Retirement

IBM Reopens Defined Benefit Pension Plan—Will Other Corporates Follow?

After years of the decline of defined benefit (DB) plans for employee retirement, it was surprising to see IBM announce the reopening of its DB plan. Meanwhile, we continue to see headlines on the paucity of retirement savings workers have in their largely self-funded defined contribution (DC) plans.

IBM’s traditional DB pension plan had $25.1 billion in assets in 2022. And IBM’s DC 401(k) Plus Plan had $53.2 billion in assets, according to the latest 11-K statement.

The announcement caught the attention of many, as IBM, known for being a leader and changemaker in retirement funding, was involved. Was IBM reversing the decades-long trend of corporations moving away from traditional DB pension plans?

Last month, IBM reactivated a defined benefit pension plan it had frozen in 2008. IBM also announced it has stopped making contributions to employee 401(k) accounts. Instead, they established new retirement benefit accounts called cash balance plans, which are pension plans where the employer controls how the money is invested. For IBM, they are funding 5 percent of an employee’s salary for which the employee will receive a 6 percent return for the first three years, then the yield on 10-year treasuries with a floor of 3 percent until 2034, then the yield on 10-year treasuries with no floor thereafter. What is going on here?

A full discussion of DB and DC funding history is beyond the scope of this column. But a few paragraphs of context around the rise and fall of DB plan funding might prove helpful.

Who still has a DB plan today? According to the Bureau of Labor Statistics, only 7 percent of private industry nonunion employees were participating in defined benefit plans as of March 2022. Contrast this to 1975 when 71 percent were in DB plans (see chart below). Today, unionized workers in both the public sector (such as federal, state and local government workers and teachers) and the private sector (such as the autoworkers), as well as active-duty military members with 20+ years of service, are the most likely workers to still have a DB plan.

Many corporate employers started making the shift from DB plans to DC plans in the 1980s. The major reasons were costs dependent on 1) lengthened participant longevity, and 2) variability arising from investment returns, which sometimes created a significant obligation for additional annual funding from the plan sponsor.

Now back to IBM—of course there is a good economic business reason behind IBM’s action.

IBM’s defined benefit pension plan is now generously over-funded. Its annual report showed a $3.5 billion surplus in the DB plan last year, while it paid $550 million in annual DC 401(k) match contributions. There is no need for IBM to put additional funds into the DB plan, and with its shift in DC policy, it won’t need further 401(k) match contributions either.

Faced with no funding requirements for its over-funded DC plan, IBM can use the $3.5 billion surplus to pay for the 5 percent annual contributions for the new cash balance plan format for at least the next 6 or 7 years—improving its bottom line by $550 million each year. Eventually, IBM will have to make contributions to the plan out of corporate funding, but excellent investment performance could help reduce the annual burden and also lengthen the timing until required contributions.

The improved financial performance is definitely a positive outcome for IBM shareholders. But not necessarily for employees, dependent upon their tenure and robustness of their retirement savings.

Articles You May Like

As their customers age, Macy’s, Kohl’s and Nordstrom are chasing younger shoppers
One-third of single-family homes for sale are newly built, report finds. Here’s what buyers need to know
Here’s how higher state taxes on the wealthy could affect interstate migration trends
These are the 3 big risks to the stock market, economist says
Fintech nightmare: ‘I have nearly $38,000 tied up’ after Synapse bankruptcy

Leave a Reply

Your email address will not be published. Required fields are marked *