Impact of IBM replacing 401(k) match with Retirement Benefit Account

[Gladiators2Swansons]

IBM announced that in 2024, they will no longer match employee's 401(k) contributions. Instead, they will contribute 5% of salary (after 1 year of employment) to what they are calling a 'Retirement Benefit Account.' The RBA exists within the IBM Personal Pension Plan. The announcement indicated a guaranteed 6% interest rate for the first 3 years, but did not mention interest rates beyond the 3 year period.

This seems like a net negative because employees can no longer determine how their money is invested. Furthermore, employees are now dependent on IBM deciding to pay out these amounts to employees when they retire and funding the program over time, instead of owning the money in their 401(k) accounts.

Actionably, I'm trying to understand how this change impacts saving for retirement, as a loved one works for IBM.

• Is my understanding of these changes correct?
• Is this a defined contribution pension plan, or another type of retirement plan?
• How is the interest rate determined?
• What changes (if any) should IBM employees make to retirement planning?

Thanks for the input!

[mkc]

It sounds like they may be reviving a cash balance pension plan.

In 1999, IBM moved anyone under 40 and/or with less than 15 years' service from the "old" defined benefit pension plan to a cash balance plan. They were later successfully sued and starting in 2004, new hires were only eligible for an enhanced 401k. Those who had funds in the cash balance plan retained them, but in 2006 IBM froze the plan and ceased any additional contributions.

Cooper v. IBM Personal Pension Plan

There was also a tweak to the "old" pension plan in 1995.

For the 1999 version, per the linked article here is how the interest rate was set for that cash balance plan:

"Effective July 1, 1999, IBM again amended its Plan to create its Cash Balance *1013 Formula ("CBF"). Under the CBF, a participant's benefit is determined by reference to a hypothetical account known as a Personal Pension Account ("PPA"). Every month, a participant's PPA accumulates "pay credits" at a rate of 5% of the employee's salary and "interest credits" at a rate one percentage point higher than the rate of return on one year treasury securities."

For the 1999 version, when you left IBM (retiree, resource action, or voluntary separation) you were able to rollover the cash balance PPA into an IRA. Back in '99, there was quite the uproar, with some calculations circulating amongst employees that the change from defined benefit to cash balance would essentially slash the net pension benefit value by nearly 75%.

As you can see from this history, a company's retirement offerings can change throughout one's employment.

[antonioM]

[*]How is the interest rate determined?

Here's the break down of the interest rate for the RBA at least through 2033:

Your RBA will earn 6% interest through 2026.

Starting in 2027, interest will equal the 10-year U.S. Treasury Yield. As an additional level of protection, IBM guarantees you a minimum interest rate of 3% per year through 2033

[antonioM]

[*]Is this a defined contribution pension plan, or another type of retirement plan?

The RBA is a type of defined benefit plan:

The RBA, which is a new cash balance account in the IBM Personal Pension Plan, qualifies as a type of defined benefit plan. It is 100% employer-paid and employer-managed.

[gtrplayer]

IBM announced that in 2024, they will no longer match employee's 401(k) contributions. Instead, they will contribute 5% of salary (after 1 year of employment) to what they are calling a 'Retirement Benefit Account.' The RBA exists within the IBM Personal Pension Plan. The announcement indicated a guaranteed 6% interest rate for the first 3 years, but did not mention interest rates beyond the 3 year period.

This seems like a net negative because employees can no longer determine how their money is invested. Furthermore, employees are now dependent on IBM deciding to pay out these amounts to employees when they retire and funding the program over time, instead of owning the money in their 401(k) accounts.

Actionably, I'm trying to understand how this change impacts saving for retirement, as a loved one works for IBM.

• Is my understanding of these changes correct?
• Is this a defined contribution pension plan, or another type of retirement plan?
• How is the interest rate determined?
• What changes (if any) should IBM employees make to retirement planning?

Thanks for the input!

Whether a person wants to determine how their funds are invested is a question. Most people have no interest in the market and a revival of pensions would be a positive for them.

[KlangFool]

OP,

A) The key question is the vesting period. If someone is laid off before the vesting period, the actual amount does not matter. It is zero anyhow.

B) The most conservative option is to assume that the money does not exist. Then, decides whether it is worthwhile to continue to work for IBM.

KlangFool

[1BossDogs]

Gladiators2Swansons - do the math. So in my case - the latest IBM pension move cuts their contribution to my retirement by about 2/3rds. I max my 401K out and contribute ~$27K/yr - they matched $27K in 2022. I also put 27K into the Excess 401K and they matched $2.7K. New RBA estimates a $12K contribution. What a joke.

[34blast]

This is my understanding

IBM is giving 5% auto contribution to the RBA regardless of what the employee contributes. There is no longer any matching or auto contributions. The statement is that there will be a salary adjustment to compensate, but it is a bit vague.

For persons hired before 2004, they got 6% 401k match and auto contributions, most auto contributions were 3% or 4%. So older employees are losing 4% or 5% contributions without the salary adjustment

For employees hire after 2004, they got 5% match and 1% auto contribution, so they are losing 1% without salary adjustment.

Everyone is losing flexibility on investing for themselves.

The only employees IMHO who benefit is those not contributing to their 401k or < 4%

[miter1980]

.Actionably, I'm trying to understand how this change impacts saving for retirement, as a loved one works for IBM.

Well, you're no longer in control of managing the (lowered) employer's match money. Think of it as part of 401k (upon separating from IBM, you can roll the lump sum over alongside it anyway) that you are forced to invest in fixed income (with interest tied to US treasuries).

Actionably, you may need to rebalance your other retirement account contributions accordingly, so that the asset allocation of your total portfolio continues to reflect your chosen ratio of equities vs fixed income.

[Caligal]

https://www.theregister.com/2023/11/02/ ... k_changes/

I have not seen the details, but would be curious to know how this fund will be categorized - obviously not a 401k, and if not a traditional defined benefit plan, there would be no protections under ERISA.

Having been impacted (negatively) by the changes in both the IBM retirement plan and the retiree healthcare, I would venture a guess that this is another cost savings for IBM, and not necessarily an improvement for the employees.

[Tubes]

My opinion of plans like these are to assume it doesn't exist and plan accordingly, i.e. max out the retirement vehicles that you can control.

I worked for IBM for 10 years until 1995 and one reason I left was the emerging retirement changes at the time. I could see the world was turning and took much more control over my retirement that year. I am glad I did.

[miter1980]

I have not seen the details, but would be curious to know how this fund will be categorized - obviously not a 401k, and if not a traditional defined benefit plan, there would be no protections under ERISA.

I think it's pretty clear that it's a "cash balance pension" plan. Here's the DoL fact sheet about such plans:
https://www.dol.gov/agencies/ebsa/about ... sion-plans

[Brenkj]

I've always heard that the main reason to invest in a company 401k is the employer match - and that the administrative costs and restrictions on investment options make a 401k not a great saving option without the match. Now that IBM is replacing the 401k match with this other payment that is made regardless of employee participation in the 401k, is it a better idea to invest for retirement outside of the 401k plan? Does the fact that I'm enrolled in the Roth 401k plan change the analysis? Thanks.

[anoop]

[*]How is the interest rate determined?

Here's the break down of the interest rate for the RBA at least through 2033:

Your RBA will earn 6% interest through 2026.

Starting in 2027, interest will equal the 10-year U.S. Treasury Yield. As an additional level of protection, IBM guarantees you a minimum interest rate of 3% per year through 2033

"IBM said it’s guaranteeing a 6% return on that money through 2026. From 2027-2033, it guarantees the 10-year Treasury yield with a 3% floor and in 2034 and beyond, employees will receive whatever the 10-year Treasury yield is. The 10-year Treasury yield is currently hovering around 4.5%."
https://finance.yahoo.com/news/goodbye- ... 35154.html

This is interesting in that IBM is making a call for the employee that the 10-year yield will beat inflation over the long run. Not sure how that works in a world of QE or yield curve control. If at all, they should have put it in 10-year TIPS, but even those have had periods of negative yield.

[anoop]

I've always heard that the main reason to invest in a company 401k is the employer match - and that the administrative costs and restrictions on investment options make a 401k not a great saving option without the match. Now that IBM is replacing the 401k match with this other payment that is made regardless of employee participation in the 401k, is it a better idea to invest for retirement outside of the 401k plan? Does the fact that I'm enrolled in the Roth 401k plan change the analysis? Thanks.

Not all 401(k) plans are equal. My previous employer offered a brokerage option so I could pretty much buy anything. Current employer does not.

I think what you're referring to is the strategy where one should prefer 401(k) up to the match, then max the Roth, then go back to the 401(k) if there are funds still left and max that. This was in days before the Roth 401(k). I don't believe there's ever a benefit to investing for retirement outside a tax-deferred/tax-advantaged account.

[Hacksawdave]

Good ole IBM. Thanks to them, my company’s pension was dissolved in 2002. As I recall, the case mentioned went to the Supreme Court and found in favor of the seasoned IBM employees and created a two-choice remedy. Unfortunately, that remedy was rendered only to the IBM case and a large number of companies moved to the CBP plan, including ours.

Our CBP was tied as the new IBM RBA is going to be – tied to the close of the 10-year treasury on the last day of the quarter for the next quarter. Our company used a laughable figure of the 10-year returning 6.5% forever in their equations of how this plan is going to be “better” than the old pension plan being phased out. The CBP plan was later dissolved in 2007.

[8301]

Gladiators2Swansons - do the math. So in my case - the latest IBM pension move cuts their contribution to my retirement by about 2/3rds. I max my 401K out and contribute ~$27K/yr - they matched $27K in 2022. I also put 27K into the Excess 401K and they matched $2.7K. New RBA estimates a $12K contribution. What a joke.

Is your employer's match $27K, 100% of your 401k contribution?
What is Excess 401k?

[evancox10]

.Actionably, I'm trying to understand how this change impacts saving for retirement, as a loved one works for IBM.

Well, you're no longer in control of managing the (lowered) employer's match money. Think of it as part of 401k (upon separating from IBM, you can roll the lump sum over alongside it anyway) that you are forced to invest in fixed income (with interest tied to US treasuries).

Note that you (apparently) get the return of 10-year treasuries with the interest rate risk of a money market fund. So, maybe not that bad if you’re ok with a little fixed income.

And I know right now the yield curve is inverted, and money markets may yield more than 10-yr treasuries, but it’s highly atypical to be in a prolonged inverted yield curve.

[bitlicious]

The Excess 401K plan is a non-qualified savings plan, it allows tax deferral but the balance represents a liability on the IBM balance sheet, rather than an account balance protected by statute. If IBM were to go belly up before you receive a payout (in full at separation, or over 7 years if elected), you stand in line with other IBM creditors ... and not at the front of the line either. It's offered to employees whose compensation is high enough to prevent a full normal 401K match given regulatory constraints, but participation requires the employee to accept the aforementioned risk. When I was an employee, I took advantage of it mainly to get the full match and lower taxable income, figuring my risk was pretty low all things considered. Given their track record over the last twenty years, I see the direction of that risk arrow in future as rising, but maybe not enough to leave that option on the table.

[8301]

The Excess 401K plan is a non-qualified savings plan, it allows tax deferral but the balance represents a liability on the IBM balance sheet, rather than an account balance protected by statute. If IBM were to go belly up before you receive a payout (in full at separation, or over 7 years if elected), you stand in line with other IBM creditors ... and not at the front of the line either. It's offered to employees whose compensation is high enough to prevent a full normal 401K match given regulatory constraints, but participation requires the employee to accept the aforementioned risk. When I was an employee, I took advantage of it mainly to get the full match and lower taxable income, figuring my risk was pretty low all things considered. Given their track record over the last twenty years, I see the direction of that risk arrow in future as rising, but maybe not enough to leave that option on the table.

[bitlicious]

It was better IMHO ... but without matching, it becomes just another deferred comp plan. I would assume if the qualified 401K match is ending, the Excess match is also.

[ClassII]

Sounds like if IBM went bankrupt you’re just another creditor. Not to mention what I can only imagine are onerous terms for leaving IBM “early”.

No thanks.

[bitlicious]

Actually, I just recalled that my IBM Cash Balance Pension account also had an Excess deferral version, to get around max company contribution limits to the the qualified plan. The cash balance plans were ended and frozen (except for earnings) a number of years ago ... but what's old is apparently new.

[bitlicious]

The only onerous part about leaving applied either way: since they're non-qualified plans ... taxes are due at payout and the balance isn't eligible for rollover. One had to plan their post-IBM tax situation with that in mind. There were no restrictions or penalties on "early exit" separations.

[Brenkj]

Thanks for all the feedback on this. I max out the IBM Roth 401k every year, and I typically get a match of $16k to $17k. Sounds like the RBA contribution will be less than that. I'm not going to get another job, so I'm wondering about any thoughts for my best options for maxing out saving going forward. The IBM Excess 401k plan? An HSA? The IBM Employe Stock Purchase Program? Some combination of those?

Thanks.

[m0derton]

For the seasoned veteran employee getting close to retirement, the yearly match is likely not moving the needle all that much anymore compared to the years of growth from past matches. For the middle-career employee, this seems like a way other than bonds to get some fixed-income into the investment mix. However, for a fresh out of college employee, this sounds like forced fixed-income at a time when you'd want to be close to 100% stocks.

I guess one consequence to this would be a deflated pre-tax 401k over a long employment horizon to where future RMDs might not be much of an issue.

I work for a company that tends to follow what companies like IBM or GE do with their employee benefits. I hope this doesn't catch on.

[privateID]

For the seasoned veteran employee getting close to retirement, the yearly match is likely not moving the needle all that much anymore compared to the years of growth from past matches. For the middle-career employee, this seems like a way other than bonds to get some fixed-income into the investment mix. However, for a fresh out of college employee, this sounds like forced fixed-income at a time when you'd want to be close to 100% stocks.

I guess one consequence to this would be a deflated pre-tax 401k over a long employment horizon to where future RMDs might not be much of an issue.

I work for a company that tends to follow what companies like IBM or GE do with their employee benefits. I hope this doesn't catch on.

I agree that for all but the fresh out of college employee, this really should just be viewed as the location for part of their fixed income. So not really a huge deal other than the inconvenience of forcing it to be in this location and having to adjust elsewhere. For the fresh out of college employee, they are being forced to be more conservative. Assuming they will also be contributing to the 401K and/or Roth IRA, they can have a reasonable AA as long as they contribute more themselves. For example, assume a new hire makes $100K (makes working with the percentages below easier), gets the 5% into the RBA, and chooses to max out their 401K (22.5% of their salary) and Roth IRA (6.5% of their salary) and invest all that in stock. Their AA would be approx 85% stock/15% fixed (stock portion = 29%/34%). Of course the stock should outpace the fixed, so if there desired AA is more stock, that should happen eventually. If the new hire contributes half that much, the AA drops to 75% stock/25% fixed (stock portion = 14.5%/19.5%). I'm not saying it is great for the new hire, but if they save, it is a reasonable AA. And if they really can't save at all, the new plan is better because they don't have to contribute anything to get IBM's 5% contribution. But I agree, the new hire has the biggest hit here.

[BenS]

Typically we use bonds as a separate and liquid asset class that we can buy stocks with in a down market. With IBM's new plan, an employee cant do this. From my perspective the RBA therefore does not serve the purpose of FI. It is similar to SS in that way -- while it may be a steady stream of cashflow, its not liquid whatsoever.

[privateID]

Typically we use bonds as a separate and liquid asset class that we can buy stocks with in a down market. With IBM's new plan, an employee cant do this. From my perspective the RBA therefore does not serve the purpose of FI. It is similar to SS in that way -- while it may be a steady stream of cashflow, its not liquid whatsoever.

If the only purpose of fixed income for you is to rebalance toward stock, then sure, it can't serve that purpose. I think for many that is not the only purpose. It's to prevent wild swings in your portfolio. As part of a larger fixed income, it can serve that purpose well. In fact, you can argue it's a pretty good fixed income device with IBM's floors for the rates of return.

[changingtimes]

Typically we use bonds as a separate and liquid asset class that we can buy stocks with in a down market. With IBM's new plan, an employee cant do this. From my perspective the RBA therefore does not serve the purpose of FI. It is similar to SS in that way -- while it may be a steady stream of cashflow, its not liquid whatsoever.

If the only purpose of fixed income for you is to rebalance toward stock, then sure, it can't serve that purpose. I think for many that is not the only purpose. It's to prevent wild swings in your portfolio. As part of a larger fixed income, it can serve that purpose well. In fact, you can argue it's a pretty good fixed income device with IBM's floors for the rates of return.

My Megacorp froze the pension and stopped offering a 401k match in 2012/2009. We were given two replacements, a cash balance plan and a "secure retirement account" (basically another CB plan). And then in about 2016 they brought back a 401k match (up to 3% on 6% employee contributions). The two CB plans have tiers of employer contributions based on years of service, and those plus the 401k match now provide a nearly 14% match for me each year. I just consider the CB plans to be a portion of my pension, and invest everything else a bit more aggressively.

I look at my fixed income stuff (including SS) as the In Case I Blow Everything backup plan. I don't think it's the end of the world to not have 100% control over 100% of my portfolio.

[LeftCoastIV]

Wonder if IBM is planning to profit from the float on this cash.

[UNCHEEL]

There are several ramifications to the change:
- The 1% IBM is moving into the salary plan does not mean everyone is getting raise. It just adds to the pool and IBM management will decide how
to use it.
- The guaranteed rates, currently above the treasury base, helps their legal support argument for the change, but it just means that they have
more cash in hand and think they can get more return on their own investment than is paid to employees. Meanwhile, employees lose out on
the potential to beat those rates on their own investment choices. How that pays off (or not) to all parties depends on that happens with future
markets & rates. But, the odds are with IBM, not the employees.
- Some 401k proponents are concerned that, by eliminating matching, the company is reducing the incentive for employees to save for retirement.
That's probably true, and can result in a problem for marginal situations, but it's really on the employees.
- The lower amount flowing into 401k's will also reduce the amount that employees can borrow for emergencies. Taking loans against 401k's is not
generally recommended, but it IS a loss of some flexibility.

[m0derton]

I've thought of a possible benefit, but likely only for super-savers: not matching would reduce the total amount going into a 401K plan, so a plan with the ability to do the mega-backdoor Roth would enable you to stash much more into the Roth portion.