IBM bringing back pensions, cutting 401k match

{{ 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. }}

401ks and making everyone their own retirement portfolio manager has probably been a disaster for 90% of the work force. Most workers don’t understand the concept of “skim”, and get fleeced by stock brokers and financial advisors. Only a minority of workers did better investing for themselves.



IBM’s approach is a modern revision - they’re marking a 5% contribution to the pension instead of a traditional long-service escalating process as my former employer (total YOS = 27.5) did. Of course, what they did to get away from the old formula starting in '13 was just, put 4% a year into a cash balance, non-manageable / non-investable - losing value over time.

Despite the skim slam, and whatever NYT’s paywall-hidden slant is, whether it’s more effective or not for the employee depends on how effectively they manage that pension fund, or just make it 0% and “good luck to you”.

Rising interest rates should make pension investing a bit easier. Better returns on low risk, conservative investments. Of course risk takers will get better returns if they do it right.

A online course I took from USC said virtually all government pensions were funded with 30 year US Government bonds. (Actually some 3rd party did the purchasing and balanced bond maturities based on actuarial considerations and retiree ages.) On the assumption pensions work that way the actual cash cost for funding a fixed pension would be lower when interest rates are high for a fixed amount pension.

Certainly in my wive’s case for a bank, the data fits. Annual during her career she got reports say Table one is payout for the various monthly payment amounts. (employee 's life only, employee & spouse, employee with 50% decease to spouse if employee died first). At the end there was a paragraph saying Cash payout option with low interest rate assumption $X and Cash settlement with high interest rate assumption $Y. In every case the low interest rate amount was much greater single payment amount.

Indeed rising interest rates make annuities more affordable and reduce the cash value of your pension fund if you decide to take a lump sum.

Insurance is a Wall Street industry. It’s all about the cost of money (or its future value).

This is exceptionally savvy on the part of IBM for at least one reason:

Highly compensated employees

There are additional contribution restrictions for highly compensated employees as defined by the IRS and your 401(k) plan.

  • They make more than the annual compensation limit designated by the IRS. The limits are $135,000 for 2022 and $150,000 in 2023. The 401(k) plan may also specify that the individual must be in the top 20% of employees when it comes to compensation.

In order for a plan to remain compliant with ERISA, HCEs cannot contribute more than 2 percentage points more of their salary than non-HCEs on average. So if the average non-HCE contributes only 5%, the HCE group cannot contribute more than 7% of their combined salary.

IBM has a high number of HCEs who likely received NO 401k match at all. Be removing the 401k match and instead making it a pension, you can now give those HCEs that 5% extra compensation that they have been missing for years.

Who no longer gets a 401k match for the same reason.