IBM’s 401(k) to Pension Shift Is Hard Act to Follow for Plans

IBM‘s unexpected move to shift its corporate workers from a 40-year-old 401(k) to a cash-balance pension has piqued the interest of other corporate plan sponsors, but it’s highly unlikely to herald in a revival of traditional defined benefit plans in 2024.

The multinational software company—historically a Big Tech leader in corporate benefit adjustments—started off the new year by dusting off its old, frozen cash-balance pension plan and enrolling tens of thousands of 401(k) participants. Instead of matching contributions, the company will fund a salary-adjusted 5% credit per worker in its new “Retirement Benefits Account.”

Big Blue stands to save more than $3.6 billion by tapping the money it built up in the older plan. That’s enough to cover pension obligations for at least the next six years, according to data the company filed with the US Labor Department.

It’s a major development for the traditional pension industry that has seen an acceleration in freezes, buyouts, and risk transfers over the last decade, accounting for a $1 trillion reduction in assets since 2013, according to the Congressional Research Service. IBM froze its own plan between 2004 and 2006 and completed a partial, $16 billion risk transfer with Prudential Financial Inc. and MetLife Inc. in 2022.

Despite the hype, benefits experts say the move says less about the merits of a pension and more about single-employer pension plan market funding. Corporate pensions closed 2023 at more than 102% funding, a two-year long surplus, according to a Milliman Inc. analysis. A decade ago, funding percentages averaged around 80%.

“I don’t think it says much at all about how retirement should be provided,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “It’s more a financial trick that companies that have over-funded plans can use to get at these frozen or jailed or trapped assets.”

Mixed Interest

Companies looking to replicate IBM’s savings strategy need to have a competitive reason to take on the additional market risk and a well-funded pension plan to spare. After they’ve spent trapped assets, they have to be prepared to cover new pension obligations from corporate revenues or put their employees through the disruption of another major retirement plan change.

That narrows the candidates that would replicate IBM’s move to just a handful of major US energy, finance, tech, and health-care firms, said Munnell. Until 2022, IBM topped Milliman’s list of well-funded private-sector pensions, meaning its savings represent the best deal a company will get.

Still, the post-pandemic economic recovery has added more than $20 billion worth of trapped assets to the defined-benefit market, Labor Department data shows. Many companies are beginning to express careful interest in giving pensions another look.

Jonathan Price, national retirement practice leader at benefits consulting agency Segal Group Inc., said he has received more calls about unfreezing or starting a new pension in the past year than he has in the past decade.

A new worker joining IBM’s plan could cover 70% of their income in retirement, said Richard Phillips, CEO of ERISA Advisers Inc. Pensions, as opposed to 401(k)s, permanently guarantee a sustainable source of income through retirement, and workers have demonstrated a continued interest in lifetime income options, he added.

“What IBM has structured can work in many environments,” Phillips said. “I’m seeing an incredible amount of interest in this right now.”

Surplus Spend

In a statement, IBM said it is “continually making improvements” to its employee financial well-being program. The new plan allows IBM to “provide a benefit to employees that also helps diversify their retirement portfolios.”

The tech giant had other options for spending its surplus. It opted for a traditional interest accrual rate, but it could have taken advantage of eased regulatory burdens to save itself money and guarantee its workers more, said John Lowell, a partner at October Three Consulting LLC.

Cash-balance plans are different from other pensions in that they are calculated per-participant, somewhat like a 401(k). Instead of relying on participant contributions and matches, employers make pay credits based on salary and interest credits linked to market indices.

The SECURE 2.0 Act (Pub. L. No. 117-328) Congress passed in December 2022 and guidance (IRS Notice 2024-2) the IRS issued in December gave employers the freedom to set higher accrual rates when conducting equity tests on benefit levels.

IBM will guarantee 6% interest for the first three years of its plan, but that will eventually decrease to a 10-year Treasury rate average. The current rate is just below 4%.

Lowell said IBM could have opted for a variable rate that gave its workers a better chance of accruing savings without failing its equity backloading testing under the new IRS rules.

“I would have managed it differently,” Lowell said.