The December 7, 2012 Wall Street Journal contains the following story. How ironic, another attack on Americans on December 7!
International Business Machines Corp., IBM +0.55% a bellwether for employee benefits, is overhauling its retirement program to contribute once a year to employee 401(k) accounts in a lump-sum payment.
Starting next year, IBM’s contributions, which generally range from 6% to 10% of pay, will take place Dec. 31. Workers who leave the company before Dec. 15 won’t qualify for the match, unless they retire.
IBM’s switch is the latest in a series of moves big companies have been making to rein in retirement-plan expenses in recent years—and the financial implications for employees could be significant.
Many U.S. companies cut their 401(k) match in 2009 during the economic slowdown, and some of them have only partially restored it. In 2011, 7% of employers made no contributions at all to their plans, up from 2% in 2001, according to benefits consultant Aon AON +0.28% Hewitt.
Benefits experts say IBM’s shift could start a trend among other large employers. Earlier this year Ford Motor Co. F -0.62% said it would offer retirees a lump-sum payout to offset its pension obligations. General Motors Co. GM -1.75% and about a dozen other companies quickly followed suit, according to the Pension Rights Center, a Washington, D.C., advocacy group…
This is a company that is a leader in changing the role of the employer in retirement. It used to have a traditional pension plan, it converted that to a cash balance plan and then switched to all 401(k) in the process saving money and shifting more and more responsibility to workers. Of course, IBM is not alone, virtually all employers except government’s have followed the lead. Dramatically cutting back or in many cases eliminating retiree health benefits is also part of the scenario.
And you wonder why the middle class is being squeezed? Short-sighted employers focused on the next quarter’s earnings are part of the reason.
As someone who spent nearly fifty years in corporate America designing and managing employee benefits, I find this trend reprehensible. Not only are employers killing the very concept of retirement, at the same time the government is considering proposals to lower the lost revenue from pre-tax retirement savings. If that happens, it will be even harder for people to save for retirement.
Look at what’s in the mix; Social Security going bankrupt, possibly raising the Medicare eligibility age, making it tougher to save for retirement, health care cost shifting and ever rising costs, and Americans generally not saving adequately for retirement now.
Employers who decry government mandates and interference in their business often have no one to blame but themselves. Companies create situations that lead to more and more government programs to fill the void they create. This is a good example.
Some day the average age of the workforce will be 80 and everyone under 40 will be unemployed … or working for government. Perhaps our strategy to keep people healthy so they can live longer is misguided.
One of these days there will be mandatory government retirement programs involving employers and workers, one of these days the stock market will suffer for it. One of these days employers will be trying to figure out how to manage an aging workforce.
One of these days the next generation will be saying, boy did they screw things up back at the turn of the 21st century.
Related articles
- IBM Draws Flak for Change to 401(k) Plan – Bloomberg (bloomberg.com)
- IBM will change way it computes 401(k) match (bizjournals.com)
QUINNSCOMMENTARY 
Dick
My db plan traces back to 1946. Back then, it was a contributory career Average formula plan with no early retirement subsidy, participation started at age 35 and there was. No post retirement cola – only a variable annuity where benefits could rise or fall post retirement.
Once when the plan actuary complained about the prospective reductions in the rate of accrual, he noted that I only want the benefit I was promised at hire.
I did the calc one day and sent him a bill for the past due contributions and confirmed his benefit would be much less if we fulfilled the promise made to him at hire.
I don’t know about you but I made changes to pension and retiree medical, and posted the reservation of rights almost every year. I confined over and over that the company. Oils and WILL prospectively change accruals.
And, as a retiree today, when I see other retirees they almost always revel in their good fortune to have worked for a firm that never over promised and underfunded their commitments, that reset expectations and funded the plans.
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BRAVO Mr. Quinn – this has been happening since I was working in the early 1960’s! It sounds as though it’s right out of the book “Who Stole the American Dream” by Hedrick Smith. Brings to mind a George Carlinism: “It’s called ‘The American Dream’ because you have to be asleep to believe it.”
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This is not new. Many firms looked at changing the timing of the match. I looked at it in 2008 as a means of avoiding suspending the match in my 401(k) plan.
I don’t care much for IBM’s move. However, you miss major points when you assign blame about the decline in DB plans and the lack of focus on retirement preparation solely to corporate America.
Go all the way back to ERISA in 1974, you’ll find that they sowed the seeds for consistent underfunding in the initial bill (see link on origins of ERISA, where, on page 702, it is clear that many DB plans never had a goal of fully funding liabilities. It notes that: “… “sound” funding did not mean “full” funding. Even if it were feasible for an employer to pay the entire past service liability when it created a retirement plan, the tax laws discouraged this course of action. … Like the vesting requirements in UAW plans, the funding provisions reflected a decision to budget limited resources in a manner that provided relatively liberal retirement benefits. By lengthening the period for paying off past-service liability, a plan could devote less of the employer’s current contribution to past service liability and more to current retirement benefits.” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=290812)
When IBM shifted from final average pay to cash balance, what they got was … litigation. You had people who misunderstood that it wasn’t a choice between a defined benefit pension plan with a final average pay formula and a plan with a career average/cash balance formula. They litigated and litigated but the decision was always whether or not to have a lower cost defined benefit pension plan or no pension plan at all. Look at the TowersWatson 2012 study of the Fortune 100 – where only 30 employers have a defined benefit plan, most of those are cash balance/hybrid formulas, leaving only 11 employers with a final average pay formula. http://www.towerswatson.com/united-states/newsletters/insider/8067
So, at least IBM does not overcommit and underfund like, say United Air Lines, who dumped $6B of unfunded liabilities on the PBGC, making it more difficult for remaining DB plans to continue. Or, at least IBM does not dump on taxpayers like GM – where you and I are paying for their historic underfunding of pensions and retiree medical benefits through the political/bail out process.
Just like Medicare and Social Security, you and I, through the tax systems, are paying for others’ benefits where politicians and corporate leaders and union bosses all committed to significant benefits – but then failed to properly fund them. Your decision to single out IBM for criticism is highly misplaced… when it is obvious they want to limit their liability to what they believe they can afford to fund.
As I always say, “pension promises without funding are mere dreams”.
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I think you are being too technical, too corporate and a bit naive on this one. The fact is people rely on the “promises” made by corporations (or used to) when hired, when they were told for years that part of their total compensation was the future value of the pensions and other benefits.
Then when things get a little tough none of that matters. My previous employer where I managed the benefits for over 45 years just changed the formula on the people remaining in the DB plan (the employees not in the union) with the result that people with many years of service suddenly found the pension they were counting on in a few years cut by thousands. This plan began in 1911.
We changed the entire benefits plan in 1995 for new hires so they had no retiree medical and a cash balance plan for the express purpose of cutting future liabilities and avoiding harmful changes retroactively for employees with long service. a new CFO, a new philosophy and bam, none of that matters. This company got through the depression with no layoffs, no eliminating pension and only a temporary 10% cut in pay for employees that really was temporary.
These types of changes are like telling an executive, hey remember that bonus you earned and we paid you in four years ago, we need it back.
What has changed is not due to ERISA or any other law, but rather the people making corporate decisions and their priorities.
Corporations make promises when it’s convenient to do so and suddenly find reasons they can’t be kept when it isn’t. Don’t make promises you can’t keep under any scenario.
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My daughter took a job in NYC in 2005 as a paralegal for about $50,000 a year, including overtime. She worked there two years and saved $26,000 outside retirement plans. The idea that our grandchildren are unable to provide for themselves is as ridiculous as saying a paralegal could not save the sum my daughter did. She grew up understanding that she had to provide for herself, that you make a lunch and bring it to work, that you don’t go to Happy Hours twice a week, that you make a crock pot full of stew and eat at home all week, that you borrow books from the library and improve your knowledge base and understanding of the world, and that having cash in the bank is freedom to choose what pleases you. The issues you address are cultural ones – the dependency on the good will of others that requires compulsion and force to induce the others to nanny you along. Somehow, her generation and the Boomers learned that someone else will fix it, and now the debt is so crushing that freedom will evaporate.
Your employer is not your keeper, and even more so, the government should not be. Contribute so much and make yourself indispensable, and you shall never want unless the government comes and takes from you in the name of :fairness”, because what’s more “fair” than taking ever more from the person who works the hardest and contributes the most to those around them.
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Nice in theory, but not reality for many reasons. I know there is more to your daughters story than you are telling. Saving that amount in two years living in NYC at that income is not easy so I suspect there were some extenuating circumstances.
Dick
Richard D Quinn Editor Quinnscommentary.com
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Nope. She wanted to go to graduate school and knew she had to pay for it, and she knows that debt crushes the debtor and that she would be responsible. There was nothing more to it than that. She doesn’t watch cable, so no charge for that. She had a small wardrobe, which was all that would fit in a tiny apartment. It’s a question of want to, focus, perseverance, and willingness to defer gratification, nothing more.
Her boyfriend thereafter went to San Francisco with her in 2009 (initial year was 2007, not 2005 as I said) and took a warehouse job. He now is a supply chain manager – again as a function of becoming utterly indispensable.
It’s all about the culture they come from. Those two know that a job is what you create for yourself by finding a way, any way you can through personal ingenuity, pluck and nonstop effort, to contribute the maximum, often for someone who did not know they needed that assistance; they do not believe that either government or employers “create” jobs. The wealth of a society is directly proportional to the extent to which such an ethic exists in that society. They manifest that ethic, and thus they apparently also must bear the burden for planning for and administering someone else’s retirement. That’s a commentary all in its own right.
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