Benefits November 3, 2023

IBM Plans to End 5% Employer Matching in 401(k) Plan

The American multinational technology company is pulling its traditional 401(k) company match in favor of a company retirement account contribution for all employees.

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IBM plans to end 5% matching contributions and 1% automatic contributions to employees’ 401(k) accounts in favor of an automatic 5% retirement benefit provided to all employees, starting January 1, 2024, a company spokesperson confirmed by email.

The technology corporation will still allow employees to make deferrals into a 401(k), but it will direct 5% of each employee’s salary into what it terms a “Retirement Benefit Account,” according to a spokesperson and details from a company memo posted to a conversation on the web site Reddit.

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“IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account within the existing IBM Personal Pension Plan, which helps save for retirement automatically, with no contribution required from the employee,” explained the spokesperson by email. “The RBA adds a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”

IBM employer contributions were based on an internal IBM pension formula that varied depending on an employee’s eligibility for the IBM Personal Pension Plan as of December 31, 2007, and a different set of options for those hired on or after January 1, 2005, according to the firm’s 2022 Form 5500, filed in July 2023.

Currently, IBM automatically enrolls new employees into the DC plan at 5% of eligible salary and performance pay after approximately 30 days of employment with IBM, unless they elect otherwise. New hires become eligible for the IBM automatic contribution and the IBM matching contribution after completing the applicable service requirement, which generally is one year.

Additionally, in plan year 2022, “matching and automatic contributions were made once annually at the end of the year. In order to receive such IBM employer contributions each year, a participant must be employed on December 15 of the Plan year, and meet all eligibility requirements,” according to information included in the 2022 Form 5500.

Participants in the existing IBM plan are fully vested at all times “in their account balance, including employee contributions, employer contributions and earnings thereon, if any,” according to information in the 2022 Form 5500. The IBM memo said the company plans to end matching contributions in a change planned as part of continued improvements to support workers’ well-being.

“By introducing this retirement benefit within IBM’s Personal Pension Plan, which is stable and well-funded, IBM is able to provide a benefit to IBMers that also helps diversify their retirement portfolios,” the leaked IBM memo stated. “We periodically benchmark the benefits IBM offers compared to industry peers, and 5% is aligned to the market—but in addition, with the RBA, no employee contribution is required.”

Additional text of the leaked document included a description of the “key features of the Retirement Benefit Account”:

  • Guaranteed 6% annual interest rate for the first 3 years; 
  • Tax-deferred growth; 
  • Even when the market declines, your balance will not; 
  • No enrollment necessary. No investment decisions to make; and 
  • Immediately vested and portable.  

‘Concerning’ for Employees

IBM planning to end the employer match is uncommon, says Rob Massa, managing director and Houston operations retirement practice leader at Qualified Plan Advisors.

“The U.S. [private] retirement [system] is a voluntary one and, as long as a plan sponsor follows the law and IRS/[Department of Labor] regulations and administers the plan in accordance with its plan document, they may make any plan design settlor (i.e., non-fiduciary) decisions in any way they prefer,” he says. “The decision to eliminate the match is legally acceptable, and there is no fiduciary liability associated with it.”

Phillip Hulme, chief financial adviser and COO at Atlanta-based Stars & Stripes Financial Advisors, explains that the move by IBM is “concerning for employees.”

IBM is shifting risks for retirement benefits from the company and onto employees by taking away workers’ matching contributions, which means they will be “earning less,” Hulme says.

The leaked IBM document addressed some of the differences to the existing plan, called the IBM 401(k) Plus Plan. “[W]e recognize 5% is less than employees are eligible to receive through the current 401(k) Plan,” the memo stated. “To offset the difference, IBM is providing a one-time salary increase effective January 1, 2024, separate from the annual salary plan later in the year.”

IBM reported in a September 2022 SEC filing about its transfer of $16 billion worth of defined benefit pension plan obligations to Prudential Financial and MetLife, one of the biggest pension risk transfer deals ever. The IBM defined benefit plan was frozen to new hires in 2006.

In the 2022 plan year, 168,865 IBM retirement plan participants held retirement balances in the IBM 401(K) Plus Plan, comprising more than $53.3 billion in total assets, as of the latest data available.

Rebrand

Plan adviser Massa had not previously heard of a plan sponsor offering something called a “Retirement Benefit Account.”

“However, under the law, a plan sponsor can name any retirement plan anything they want,” he says. “For example, while most plans use the [IRS’] IRC [Internal Revenue Code] Section 401(k) in the name of their salary deferral plans, there is no requirement to use that term.”

Employees will become eligible for the RBA regardless of whether they participate in any other IBM retirement plan, but similar to eligibility for the 401(k) plan, the new benefit has a one-year service requirement, according to the memo.

“Based on what has been shared from IBM, this sounds like a cash balance plan,” adds Massa. “IBM currently sponsors a cash balance plan called the ‘IBM Personal Pension Plan,’ and my educated guess is that they are either using this program and rebranding it or constructing a new cash balance plan and calling it the IBM Retirement Benefit Account Plan. Cash balance plans are designed to have both a contribution credit (i.e., 5% per year) and an earnings credit (e.g., 4% per year). So that’s my best guess as to what they are up to.”  

Cash balance plans share some similarities with both DC and DB plans but are regulated as defined benefit plans.  

IBM’s plan to eliminate the company match was first reported by The Register, a technology news website based in the U.K. Early reporting was based off of a leaked internal IBM memo and a note on LinkedIn from adviser Hulme, a former IBM employee who says he was aware of the move.

“On the face of it, I see no [Employee Retirement Income Security Act] issues or legal risks with what they are doing,” says Massa. “But going forward, if this is a cash balance plan, IBM would be assuming the investment risk on the cash balance plan portfolio and will also be assuming the cost of PBGC premiums.”  

Despite IBM’s uncommon move to end retirement plan matching contributions, the company should not face legal issues under ERISA, agrees Drew Oringer, a partner in and general counsel at the Wagner Law Group.

“The entire private retirement system is voluntary, and IBM has no obligation to continue or provide any particular ongoing benefit,” says Oringer. “An employee benefit, like a 401(k) plan, is in many ways nothing other than another part of the overall compensation package that includes basic salary.”

Compliance November 3, 2023

Bakery Drivers Plan Loses Case in $132M SFA Application

The plan applied for special financial assistance but was denied because the pension fund had previously been terminated.

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A federal court upheld the Pension Benefit Guaranty Corporation’s decision to deny a multiemployer plan’s application for special financial assistance.

The PBGC had denied the application because the Bakery Drivers Local 550 and Industry Pension Fund had terminated by mass withdrawal in 2016, then attempted to restore itself in 2022 with the intent to apply for an SFA grant. Local 550 challenged the PBGC’s decision in March in the U.S. District Court for the Eastern District of New York. The court ruled against the pension fund on October 26 in Board of Trustees of the Bakery Drivers Local 550 and Industry Pension Fund v. PBGC.

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In 2011, approximately 60% of Local 550’s contributions came from Hostess Brands Inc., which declared bankruptcy in 2012 and was not required to pay withdrawal liability to the plan. In 2016, the remaining largest employers in the multiemployer plan transferred liability to the International Brotherhood of Teamsters and terminated the plan by mass withdrawal. The pension fund’s complaint noted that the PBGC approved this transaction and that it was done in the best interests of the plan.

According to the plan’s Form 5500 from 2016, the last year of its existence, it had 122 active participants at the beginning of 2016 and 0 at year’s end. It had 711 retired participants, 303 participants entitled to benefits in the future and 246 deceased participants with beneficiaries receiving benefits. The plan was 21.84% funded at the end of that year.

The Floral Park, New York-based plan argued that it restored itself in September 2022 and met the criteria for a grant under the Special Financial Assistance program. Specifically, according to the PBGC’s final rule, a plan in critical and declining status in plan years 2020, 2021 or 2022 is eligible for a grant, in addition to other criteria. Since Local 550 was in critical and declining status in 2022, the year it was reconstituted, it asserted that denying the plan’s application was unlawful.

When the plan restored itself in 2022, it anticipated its insolvency by August 2023. The plan applied for a $132 million grant in January 2023. The PBGC denied the application because plans terminated by mass withdrawal are ineligible for a grant, and there is no process for self-restoration under the Employee Retirement Income Security Act. Only the PBGC can restore a multiemployer plan.

The district court ruled that a terminated plan cannot have status under the PBGC’s system for rating plan solvency and therefore cannot claim to have been in critical and declining status for the purposes of applying for an SFA grant. Further, ERISA does not permit plans to unilaterally restore themselves. Therefore, the PBGC acted reasonably within the statute in denying the application, according to the court decision.

John Lowell, a partner with October Three, explains that, “While the statute makes provision for PBGC to restore a plan that has been terminated via mass withdrawal, the statute neither specifically allows nor precludes a fund from doing that itself. The court found that PBGC was acting within the powers afforded it by Congress in saying that the fund in question could not restore itself and thereby make itself eligible for the taxpayer-funded Special Financial Assistance.”

Lowell adds that this is unlikely to be a recurrent problem, because this is “an unusual case in which the fund tried to avail itself of a novel legal theory. I do not see where this will have any effect on other pending or future applications for SFA money of which I am aware.”

Attorneys for the plan did not respond to a request for comment about whether they intend to appeal the court’s decision.

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