Will IBM Resurrection of Cash Balance Plan Cause a Ripple Effect?

As employers find themselves in a “war for talent” and employee retention increasingly becomes a challenge, many plan sponsors are reassessing their total rewards packages and may look at IBM’s recent move to a cash balance plan as a way to try to attract and hold onto employees. 

Brian McDonnell, head of the global pension practice at Cambridge Associates, says there is a growing realization among employers that defined contribution plans are one tool in the “retirement readiness toolkit,” but they transfer a considerable amount of risk to participants. 

“I think [plan sponsors] are realizing that part of the reason [defined benefit plans] were around for so long … is that, dollar for dollar, they are actually a relatively affordable way of providing a relatively high level of retirement security to your employees [and] to your beneficiaries,” McDonnell says. “There’s more volatility along the way, but certainly, I think over most longitudinal periods of looking at what it might cost to sponsor versus the benefit provided, I do think they look attractive, and they are very competitive.” 

McDonnell adds that while IBM may have been uniquely positioned to revert to its cash balance plan, as the company’s plan, frozen in 2006, is likely now overfunded, many more firms may also be in the position of having an overfunded plan as a result of discount rate changes and high interest rates.  

John Lowell, a partner at October Three Consulting, said in a recent webinar hosted by Callan that IBM likely applied the surplus from its frozen plan toward some of its future cash balance accruals. 

In addition to reopening the cash balance plan, IBM is ending its 5% DC matching contributions and 1% automatic contributions to employees’ 401(k) accounts in favor of an automatic 5% retirement benefit provided to all employees. 

“IBM is far from alone in having an overfunded pension plan,” McDonnell says. “They’re now in a position to look around and creatively say, ‘What are the next steps for our retirement benefit?’” 

McDonnell says the mindset of DB plan sponsors over the last 10 to 15 years has likely been focused on terminating the plan and decreasing liability to be least costly to the company. While the percentage of workers covered by a traditional DB plan has been steadily declining over the past 25 years, McDonnell argues that there is a compelling case for plan sponsors to reevaluate the benefits these plans can offer. 

“I think advice for [plan sponsors] would be to look at [their] defined contribution plan and [ask], ‘How much is it costing per year to remain competitive in the marketplace for talent?’” McDonnell says. “If [they] haven’t thought about [their] defined benefit plan in the past 10 to 15 years, other than through this decreasing-of-risk lens, [they should] make sure that [they’re] educated around what tools are available for the pension plan today.” 

For liability and hedging, McDonnell says plan sponsors can think of creative ways to use a certain amount of plan assets to insulate the overall funded status of a plan. Employers can also consider growth assets in which the plan can invest beyond just stocks, such as private equity, private credit and other, diversifying, hedge fund-like strategies, he argues. 

“I think there are a lot of ways to still provide a growth rate that provides an attractive benefit while smoothing the ride along the way,” McDonnell says.  

In addition, McDonnell says the benefit of a cash balance plan for participants is that it typically involves a vesting period of, for example, five years of service, after which a participant’s balance would maintain ownership of their balance, whether working at that company or elsewhere. 

“You don’t have to work for the company for 20 years,” McDonnell says. “Once you accrue [a balance], it is your benefit that will keep growing. More money won’t necessarily be put into it on your behalf if you’re no longer working for the company, but you … can accrue a pretty meaningful cash balance.”