The big change that IBM is making in its retirement plan is a lot simpler than many people are making it out to be.
And a lot more cynical.
The company says it is merely changing the benefits terms, replacing the 401(k) match with an alternative benefit—an automatic contribution into a pension scheme.
The reality? IBM is saving itself up to half a billion dollars a year in cash costs—yes, really—by completely canceling its contributions to employees’ 401(k) accounts.
It is replacing those contributions with noncash “credits”—in other words, IOUs—in a separate pension plan. Those credits will earn a low rate of interest, which the employee won’t even see until they quit, retire or get laid off. The employee will miss out on stock market participation, which is where you make the big bucks. Oh, and the maximum contribution an employee can get each year is being slashed by 17% in value, from 6% of salary to 5%, as well.
“Starting Jan. 1, 2024, IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account,” company spokesman Tim Davidson confirmed to us in an email. “The RBA will replace current company contributions to the IBM 401(k) Plan.”
Samantha Prince, a law professor at Penn State Dickinson Law and an expert in company benefit schemes, says the new one should be excellent for IBM’s cash flow. “This move will save IBM lots of money,” Prince tells me. “IBM won’t have to make 401(k) contributions anymore.” Those contributions cost the company $489 million last year, she adds, citing regulatory filings.
For context, that was equivalent to nearly 4% of the company’s operating cash flow.
“Previously IBM had a current obligation to put money directly into employees 401(k) accounts,” Prince says. Now, “instead of injecting cash into their accounts, it issues “credits” to be converted to cash later.” In this sense, she adds, “one can view this as a loan from the employees to IBM.”
Under the old system, when IBM put money into employees’ 401(k) plans, the employees were able to invest it in stocks (and other risk assets, such as high-yield bonds). This is where you make the real money over the long term, which is why everyone is advised to keep the bulk of their retirement savings there. Over the past 100 years, stocks have earned investors an average of about 9% a year.
What will employees get in this new scheme? These new retirement “credits” will earn just 6% a year for the next three years, the company says. That’s not that much more than you can get in a federally-guaranteed certificate of deposit at a bank.
And it turns out, that’s just a teaser rate. IBM declined to comment on what will happen after three years. Prince found the details in the IBM pension plan documents: After 2026, it says, the company will credit employees with a rate of interest equal to that on 10 year U.S. Treasury bonds.
She had expected it would at least be the Treasury rate plus 1%, she says “But [it’s] not even that ‘generous.’”
Treasury bonds have underperformed stocks by a country mile over any significant period of time. They are held for stability and liquidity. They are not growth assets.
In other words IBM under the new plan will still be making contributions to employees’ retirement accounts—but it will be forcing them to lend the money back to the company, on terms usually reserved for the U.S. government.
At least IBM will be required by federal regulations to keep the plan adequately funded. The new scheme will be “strictly regulated by federal pension law (ERISA) including with respect to plan funding,” a company spokesman tells MarketWatch. He added: “Under the plan, IBM bears 100% of the risk and must be prepared to pay the benefit at time of employee separation. The RBA is immediately vested, and at separation, fully portable. “
While employees will lose out from this retirement benefit switcheroo, IBM should get a lovely boost to its cash flow and its stock price. Who benefits from that? Look no further than the honchos in the C-suite, whose lavish bonuses are tied to… er… the company’s cash-flow and stock price. Chief among them is chairman and CEO Arvind Krishna, who’s pulling down $17 million a year in salary, bonuses, performance awards, stock-related incentives and the like.
Who says IBM can’t be generous?