January 5, 2006 3:33 PM PST

IBM freezes pension, switches to 401(k)

IBM announced major changes in its retirement plan on Thursday, freezing its pension fund and shifting employees instead to an expanded 401(k), in a move the company said would save it billions of dollars in coming years.

IBM will stop contributing to its pension fund on Dec. 31, 2007, the company said. Employee benefits from that defined benefit plan will remain fixed, instead of growing each year. At that point, it will begin a new 401(k) defined contribution plan, into which it will pay as much as 10 percent of an employee's annual salary.

The change should save $450 million to $500 million in 2006 and $2.5 billion to $3 billion for 2006 through 2010, based on current pension assumptions, IBM said. However, the technology giant expects to record a one-time $270 million charge related to the change in its fourth quarter of 2005.

"We're taking these actions to better control retirement plan expenses, position the company for business growth and competitive strength, and preserve employees' earned retirement benefits, while instituting a leading-edge 401(k) plan that will be one of the richest in the country and a standard in the United States," Randy MacDonald, IBM's senior vice president of human resources, said in a statement.

"We also believe these are prudent and balanced steps at a time of uncertainty and conflicting legislative and regulatory directions about defined benefit retirement plans in the United States."

IBM has made several changes to its retiree plans already. The company modified its pension plan in 1999, a move that led to legal battles with newer employees. Starting in 2005, new employees weren't offered a pension at all.

There are two general types of retirement plans: defined benefit plans, such as pensions, in which an employer makes payments to retirees based on factors such as years of service; and defined contribution plans, such as 401(k)s, in which employers contribute money to investments that the employee manages.

The shift away from traditional pensions is becoming common, as companies shun the uncertainties and often significant costs of pensions and try to become more competitive, said Dallas Salisbury, president of the Employee Benefit Research Institute.

"Carrying a very different cost structure than your competitors and having an element of unpredictability relative to competitors has caused many companies to move away from defined benefit plans," Salisbury said.

One problem has been that pension funds are related to unpredictable interest rates or investment returns, which mean pension-holding companies have to pay correspondingly unpredictable amounts of money into them.

"9/11 comes along and causes your pension portfolio to go down, and causes it to look like you didn't earn any money," Salisbury said. Those uncertainties are being increased by legislative changes, he added.

Another complication of defined benefit plans has been the required payments to the Pension Benefit Guarantee Corp., a federal entity established to protect pensions. IBM expected to pay $500 million to the PBGC in 2005, but because of low short-term interest rates, the company had to pay $1.2 billion for the year, the company said.

IBM's action won't affect current retirees or those who retire by Dec. 31, 2007, the company said.

Among retirees, 81 percent are expected to have the same or better benefits under the new plan, IBM spokesman Clint Roswell said. The remaining 19 percent are people in the old pension plan who were still relatively far away from retirement age, he said, and that population will receive on average 12 percent less than they would have under the old pension plan.

The new 2008 plan will have three categories of employees, Roswell said. For those with the pre-1999 pension plan, IBM will match contributions of up to 6 percent of an employee's salary and add 4 percent on top. For those in the pension plan that ran through 2004, IBM will match 6 percent and add 2 percent. For those hired in 2005 or later, it will match 5 percent and add 1 percent.

IBM's 401(k) is relatively munificent, Salisbury said. "If you focus exclusively on the relative generosity of defined contribution plans, IBM's defined contribution plans are in the top 2 to 3 percent," he said. "Among 401(k) plans, they're in the top 1 percent."

IBM's pension fund has more than $48 billion in assets, and its 401(k) plan has more than $26 billion in assets, the company said. More than 90 percent of its employees in the United States already were members of the 401(k) plan.


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The current wave...
This is typical of most corporations; moving employees into much lower earning (but cost saving to the compnay) 401K plans and away from traditional pension plans. IBM's statement of 81% of their employees will get the same or greater pension amounts is a flat out lie since it's based on a employee-managed growth rate that can rarely be achieved. One of the little known secrets of this type of shift is that the employee is now paying the fund management fees in a 401K plan (even on their own contributions), where as the company pays them in a defined-benefit plan. The only way an employee will get more out of a 401K plan than a defined benefit plan at retirement is if a) the employee contributes a significant amount of their own money and b) they get lucky enough to pick the right funds. And don't forget, the top executives at IBM will still keep their own special defined benefit plans and not be impacted by this change. It's the rank-and-file that get impacted. The IBM spin on this supposed change benefiting the employees is quite despicable.
Posted by lazura (23 comments )
Reply Link Flag
Andy Lazur Is Correct !
I took early retirement last year from an employeer that had both defined benefit & 401 plans- dig it. The 401 is only optimized when you max or ge close to maxing your contributions AND take the PAIN to LEARN how to pick the "right funds"( you wont hit winners all the time). SO I'M a TELLIN YA - GET A FINANCIAL IQ!

This wont be easy to develop since most of us work for a living, and try to have a life, also. BUT IT IS YOUR MONEY!!!!! H.R. doesnt care what you make, and other people will resent you if you suddenly fall to the ceiling!!!!

So, figure out how much is enough - then read the free lit within your 401 offerings (8-10% is a base, not the max to expect out of 401 growth) Study terms and definations, read newsletters, try to find a financial mentor( BUT WATCH OUT WHO YOUR EXPERTS ARE)! There is a lotta crap out there also. Remember there is no free lunch. Hear of Dot.com?

Invest and save- dont touch that 401. Be vigilent,become educated. Most of all dont worry -be happy. Figure out what you want out of life and that 401, and OTHER savings, and go for it. I went form $1,900.00 to $248,000.00 in 15 years through my 401, yet when I started, I knew squat about investing. Now, I'm doin my own thing while trying to give back.
I encourage savers and investors to develop their financial I.Q.s NOW. It is your money and YOU can eliminate inertia, feel the fear and pull it off. Good "luck".
Posted by dimonator (1 comment )
Link Flag
Middle class may one day disappear...
Be prepared for it. Unfortunately in our country we have let capitalism and "the Market" become the dominating force in all our decisions. Here are things we likely have to look forward to:

Pensions--already disappearing as a standard benefit for years now--will rapidly be replaced by 401Ks and other more volatile retirement savings plans (greater risk to employee, lower cost to employer).

Medical benefit costs will continue to shift onto the shoulders of employees.

The part-time revolution will begin: companies will see the benefit in hiring people to work 32 hour(+or-) weeks in order to deny them a benefit package. This "savings" will allow them to hire more workers and actually increase their output for the same cost per person-hour, or not hire additional bodies and still get the same overall output for less money.

Peak Market efficiencies occur once everything is commoditized, and employees will someday become one of those commodities.
Posted by fuzz_ball (7 comments )
Reply Link Flag
"will rapidly be replaced by 401Ks and other more volatile retirement savings plans (greater risk to employee, lower cost to employer)."

401k's are as safe, if not safer than traditional pensions (as long as, as a previous poster mentioned, you take advantage of them). A pension can be wiped out completely if a company goes bankrupt. How volatile is that? And that is NOT a rare occurrance. Ask a US Airways employee. At least with a 401k, the money is in your control.

Sure, its not guaranteed for life. But its yours. This is america, control your own life.
Posted by (402 comments )
Link Flag
And Our President ...
and our president, just a couple months ago, was speaking about the need for corporations to own up to their obligation to their employee's retirement. consider there are three legs to retirement: company retirement plans, social security, and personal savings. company retirement plans all over are underfunded and/or being reduced/curtailed. social security is on shaky ground and is very unlikely to pay as much as it does today. and personal savings are at historic lows, even negative (meaning we spend more than we save) some months.

mr. president: it's going to take more than talk. it's going to take genuine leadership. leadership that acknowledges its responsibility to those who can't afford to curry favor with the politico's through huge financial contributions. otherwise, i believe there will be a sea change in the leadership of this country, but by then i think it will be too late to recover without incredible pain to lots of common folk.

mark d.
Posted by markdoiron (1138 comments )
Reply Link Flag
You're doomed to be broke
If you want to wait around for a bunch of politicians to reach a consensus on how best to tax the 'rich' to pay the largest voting block they can scare then you're doomed to be broke.

Here's a tip. You are resonsible for yourself whether you want to be or not.
Posted by scdecade (329 comments )
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Irrelevant Remark
"tax the rich"? this story is about the pay folks would like to earn in a job (via fringe benefits), not about taxing anybody.

and, if that remark was directed at me, fyi i retired quite sufficiently happy with my financial situation six years ago--at the age of 50.

mark d.
Posted by markdoiron (1138 comments )
Link Flag
Another 401K myth...
In addition to my post above about the details of this switch from a defined benefit pension to a 401K, here is another reason why IBM (and other companies) are lying about the benefit to employees in this switch. The defined benefit pension is a monthly amount guaranteed for the rest of your LIFE! While the 401K is only for as long as the money runs out. Therefore it's entirely possible to have little or no money in a 401K at retirement due to bad investment decisions or small personal contributions. As pointed out in another post, the defined benefit plan is managed by professionals (at no cost to you) while the 401K is managed by greenhorns (you!). In addition, you better not outlive your 401K (you can't outlive a defined benefit pension) or you will end up as another senior in the shelter. I understand all these companies going to 401K's for cost reasons, but I am tired of the deceptions and lies they perpetuate to their employees about the supposed benefit of this switch.
Posted by lazura (23 comments )
Reply Link Flag
More myths perpetuated
Yeah, your post contains just as many myths if not more and worse.

First of all, you say that "The defined benefit pension is a monthly amount guaranteed for the rest of your LIFE!" FALSE.
Posted by scdecade (329 comments )
Link Flag
Get Over It
<<Therefore it's entirely possible to have little or no money in a 401K at retirement due to bad investment decisions or small personal contributions.>>

So... let me get this straight. Your employer pays you a salary for the work you provide... and pays that salary over the entire course of your career. Then... once you are NO LONGER WORKING for that company, they somehow OWE you... because you made poor investment decisions earlier in life?

Get real. This perspective is a big problem... if a company pays you salary, then you are being compensated fairly. If a company *wants* to offer pension, then they are very generous and you are very lucky.

To be paid for making bad financial decisions after you have stopped working for an employer is certainly not a protected right... and it shouldn't be.

How would you like to be writing monthly checks to the plumber who fixed your sink 20 years ago? Hey... You *owe* him, because he didn't invest the money you gave him wisely.

Posted by David Arbogast (1709 comments )
Link Flag
This is good
This is a good thing, and more companies should move in this directions.

Giving pensions for life was wonderful when employees retired at 62 and didnt live past 67. But nowadays, with people living much longer, these pensions have become a serious, accumulating problem that companies often just cant keep up with. And when that happens, the company goes under, and guess what - so does the pension. Take a look at GM, for example, who's super-generous retirement pension and life time health care benefits have pushed it towards bankruptcy.

Putting money into an account owned by the employee means that the employee does not have to worry about their company pulling an Enron and wiping out their retirement savings. It also means that fewer companies will be pushed into bankruptcy by a retirement plan they can no longer afford because it was developed back when lifespans were shorter.
Posted by (402 comments )
Reply Link Flag
you said: "Giving pensions..."

give? do you know any companies that **give** pensions away? i want to go straight to that company and get mine.

in fact, these were part of a total compensation package. and the reason they are being eliminated is because overseas third world country companies do not pay them, and U.S. businesses must, in today's world, be able to compete with those low-priced imports. personally, having lived and traveled over 27 years to third world countries all around the world, i can assure you that they're beautiful people. but, i have no desire whatsoever to see the U.S. economy brought to that level.

also, many of the companies who are having troubles with their plans have failed to properly fund their plans through the years. and now the employees are being expected to take the hit, while the suits walk away with outrageous compensation packages, huge bonuses and golden parachutes.

mark d.
Posted by markdoiron (1138 comments )
Link Flag

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