IBM is offering employees a new retirement account that looks a lot like a pension
On January 1, IBM discontinued its 5% dollar-for-dollar payout in its 401(k) plan and began providing most of its US workers with a portable “retirement benefit account.”
In other words, the company rolled back part of the defined contribution plan and added something more like an old pension.
While traditional defined-benefit pensions are still rare in the private sector, IBM’s move could inspire other companies to rethink their approach to retirement plans.
“We expect to see the continued evolution and even emergence of additional types of employer-based retirement plans,” Dylan Tyson, president of Prudential Retirement Strategies, told Yahoo Finance.
How IBM is reversing the transformation of pension plans
ibm (IBM) contributes 5% of the employee’s salary to the accounts, providing a guaranteed deferred tax return of 6% for the first three years. From 2027 through 2034, you will earn a guaranteed return equal to the interest rate on 10-year Treasury bonds (currently about 4.2%).
“It helps people save for retirement automatically, without requiring a contribution 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 transitions out of Big Blue, the money that has accumulated in the account can be paid out as a lump sum (and rolled over to an IRA or 401(k) plan) or as an annuity that pays monthly benefits for the life of the participant or survivor.
If this setup sounds familiar, the concept isn’t entirely new. An IBM account has 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.
However, the specific plan launched by IBM is known as the Cash Balance Plan, which is slightly different from the Classic DB Plan. With a cash balance plan, employees do not have individual accounts; Instead, the plan “caps” the interest it will pay from its general assets.
For many employees, the guaranteed return of this account without employee involvement can be a relief for several reasons.
First, sweating in market volatility is part of the territory 401(k) retirement savers Those who watch their scales rise and fall often have little knowledge of how to adapt.
Secondly, it is difficult to convince people of this Save at all in their retirement plans without some encouragement. When I was starting out in my career, it wasn’t easy because I wasn’t making much and I felt like I needed every cent to cover my bills. Fortunately, I started thanks to my parents’ nagging, and I soon realized I wasn’t really missing out when the pre-tax money was cut.
Starting in 2025, the SECURE Act 2.0 will require companies with new 401(k) plans to automatically enroll their employees at a contribution rate of at least 3%. However, employees may opt out.
This approach has already made a big difference in the amount people have been able to save for retirement. The average total employee retirement account contribution rate is 11% of their paychecks for those in automatic enrollment plans, nearly 40% higher than the 8% rate for those hired under voluntary enrollment, according to Vanguard’s 2023 “How to Save America” report. a report.
Read more: Retirement Planning: A Step-by-Step Guide
Plans with automatic enrollment had higher total contribution rates across all demographic variables, with wide gaps for younger, less permanent, and lower-income employees.
Pensions as a recruitment tool
IBM’s move capitalizes on an employer benefit that has become a specific benefit sought by job seekers.
“After decades of declining access to a pension, a pension can help employers stand out among their peers,” Daniel Chow, glass doorThe chief economist at Yahoo Finance said.
“Employees consistently rate benefits packages with a pension better than packages with only a 401(k),” he said.
More evidence of the desirability of an old-fashioned retirement account: Nearly 4 in 10 workers with a 401(k) said that “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. (Ibri) and Greenwald’s research.
“I’ve received more calls about pensions in the past year than I have in the last decade,” said Jonathan Price, national pensions leader for Seagala benefits and human resources consulting firm, told Yahoo Finance.
“Recruitment teams recognize that pensions play a critical role in attracting top-tier talent,” he said. “I expect at least two more companies to announce their own pension plans in 2024.”
A quick history of pensions
Let me come back and share with you a brief summary of this seismic shift in the world of retirement.
More than two decades ago, large numbers of employers began closing traditional defined-benefit pensions and replacing 401(k) retirement plans in which employees contributed to themselves with a small portion of employer-provided funds. Today, only 11% of private sector employers offer pensions, compared to only 11% of private sector employers. 35% In the early nineties. More than half of private sector employees have a 401(k) plan, according to Bureau of Labor Statistics.
Although pensions are still prevalent among state and municipal public sector employers, they have almost disappeared in the private sector.
That’s why IBM’s move has caused a stir in the retirement industry.
“There has been talk for over a year about the idea of companies having… Frozen defined benefit pension (DB). “Plans may unfreeze them, for a number of reasons,” said Mark Miller, retirement expert and author Re-retirementRYahoo Finance said. “First, many DB plans are overfunded at this point, so the dollars are there. Second, pensions are seen as a desirable benefit in the war for talent. Finally, more employers are realizing that many retirees will struggle to In order to generate sufficient retirement income from savings and Social Security.”
But don’t expect a drastic change yet. “The plan sponsors have approached this with caution,” Miller added.
What’s noteworthy is that IBM has traditionally been a leader in the corporate world when it comes to employee benefits. “In fact, IBM was one of the first major companies to announce the transition to a fully defined contribution (DC) retirement program in 2006,” Miller added. “This turned out to be a harbinger of a decline in the number of employers offering traditional pensions in the following years.”
The crisis of preparing for retirement
One motivation behind the curiosity about a specific benefit is that many workers face decades of retirement with scarce savings set aside.
While the average employer-provided 401(k) balance was $107,700, according to Fidelity Investments. a report Published last fall, a large portion of working Americans simply do not save. In 2022, although nearly three-quarters of non-retired adults had at least some retirement savings, about 28% had none, up from 25% in 2021, according to a report By the Federal Reserve.
At the same time, the retirement gap between older and lower-wage Americans is worsening. In 2019, only 1 in 10 low-income workers ages 51 to 64 set aside anything for retirement, versus 1 in 5 in 2007, according to a recent report. analysis By the US Government Accountability Office.
And let’s raise another red flag high. This year, there will be the largest increase in the number of Americans turning 65 in U.S. history — about 4.1 million. He called it the “Peak 65 Zone” in A.J New report From the Alliance for Lifetime Income.
From now on, more than 4 million Americans will turn 65 each year through 2027, which is more than 11,200 every day.
What’s so magical about being 65? In general, you are now eligible for medical care Health insurance This will likely lead to more formal retirements because many workers delay retirement until they no longer need employer-provided medical insurance.
For many workers, this means that their peak earning years will be in the rearview mirror, and they will begin to tap into their accumulated retirement savings and… Social security. This presents a problem for Americans who have not saved enough, or lack thereof Financial acumen To figure out how to spend their savings without outliving their nest egg.
“The country’s public and private sector pension systems have become outdated, as has the now outdated approach to retirement planning that focuses 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,” said Jason Fichtner, the bank’s chief economist Center for Partisan PolicyYahoo Finance said.
“Actual income” for retirement is exactly what the IBM plan promises — and why it gets so much attention.
If it’s not a pension, it’s “like a pension.”
Despite this, no one expects “a widespread return to traditional pensions,” Tyson said.
Jessica Sclafani, Chief Defined Contribution Strategist at T. Rowe PriceHe called IBM’s new accounts “an interesting architecture,” but expects adoption of such plans to be limited.
She added that most 401(k) and similar plan sponsors are not racing to “implement retirement income solutions, but they are significantly more engaged on the topic.”
For example, Fidelity Investments, which manages accounts for more than 43 million participants and 24,000 employers, Announce Thursday launched the Direct Guaranteed Income option, which allows employees to convert all or part of their retirement savings — from a 401(k), 403(b), or 457(b) account — into immediate annuity to provide pension-like payments throughout retirement.
“The transition into retirement can certainly be an anxious time, with many people worried about not having enough money to get them through their lives,” Kerry Duggan, senior vice president of Financial Wellness and Retirement Income Solutions, told Yahoo Finance. “This gives employees greater choice in retirement income planning.”
Kerry Hannon is a senior columnist for Yahoo Finance. She is a workplace futurist, 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 “You’ve never been rich.” Follow her on X @kerihannon.