IBM’s decision to eliminate its 401(k)-match policy earlier this month was an awakening for advocates of the private retirement plan market, leading some to question whether the riddance signals a shift in how large playmakers prepare their employees for retirement.
In an internal memo to its employees, the company announced it was switching its existing 5% 401(k) match and 1% automatic contribution to a monthly automatic tax-deferred amount equal to 5% of workers’ eligible pay. Starting in the new year, the newly introduced feature would be called the Retirement Benefit Account (RBA), which would exist within the IBM Personal Pension Plan.
Per IBM’s memo, the company is guaranteeing a 6% annual interest rate return on RBA contributions for the next three years through 2026. From 2027 to 2033, it guarantees the 10-year Treasury yield with a 3% floor. In 2034 and beyond, employees will receive whatever the 10-year Treasury yield is, currently at 4.5%.
In a statement provided to 401(k) Specialist, IBM advertised the feature as “a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”
Furthermore, the statement noted that while the RBA would replace current IBM contributions to the 401(k) plan, employees could continue to contribute on their own accord.
IBM’s decision was met with poor reactions among several hundreds of employees, who have since issued an open letter directed at the company. Among other points, the letter argues that the change would result in smaller contributions from IBM and a reduced long-term rate of return, as contributions would be invested once a month rather than in biweekly intervals.
Understanding that the new policy decreased overall plan contributions, IBM added that it would provide a one-time salary increase effective January 1, 2024, separate from its annual salary plan. However, the income would be considered taxable, unlike the tax-deferred 401(k) match, and employees would be responsible for saving and investing that money moving forward—something many are skeptical they will do, particularly in retirement accounts.
Retirement industry leaders have also wondered whether the tech magnet’s change would snowball into a wider movement among industry giants revamping their retirement benefits, and more notably, head towards DB formulas. If it were to happen, it’s possible that participants would not be able to achieve the same gains on their investments than in the past, experts have noted.
“If IBM’s approach were to become the industry standard, participants would no longer be able to hold extremely high stock weightings.”
John Rekenthaler, Morningstar
“If IBM’s approach were to become the industry standard, participants would no longer be able to hold extremely high stock weightings,” wrote John Rekenthaler, the director of research for Morningstar, in a report on IBM’s retirement remodel. “The level would depend upon the size of the defined-benefit plan, but as a rough estimate, the equity limit for hybrid plans would be about 80%. That could be a shortcoming.”
David Blanchett, head of Retirement Research at PGIM DC Solutions, further noted in a LinkedIn post that the decision wouldn’t add any costs for IBM since the contributions are being funded from a surplus of pension plan benefits, but could instead deplete profits from its participants. “It probably won’t cost IBM that much more from an employer contribution perspective, given the 97% participation rate in the plan, but the long-term growth of the monies is likely to be lower than if contribution was invested in a balanced portfolio,” Blanchett wrote.
Additionally, the combination of the traditionally standalone target-date fund (TDF), along with a fixed interest account, could confuse the math involved, writes Rekenthaler.
Others questioned whether the news meant that IBM would once again offer a cash balance plan, and praised the company for offering a benefit that does not require contributions or investment decisions from its employees. The company had formerly offered a defined benefit plan until freezing the accounts in 2006, when it shifted towards a defined contribution (DC) formula to slim plan costs.
“…Asking employees to fund, manage, and disburse a retirement benefit without disposable income, investment acumen, and a crystal ball is just poor policy. I’m glad that IBM agrees,” wrote Russell Kamp, managing director and senior asset manager for asset and liability management firm Ryan ALM, in a post to his LinkedIn.
Others, like Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis (SCEPA) at the New School, hopes the move spearheads a resurgence of DB plans. In an opinion piece for Forbes, Ghilarducci opines that DC plans aren’t meant to encompass the entirety of a participant’s retirement accumulation, but rather, just fragments of their overall savings. Instead, let DB plans handle most of the buildup, she writes.
“…IBM has declared the 401(k) as a primary plan a failure and other companies should too,” Ghilarducci wrote. “401(k)s are for little extras — if workers want more savings they can always go to the IRA and 401(k).”
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