IBM Beefs Up 401(k), Backs Off DB – Come 2008

January 5, 2006 (PLANSPONSOR.com) - IBM today announced a major redesign of its retirement plans, announcing plans to freeze current pension benefits, while significantly enhancing its 401(k) offerings, effective in January 2008.

The changes, which IBM said will affect only current employees of the firm, not its 125,000 US retirees, former employees with vested benefits, or employees who retire prior to January 1, 2008, are designed to shift the focus of its programs “toward the more predictable cost structure of a 401(k), or defined contribution, plan and away from its legacy defined benefit pension equity and cash balance plans,” according to a press release.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

The moves were unveiled just a year after a comparable announcement that, effective January 1, 2005, all new US hires at IBM will be enrolled in a newly designed “401(k) pension” rather than the firm’s still-controversial cash balance plan (see “Blue” Moves ). The changes clearly further an accelerating move away from a reliance on defined benefit pensions by large corporate plans – a trend exacerbated by the prevailing low-interest-rate environment that inflates projected pension liabilities, and legislative uncertainty involving both design and funding requirements.

Ongoing Trend

In a statement following the announcement, American Benefits Council President James Klein noted, “IBM’s announcement is reflective of an ongoing trend among many companies away from defined benefit pension plans and toward greater reliance on improved 401(k) plans. The reasons for this trend are varied and differ for each company. For some, it is a response to the global competitiveness they face among companies that have never offered defined benefit pension plans. For others, the uncertainty about future pension policy decisions by Congress is a contributing factor. For many companies, it is a combination of factors. One thing is true for all employers: they do not make such a decision lightly or without regard to the impact on their workers and retirees. In this regard, IBM has clearly demonstrated tremendous thought by delaying for two years the plan changes and by making very valuable improvements to its already excellent and generous 401k plans.”

IBM’s changes include:

  • The firm’s US defined benefit pension plans will stop accruing new benefits effective December 31, 2007. All benefits earned through that date by participants in its pension equity and cash balance plans will be preserved as of that date and available to participants when they leave IBM, under the same payment options currently in effect.
  • IBM plans to double the current company match to dollar-for-dollar on up to 6% of salary deferrals, while making additional automatic contributions of 1% to 4% of employees’ pay into their 401(k) account, making its “401(k) Plus Plan” “one of the richest in US business,” by giving current pension plan participants an annual company-funded contribution of as much as 10% of their pay, according to the firm.

That additional match will be applied as follows:

  • Pension equity plan participants will receive a dollar-for-dollar match on the first 6% of pay deferred and a 4% automatic company contribution, for a total of 10% of pay. Non-exempt pension equity plan participants will receive an additional special savings award equal to 5% of pay.
  • Cash balance plan participants will receive a dollar-for-dollar match on the first 6% of pay deferred and a 2% automatic company contribution, for a total of 8% of pay.
  • Employees hired after December 31, 2004, receive a dollar-for-dollar match on the first 5% of pay deferred and a 1% automatic company contribution after one year of service, for a total of 6% of pay.

The new 401(k) plan also will include an automatic enrollment assumption, annually depositing the automatic company contribution of 1% to 4% of pay directly into these employees’ accounts.

“In recent years, IBM has been following a global strategy to move toward defined contribution retirement plans for both existing employees and new hires,” said Randy MacDonald, IBM senior vice president, human resources. “These changes are consistent with this direction and will give us more predictable retirement plan costs, along with benefits that remain ahead of — but more in line with — our competitors.”

IBM says that its US defined benefit qualified pension plan was fully funded in excess of the projected benefit obligation with more than $48 billion in assets at the end of 2005, while its $26 billion 401(k) plan is the largest in the country. More than 90% of IBM’s US employees currently participate in the plan, and 88% already defer at least 6% of pay.

«