Now, not living in the US, I have only a basic idea about how 401(k) plans work - but I do know that the way a company manages their employee retirement plans can have a huge impact on their bottom lines.

From what I can tell, these changes look like they will cost IBM some money now, in return for significant savings in the future.

There has been a lot of press coverage of this announcement - especially in finance markets, and indeed, IBM shares had rebounded upwards in days immediately after the announcement - an endorsement from shareholders at least.

Now that I’ve read a few more of the comments out there - it seems that IBM currently has what’s called a pension plan - essentially a guaranteed income payment for retirees. This offers certainty to the employee - which is great - but also creates an extended financial commitment to the company. The move to employee-funded schemes offers a lot less certainty to the employee - since their retirement money rests in the hands of the investment markets, and there are no guarantees on the level of income they will finally see. I can understand why many employees will be upset by this - a pension is always a nice thing to have, but unless it is truely guaranteed, it’s still a risk - especially if you don’t have any additional investments to fall back on in retirement.

Here in Australia, we have what’s called the Superannuation Guarantee - essentially it is mandated by law that all Australian companies must invest a minimum of 9% of the employee’s salary into a complying superannuation fund. These superannuation funds take many forms, but they are strictly controlled by the financial regulators and are generally considered financially sound. From the middle of last year, employees also now have a choice as to which superannuation fund their money is invested with - no longer required to invest with the fund chosen by their employer. The overall laws controlling superannuation are rather complex - but in general, they are seen as a good thing - although 9% is considered to be insufficient to guarantee a decent lifestyle in retirement without additional investments made by the employee.

Given that most Australian superannutation funds will typically have a significant portion of their money invested into the Australian stock market - this has been one of the contributing factors in the performance of local markets in recent years. Large wholesale managed funds can usually rely on a regular inflow of money from the superannuation funds - which they invest into mostly Australian shares.

My point ? Pensions - although a nice idea - are never going to be sustainable. Employee funded is a much more effective mechanism in my opinion. Technically, Australia’s superannuation is considered “employer” funded - the contribution is above and beyond your negotiated salary, although in reality, it is all considered part of your salary package. Every salary negotiated by Australian employees has a minimum guaranteed 9% superannuation contribution in it. Because this is an Australia-wide, government mandated initiative - it is consistent, well controlled, and generally considered a safe investment.

Because not every company in the US offers such pension plans, IBM is certainly not competing on a level playing field when it comes to similar companies who don’t offer similar plans, and the financial commitments that go with them. This is one of the compelling reasons for the change - in order to stay afloat in the long term, IBM needs to play the same game that everyone else plays. Unfortunately, the employees must bear the cost - but I’d suggest they would probably bear an even greater cost if IBM were to go out of business as a result of running out of money to fund the ever-increasing pension commitments !!

I’d like to see a more consistent guarantee of retirement investment savings for workers across the US - it seems that too much of US life is dictated by the company you work for. Perhaps that’s a bit too much of a socialist attitude? Australia certainly has been accused of having too many socialist policies and “safety nets”. I actually think our system is not bad, certainly not perfect, but at least it is pretty consistent. But I’m not a political commentator, so I won’t comment more.

IBM Press Release: IBM Changes U.S. Pension Plans, Effective in 2008, as Part of Ongoing Global Retirement Plan Strategy Shift

IBM today announced that it has changed its U.S. defined benefit pension plans and that it plans to redesign its 401(k) savings plan, effective in January 2008.

The changes continue IBM’s global strategy of shifting the future focus of retirement benefits toward the more predictable cost structure of a 401(k), or defined contribution, plan and away from its legacy defined benefit pension equity and cash balance plans. They include:

  • Stopping the accrual of future benefits in the company’s defined benefit pension plans, and fully preserving all retirement benefits that employees will have earned as of December 31, 2007.
  • Redesigning its 401(k) savings plan to make it one of the richest in U.S. business by giving current pension plan participants an annual company-funded contribution of as much as 10 percent of their pay. To provide this benefit through its new 401(k) Plus Plan, IBM plans to double the current company match to dollar-for-dollar on up to 6 percent of salary deferrals, and to make additional automatic contributions of 1 to 4 percent of employees’ pay into their 401(k) account.
  • Assisting nonexempt pension equity plan participants to save more by providing an annual special savings award of 5 percent of pay to their 401(k) savings plan, in addition to the company-funded contribution of up to 10 percent of pay.
  • Ensuring 100 percent employee participation in the 401(k) savings plan by opening accounts for employees who do not contribute to the plan, and annually depositing the automatic company contribution of 1 to 4 percent of their pay directly into these employees’ accounts.

The changes do not affect IBM’s 125,000 current U.S. retirees, former employees with vested benefits or employees who retire prior to January 1, 2008.

“In recent years, IBM has been following a global strategy to move toward defined contribution retirement plans for both existing employees and new hires,” said Randy MacDonald, IBM senior vice president, human resources. “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.

“We’re taking these actions to better control retirement plan expenses, position the company for business growth and competitive strength, and preserve employees’ earned retirement benefits, while instituting a leading-edge 401(k) plan that will be one of the richest in the country and a standard in the United States. We also believe these are prudent and balanced steps at a time of uncertainty and conflicting legislative and regulatory directions about defined benefit retirement plans in the United States.”

The company will record a one-time pre-tax charge related to these pension plan changes of approximately $270 million in the fourth quarter of 2005 as a result of the curtailment of the defined benefit plans.

IBM expects the U.S. plan changes announced today, along with 2006 retirement plan changes under consideration in several other countries, will result in worldwide retirement-related expense savings of $450 to $500 million for 2006, and $2.5 to $3 billion for the period 2006 through 2010, based on year-end 2005 pension assumptions.

Despite these global actions, the company said it still expects worldwide 2006 retirement-related plan expenses will continue to increase over 2005 levels by $400 to $500 million, excluding the impact of 2005 one-time charges.

IBM’s U.S. defined benefit pension plans will stop accruing new benefits effective December 31, 2007. All benefits earned through year-end 2007 by participants in its pension equity and cash balance plans will be preserved as of that date. These benefits will be available to participants when they leave IBM, under the same payment options currently in effect.

Benefits planned under the new 401(k) Plus Plan, beginning in January 2008, are as follows:

  • Pension equity plan participants receive a dollar-for-dollar match on the first 6 percent of pay deferred and a 4 percent automatic company contribution, for a total of 10 percent of pay. Nonexempt pension equity plan participants receive an additional special savings award equal to 5 percent of pay.
  • Cash balance plan participants receive a dollar-for-dollar match on the first 6 percent of pay deferred and a 2 percent automatic company contribution, for a total of 8 percent of pay.
  • Employees hired after December 31, 2004, receive a dollar-for-dollar match on the first 5 percent of pay deferred and a 1 percent automatic company contribution after one year of service, for a total of 6 percent of pay.

IBM’s U.S. defined benefit qualified pension plan was fully funded in excess of the projected benefit obligation with more than $48 billion in assets at the end of 2005. No funding contribution was made to the U.S. plan in the fourth quarter of 2005.

IBM’s 401(k) plan, with more than $26 billion in assets, is the largest in the country. More than 90 percent of IBM’s U.S. employees participate in the plan, and 88 percent of these participants already defer at least 6 percent of pay. The plan also offers one of the lowest management fees of any 401(k) plan, automatic savings, a range of investment features, availability of a rollover to an annuity payment form and disability protection.

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