IBM, which decades ago helped lead the shift from defined benefit plans to defined contribution plans, recently told U.S. employees it will be scrapping its 401(k) match in favor of funding what it calls a “retirement benefit account.”
Other companies may find it tricky to follow suit, experts say.
Starting next year, IBM will no longer provide a 5% match and a 1% automatic contribution into an employee’s 401(k). Instead, effective January 1, the company will put 5% into the RBA, essentially a pension plan that will pay 6% interest through 2026. After that, the RBA will earn a rate equivalent to the 10-year U.S. Treasury Yield, with a 3% per year minimum through 2033.
IBM says the change adds a stable and predictable benefit to employees and helps diversity their retirement portfolios.
“Under the plan, IBM bears 100 percent of the risk and must be prepared to pay the benefit at time of employee separation,” IBM said in a statement.
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It’s unlikely to start a trend, however.
To make a similar move, experts say a company would have to already have a traditional defined benefit pension plan in place, and it would have to be overfunded and not be affiliated with a union.
“Other companies may not have structure to pull off this type of change,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. “IBM was in a really good situation to do it.”
IBM change makes use of a $3.5 billion surplus
“Big Blue,” as IBM was once known, has a long history of changes to its retirement plans.
In 1984, it was among a wave of large companies that began offering 401(k) plans. By the 1990s, its pension plan was cut back, then closed to new participants in 2006 and frozen in 2008. Some employees opposed the change, filing a lawsuit. In 2005, IBM settled some claims and won on appeal for the rest.
Last year, IBM transferred $16 billion worth of pension liabilities to insurance companies Prudential and Met Life. The company had a $3.5 billion surplus in its plan, according to the company annual report.
Restructuring the retirement plan gives IBM the ability to use those surplus pension assets to fund its match.
“What’s interesting about what IBM is doing is they’re thinking about maybe there’s a more efficient way to capture those assets,” said Jonathan Price, a senior vice president and the national retirement practice leader at Segal, an HR management consulting firm. ”They’re taking a slightly more nuanced approach than what we might have seen a few years ago and what we still might see other employers choose to do in the future.”
What the change means for employees
For employees, IBM’s change is a mixed bag. Even employees who are not contributing to the 401(k) plan will get a defined benefit and the option for a lifetime annuity payment. But younger employees and those who make significant contributions in the plan are likely to find the set returns will limit potential upside.
“Six percent sounds nice for 2024-2026, but after that, yields could be as low as 3%,” said Brandon Gibson, a certified financial planner and founder of Gibson Wealth Management in Dallas. He says a 6-7% annual return is a reasonable goal that can be reached with a mix of equities and fixed income.
CFP Jack Heintzelman, a financial adviser with Boston Wealth Strategies in Needham Heights, Massachusetts says plan participants should consider the allocation of the rest of their 401(k) assets since the match is going into a highly conservative investment.
“You could maybe take on a little bit more equity exposure, a little bit more ‘risk,’ because the company’s contribution is in a fixed income, bond-like investment,” said Heintzelman. He said this is a reminder for employees to look at their retirement portfolio to see how the investments meet their goals.
While the change may not provide a significant benefit, experts say it’s still better than nothing: There’s no legal obligation for an employer to offer a 401(k) plan or provide a match.
“It’s a decision that the employer has the right to make,” said Segal’s Price.