- IBM is switching from a 401(k) match to traditional defined benefit contributions.
- Companies considering similar plans will need to have a structure similar to what IBM has built over the years.
- While the new plan provides employees with a guaranteed rate of return, that rate of return may be much lower than the rate of return they would receive by investing their funds more aggressively.
Pedestrians walk in front of the IBM Building in New York.
Scott Mullin | CNBC
IBM, which led the transition from defined benefit plans to defined contribution plans decades ago, recently offered its U.S. employees 401(k) funds to fund what it calls “retirement benefit accounts.” I told them that Match would be abolished.
Experts say it may be difficult for other companies to follow suit.
Starting next year, IBM will no longer offer a 5% match and 1% automatic contribution to employees’ 401(k)s. Instead, from January 1, the company will put 5% into the RBA, effectively creating a pension scheme that pays 6% interest until 2026. The RBA would then earn an interest rate equal to the 10-year Treasury yield. Minimum annual interest rate of 3% until 2033.
IBM says the changes will add stable, predictable benefits for employees and help diversify retirement portfolios.
“The plan requires IBM to assume 100% of the risk and be prepared to pay benefits upon employee separation,” IBM said in a statement.
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Experts say a similar move would require a company to already have a traditional defined benefit pension plan in place, be overfunded and not unionized. .
“Other companies may not be equipped to make this kind of change,” said Craig Copeland, director of benefits research at the Employee Benefits Research Institute. “IBM was in a very good position to do that.”
“Big Blue,” formerly known as IBM, has a long history of changing its retirement plans.
In 1984, it was one of a wave of large companies that began offering 401(k) plans. By the 1990s, the company’s pension plan was cut, closed to new members in 2006, and frozen in 2008. Some employees opposed the changes and filed suit. In 2005, IBM settled some lawsuits The remaining cases were won on appeal.
Last year, IBM transferred $16 billion worth of pension obligations to insurance companies Prudential and MetLife. The company had projected a profit of $3.5 billion, according to its annual report.
By restructuring its retirement plan, IBM will be able to use excess pension assets to fund it.
“What’s interesting about IBM’s efforts is that they’re thinking, is there a more efficient way to acquire these assets?” said Jonathan Price, senior vice president and national retirement practice leader at human resources management consulting firm Seagull. speaks. “They’re taking a slightly more nuanced approach than what we saw a few years ago and what other employers may choose to do in the future.”
For employees, IBM’s changes are mixed. Employees who do not contribute to a 401(k) plan still have the option of defined benefits and lifetime annuity payments. However, younger employees and those who have made significant contributions to the plan are more likely to believe that the set margin limits potential upside.
“6% from 2024 to 2026 sounds good, but after that, yields are as low as 3%,” said Brandon Gibson, a certified financial planner and founder of Gibson Wealth Management in Dallas. There is a possibility that it will happen.” He says a 6% to 7% annual return is a reasonable goal that can be achieved with a mix of stocks and bonds.
CFP Jack Heintzelman, a financial advisor at Boston Wealth Strategies in Needham Heights, Mass., says the match is a very conservative investment, so plan participants are encouraged to invest in their remaining 401(k) assets. He says that the allocation should be considered.
“The company’s contribution is in fixed-income investments like bonds, so it may be willing to take on a little more equity exposure, a little more ‘risk,'” Heintzelman said. He said this is a reminder to employees to look at their retirement portfolios and see how their investments are meeting their goals.
While the change may not bring much benefit, experts say it’s still better than doing nothing. There is no legal obligation for employers to offer or match a 401(k) plan.
“That’s a decision that the employer has the right to make,” Segals-Price said.