One of the biggest private U.S. employers is backing away from the defined benefit pension plan concept.
The employer, International Business Machines Corp., Armonk, N.Y., says it will be freezing its defined benefit pension plan and beefing up its 401(k) retirement savings plan in 2008.
IBM is making the retirement plan changes in part to give the company more predictable retirement plan costs, the company says.
But “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,” Randy MacDonald, an IBM senior vice president, says in a statement.
The White House and Congress have been struggling in recent years to pass a defined benefit pension system reform bill. IBM has been one of the leaders in efforts to persuade officials to come out with laws that encourage employers to stay in the defined benefit plan system.
The changes in IBM’s plans, scheduled to take effect Dec. 31, 2007, will not affect current U.S. retirees, former employees with vested benefits or current employees who retire before Jan. 1, 2008, the company says.
IBM says it will be compensating for the defined benefit plan freeze by increasing 401(k) plan match contributions to as much as 15% of employees’ pay.
IBM hopes to double the current company match to dollar-for-dollar on up to 6% of salary deferrals, and to make additional automatic contributions of 1% to 4% of employees’ pay into their 401(k) accounts, the company says.
IBM will help hourly workers save more by contributing an annual special savings award of 5% of pay to their 401(k) savings accounts, in addition to the usual employer match contributions, the company says.
IBM says it also will make allowances for employees who decide not to contribute to 401(k) accounts, by automatically opening 401(k) accounts for noncontributors and depositing the automatic company contribution of 1% to 4% of the noncontributors’ pay directly into the noncontributors’ accounts.
Making the changes will cost IBM only $270 million but lead to $2.5 billion in savings over the next 5 years, the company estimates.
IBM notes that its defined benefit pension plan has $48 billion in assets and was fully funded in 2005.
The company’s 401(k) plan has $26 billion in assets and is the largest 401(k) plan in the country.