On January 1, IBM put the brakes on the 5% salary-to-dollar competition for employees in its 401(k) plans and began offering portable “retirement accounts” to most of its U.S. employees.
In other words, the company has eliminated some defined contribution plans and added something like an old-fashioned pension.
While traditional defined benefit pension plans remain in short supply in the private sector, IBM's move could prompt other companies to reconsider their approach to retirement plans.
“We expect continued evolution and even the emergence of additional types of employer-based retirement plans,” said Dylan Tyson, president of Prudential Retirement Strategies.
How IBM is turning on its pension plan
IBM (IBM) contributes 5% of an employee's salary to the account, which guarantees 6% tax-deferred gains for the first three years. And from 2027 to 2034, it guarantees a return equivalent to the 10-year U.S. Treasury rate (currently about 4.2%).
An IBM spokesperson told Yahoo Finance, “It helps employees automatically save for retirement without having to make any contributions, and employees can continue to contribute to their 401(k) plans as they currently do. I can do it,” he said. The new benefit is “stable, well-funded and helps diversify your retirement portfolio.”
When someone moves out of Big Blue, the money saved in the account can be paid out in a lump sum (and rolled over into an IRA or 401(k) plan) or as an annuity paid monthly. Interest in the life of the participant or his or her survivors.
While this setting may seem familiar, the concept is not entirely new. IBM accounts are like traditional defined benefit (DB) pensions. Employers contribute, invest, and manage retirement funds for their employees, and employees receive guaranteed monthly checks for the rest of their lives.
However, a particular plan launched by IBM is known as a cash balance plan and is a little different from traditional DB plans. In a cash balance plan, employees do not have personal accounts. Instead, the plan “defines” benefits to be paid out of general assets.
For many employees, this guaranteed return on the account without employee involvement can be reassuring for several reasons.
First, sweating market fluctuations is part of the territory for 401(k) retirement savers who watch their balances rise and fall, often with little knowledge of how to make adjustments.
Second, without some encouragement, it is difficult to get people to save at all for retirement plans. It wasn't easy when I was early in my career because I wasn't making much money and felt like I needed every cent to cover my bills. Fortunately, thanks to my father's nagging, I was able to get started. And when my pre-tax funds were cut off, I quickly realized I wasn't really missing out on it.
Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) plans to automatically enroll employees with a minimum contribution rate of 3%. However, employees can opt out.
This approach is already making a big difference in the amount people can fund for retirement. According to Vanguard's 2023 “How America Saves,” the average total contribution rate for employee retirement accounts is 11% of salary for employees enrolled in automatic enrollment plans, and for employees hired on a voluntary basis. This is nearly 40% higher than the 8%. report.
read more: Planning for Retirement: A Step-by-Step Guide
Plans with automatic enrollment had higher total contribution rates across all demographic variables, with the largest differences among younger, shorter-tenured, and lower-income employees.
Pensions as a recruitment tool
IBM's move capitalizes on employer benefits, which are increasingly recognized as perks that job seekers seek.
“After decades of declining pension benefits, pensions can help employers stand out among their peers,” said Daniel Chao. glass door's chief economist told Yahoo Finance.
“Employees consistently rate benefits packages with pensions as better than 401(k)-only packages,” he said.
Further evidence of appetite for old-fashioned retirement accounts: According to a government survey, about 4 in 10 workers with a 401(k) prefer investments that provide guaranteed income in retirement. options” are the most valuable to improving their plans. Employee Benefits Research Institute (EBRI) and Greenwald Research.
“We've received more calls about pensions in the past year than we've had in the last 10 years,” said National Superannuation Leader Jonathan Price. seagullThe company, a benefits and human resources consulting firm, told Yahoo Finance.
“Recruitment teams recognize the important role pensions play in attracting top talent,” he said. “I expect at least two more companies to announce their own pension plans in 2024.”
Briefly explain the history of pensions
Let me go back and briefly summarize this seismic shift in the retirement world.
More than 20 years ago, many employers began eliminating traditional defined benefit pension plans and replacing them with 401(k) retirement plans in which employees make their own contributions, matched by a small amount of money from the employer. Currently, only 11% of private employers offer pensions. 35% Early 90's. According to , more than half of private sector employees have their 401(k) plan. Bureau of Labor Statistics.
While pensions remain dominant among state and local employers in the public sector, they have all but disappeared in the private sector.
That's why IBM's move caused an uproar in the retirement industry.
“This idea has been discussed for over a year. Defined benefit (DB) pension freeze “A plan can unfreeze for several reasons,” said Mark Miller, retirement expert and author of the book. Retirement Ribouthe told Yahoo Finance. “First, many DB plans are overfunded at this time, so dollars are available. Second, pensions are perceived as a desirable perk in the talent war. Finally, many retirees More and more employers are recognizing that Americans are having a hard time generating adequate retirement benefits from their savings,” and Social Security. ”
But don't expect big changes just yet. “Plan sponsors are approaching this carefully,” Miller added.
It's worth noting that IBM is typically a leader in the corporate world when it comes to employee benefits. “In fact, IBM was one of the first large employers to announce a move to a fully defined contribution (DC) retirement plan in 2006,” Miller added. “And that turned out to be a precursor to a sharp decline in the number of employers offering traditional pensions in the years that followed.”
Retirement preparation crisis
One of the factors behind the interest in defined benefit plans is that many workers face decades of retirement with little savings.
Meanwhile, the average employer-sponsored 401(k) balance was $107,700, according to Fidelity Investments. report A paper published last fall found that the majority of working Americans simply don't save. In 2022, nearly three-quarters of non-retired adults had at least some retirement savings, but about 28% had none at all, up from 25% in 2021. report By the Federal Reserve System.
At the same time, the retirement gap is worsening for older Americans with low wages. A recent study found that in 2019, only one in 10 low-income workers between the ages of 51 and 64 had put something aside for retirement, compared to 2007. In 2017, it was one in five people. analysis According to the U.S. Government Accountability Office.
And let me raise another red flag. The number of Americans turning 65 this year will be the largest jump in U.S. history, reaching about 4.1 million. This is called the “Peak 65 Zone.” new report From the Alliance for Lifetime Income.
From now until 2027, more than 4 million Americans will turn 65 every year, or more than 11,200 people every day.
What's so attractive about being 65 years old? Generally now eligible for Medicare health insurance, many workers delay retirement until they no longer need employer-provided health insurance, potentially triggering a more formal retirement.
For many workers, that means putting their best-earning years in the rearview mirror and starting to tap into their accumulated retirement savings and Social Security. This is a problem for Americans who don't save enough or lack the financial acumen to figure out how to spend their savings without outliving their nest egg.
“This country's public and private sector retirement systems have become outdated and focused solely on saving a lump sum rather than the actual income needed for a retirement that may last 20, 30, or even 20 years. The now-outdated retirement planning approach that we relied on is now obsolete. It will take many more years,” said Jason Fichtner, chief U.S. economist. Bipartisan Policy Centerhe told Yahoo Finance.
“Real income” in retirement is exactly what IBM's plan promises, which is why it's garnering so much attention.
read more: How much money should I save by the age of 40?
If it's not a pension, it's similar to a pension.
Still, Tyson said no one is predicting a “massive resurgence of traditional pensions.”
Jessica Sclafani, Senior Defined Contribution Strategist T. Rowe Pricedescribed IBM's new account as an “interesting structure” but expected adoption of such plans to be limited.
Most sponsors of 401(k) and similar plans “are not in a rush to implement retirement income solutions, but they are pretty passionate about the subject,” she added.
For example, Fidelity Investments, which manages more than 43 million participants and 24,000 employers, announced Thursday announced the Guaranteed Income Direct Option, which allows employees to convert all or a portion of their retirement savings from a 401(k), 403(b), or 457(b) account into an immediate income annuity. You will be able to provide things like Payment after retirement.
Keri Dorgan, Fidelity's senior vice president of Financial Wellness and Retirement Income Solutions, said, “The transition to retirement can certainly be an anxious time, and one that many people spend their entire lives in. I'm worried about not having enough money,” he told Yahoo Finance. “This gives employees greater choice in their retirement income planning.”
Kelly Hannon is a senior columnist at Yahoo Finance. She is a workplace futurist, career and retirement strategist, and author of 14 of her books, including “The World's Best.''Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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