IBM and its tricky pension trade

At Work, Observations on life, Retirement 5 comments

Disclosure: the following is based on published information some not yet confirmed by IBM

IBM is eliminating a 5% match and a 1% employer guaranteed 401k contribution. Instead it will contribute 5% of worker pay to a new retirement account looking suspiciously like a cash balance pension plan.

And, to offset the 1% contribution loss it will give a onetime raise.

What’s the deal? Who wins and who loses? Let’s put it this way, the company isn’t making such a change so it can spend more.

Per the memo, IBM said it’s guaranteeing a 6% annual interest rate return on Retirement Benefit Account (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%).

Or maybe not.

If this is, in fact, a cash balance pension plan or being integrated into an existing pension trust, the answer is easy. IBM is limiting its liability by limiting the plans return to beneficiaries (in other words the pension formula) while being free to earn a greater return through trust investments over many years.

Are employees the losers? Yes, no, maybe. There are several factors. Would the employee earn more on the 6% company money in the 401k? Quite likely they would. Will employees stay with IBM long enough to benefit from the new plan? Possibly not. Will the RBA offer an annuity payout? Probably and it could be an advantage to workers. Will the new plan protect workers from stock market losses in 401k for employer contributions? Possibly.

But the bottom line is IBM will spend less and workers in the aggregate very likely will have less in future retirement funds if for no other reason than the growth in their RBA will be limited to fixed income investments.

5 comments

  1. I’m fortunate to have a 5 % cash pension contribution AND a 50 % 401k match up 8 %. Funny thing is that my company didn’t mention the pension when I was offered the position. I was slightly disappointed about the 401k match (I’ve had 100 % matches at a few employers) – until I found out that we had the pension contribution!

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  2. I retired after 35 years with IBM about 18 months ago. This is not the great IBM that many of your readers think of from the 60’s, 70’s and early 80’s — far from it. IBM never does anything that does not benefit IBM. In speaking to several friends who are still there – they all know they are getting screwed here. Just like when IBM eliminated the pension plan in the late 90’sand told employees that it would be a “neutral” change – no one believed it then and it proved to be 100% false. The RBA is a terrible idea for employees and more will leave as a result.

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      2. 1. Lack of control over investments – ibm HAD a very robust selection of investment choices in their 401k. Now those are gone on the lost match
        2. Limited potential returns – how low were treasuries before the fed raised rates?
        3. Already hearing from managers that the one time pay increase is inadequate
        4. As rdquinn noted – ibm did not do this to help employees. 35 years at IBM. I can confirm this is their mo

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