IBM Reopens Its Frozen Pension Plan, Saving the Company Millions

Traditional pension plans haven’t come back. But the news from IBM might lead you to think so.

Last month, IBM thawed out a defined benefit pension plan that it had frozen more than 15 years ago. The company has also stopped making contributions into employee 401(k) accounts.

These moves are startling, because, on the surface, at least, IBM seems to be reversing a decades-long trend of corporations moving away from traditional pension plans. With the old plans, companies promised to pay employees retirement income that rewarded them for long years of service. But these plans were expensive, and IBM and hundreds of other firms instead began to emphasize 401(k)s that moved the primary responsibility for saving and investing to workers.

IBM’s new approach is significant because the company has been a leader in employee benefit policymaking. What it is doing now is no simple return to the classic cradle-to-grave benefits system. In fact, IBM’s new pension plan isn’t nearly as generous to long-tenured employees compared with its predecessor.

The move has real advantages for some people who work at IBM, particularly those who put little or no money of their own into 401(k)s and who stay at the company for a relatively short while.

Crucially, IBM’s maneuver is likely to be wonderful for its shareholders. The company is saving hundreds of millions of dollars a year by stopping contributions to employee 401(k) accounts. And it doesn’t need to put any money into the pension plan this year — and, probably, for the next few years — because it has plenty of money already in it. On a purely financial standpoint, IBM is improving its cash flow and bottom line.

For a small but important subset of companies — those with fully funded, closed or frozen pension plans — IBM’s move could be a harbinger of things to come, pension consultants say. IBM is using a surplus in its pension fund to simultaneously change its employee benefits package and help the company’s finances.

“You’ll be seeing more of this,” said Matt Maloney, a senior partner at Aon. “But I don’t think it’s really a watershed event because not that many companies are in a position to do what IBM is doing.”

Retirement Basics

IBM calls its new pension plan a “retirement benefit account.” It is nestled, legally and bureaucratically, within the old version. Because it’s part of the defined benefit pension plan, the new plan is backed by the government’s Pension Benefit Guaranty Corporation, which will pay benefits, up to certain limits, if the plan runs out of money or the employer goes out of business.

Unlike 401(k)s, in pension plans the employer makes “the contribution, owns the assets, selects the investments and bears the investment risk,” said Alicia Munnell, the director of the Center for Retirement Research at Boston College.

Employees are immediately vested in the new IBM plan, and can take their money with them when they leave, IBM says. So far, so good.

But for many employees, the change comes at a cost.

IBM will no longer make contributions to employee 401(k) plans. Until now, it made 5 percent matching contributions and 1 percent automatic contributions, according to internal documents that were posted publicly and whose authenticity Jessica Chen, an IBM spokeswoman, confirmed. That money and those accounts are owned by employees. It took a year for employees to be vested in those accounts.

The new retirement benefit accounts are part of a so-called cash balance plan, a pension plan in which the employer controls how the money is invested.

In the new IBM accounts, employees receive credits equal to 5 percent of their salary — 1 percentage point less than the company’s maximum contribution to the 401(k) used to be. For the first year only, employees are getting a 1 percent salary bump to make up for the discrepancy in contributions between the old 401(k) and the new retirement accounts.

Risk and Return

IBM documents show that in the new accounts, employees are guaranteed a return of 6 percent interest for the first three years — an excellent rate under current market conditions.

From 2027 through 2033, the return is likely to fall. Employees will receive the yield on 10-year Treasuries, with a floor of 3 percent. From 2034 on, there is no floor. So if Treasury yields fall below 3 percent — as they were most of the time from late 2008 through early 2022 — a paltry return is all that employees will get.

Remember, in a 401(k), employees are free to invest as they like. People with a long investing horizon can favor the stock market, which tends to produce higher returns than government bonds over long periods.

Although IBM workers can keep their 401(k)s and continue to add money to them, they won’t have the…