The modification to IBM’s retirement plans is more straightforward than many people may understand.Thank you for reading this post, don't forget to subscribe!
And much more skepticism.
IBM recently announced the termination of conventional company match contributions to worker 401(k) plans. This action will result in substantial cost savings for the company. But what are the implications for its employees?
The company states that it is simply altering the conditions of the benefit by substituting the 401(k) match with an alternate benefit – an automatic contribution to a pension plan.
In actuality, IBM is conserving up to half a billion dollars annually in cash expenditures by completely discontinuing its contributions to employees’ 401(k) accounts – yes, indeed.
These contributions are being replaced with non-cash “credits” – in other words, IOUs – in a separate pension plan. These credits will offer low interest rates that employees will not realize until they leave the company, retire, or are terminated. Employees will miss out on participation in the stock market, where significant returns are achieved. Additionally, the maximum contribution an employee can make each year is being reduced by 17%, from 6% of salary to 5%.
“Starting January 1, 2024, IBM is introducing a new company-provided benefit known as the Retirement Benefit Account for US employees,” company spokesperson Tim Davidson confirmed in an email to us. “The RBA will replace the company’s existing contributions to the IBM 401(k) plan.”
Samantha Prince, a legal professor at Penn State Dickinson Law and a specialist in company benefit plans, believes the new approach should greatly benefit IBM’s cash flow. “This move will save IBM a substantial amount of money,” Prince informed me. “IBM no longer has to make 401(k) contributions.” These contributions cost the company $489 million last year, he said, citing regulatory filings.
For context, this was equivalent to about 4% of the company’s operating cash flow.
“Previously IBM had an ongoing obligation to put money directly into employees’ 401(k) accounts,” explains Prince. Now, “instead of putting cash in their accounts, it issues “credits” to be converted into cash later.” In this sense, she adds, “one could see it as a loan to IBM from the employees.”
Under the old system, when IBM deposited money into employees’ 401(k) plans, employees could invest it in stocks (and other risk assets, such as high-yield bonds). This is where the substantial long-term gains are realized, which is why everyone is advised to allocate the bulk of their retirement savings here. Over the past 100 years, stocks have achieved an average return of about 9% annually.
What will the employees receive in this new scheme? The company states that these new retirement “credits” will earn only 6% annually for the next three years. This is no better than what one would receive from a federally guaranteed certificate of deposit at a bank.
And it turns out, that’s only a teaser rate. IBM declined to comment on the interest rate beyond the three-year mark. Prince found details in IBM pension plan documents: After 2026, the company will issue loans to employees with an interest rate equivalent to a 10-year US Treasury bond.
She had anticipated it to be at least the Treasury rate plus 1%, she notes, “but,” [it’s] Not that ‘liberal’ at all.”
Treasury bonds have outperformed stocks by a wide margin over any significant period. These are maintained for stability and liquidity. They are not growth assets.
Put differently, under the new plan, IBM will still contribute to employees’ retirement accounts – but it will obligate them to lend the money back to the company, on terms typically reserved for the U.S. government.
At the very least, IBM would require federal regulations to ensure the plan remains adequately funded. A company spokesperson informed MarketWatch that the new plan “will be strictly regulated by the Federal Pension Act (ERISA) with respect to plan funds.” Further adding, “Under the plan, IBM bears 100% of the risk and must be prepared to pay benefits at the time of employee separation. RBA is immediately contained, and when detached, is completely portable. ”
While employees will be negatively impacted by this shift in retirement benefits, IBM should experience a significant boost to its cash flow and stock value. Who stands to gain? Look no further than the prominent executives, whose generous bonuses are linked to the company’s cash flow and stock value. Foremost among them is Chairman and CEO Arvind Krishna, who is drawing $17 million annually in salary, bonuses, performance awards, stock-related incentives, and similar benefits.
Who says IBM isn’t capable of being generous?