out a full page ad in pensions and investments and it'll just be told you. So love Robin and Kevin, you know.

Nice. Yeah. Well, let's definitely, let's now dive into this because I think we've kind of set the whole table here for, you know, what's happened with pensions, where are they today? What's happened with 401ks? And then I know that you have for, you know, many years. And we'll, we'll point to the New York Times article and some of the other things, other resources you're pointing to here are mentioning, but really been thinking about how do you combine the best of pensions and 401k or DC assets? So, you know, the flexibility there along with the reliable income. I'd love to hear kind of what you're building or what you've built. I know it's live and kind of also where you see that going.

Yeah. So we're talking about the lifetime income strategy and it's approaching its eighth anniversary. So it's, it's been live for quite some time. In fact, it's, it would be in third grade if it was my child. And in many ways it is. At one point in the month of December, we passed the $2 billion mark in terms of total assets invested through the lifetime income strategy. And then at another point in the month of March, we passed the $2 billion mark in the other direction. However, in spite of that rise and fall in the investment assets, the level of guaranteed income that the program has secured for me and literally tens of thousands of other people that are working for Raytheon Technologies through the legacy UTC workforce, that's only gone up. And in fact, even though from an investment perspective, I think my year to date return on a personal level, maybe I didn't check it last night, but maybe the night before, the night before that, it was like a negative 16 and 16.35. I was down about almost 16.5%. And yet my level of guaranteed income from the end of the year when I reached the 25th anniversary of my 25th birthday, as someone politely pointed out, it's up by 20% in the last three, four months. So this lifetime income strategy is built with the conscious intent of creating a level of financial security that hasn't been available through a defined contribution plan until now. But I should also say that the way this program was put together, and again, we work with some of the best minds in the world on this and we are not too proud to say that we stole shamelessly from the best thinkers. You know, Zvi Bodhi, it was him publishing the conference proceedings for the Life Cycle Savings and Investing form that he had in 2006. I actually have a dog eared copy of that where the pages are falling out. And there was a panel in that conference where it was me and Bob Merton, I think, and Paul Seth Samuelson. These guys are talking about the idea of life cycle investment and saving. And you know, it was a relatively new idea. Samuelson only suggested it in 1933. Right. And it was finally starting to get some traction with the passage of the Pension Protection act in 2006. Now this is one of those things where maybe it's not widely understood, but certainly the architects of that legislation and the movement that led to it was, hey, there is a psychological aspect to this that we used in the past but never recognized. It was called automatic enrollment. And also over time, this concept of automatic escalation, it was all happening under the surface, unbeknownst to the employees. But that was how the security of the traditional pension was created. Now we were at, literally at the time all of this stuff was happening, we were going out to all of our strategic partners, investment managers, insurance companies, custodians, record keepers, and saying, give us your best ideas. Right? And the thought behind that was, well, it's kind of a funny story. I'll tell you, Steve. So I got hired at United Technologies in 2005 with the purpose of overseeing the non US plans. And due to some staff turnover that happened, you know, I got there a week later, somebody left. On my first day, Robin came in and said, oh great, you know, you're going to also take care of the defined contribution plan. And I thought, wow, that's like getting two jobs for the price of one. Thank you very much. But no. Robin was like, no, no, this is really cool. Because the savings plan here at UTC is one of the most valued benefits. We have tens of thousands of people that leave their money in there even after they leave employment, whether they're retiring or going to work for a competitor, whatever the deal is, they love the savings plan. They keep their money in it. And I thought, you know what? The writing is on the wall. I was standing in front of a Bloomberg terminal in April of 2006. One of the other analysts in our group was there and we were both reading a story about a peer company that had closed its traditional pension to new entrants. And about two months before that, another peer company had done the same exact thing. And I just turned to him, I was like, chris, you know, it's only a matter of time. And he goes, well, what are you talking about? I said, well, look, if our peer companies are all closing their plans, when is UTC going to close its defined benefit plan? Because at the time we were still offering a cash balance formula. Chris and Robin and I, we got hired and we were cash balance people. And I said, but don't worry about it. I'm already thinking about this. You know, I had about a year of all right, now I'm taking care of this DC plan. What do we do to make this ready for prime time? How can we make this design functional and stable and reliable when it becomes the primary form of retirement benefit that UTC offered to its employees? And so I told them a little bit about some of these ideas. I said, but, you know, don't go tell Robin, because it's not fully baked yet. And so, you know, don't worry about it. I won't do it. We finish reading the article, we go back to our offices. You know, I don't have Bloomberg on my desktop today. Everybody else does, but at the time it was all shared terminal. So Chris goes back to his office, I go back to mine. About an hour later, the phone rings and it's Robin. Yeah, Chris just tells me you got this bright idea. Tell me more about this. Oh, great. Well, you know, I haven't really. And she goes, listen, sounds really good. Obviously we have more urgent things to work on, but keep on looking into it. So put the word out, started getting people coming in, showing us all these great ideas, and it really was fascinating to see how the different perspectives, where the ideas originated and whatnot. But in the end, it took us a number of years to develop this thing called the lifetime income strategy that in my mind is an overnight success. Now, I've done a lot of talking and I haven't really given you many details. How much do you want to know about what it is when I say the lifetime income strategy?

Yeah, well, I'd love to. I'd love for you to explain kind of at a high level. Yeah. What, how does it work? And, I mean, I'll give you my view and then you can correct it. And then. And then also followed up by, are other people doing this? Because I definitely understand you guys have taken a lot of the right. These ideas that, hey, we said, here are the best practices we should build into this. You've actually created it. You've got real money. $2 billion in it, it's delivering a benefit. But here's my understanding based on our previous conversations, essentially people can dollar cost average in save over time into a target date fund. So it's pretty simple, right? They're kind of accumulating money like they normally would into a target date fund. But what you are doing that's different is that as people approach their target retirement date doesn't have to be an exact date, but they kind of get within a certain time frame, five or ten years, you start dollar cost averaging out of the target date fund and into a stream of annuities, or sorry, variable annuities, where you've negotiated the rate to be super low because you're buying essentially wholesale. So there is still some market participation through that and you're having income floors that people are getting. Now, I will say my perspective, and I'm not an expert on variable annuities, is that in the retail world they're expensive. And the kind of my take on the best practices, better to keep kind of like the annuity part and the investment part separately separate. But if you've negotiated it and gotten kind of a better deal, then maybe it makes more sense. But that's my kind of high level view on what you've constructed. But obviously want to get you to.

Fully explain you're in the ballpark, having not designed it yourself. I'm very impressed that you understand it to the level that you do. But there are some meaningful nuances here that I should point out. So we use the term target date fun a little too loosely, right? Target date funds use the theory of life cycle saving and investing that was originally brought up by Paul and guys like V. Bode have really refined it over the years. You read the papers that Bode and Trussard have published and a number of others, and now it is ubiquitous, the target date fund. But really what we're talking about is smoothing out your saving, your spending and your consumption. That's it at the basic level. Now, what's different about the lifetime income strategy? Well, the first thing that's different, it's not a fund, right? It's a portfolio that's built for you, Steve. It's based on your exact biological age down to the day. And what we've done is we've worked with asset managers and quantitative specialists to come up with an optimal path where your savings pattern is combined with the expected behavior of an investment portfolio and your money remains invested for your whole life. But at a certain point, we begin to introduce insurance guarantees and the Specific vehicle to do that is a variable annuity with a guaranteed lifetime withdrawal benefit. Now, the reason why we can do that better, or I'll say at least for cheaper than just about anybody else, it's not only because we're big enough to get wholesale pricing. We're also big enough where we have competitive bidding between multiple insurance carriers on a regular basis every month. Last night I got my bids that will be affected from May 1st through May 31st. Right. And I'm going to go through those. I have an algorithm, I have an outside partner, I have an independent valuation service. In the next 48 hours, we are going to come up with the stated allocation and then publish blended guaranteed income benefit rates that will be in effect, and they're specific to people's ages. There's nowhere else in the world that you can actually get this with the exception of our strategic partner, who rolled out version 2.0 of this design about two and a half years after we did. Now I say nowhere else. There are similar designs. You can get them. There are literally thousands of plans on the Prudential record keeping platform that have something similar. There are lots of plans that are on other recordkeeping platforms that actually have variations on this design. And we've seen other people develop more and more applications of this idea of using the technology and the infrastructure, you know, the sort of the operational engine underneath the hood, to scale these personalized portfolios. Now, unfortunately, most of the application of that is done in an investment only context. But what we do see are more and more people starting to think about what we've been doing for more than eight, well, almost eight years. And we're hoping that in the coming weeks, months and years, we're going to see people come up with even better ideas than the one that we have. Because I think I said this to you when we were getting ready to do the call. I've never wanted to be number one. I've always wanted to be second best. I wanted to be literally number two. And the reason for that was they would always give me something to shoot for, to be better. And I don't care who's number one. But if I can ride on their coattails and get the advantage of their thinking, stand on the shoulders of giants, I'm very happy to do that. And I think I'm more than meeting the standard of care. You know, I might not be the world's best, but there's nothing wrong with a silver medal.

Well, that's awesome. So people have taken this idea, this kind of framework that you've created at UTC or Raytheon Technologies now and there you're seeing it get implemented in other plans. That's awesome. Is anyone doing it on the, on the retail side? Because that was my initial reaction is like, oh, I know a lot of our users, you know, we have 85,000 people that have created plans on our site and you know, they're all 50 to 65 years old or not all, but many. Then they're really thinking about how do they, you know, they've grown, they've most of them have kind of grown up with qualified savings and 401ks. And so they've got this big, you know, asset pool but then they have to turn it into income. And so they're thinking about oh, what's the safe withdrawal rate? How do I manage this drawdown stuff? And you know, we're trying to help them get educated about a lot of things that you're putting there, which is, you know, let's think about building a floor income with Social Security. Do you have a pension? How can you claim that smartly? Thinking about joint and survivor, you know, but, and should you annuitize. But it would be great I think, if there was kind of an industrial strength version of this that they could access and get that wholesale pricing. Because what, that's what they want. They want to de risk their situation, get a good deal, pay, you know, low fees and have low volatility. Do you think you'll, you know, we'll see that in a retail environment.

I know people are working on it, can't tell you who. I've had to sign NDAs and stuff over the last many years. I know it's, it's been discussed with the passage of the Secure Act, I think broader availability and access to these kinds of designs, it's just a matter of time. You know, relaxing the requirements for the MEPS and the multi employer plans, giving employers and professional organizations the ability to pool their resources that if anything is going to push the retail side that much harder to try and create these sources of stable, reliable, secure retirement income. Now what's really interesting about it is you've seen an explosion of technology in the retail space, right? Well, how do you fund that? Reality is it's funded because the margins are a lot wider in the retail market than they are in the institutional. I think I told you the story about I have a reputation for, you know, being a real, you know what when it comes to fee negotiations and I wear that as a badge of honor. That's my job. I'm not just doing it for me, I'm doing it for 250,000 other people. But in the retail space, I fully expect that you're going to see more accessibility for this type of a solution. Because here's the secret, Steve. There's nothing that we're doing that hasn't been around for the better part of 15 years. The only thing that's different is we've put all of this stuff together that has existed separately over that time. And I won't even take credit. Certainly wasn't my original idea to do this. You know, the idea of using multiple lead insurers with a competitive bidding system. I was a guy named Ken Mungen from Milliman, the actuarial firm, the co designer of our strategy who was with Alliance Bernstein, guy named Mark Fortier, he worked with a guy named Tom Fontaine, another guy named Seth Masters. Tom I think is teaching math out in Colorado. Seth is on the wealth management side at ab and Mark has gone on and come up with even more designs with how you can do this. There's a lot of different ways to do this. A lot of smart people have put their energy into it. It's only a matter of time before this becomes ubiquitous. It's like, you know, how many cell phones do you have in front of you right now, Steve? 1, 2, 3, 4. Well, you know, I'm, I've been in, in the mobile technology area as a user long enough where I had a Palm Pilot that had a detachable modem that you could click on and when Palm came out with the trio or I used to say trail because I thought that would sound cool like Target, you know, I know a guy that actually walked in my office with a trio and I had tech ends, right. So but now I'm speaking to you through one very well broadly adopted platforms. And I have another one next to me that I'm so grateful hasn't rang because I just realized I forgot to put it on airplane mode. On my lap here I have a touchscreen device made by another well known company out of Seattle. And you know, I have a giant research workstation replacement laptop sitting next to me. You can probably hear the fan going on and off because I'm you know, basically dimming the lights for the better part of my county. But with all of this stuff, 10 years ago it wouldn't have even been possible. So here's another analogy for it. Pop music here in the 60s, from 1962 to 1967 we went from Frankie Valli in the Four Seasons to the Jimi Hendrix Experience. Wouldn't it be great if we could do the same type of revolutionary change within the retirement industry? We can do it. We just got to get out there, take a chance.

Yeah, I definitely think that things are picking up speed in a material way. I think what we've just seen with the coronavirus is how quickly things can change. I mean, obviously it's a negative thing where, hey, we all had to go to work remotely. We're all kind of trapped at our houses. But we are on the flip side. As I was hiking with my wife yesterday, I was like, oh, let's, let's think about, you know, since we're stuck here, let's think about the things that we're grateful for. And it's like, oh, you know, hey, we can Zoom or FaceTime with our families that are all over the place, right. And, and like, see each other in some ways, even though we can't necessarily be together. And yeah, there's a big chunk of the population that can be productive overnight. Like you're, like, you're saying in the beginning, right? Your whole, whole organization and your whole supply chain globally had to adapt so that you can continue to provide services for hundreds of thousands of worldwide participants when you're managing $100 billion, you know, just after, like two weeks after you've like, finish this merger with Raytheon. So it is amazing. And I do think that we are seeing with, you know, in the fintech space and, you know, I'm out here obviously in Silicon Valley. It's like this is the area that's getting a ton of investment. There's so much focus on how do we do banking, how do we do insurance, how do we do, you know, investing. And you know, obviously we're doing how to do planning and retirement income, you know, 10 times better than it's being done today, 10 times cheaper. So I think you're going to start to see some massive acceleration in the retail space. And like we've been talking about, you know, we're eager to learn from, you know, what are the best practices. What are people doing kind of on the, on the business side of this enterprise that where it exists today?

I mean, sky's the limit when it comes to this stuff. You made the reference to the ERISA Advisory Council and I had the good fortune to serve on that for three years. And you know, I can blame Josh Cohen for talking me into it, because if I had any idea how much work it was before I joined, I probably Wouldn't have, but he had already had been on the council for a year when he was talking me into submitting for the nomination. What I, what really was driven home by that experience is that as a fiduciary, not only am I entitled to, to look at the best ideas in the world, I take it as a personal obligation. I am making decisions that are going to influence hundreds of thousands of people for their entire lives. It really is life or death types of decisions that people don't realize are life or death because, you know, they're so far removed the feedback loop on this stuff. Decades, they're lifetimes away. But the incentive is there. We have the tools right now. The current circumstances are such that people, they do have to focus on today. And I actually sent an email to somebody where we were talking about giving people more access to their retirement savings through the provisions of the CARES Act. You know, that was just passed weeks ago. And I'm talking about making it easier for people to take money out before they're retired. And I had to put in parentheses, yes, this is Kevin Hanney who is writing this email. Not his life model decoy. But at the same time, when we're making those decisions about creating this access to the money, we also have to think about it on the other end. How can we make it easier and more efficient and more probable that people are going to put money back into the plans when they have the capacity to do that? Right. Sometimes it's that old saw in investing I think Will Rogers is attributed with. I'm more concerned with the return of my principal than the return on my principal. When we're talking about retirement arrangements, it's more about living at some point than just the standard of living. Today we have the opportunity to try and do both.

Yeah, that's awesome. Well, look, Kevin, this has been great. What I'll do is in the show notes, we'll point to the New York Times article and some of the resources you've shared. But with that, I'll wrap it up then. Thanks, Kevin, for being on our show. Thanks, Dotto Robison for being our sound engineer. Anyone listening? Thanks for listening. Hopefully you found this useful. Our goal at New Retirement is to help anyone plan to manage their retirement so they can make the most of their money and time. And if you've made it this far, I encourage you to do a couple things. One, check out our private Facebook group or you can follow us on Twitter and then also you can check out our site@newretirement.com where you can build your own plan for free. And finally, we are working on building the audience for this podcast. So if you want to leave us a review, we will read it and we greatly appreciate it. So with that, thanks and have a great day.