(Yahoo!Finance) - On Jan. 1, IBM put the brakes on its dollar-for-dollar 5% employee match in its 401(k) plan and began providing most of its US workers a portable "retirement benefit account."
In other words, the company has backed off a portion of its defined-contribution plan and added something more like an old-school pension.
While traditional defined-benefit pensions remain scarce in the private sector, the IBM move could inspire other companies to rethink their approach to retirement plans.
"We expect to see a continued evolution and even the emergence of additional types of employer-based retirement plans," Dylan Tyson, president of Prudential Retirement Strategies, told Yahoo Finance.
How IBM is flipping the switch on pension plans
IBM (IBM) contributes 5% of an employee’s salary to the accounts, which provide a 6% guaranteed, tax-deferred return for the first three years. And from 2027 through 2034, they’ll yield a guaranteed return equal to the 10-year Treasury rate (currently about 4.2%).
"It helps save for retirement automatically, with no contribution required from the employee, and they can continue to contribute to their 401(k) plan as they do today," an IBM spokesperson told Yahoo Finance. The new benefit "is stable, well-funded and also helps diversify their retirement portfolios."
When someone moves on from Big Blue, the money that has piled up in the account can be paid out as a lump-sum amount (and be rolled over into an IRA or 401(k) plan) or as an annuity that pays out monthly benefits for the life of the participant or their survivor.
If that setup sounds familiar, the concept is not entirely new. The IBM account has the ring of a traditional defined benefit (DB) pension: Employers contribute, invest, and manage retirement funds for their workers, who receive guaranteed monthly checks for life after they retire.
The particular plan IBM launched, however, is known as a cash balance plan, which is a bit different than a classic DB plan. With a cash balance plan, employees do not have individual accounts; instead, the plan "defines" a benefit it will pay from its general assets.
For many employees, this account’s guaranteed return without employee involvement could be a relief for a couple of reasons.
First, sweating the swings of the markets is part of the territory for 401(k) retirement savers who watch their balances rise and fall, often with little knowledge of how to adjust.
Second, it’s hard to get people to save at all in their retirement plans without some encouragement. When I was early in my career, it wasn’t easy because I wasn’t making much and felt like I needed every cent to cover my bills. Luckily, I did start thanks to my dad’s nagging, and I quickly realized that I didn’t really miss it when the funds were lopped off pre-tax.
Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) plans to automatically enroll their employees at a minimum contribution rate of 3%. Employees, however, may opt out.
This approach has already made a sizable difference in the amount people have been able to sock away for retirement. The average total employee retirement account contribution rate is 11% of their salary for those in plans with auto-enrollment, nearly 40% higher than the rate of 8% for those hired under voluntary enrollment, according to Vanguard’s 2023 "How America Saves" report.
Plans with automatic enrollment had higher total contribution rates across all demographic variables, with the widest gaps for younger, less-tenured, and lower-income employees.
Pensions as a recruiting tool
The IBM move is tapping into an employer benefit that’s becoming an identified perk sought by job seekers.
"After decades of declining pension access, a pension can help employers stand out among their peers," Daniel Zhao, Glassdoor’s lead economist, told Yahoo Finance.
"Employees consistently rate benefits packages with a pension better than packages with just a 401(k)," he said.
More evidence of the appetite for the old-style retirement account: Roughly 4 in 10 workers with 401(k)s said "investment options that provide guaranteed retirement income" would be the most valuable improvement to their plan, according to a survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research.
"I’ve received more calls about pensions in the past year than I have in the past decade," Jonathan Price, national retirement leader for Segal, a benefits and HR consulting firm, told Yahoo Finance.
"Recruiting teams are recognizing that pensions play a crucial role in attracting top-tier talent," he said. "I predict that at least two more companies will announce their own pension plans in 2024."
A quick history of pensions
Let me back up and share a brief recap of this seismic shift in the retirement world.
More than two decades ago, droves of employers began shuttering traditional defined-benefit pensions and substituting 401(k) retirement plans that employees contributed to themselves with a small match in funds from the employer. Today, just 11% of private employers offer pensions, compared with 35% in the early '90s. More than half of private-sector employees have a 401(k) plan, according to the Bureau of Labor Statistics.
While pensions still rule among public-sector state and municipal employers, they have all but vanished in the private sector.
That’s why IBM’s move has the retirement industry abuzz.
"There’s been talk for more than a year about the idea that corporations who have frozen defined benefit (DB) pension plans might unfreeze them, for several reasons," Mark Miller, a retirement expert and author of Retirement Reboot, told Yahoo Finance. "First, many DB plans are overfunded at this point, so dollars are available. Second, pensions are perceived as a desirable perk in the war for talent. Last, more employers are recognizing that many retirees will struggle to generate enough retirement income from savings and Social Security."
But don’t expect a sea change quite yet. "Plan sponsors have been approaching this cautiously," Miller added.
What’s noteworthy is that IBM has typically been 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 shift to an all-defined contribution (DC) retirement program in 2006," Miller added. "And that turned out to be a harbinger of a plunge in the number of employers offering traditional pensions in the years that followed."
The retirement readiness crisis
One driver behind the curiosity over a defined benefit is that many workers face decades in retirement with a dearth of savings set aside.
While the average employer-provided 401(k) balance was $107,700, according to a Fidelity Investments report published last fall, a large portion of working Americans simply aren’t saving. In 2022, although almost three-fourths of non-retired adults had at least some retirement savings, about 28% did not have any, up from 25% in 2021, according to a report by the Federal Reserve.
At the same time, the retirement chasm is worsening for older, low-wage Americans. In 2019, only 1 in 10 low-income workers between the ages of 51 and 64 had set aside anything for retirement, versus 1 in 5 in 2007, according to a recent analysis by the US Government Accountability Office.
And let’s toss in one more red flag rising. This year, there will be the greatest upsurge in the number of Americans turning 65 in US history — about 4.1 million. It’s been dubbed the "Peak 65 Zone" in a new report from the Alliance for Lifetime Income.
Moving forward, over 4 million Americans will turn 65 each year through 2027, which is more than 11,200 every day.
What’s so magical about age 65? In general, you’re now eligible for Medicare health insurance, and that’s likely to trigger more formal retirements since many workers delay retiring until they no longer need employer-provided medical insurance.
So for many workers, that means their peak earnings years are in the rear view mirror, and they’ll begin to tap their accumulated retirement savings and Social Security. That’s problematic for Americans who haven’t saved adequately, or lack the financial acumen to figure out how to spend down their savings without outliving their nest egg.
"The country’s public and private sector retirement systems have become obsolete, as has the now-antiquated retirement planning approach of focusing solely on accumulating a lump sum of savings rather than the actual income people will need for a retirement that could last 20, 30 or more years," Jason Fichtner, chief economist at the Bipartisan Policy Center, told Yahoo Finance.
"Actual income" for retirement is exactly what IBM’s plan is promising — and why it’s getting so much attention.
If not pension, then 'pension-like'
Even so, no one is predicting a "large-scale comeback of traditional pensions," Tyson said.
Jessica Sclafani, senior defined contribution strategist at T. Rowe Price, called IBM’s new accounts an "interesting structure," but expects adoption of such plans will be limited.
Most 401(k) and similar plan sponsors aren’t racing to "implement retirement income solutions, but they are significantly more engaged on the topic," she added.
For instance, Fidelity Investments, which administers accounts for more than 43 million participants and 24,000 employers, announced Thursday a 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 to provide pension-like payments throughout retirement.
"The transition to retirement can certainly be an anxious time, with many people worried about not having enough money to last their lifetime," Fidelity’s Keri Dogan, senior vice president of financial wellness and retirement income solutions, told Yahoo Finance. "This allows employees greater choice in their retirement income planning."
By Kerry Hannon·Senior | Columnist
January 27, 2024
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich."
