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Retirement Planning > Retirement Investing

Big Blue Closes Defined Benefit Plan To New Workers

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NU Online News Service, Dec. 9, 2004, 9:18 a.m. EST

International Business Machines Corp., Armonk, N.Y., says it will resolve a long-running dispute over pension plan design by shutting its cash balance pension plan to new employees.[@@]

IBM will offer the new employees a 401(k) defined contribution plan instead.

IBM angered some employees by converting to a “cash balance” pension plan from a traditional defined benefit plan in the 1990s.

Although IBM came up with several strategies for protecting the interests of older pension plan members, it has been in court defending its cash balance plan for years.

The company says that, even though it is closing its cash balance defined benefit plan to new employees, it still is committed to the defined benefit pension system.

IBM is changing its retirement benefits to make them more similar to the retirement benefits that competitors are offering, the company says.

A sponsor of a traditional plan bases contribution calculations on a formula that assumes each employee will spend many years with the company. Contributions for employees with more years of service are higher, because of an assumption that contributions made in later years will have less time to earn interest or other investment returns.

A sponsor of a cash balance plan makes enough contributions to define a certain amount of benefits for each plan member each year. Higher-paid employees may get bigger contributions, but the sponsor makes few or no adjustments for the plan member’s age or length of service.

Opponents of the cash balance approach say it may discriminate against older employees by reducing their final benefit totals.

Supporters say the approach is more fair for most employees, because it accommodates the needs of employees who may switch employers many times during their careers. A cash balance plan also guarantees that employees will receive a certain minimum amount of benefits when they retire. Because federal law treats a cash balance plan as a defined benefit plan, the plan benefits are insured by the Pension Benefit Guaranty Corp., supporters say.

Members of 401(k) plans have no guarantees other than the investment guarantees built into certain investment options, cash balance supporters say.


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