Human Capital & Careers

IBM Freezes Its Defined-Benefit Plan

Meanwhile, Big Blue aggressively expands its 401(k) benefits to ease the transition.
Stephen TaubJanuary 6, 2006

IBM officials announced sweeping changes to the company’s pension plans that will save the corporation $2.5 billion to $3 billion by 2010.

The changes are part of IBM’s global strategy of shifting the future focus of retirement benefits from traditional defined-benefit plans to 401(k) defined-contribution plans, which are more a deferred savings account than a classic pension plan. IBM will stop the accrual of future benefits in the company’s defined-benefit pension plans as of December 31, 2007, say officials.

Meanwhile, IBM will aggressively expand its 401(k) benefits. For instance, the company will provide current pension plan participants with an annual company-funded contribution of as much as 10 percent of their salary. This new benefit will be part of IBM’s new 401(k) Plus Plan and requires the company to double the current dollar-for-dollar company match to a maximum of 6 percent of salary deferrals, and make additional automatic contributions of 1 percent to 4 percent of employees’ pay into their 401(k) accounts.

Further, IBM will provide an annual special savings award of 5 percent of salary to participants’ 401(k) savings plan.

Officials also said the company will automatically open accounts for employees who do not contribute to the plan, ensuring 100 percent employee participation in the 401(k) savings plan. IBM will deposit the annual automatic contribution of 1 percent to 4 percent of an employee’s salary directly into the accounts.

According to IBM, the changes do not affect its 125,000 current U.S. retirees, former employees with vested benefits, or employees who retire prior to January 1, 2008.

IBM’s move is part of a larger trend among U.S. companies to scale back defined-benefit plans. According to Bloomberg, IBM’s pension deficit, which was about $7.4 billion at the end of 2004, ranked fourth-highest in the country, behind Ford Motor Co., Exxon Mobil Corp., and General Motors Corp.

“In recent years, IBM has been following a global strategy to move toward defined-contribution retirement plans for both existing employees and new hires,” says Randy MacDonald, IBM senior vice president, human resources. “These changes are consistent with this direction and will give us more predictable retirement plan costs, along with benefits that remain ahead of — but more in line with — our competitors.”

The changes made to its U.S. plans, as well as other modifications under consideration at IBM companies in other countries, will result in worldwide retirement-related expense savings of $450 million to $500 million for 2006, noted documents filed with the Securities and Exchange Commission.