take biggest hit
IBM sharpens focus on 401(k)
By Brian Bergstein, Associated Press
The Arizona Republic
Monday, January 9, 2006
BOSTON - IBM's freeze of its otherwise healthy U.S. pension
plan will reverberate through industry not only because it
illustrates the erosion of traditional benefit packages, but
also because it sharpens the focus on 401(k) plans as a
source of retirement security.
With the 401(k) increasingly becoming a de facto pension for
many American workers, several experts suggest reforms are
International Business Machines Corp.'s announcement last
week drew attention because the security of the technology
giant's $48 billion U.S. pension fund stands in contrast to
endangered plans run by airlines and other large companies.
However, retirement analysts found IBM's enhancements to its
401(k) more notable, saying the company is transplanting
some virtues of traditional pensions that generally have
been absent from newer kinds of plans.
When the pension freeze takes effect for IBM's 125,000 U.S.
employees in 2008, IBM will match their 401(k) contributions
dollar-for-dollar on up to 6 percent of salary; previously
the match had been 50 cents on the dollar, a common figure.
Perhaps more importantly, the company will automatically
contribute an extra amount equal to 1 to 4 percent of
employees' pay into their 401(k) plans in an attempt to make
sure every employee participates.
Those notions of universal participation and automatic
security were hallmarks of traditional pension packages
known as "defined-benefit" plans.
Newer plans such as 401(k) packages are known as
"defined-contribution" plans because that's all the company
is promising - to contribute a set amount, if it offers a
match. The size of the retirement benefits depend on the
vagaries of investment portfolios, shifting the risk from
the company to the employee.
In 1985, 89 percent of Fortune 100 companies offered
traditional pension plans, but that had fallen to 51 percent
by 2004, according to Watson Wyatt Worldwide, a
human-resources firm. Some 11 percent of the plans were
frozen or terminated for new employees, up from 5 percent in
Although highflying returns in pension fund investments
sometimes make defined-benefit plans less expensive to run
than 401(k) plans - and pad a company's bottom line -
companies also decry the year-to-year uncertainty of whether
they'll have to contribute to their pension funds in the
markets' down years.
These costs and complexities, the companies argue, are a
competitive disadvantage in industries in which nimble
startups aren't saddled with pension obligations.
Not surprisingly, many of the blue chip names that have
closed pension funds to newly hired workers or ended
accruals in plans altogether, such as IBM, Hewlett-Packard
Co., Motorola Inc. and Verizon Communications Inc., are in
technical fields teeming with younger, pension-less rivals.
IBM, which had already closed its pension plan to workers
hired after 2004, said it expects to save up to $3 billion
in pension-related costs through 2010, as the company can
stop accounting for benefits that would have accrued after
the freeze takes effect. IBM estimated that 19 percent of
its U.S. employees would see benefits eroded because of the
changes; those people will see, on average, a 12 percent
drop in benefits, the company says.
Another reason for the rise of 401(k) plans is legal
uncertainty surrounding a hybrid defined-benefit package
known as a cash balance plan, which lets workers accrue
benefits that they can take with them if they leave a
company, but doesn't pay a lifetime annuity like traditional
A large part of the controversy involves IBM, which like
many U.S. companies moved its employees to a cash-balance
plan in the 1990s. Today 86,000 IBM U.S. workers have such a
package. But some older workers complained that the packages
trimmed their expected pension benefits, and IBM was sued
over its plan. Big Blue settled the case but is appealing a
verdict that it committed age discrimination.
But while 401(k) plans carry much less baggage for
companies, they also carry far less security for the 50
million Americans who have them. If the plans are going to
all but replace pensions, many experts say, then wider
changes ought to follow.
For example, Medicaid and other public assistance programs
generally exclude pension holdings when determining a
person's eligibility, but defined-contribution accounts such
as 401(k)s are often considered assets that can reduce
someone's ability to get benefits, said Mark Iwry, senior
adviser to the Retirement Security Project and a former head
of private-pension regulation at the Treasury Department.