IBM’s New 401k Match Policy Isn’t What You Think

IBM’s New 401k Match Policy Isn’t What You Think

November 28, 2023

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IBM’s New 401k Match Policy Isn’t What You Think
by Christopher Carosa November 28, 2023

IBM just canned its 401k match. Many feel this is a one-off and the media have over-hyped the policy change. If you take a look inside, you’ll see why what IBM did might make sense for IBM, but few other companies are in the position to pull off a similar move. Nor might they want to.

IBM’S NEW RETIREMENT BENEFIT POLICY

What exactly did IBM just do? They just violated the sacred principle of the 401k plan according to many (although a few disagree with this principle): they eliminated the company match.

“IBM, given their significant over-funded Defined Benefit plan status, found it opportunistic to replace the 401k match with a cash balance plan,” says Stephen Kloss, Senior Client Executive at Oswald Financial in Cleveland, Ohio. “The 401k employee deferral opportunity would remain.”

Specifically, the new program, which will become effective next year, shifts IBM contributions from its defined contribution plan to its defined benefit plan.

“Starting in 2024, IBM will no longer make the current 5% matching and 1% automatic contributions to its 401k plan,” says Albert Feuer of the Law Offices of Albert Feuer in Forest Hills, New York. “Instead, IBM will give employees with at least one year of service a monthly pay credit to a tax-qualified plan that is 5% of their eligible pay, and the employee’s so-called IBM Retirement Benefit Account balance will accrue interest at 6% per year through 2026, then will accrue the 10-year U.S. Treasury Yield, with a 3% per year minimum through 2033.” See attached IBM Benefits Summary U.S. 2024.

WHY DID IBM MAKE THIS POLICY CHANGE?

There’s an adage that says, “Follow the money.” That may apply here.

“Doubtless they figure it will work out to their financial advantage—and probably because it will allow them to leverage/access moneys already contributed to their existing cash balance plan (currently frozen, I believe),” says Nevin Adams, industry thought leader currently residing in Manassas, Virginia.

In fact, if you dig down deep into the financials, you’ll discover the real reason why this publicly traded company might prefer the new policy.

[IBM is doing this] “to release excess funding previously contributed to their cash balance plan that they now can assign to new employees’ benefits, thus enabling them to save cash over the next few years by not needing to contribute cash to their employees’ retirement accounts,” says Michelle Richter-Gordon, co-founder of Annuity Research & Consulting in New York City.

But just because this new policy is in the best interest of IBM shareholders doesn’t mean it can’t also be in the best interests of employees in general.

“We live in a world where over half of working Americans live paycheck to paycheck, yet companies continue to place a higher priority on retirement savings than other financial priorities that can have a more meaningful impact on overall financial wellbeing,” says Mark Nicholas, founder of Transform Retirement in Green Bay, Wisconsin. “The change that IBM has made here levels the playing field, helping all of their employees save for retirement, not just those who are in a better financial position and can afford to contribute. I feel like this shift recognizes the unique financial challenges that each employee faces and aims to stop incentivizing behaviors that are counterproductive for the most vulnerable employee populations.”

When you look at the details of what IBM is doing, it becomes clear why they can do it and why it makes sense for them to do it.

“They analyzed the cost benefit issue of their over-funded defined benefit plan and figured they can use the ‘extra’ money in the DB plan to meet their ‘contribution’ requirement,” says Lawrence (Larry) Starr, Executive VP at Cornerstone Retirement/QPC in West Springfield, Massachusetts. “The IBM Personal Pension Plan — closed to new participants since 2005 and frozen since 2008 — had a funding ratio of 116.8% and a pension surplus of $3.6 billion last year, according to the latest 10-K statement. The pension plan had $25.1 billion in assets last year. They are funding the 5% DB contribution with existing money in the plan, so it reduces their cash flow requirement for benefits. Also, it eliminates the employee picking and choosing investments (which I am biologically an opponent of, so I support that concept), and eliminates employees doing the wrong thing at the wrong time for the wrong reason, which is almost always what they do! Now, those funds will be invested by the trustees with the eye to a modest but constant return. What is good is that all employees will get the 5% DB contribution, where in the 401k, those that cannot defer because they can’t afford it don’t get anything. That’s why I prefer non-elective 3% (or more) safe harbor contributions in the 401k so we are not discriminating among our employees based on their own financial circumstances.”

While this may offer the corporate advantage of placing all employees on the same level playing field, not every employee will agree with the change.

“When companies benchmark and review their total compensation and rewards for employees, it is not uncommon for changes to be made to employee benefits programs and that may be the case here,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “A typical consideration is achievement of cost-savings while maintaining competitiveness. Based on the internal memo, IBM appears to view this as a positive change to provide a stable retirement benefit that helps employees diversify their retirement portfolios. However, not all employees may perceive it as a beneficial change. For these types of changes, enhanced communications that include comparisons of how these types of programs work might be helpful for the employees.”

WHY IBM’S NEW POLICY IS UNLIKELY TO BE ADOPTED BY OTHER COMPANIES

First, recognize that Big Blue is not the icon that it represented generations ago. Newer tech companies like Google, Apple, and Microsoft (to name a few) are on the vanguard in terms of benefits that matter to younger employees (spoiler alert: it ain’t in the retirement plan arena).

“In the past other companies followed IBM’s lead in these areas,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village California. “They are not the trendsetters they once were. That being said, if IBM is successful at selling this over time to their employees, then other companies will be sure to follow.”

Following IBM in this specific case may not be as easy as simply flipping a switch.

“Other firms in the same position (frozen DB plan with a cash balance formula and a funding surplus) will likely consider similar actions (including IBM’s recent pension risk transfer),” says Jack Towarnicky, Of Counsel for Koehler Fitzgerald, LLC in Powell, Ohio. “However, I would be surprised to see an employer that is not in the same situation (no current DB plan, or no DB funding surplus) adopt a DB plan and concurrently remove the match from an existing 401k plan.”

A case can be made, however, that IBM’s emerging emphasis on a defined contribution plan structured like a pension plan may represent a fresh approach that could have legs. Again, this would require a fundamental change in how companies design their retirement plans.

“It seems IBM was able to pivot to this type of change because they already sponsored another retirement plan,” says Capezza. “This new account appears to be a hybrid pension-type of plan or cash balance plan, which the internal memo referred to as being within the IBM Personal Pension Plan. If other companies do not offer such plans that could offer this type of benefit, they would need to adopt a whole new plan to provide this retirement benefit in lieu of a 401k matching contribution. The irony is that IBM is touted as having taken the lead away from offering defined benefit pension plans to provide retirement benefits. There has been so much controversy in general as to whether the employer-provided defined contribution plan approach was the right way to go for employees to ensure retirement savings. Perhaps there is momentum for the pendulum to swing back to an employer-provided pension type of benefit.”

In effect, IBM appears to be attempting to create two of the three legs of a traditional retirement savings stool (i.e., savings and pension, with Social Security being the third leg). Ironically, this may be self-defeating, as they’ve removed the acknowledged incentive to save in a 401k plan and placed a significant chunk of an employee’s retirement account in fixed-income investments which have historically underperformed equity investments.

“It is too early to tell until we see how it works in practice and the details of the IBM plan,” says Feuer. “I would pay more attention to attempts to revive traditional defined benefit plan accruals, as the UAW sought to do in its recent strikes against the big three automakers. However, the IBM conservative approach seems to be at odds with the integrated total pension approach that characterizes target investing. It also raises questions whether it may result in less people participating in 401k plans because of the lack of a match. Finally, the contributions seem to far too small to address the lack of retirement readiness of many employees. Notice that no one has given an estimate of the level of annuity benefits that such contributions would fund for the typical employee who would participate for any period of time, such as 10 years, 20 years.”

Industry professionals already recognize that employees need to save more than 10% of their salaries in order to grow their retirement savings to a level high enough to increase the odds of a comfortable retirement. And that assumes equity-like returns, not bond-like returns.

If history is any guide, IBM’s “one size fits all” solution will likely be as successful as most “one size fits all” solutions.

Eliminating the match and investing a large portion of retirement savings in bonds creates a risk. It may cause the retirement savings to go down in flames.

Are its employees prepared for this?

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.