Tech giant IBM plans to replace its 401(k) matching program with another type of benefit, but many employees and financial advisors are concerned that it will reduce their retirement savings and become the norm. ing.
In a memo to U.S. employees last week, IBM announced a new “retirement plan” starting Jan. 2 with a 5% 401(k) match and a 1% automatic contribution to a tax-deferred 5% automatic retirement plan. announced that they would be switching to RBA (RBA). 1.
Each employee with at least one year of service receives a “monthly account credit, up to IRS limits, in addition to the company’s annual pay plan to offset the difference with current company 401(k) contributions.” ” and receive a one-time raise. rate” and new credits.
IBM said it would guarantee a 6% return on the funds through 2026. From 2027 to 2033, the company will guarantee the 10-year US Treasury yield at a minimum of 3%, and from 2034 onward, employees will receive payments based on the 10-year US Treasury yield. The 10-year US Treasury yield is currently hovering around 4.5%.
Financial advisers worry that not only does the plan not look very lucrative for employees, but if a Fortune 500 company like IBM can pull it off, other companies will follow suit.
“Perhaps most concerning is how risk is being The question is whether the costs are being passed on to employees.”
How do retirement accounts negatively impact your retirement savings?
Here’s why financial advisors are skeptical of IBM’s new plan.
◾ Disincentivizes saving. Without the lure of a 401(k) match, or what experts like to call “free money,” people might not be able to save as much.
◾ Employees lose control of their money. They don’t get to choose how to invest that money, which takes away the flexibility of a 401(k), such as using it for loans, Hulme said.
◾ Profits will be lower. The average inflation-adjusted return of the stock market over the past 200 years is: 6.5%～7%That compared with IBM’s highest guaranteed return of 6%, according to consulting firm McKinsey & Company.
◾ More taxable income. The one-time raise that an employee receives as part of a new benefit package is taxable income, unlike a 401(k) match, which is tax-deferred, and the employee is responsible for saving and investing that money now. there is.
◾ You can only get a raise once. For the next few years, employees will not be compensated for losing games.
◾ It is unclear how the RBA will be funded. Under the Employee Retirement Income Security Act, companies must fund 401(k) matches with real dollars. If IBM’s “credit” is just that: “There’s no cash in it, it’s just on the books. If something bad happens and IBM can’t pay off its debts,” employees will be in trouble. Mr. Hulme said. .
Why is this change important for workers around the world?
“If IBM can get around this problem, other companies will probably follow suit,” said Steve Azzury, a consultant and owner of Azzulea Financial in Troy, Michigan. “IBM helped me.” Lead the charge to your 401(k)Basically, pensions will be abolished in America. ”
Why would IBM switch to RBA?
cash management.
“It could be a response to rising interest rates,” Hulme said. “If I were in his IBM shoes and had debt and refinances every year, and interest rates went from zero to 5% or more, I would think about cash flow management and reduce that debt and bring in cash at lower interest rates. I’ll think of a way.”
The company allows you to improve your cash flow by simply depositing money into your account, rather than using actual dollars to fund it. He said the company’s risk is reduced because its cash flow appears to have improved and it may be able to get favorable interest rates on refinancing.
others guess IBM can use the money as a cheap source of funding for its operations or invest it to earn returns that exceed those promised to employees.
In any case, employees must be “prepared to bend.” I wrote a poster In Arstechnica’s open forum on this topic.
What does IBM say about its new retirement plan?
IBM says the RBA helps U.S. employees “automatically save for retirement without requiring any employee contributions.” It also adds “a stable, predictable benefit package that diversifies retirement portfolios and provides employees with greater flexibility and choice.”
The company also emphasized that employees can continue to contribute to their 401(k) plans. Only the company’s part will change to help “diversify your retirement portfolio.”
Where are you?Average 401(k) balance by age
Savings for retirement:Low-income workers face significant challenges toward retirement.What’s stopping them from saving?
How many IBM employees will be affected by this change?
This change applies only to U.S. employees. The company is worldwide Approximately 288,000 employees It occurred last year, but it’s unclear how many people are in the United States. According to some reports, Less than 100,000 in the united states
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
