Employee benefits are constantly evolving, and the trend line isn’t great for most workers. Last week, IBM—an often copied benefits leader—delivered another blow. The business services giant revamped its 401(k) plan in a way that will transfer millions of dollars to shareholders at the expense of employees.
Beginning next year, IBM will delay 401(k) matching contributions until Dec. 31. On that date, it will deposit a lump sum in the account of those who were in the plan and working at the company as of Dec. 15. Workers leaving the company before that date will get no match, including any workers who may have been fired, say, on Dec. 14. The one exception is for those who formally retire. They will get a full match.
This translates into big savings for a company that paid out $875 million in employee contributions last year. That savings should flow to the company’s bottom line, benefitting shareholders. Strong profits are good for employees, too. Still, workers lose in a number of ways.
First, workers will forego up to a year of growth on contributions they would have received with each paycheck during the year. Second, by getting a single contribution at year-end workers lose the benefit of dollar cost averaging, a smoothing mechanism that reduces the risk of buying fewer shares at a temporary high price. The new set-up also gives the company an incentive to cut heads just before the holidays.
Big Blue still has one of the best benefits packages anywhere. The company matches contributions dollar for dollar up to 6% of eligible pay for those hired before 2005. Those hired later are eligible to receive up to 5% of pay. IBM also makes automatic contributions, ranging from 1% to 4% of pay, even if an employee doesn’t contribute.
Meanwhile, if the company was determined to cut 401(k) costs, this method inflicts minimal damage on those who remain with the company long term. The biggest savings will come at the expense of those who leave.
But any cut is a serious matter. We have a retirement savings crisis in America and the safety net keeps being eaten away. Social Security is a mess. Public and private pension plans are underfunded. We’ve moved squarely away from secure defined-benefits plans towards riskier defined-contribution plans, and now defined-contribution plans are under assault. That was never more evident than during the Great Recession, when many companies did away with their match entirely. Some, but by no means all, have since reinstituted a match.
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IBM’s move represents another cut in the slow bleeding of the American pension system. As Mike Alfred, chief executive of BrightScope, which rates corporate 401(k) plans, told the Los Angeles Times: “IBM is one of the world’s most influential plan sponsors. Everyone in the benefits industry will pay close attention to whatever IBM does.”
So look for your company to again chisel away at your plan, and recognize that your retirement security is in your hands alone.