In a memo sent to global IT giant IBM’s U.S. employees last week that is generating shockwaves throughout the 401(k) industry, the company announced a major change to its retirement plans.
“Starting January 1, 2024, IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account within the existing IBM Personal Pension Plan.”
Statement from IBM
“Starting January 1, 2024, IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account (RBA) within the existing IBM Personal Pension Plan, which helps save for retirement automatically, with no contribution required from the employee,” reads a statement provided to 401(k) SpecialistThursday by IBM Corporate Communications Manager Jessica Chen.
“The RBA adds a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options. The RBA will replace current company contributions to the IBM 40 1(k) Plan, but employees can continue to contribute to their 401(k) plan as they do today,” the statement continued.
Specifically, last week’s memo said IBM is switching its existing 5% 401(k) match and 1% automatic contribution for eligible U.S. employees to a new monthly automatic tax-deferred amount in the RBA equal to 5% of their eligible pay. The RBA qualifies as a type of defined benefit plan that is 100% employer-paid and employer-managed—making it a move that essentially un-freezes the tech giant’s large defined benefit plan that has been frozen since 2008 and closed to new participants since 2005.
“IBM is continually making improvements to how we support employee financial wellbeing,” the statement concluded. “By introducing this retirement benefit within the IBM’s Personal Pension Plan, which is stable and well-funded, IBM is able to provide a benefit to employees that also helps diversify their retirement portfolios.”
Many employees, financial advisors and interested bystanders have been posting comments to message boards expressing concern that the change will dampen retirement savings by removing employees’ incentive to contribute to their retirement account because the company match will no longer exist.
“We recognize 5% is less than employees are eligible to receive through the current 401(k) Plan. To offset the difference, IBM is providing a one-time salary increase effective January 1, 2024, separate from the annual salary plan later in the year,” the company memo stated.
But the one-time raise is taxable income, 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. Some have argued the only employees who clearly benefit from the change is those who do not contribute at least 4% of their salary to their 401(k).
Other potential drawbacks include the fact that employees can no longer choose how they want to invest the company’s retirement contribution; taking loans from resulting smaller 401(k)s will be a less-attractive option; and potentially lower returns, with IBM’s highest guaranteed return rate being 6% for the first 3 years of the program.
Per the memo, IBM said it’s guaranteeing a 6% annual interest rate return on RBA contributions for the next 3 years through 2026. From 2027-2033, 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 (which is currently around 4.5%).
The memo said enrollment will be automatic, although the RBA has a one-year service requirement similar to the eligibility for the 401(k) Plan. Employees will be immediately vested and portable.
Because it’s IBM—one of the largest defined contribution plans in the country and looked at as one of the key companies that decades ago moved the needle from DB pension plans to fledgling 401(k)s—many are wondering if this move will be imitated by other large companies with fully funded DB plans to utilize their pension surplus to reduce ongoing costs.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
So how does and HCE max out? Without Safe Harbor won’t the ceiling be much lower for many employees?
Dear Brian,
A very interesting article! From the brief description, there are many questions, what issues, problems were in place that this change is expected to solve. Potential liabilities? Recruit? Retain? Reward?
The changes are inside a “Pension Plan” this by itself is something unusual nowadays.
On a different note, If the funds, as mentioned are immediately vested and portable, the question is what is the usual, not average, tenure of the employees?
Does the 401(K) plan offered or offer or will cease to offer a “brokerage window”?
My best regards,
Roberto
Just a way to fund government overspending through the purchase of Treasuries. This has nothing to do with the employees.