The employees' fixed payout rate, or the annual percentage allowed to be withdrawn, is based on the average benefit rate at which they acquired the annuities over time. In June, for instance, a 48-year-old would have bought annuities that paid about 4.8 percent, while a 60-year-old would have received a 3.86 percent rate.
Those rates are influenced by the age of the employee when the annuity was bought, the prevailing interest rates and the unique way United Technologies acquires the annuities for workers. The annuities are essentially acquired in pieces over many years.
Instead of the company's dealing with one provider, three insurers, Prudential, Lincoln Financial and Nationwide, bid on the company's annuity business each quarter. AllianceBernstein designed and handles this program.
"It's a balance of getting the best price the market is willing to offer and getting the benefit of diversifying across insurance companies," said Kevin Hanney, director of portfolio investments for United Technologies' pension investment group. (Still, a worker could end up with annuities from only one or two companies depending on how the bidding process proceeds).
One of the biggest risks of buying annuities, of course, is the possibility that the insurer could fail, jeopardizing the buyer's income. If that were to happen, Mr. Hanney said, the annuity contracts would be insured by the state guaranty associations, though they may not cover the full amount of a worker's income guarantee because of caps the associations impose that vary by state. Still, the market value of the investments in the contract would remain available to the participant or the participant's beneficiaries, he said.
Variable annuities have become notorious over the years for their high fees. But in this case, specialists agree that they are fair, given the guarantee on offer. Workers 47 or younger pay 0.13 percent annually in fees for the underlying index funds.
The insurance in the guaranteed income fund costs a flat 1 percent of assets invested each year, much less than most variable annuities. So as workers buy more of that fund over time, their costs increase. Total costs, including investment and insurance fees, are 0.21 percent of assets at 48 and continue to inch higher until they hit 1.24 percent of assets for those 60 and older.
Workers can withdraw some or all of their savings in a lump sum (at market value) at any time, free of penalties, but that should be done only as a last resort. If someone withdraws all of his or her money after having started paying for the insurance, he or she will have paid higher fees for a benefit that is never cashed in.
"A 1 percent fee sounds relatively innocuous, but if you compounded it over 10 or 25 years, that is a great deal of money," Mr. Webb said. "The value of this thing only accrues to you if actually hold it until very advanced ages."
If an employee withdraws only some money in a lump sum, her or his payouts will be reduced proportionately.
Employees can also choose to take a joint benefit to cover a spouse, though the payout rate will be lower. They can leave any leftover funds to heirs. And if the worker leaves the company before retirement, he or she can roll the annuity over into an individual retirement annuity, which is essentially an individual retirement account for annuities. But executives said it would be more cost-effective to leave the annuities in the 401(k) plan, which would continue to reinvest the money in the secure income fund over time as if you were an active employee.
One of the biggest challenges employees are likely to face is simply trying to evaluate whether this is a good value. It is a mind-numbing calculation.
"My concern about all these products is that they are complicated and have opaque charges," Mr. Webb said. "Given the information in the brochure, my Ph.D. in economics leaves me ill-equipped to say whether this is a good buy. I have no idea how the average U.T.C. worker would be able to work out what to do."
United Technologies' executives say that education is essential, and the company provides its employees with brochures, workshops and videos to help them understand the strategy. The company also has a benefits call center that can provide more detailed answers, including income estimates based on an individual's situation.
"The nature of most if not all insurance is that you'll never really know in advance exactly how much insurance you purchase will pay out," Mr. Hanney said. But "participants choosing this option also may find immediate value in the knowledge that — even if the future brings extremely volatile equity markets — they can retire on schedule with a reliable income."