2million - My Journey to Financial Freedom

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Friday, January 06, 2006

Big Changes Coming in IBM's Retirement Plan

Yesterday, IBM announced a major program change to its retirement plan. It will begin freezing its pension plans 12/31/2007 and move all retirement contributions to its 401k plan.

In today's plan I get an automatic 5% pay match to IBM's cash balance retirement plan which sits in an account and earns an annually fixed yield equivalent to 1-yr Treasury bills (currently 5%). I also get a 50% match on contributions up to 6% of my salary in IBM's 401k plan. If I maximize these benefits (through my own contributions) I will receive an equivalent 8% of my salary in retirement plans.

In the new plan which begins January 1, 2008, I will receive an automatic 2% contribution to my 401k plan regardless of what I contribute. I will also receive a 100% match on contribution up to 6% of my salary in IBM's 401k plan. If I maximize these benefits (through my own contributions) I will also receive an equivalent 8% of my salary in retirement plans.

So is this a good or bad change? Initial review says this is a good change - the total contribution stays the same, but I now will have more control of my retirement money and what it is invested in.

However there are other things to consider:
- As was the case with me 401k contributions this year, I overshot the 401k limit towards the end of the year and wasn't able to make additional contributions in my last paycheck. In the new plan if you overshoot the 401k contribution limit the impact will be twice as severe as in today's plan (missing out on a 6% match, instead of a 3% match).

- What if something unexpected happens in the future and I need to stop contributing money to my 401k plan for periods of time for medical bills or unplanned emergency expenses? While I don't think its necessarily a good idea, I do think that there could be instances in the future where I would want to stop contributing to raise cash in emergencies for periods of time. Under this new plan my retirement plan is impacted more and I would be forced to loose an additional 3% of my match in this case.

Overall I think the change is a good step to make. I think it helps the company better position itself to manage current pension obligations for the future and as long as workers are savings themselves, they shouldn't notice a big difference. However my biggest concern is if a huge company in good financial shape, such as IBM, is realizing how expensive and big of a liability it is to save for the retirement of its workers, how are all the individuals going to be able to do it?


  • I agree with your assessment of the new plan. I like being able to have more control over my money. I also just wrote an article about this over at YPFB.

    The comments/questions that I had were:
    1) Will this automatic part of the payment always be there?
    2) When does that automatic payment get paid to us?
    3) I thought that we only made something like 3% on our pension last year? They should have just put it in Emigrant Direct and made 4%.

    By Blogger RS, at 11:41 AM  

  • Would just like to pass along a rumor that I heard today (and it could be just that). I heard that this changing of the pension plan will have a large negative effect on IBM's bottom line in the fourth quarter and that could really hurt our variable pay (IBM bonus system) this year.

    By Blogger RS, at 2:23 PM  

  • I am an year+ old IBM employee ( joined in Oct 2004 ) but I have not seen any pension contributions. Which site do you check that? Not Hewitt ( i.e $401K) right?


    By Anonymous Anonymous, at 11:09 PM  

  • So I have a Qn..

    I am planning to pump as much as possible into 401K and finish up with my contribution within first 3 months. Will I miss all the matching? I thought it's 6% irrespective of whether you spread it out or front load? Please explain.

    By Anonymous Anonymous, at 11:13 PM  

  • Yes - my understanding is you will loose your matching - I lost some in 2005 because I hit the contribution limit too early.

    By Blogger 2million, at 9:53 AM  

  • TIA,
    The site to check is www.netbenefits.com.

    By Blogger RS, at 4:11 PM  

  • My hubby also works in ibm. he didn't contribute to 401k in the first month due to the password issue. it's bad when you input incorrect passwork for several times, you must wait a mail to get the new one. We thought we might lost the company match for that period although we made it up at the end of last year. To my surprise, i checked my hubby's 401k and found that we got some so-called company match in Jan. 10. The amount seems to be what we missed in the first month. I don't know if it's something else or it's really the catch up. By the way, my hubby is a new hire.

    By Blogger circle, at 6:11 PM  

  • Just a quick comment...

    If your pension plan is like most others, the payout is guaranteed at until death. The tricky part about is the amount of growth you believe that you will get with the extra money in the 401K that IBM has decided to contribute. Typically, it will not equal the amount that the pension will pay over time. With the increase in lifespans of people, I think if you do the math, you will find that the company is screwing you out of alot of cash. I did the same calc with my company (they also ended out pension plan and "compensated" by giving us more money in our 401K). But my math, I am getting screwed out of about $200K over time.

    By Anonymous Anonymous, at 2:58 PM  

  • What if something unexpected happens in the future and I need to stop contributing money to my 401k plan for periods of time for medical bills or unplanned emergency expenses?

    You borrow against your 401, you should always continue to put in the maximum amount.

    By Anonymous Anonymous, at 8:51 PM  

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