IBM Enhances 401(k) While Freezing Pension Plan
IBM announced in January it would freeze its defined benefit pension plan, but it softened the blow to employees by introducing a substantially enhanced 401(k) plan. The move was seen as further evidence that the shift from defined benefit to defined contribution plans is accelerating among large U.S. employers, including financially stable companies with well-funded pension plans like IBM.
The company said employees would stop accruing benefits in its defined benefit plan on December 31, 2007 and would retain only the benefits earned based on salary and service as of that date. The changes would not apply to current retirees or employees who retire before the start of 2008.
At the same time, IBM said it was redesigning its 401(k) plan to make it one of the most generous in corporate America. Under the enhanced plan, current pension plan participants would receive company-funded 401(k) contributions equaling up to 10% of their annual salaries, with 6% paid in the form of dollar-for-dollar matching contributions and 1% to 4% made as automatic contributions. To ensure full participation in the 401(k) plan, the company said it would open accounts to receive the automatic contributions even for employees who do not contribute their own money.
IBM had announced previously that all U.S. employees hired after January 1, 2005 would be enrolled in the company’s 401(k) plan. The company reported that, at the end of 2005, its defined benefit plan was fully funded in excess of the projected benefit obligation, with more than $48 billion in assets. Its 401(k) plan, with $26 billion in assets, was the largest in the country. More than 90% of IBM’s U.S. employees participate in the 401(k) plan, the company noted, with 88% of participants contributing at least 6% of pay.
Explaining the reasons behind the move, Randy MacDonald, IBM senior vice president, human resources, said, "In recent years, IBM has been following a global strategy to move toward defined contribution retirement plans for both existing employees and new hires. These changes are consistent with this direction and will give us more predictable retirement plan costs, along with benefits that remain ahead of—but more in line with—our competitors."
MacDonald added that, by altering its retirement benefit offerings, IBM expected to better control retirement plan expenses, while preserving earned benefits and providing employees with "a leading-edge 401(k) plan that will be one of the richest in the country and a standard in the United States." MacDonald also acknowledged that recent moves by the U.S. lawmakers and regulators to tighten the funding and reporting requirements on defined benefit plan sponsors played a role in the company’s decision to freeze its traditional pension plan.
A number of companies in ailing sectors, such as the airline and steel industries, have terminated their pension plans due to acute funding shortfalls. But other U.S. employers not facing severe financial difficulties have recently announced plans to halt accruals or close their defined benefit pension plans to new employees, including Verizon, Motorola, and Lockheed-Martin.
