IBM to scrap 401(k) matching, offer something else instead

Changes gone down about as well as a hard reboot on a production DB

IBM is set to shake up its retirement benefits in 2024 much to the alarm of at least some staff.

The IT giant on Wednesday informed its US workers that starting on January 1, 2024, the corporation will no longer match employee contributions to their 401(k) retirement plans. Instead, it will offer a new benefit called a Retirement Benefit Account (RBA).

"Each eligible employee’s RBA will be credited monthly with an amount equal to five percent of their eligible pay – no employee contribution required," a leaked internal memo reads, the content of which was confirmed by The Register's sourcing.

"IBMers will also receive a one-time salary increase to offset the difference between the IBM contributions they are currently eligible to receive in the 401(k) plan and the new five percent RBA pay credit. This is separate from the annual salary plan later in the year."

IBMers will also receive a one-time salary increase to offset the difference

IBM did not respond to a request to provide further details and to explain the decision.

The Register spoke with Phillip Hulme, founder of Atlanta-based Stars & Stripes Financial Advisors and a former IBM employee, who said that several clients who work at IBM had mentioned the company's retirement benefits changes.

The retirement benefit revision helps IBM save in terms of retirement benefit obligations. By shifting its employee 401(k) contribution from six percent (five percent matching plus one percent automatic contributions) to a five percent RBA contribution, that's a 16.66 percent savings in outflow.

Or possibly 100 percent: if IBM holds and manages its RBA contribution, it doesn't have to pay anything out at all until the employee leaves the company. It would thus move from paying cash into workers' external 401(k) accounts to writing them an IOU.

It's claimed that IBM will guarantee a six percent return for two years with its RBA and after that the interest rate will track the 10-year yield for Treasury Bonds. That's about 4.25 percent, which is significantly less than the average 10-year yield for the stock market.

But this arrangement appears not to be particularly beneficial for employees. One individual using a throwaway Reddit account name and claiming to be an employee has penned an open letter to IBM leadership asking the database titan to reconsider.

The letter cites six reasons for opposing the change, the first of which is that employees will see less money.

"Previously, employees were able to contribute six percent of total pay (five percent matching and one percent automatic contributions) to the 401(k)," the missive explains. "With the RBA, one percent of tax advantaged contribution is eliminated and is instead replaced with a one time, taxable 'salary increase.'

"Not only does this result in a net decrease in IBM's contribution as of January 1, 2024, the one percent 'salary increase' is actually a decrease in total compensation that puts the burden of saving the one percent 'salary increase' for retirement on to IBMers."

The author pointed out that to make up for the lost one percent tax-advantaged contribution, IBM's salary increase in 2024 would need to be more than that to offset the reduction caused by state and federal taxes. And the raise would need to occur annually and be linked to IRS limits on tax-deferred retirement saving.

Hulme told The Register what IBM appears to be doing is shifting financial risk from the business onto employees.

"The biggest concern I have, which isn't clear anywhere, is that this account may not actually be an account that they have to fund inside of a trust," said Hulme.

Hulme explained that under ERISA, the Employee Retirement Income Security Act of 1974, the US government says that qualified employee-sponsored retirement plans need to be funded with real dollars.

"So sometimes you'll see companies do retirement plans that are not qualified through ERISA," he said. "And as a result, they can pay into those with current year earnings, similar to how the government funds Social Security in part through current year taxes."

If IBM were to become insolvent, Hulme said, those accounts would be considered general liabilities that aren't secured by anything. So employees would simply become creditors with no guarantee they'd be able to recover their funds.

The company is scraping the bottom of the barrel to find ways to cut costs

In a note on LinkedIn, Hulme added, "It means the company is scraping the bottom of the barrel to find ways to cut costs and that might also include more job cuts."

IBM's RBA is said to be part of the company's existing IBM Personal Pension Plan, which does not fully comply with ERISA, a law firm suing Big Blue alleges.

In any event, IBM has not publicly stated how it will handle RBA funds. There may be no cause for concern, though if it treats the retirement benefit like it has healthcare reimbursement funds, that could be a problem.

Last year, IBM said it would withhold retiree health reimbursement arrangement (HRA) account funds for those who chose to retain legacy healthcare plans instead of shifting to its new IBM-sponsored Group Medicare Advantage program administered by UnitedHealthcare. Big Blue was able to withhold those funds because they were held in a general account and not in the name of employees.

Laurence Kotlikoff, a professor of economics at Boston University and the author of Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, told The Register that while he isn't aware of the details of IBM's plan, he'd be interested to hear Big Blue's characterization of the move and wondered whether it signals financial trouble for the venerable computing biz.

He also observed that IBM led the move away from pensions to 401(k) benefits for workers – from defined benefits to defined contributions. "That was the end of pensions in America basically," he said. ®

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