{{ In November, IBM announced a significant change to the way it structures its retirement benefits. The company is a benefits bellwether in corporate America. It was one of the first to offer a 401(k), in 1983. IBM is keeping its 401(k) plan, but beginning next year, it will eliminate matching contributions of up to 6 percent. Instead, it will contribute 5 percent of each worker’s pay into a defined-benefit instrument. }}
intercst
Seems that would double IBM’s plan administration costs.
Maybe IBM’s people are telling them their 401k zux? If they have had a 401k since 83, people are retiring now, that paid in to it for 40 years, an entire, adult, working life, so they have some hard data on the adequacy of the stash in the 401k?
Or, IBM is using a defined benefit pension to improve employee retention? A 401k does nothing for retention, because people can take their money and leave anytime.
Or, maybe IBM management are a bunch of “wokies”, who don’t realize employees are “a cost to be minimized”?
/sarcasm
Steve
Or they have determined that most of the new employees don’t last more than 5 (or x) years and have set the vested date at one month prior. So the money paid in to the plan comes back to the JC’s!
Now look what you’ve done - I’m now a conspiracy theorist!
JimA
Or they are preparing for an expected future bankruptcy–and not having to pay for (or terminating) future benefits for retirees is planned to be a huge source of cash for management. Require 100% cash-funded account be created at a separate trustee so the workers actually get the “full pay” they earned while working there.
Defined benefit pension was part of UAW negotiations. Not sure if that is in the agreement. At least it gets attention in the news. And can be a reason to join a union.
One of my coworkers at RS had previously worked at K-Mart. K-Mart, at that time, used 10 year “cliff vestiture”. He said it was routine that, once an employee passed his 8th anniversary, he started to get the treatment, make his life a living he!! intended to get the employee to quite, before he’s vested, so the company can claw back the money and call it “profit”. iirc, “cliff vestiture” is now outlawed, due to the commonality of that sort of abuse, replaced by step vestiture, over a limited number of years.
You aren’t paranoid if they really are after you.
At the other end of the scale, was RS, before management went Shiny. I put 5% of my pay into RS’ plan. The company matched 80% of what I put in, with 100% immediate vestuture. All the money went into Tandy stock. It was a great deal, as long as Tandy stock kept going up. When management went Shiny in the early 90s, that plan was taken away.
Steve
Going back to the 1990s when elimination of pension plans became popular, it’s worth reviewing why.
Though the tendency towards short job tenures was nowhere near as extreme as it is now, executives saw the writing on the wall. Employees did as well. Most defined pensions had steep “cliffs” – requiring 15 or even 20 years before the final payout amounts began to grow appreciably. Employees looking at a job market and corporate culture where they couldn’t imagine staying ten years much less 20 began viewing traditional pensions as worthless.
Switching to 401ks was viewed as a win-win by employers. They could offer a different benefit to employees expecting short tenures that looked like something of value and looks “portable.” By partnering with firms like Fidelity, they could do so at less administrative cost – to the company, not to the employee. By forcing all current employees over to 401k plans, they could eliminate the hassle of managing a defined pension plan in parallel as well. By switching people over during a hot economy, eliminating company pension obligations helped offload company balance sheets under the most advantageous terms possible.
The problem with employee churn has gotten worse over the last thirty years so that motivation to adopt 401ks remains for both employees and employers. So what is changing to trigger attempts to go back?
First, 401k plans provide zero value if employees don’t participate. We’ve had other threads on efforts to – ahem – “encourage” employees to participate via auto-enrollment, etc. While financial literacy remains at appalling levels in America, I don’t think ignorance about the benefits of company matches and tax-deferred growth is the cause of low participation. Low participation is primarily due to the lack of “household free cash flow”. Daycare is more expensive than private school tuition. Rudimentary cars are $32,000. Yearly health insurance for a family is nearly $20,000. In that climate, doing without even $150 per pay period (about 5% of an $80,000 income) is impossible for many families.
So what would interest IBM and other companies in re-launching defined benefit pensions? If one assumes employees are not saving on their own via 401ks but still want the perception of some “benefit” given by an employer, is it possible companies are being tempted by the idea of “promising” a benefit requiring payoff decades out to solve employee retention problems in the immediate term in an extremely tight labor market? Of all the things a company COULD do to provide a benefit worth (say) $50,000 dollars, chipping in relatively small amounts NOW to create a promised annuity stream twenty years from now is among the least impactful methods of doing so to current cash flows. And of course, one can always count on stock market gains of 10% per year compounded over twenty years to make up for any shortfalls. And if the company goes under? Well, that’s what the Pension Benefit Guaranty Corporation is for – dumping the cost of bankrupt pensions on the public. In the mean time, the firms have at least closed the labor gap somewhat by claiming to offer a new benefit.
In short, this trend stinks to high heaven. We’ll be reading about this in probably less than a decade.
WTH
When I left Exxon years ago in 1986, I had 5 years, 6 months service, and pension vesting was 10 years. However, Exxon Management decided to raid the overfunded pension fund and extract the excess capital for use in “general corporate purposes” like big stock options and bonuses for Executives.
Apparently US Labor Dept rules require a company to vest everyone with 5 years service or more when Management raids the pension fund. And Exxon was also required to get an insurance company guarantee that all current vested benefits would be paid. (Though there was little chance Exxon would go bankrupt.)
So management greed got me a pension I otherwise wouldn’t be entitled to.
intercst
Chicken, or egg? Are short job tenures a result of employee fecklessness? Or a function of the “JCs” taking away any reason to stay with the company, and otherwise treating the employee as expendable meat?
Steve
The other problem with defined benefit pension plans is the impact of stock price on earnings. If the portfolio the company maintains to fund pensions does well the company can claim the surplus as earnings. But similarly if the value falls the company is required to make up the difference and earnings fall.
Bottom line is defined benefit pensions put the employer’s earnings at the mercy of the stock market. That is an element beyond the control of management. Makes it difficult to steadily increase earning, driving up stock price and paying big bonus to executives.
Companies do not like it. And will avoid it if they can. Defined contribution avoids this problem. Companies like it. But many spend the money and end up with little more than Social Security in retirement. Not anything like the UAW members who often owned big trucks and a second home in vacation land somewhere. No wonder they want the glory days back.
As an old dinosaur, my WeCo defined pension, such as it is, has served, for me and fellow CWA Union folks through the transition to Lucent, but there’s were I left the workforce, nearly 40 years was enough, a force reduction offer came along, I didn’t think there would bee any more, my nicely trained supervisors, managers and even the District level had bailed, so I was facing long haul transfers, most likely, so I jumped on it… '02 and out… After thatLucent folded, taken over by Alcatel, until they, too, folded, picked up by Nokia! And to this day that Plan has transferred, stayed stable, they peel off a bit from time to time, but the retirees have also shrank a bit, it’s a separate fund from management, but so far so good…
Management, which I dodged, has been screwed over, too away medical, spousal, death benefits over the years, a buyout was offered to all of us a few years ago, it was fair, but I couldn’t replace the medical, dental with any investment I saw, so I turned it down. Management, already doing their own medical, most took the washout, moved on… The PBGC will cover my defined pension if it ever does collapse, might have to delve into investments, but no sign of concern so far…
The world of long term employees is no more it seems, maybe manufacturing, but making widgets day after day isn’t for me… WE/LU gave me changes, few long term projects, always new tech toys to figure out, make work, then on to the next…
No regrets… Well, other than LU stock losses, but AAPL more than made up for that…
Onward!
Yes, and people have learned the hard way, the employer can cancel its pension plan at any time and pocket the cash leaving you with nothing. At least with a 401k the funds are protected.
Yes, pension guarantee is available from the feds, but often the max is far below what the company promised. It has happened again and again. When the company declared bankruptcy, the pension was canceled and people lost most benefits. Bethlehem Steel comes to mind. I’m sure there were others. Someone mentioned another one recently. Solutia.
Correct, the PBGC covers us non-suits, but management if it went that far would face cuts, they made more, had more stress, I and my supervisor did comparisons, when you counted all the hours he put in, often his hourly rate was below mine… Once we were doing a lot of OT, my take-home agitated him a little, but he had other perks, freedoms…
Avaya folks were trapped, lost it all, the PBGC covered the techs, but management likely took a bath… Telecom just isn’t what it used to be, solid, dependable for all the Ma Bell folks… Poof, gone…
I’m a CWA retiree, been out since 2018. I took the pension instead of lump sum because of the desire to not have everything tied up in the stock market. Was told I was crazy by a few of my coworkers, but no regrets at all with that move. Having a steady income makes me a better investor,don’t get shook out when the market is roiled. And the market has definitely seen some turbulence since 2018,lol. Have not taken SS yet, won’t be at full retirement age for a couple of years yet. Might not wait till 70, I’ve run the #'s to exhaustion and anything close to FRA looks good ( just before age 67 ).
Always struck me as funny how the top corporate echelon like Jack Welch, or Randall Stevenson, had awesome pensions as part of their compensation packages. Pensions were important to them, but they screwed their lower level management people out of a pension, forced them to rely on 401k’s. Was always thankful that the Union did not let that happen to us.
A lot of those “JC” retirement packages include health insurance, another retiree benefit the “JCs” took away from everyone else that didn’t have the protection of a union.
Then there is the “change of control” benefit, usually in the millions, if not tens of millions, for the “JC”, while most of the proles get laid off with nothing in the consolidation.
…because, ideology dictates the mission is the care and feeding of the “JCs”, period.
Steve
How can the JCs make good decisions for the shareholders if they are worried about their jobs?
Think of the chaos if the JCs bail for other jobs in the middle of the bankruptcy.
Yes, the shareholder need to keep key personnel on board all the way to the end.
If the people who do the actual work bail, work comes to a halt, but they don’t receive the multi-millions in “retention bonus” that the “JC” does. What the shareholders think is irrelevant, because, in most bankruptcies, the shareholders are wiped out.
The bankruptcy court could as easily appoint a special master to oversee the liquidation. imho, “retention bonuses” are the honchos who drove a company into the ground performing one last looting of the corpse, before the lights go out.
In my experience, they often issue retention bonuses for those who stay to the end. At least professionals but also if its a going business probably to key employees.
In a bankruptcy, you can bet the first funds go to the law firms.
Yes, creditors probably ask the judge to review every expenditure and cancel whatever they can so creditors get more of the funds they are due.
One of the places I worked didn’t go BK, but bought out. Did I get anything in severance, or any of the accrued vacation time I was never able to use? Nope. Not one penny. The “JC” kept all the loot from the sale for himself.
Steve
And when you get to be boss of your own company, you can do it better.
Sounds like you learned from the experience.