IBM Makes Changes To Its 401(k) Plan
When it comes to pension and 401(k) plans, IBM has long been a trendsetter. That’s a worrisome fact in view of the company’s recent controversial change to their employee retirement plan.
Image via CrunchBase
As of January 1, 2013, IBM will no longer give employees their 401(k) match with each pay cycle. Instead, the technology behemoth will make one large lump-sum payment to employee accounts on December 31 of each year.
The motivation? Most independent observers say we should follow the money – IBM’s money, that is.
According to the Wall Street Journal, IBM payed out $875 million in employee 401(k) contributions in 2011, a number that will likely decrease as a result of the planned change in 2013.
First, any employee who leaves IBM’s employment prior to December 15 for any reason other than a formal retirement will not receive any company match to his or her own 401(k) contributions for the entire year. Nada. IBM executives could fire someone on December 14 and the company would not have to pay out.
Second, all employees lose an entire year of the IBM match working for them in the investment sense. To be fair, that could be considered a lucky break if the year is 2008, when the S&P 500 fell by 37 percent. But in 2012? The advantage would go to IBM. As of today, the S&P 500 is up by 12.6 percent for the year.
All in all, this points to one of the main problems in the United States’ private retirement planning system: companies can change the structure of their plans with little or no notice, throwing years of employee financial planning for their golden years into chaos.
IBM is as good a place to see this in action as any.
In 1999, IBM jettisoned its traditional pension plan in favor of a cash-balance plan. Pension amounts were frozen in place, with all future benefits coming in the form of a cash credit. Many employees – especially older workers who had been with IBM for more than a decade — lost tens of thousands of dollars in future retirement benefits in the switch.
Anger, recriminations, charges of age discrimination and lawsuits resulted, an ongoing legal and public relations mess that was not fully resolved until 2007, when the United States Supreme Court ruled in IBM’s favor. But by then, IBM was already making other changes to their retirement benefits package. In the cash balance plan, IBM was still responsible for investment risk. That would soon end. Beginning in 2005, the company ceased offering new employees the cash balance plan at all, instead granting them access to a 401(k) plan. Then in 2008, IBM froze ceased offering the cash balance plan to all employees, freezing those plans as well. All future contributions would come in the form of the 401(k).
While concerned about how the most recent 401(k) payment scheme will impact IBM employees, retirement activists and benefit plan consultants are equally concerned that other companies will make similar changes to their retirement plans. Given how far behind most Americans are in saving for retirement, any change that would add more uncertainty to the process, or cause them to lose even a few dollars in future savings, is not a good thing.
About Helaine Olen
I am the voice of The Bills, a column about the intersection of money and life, at Slate. At Inc., I contribute to the Spread the Wealth personal finance column. My work on politics, economics, workplace culture and women’s issues has been published in numerous other print and on-line publications, including The New York Times, The Wall Street Journal, The Washington Post, The Atlantic, Salon, Pacific Standard, and The Los Angeles Times, where I wrote and edited the popular “Money Makeover” feature.
I'm the author of the critically acclaimed book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, and The Index Card: Why Personal Finance Doesn’t Have to be so Complicated, which I co-wrote with Harold Pollack.
What else? I’m a passionate bibliophile, a fan of 1970s pop music and a lover of rummage sales. I live in New York City.
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