By Mark Miller
CHICAGO Dec 12IBM ads urge us all to follow its lead and help "build a smarter planet." Let's hope other companies don't follow Big Blue's latest move: an overhaul of its 401(k) plan that shifts its matching contribution to a once-a-year affair.
Starting next year, IBM will shift its matching contribution from semi-monthly to a lump sum paid each December 31. Leave the company before December 15, and you'll get no match at all for the year.
IBM declined to comment, but retirement plan experts say it is a clever money-saving move -- and one that allows Big Blue to focus its benefit resources on workers who are sticking with the company.
For loyal workers, the shift means 11 lost months every year of opportunity for dollar-cost averaged contributions and potential investment growth. And it makes the 401(k) plan less valuable to employees who leave IBM - either on their own or through layoff or disability. They'll lose the entire match for that year.
IBM is widely viewed as an employee benefits trend-setter. The company last made retirement plan headlines in 2008 when it replaced its defined benefit pension plan with a cutting-edge 401(k) plan featuring very generous matching contributions ranging from six to ten percent - depending on hire date and years of service -- low fees and access to free financial advice.
Today, IBM's 401(k) plan is the largest private sector defined contribution plan in the country, with $37.6 billion in assets. It is the 14th-best, according to the annual ranking of top 30 plans released this week by Brightscope, which rates and analyzes plans ().
"They're a major trend-setter, so a lot of other companies will be looking very closely at this move," said Brooks Herman, Brightscope's head of research.
A national trend toward annual matches would be bad news for workers, especially middle- and lower-income households already finding it very difficult to build significant nest eggs through the 401(k) system.
IBM's shift to an annual contribution will save money on matches to employees who leave.
"If plan sponsors want to cut spending, they're going to look at the smartest way to use their resources," said Alison Borland, vice president of retirement product strategy at Aon Hewitt. "Do I want to focus on long or short service? Do I want to focus on employees who stick around, or those who leave during the year?"
The change also will give IBM a big cash flow advantage. "They can time the plan contributions and invest the money elsewhere," said Roger Wohlner, a financial planner who advises small and medium-sized workplace retirement plans. "I'm sure IBM has some extremely bright treasury and cash management people who figured out this would be a nice windfall."
Aon Hewitt reports that just nine percent of plans make annual lump sum contributions now. "These are plans that just set it up this way years ago," Borland said. "IBM is the first large company to make a change like this."
IBM's example could appeal to smaller plans looking to solve a key administrative headache, said Jason Roberts, CEO of the Pension Resource Institute, which provides consulting and training services to retirement plan service providers.
"One of the most common Department of Labor rule violations that gets plans in trouble is the burden of segregating matching contributions from payroll," Roberts said. "That's not a problem for big, sophisticated companies like IBM, but some small plan sponsors might see an annual contribution as a way to simplify the administrative burden."
Meanwhile, IBM workers have been lighting up the Internet and social media with complaints about the changes, and Alliance@IBM -- an employee group affiliated with the Communications Workers of America that is trying to unionize IBM workers -- is running a petition drive urging Big Blue to rescind the move.
Although workers can continue to make regular payroll contributions and allocate those contributions throughout the year, the shift does mean 11 lost months of opportunity for dollar-cost averaged contributions and potential investment growth of the matching funds.
"One thing we are trying instill with plan participants is the importance of staying consistent with your allocations, maintaining the appropriate portfolio mix through rebalancing and the benefit of smoothing volatility through contributions over time," said Roberts. "This allocates a big chunk of your contribution all at once."
IBM's 401(k) will be less valuable for any workers who leave IBM, either on their own or through layoff or disability, since they'll lose an entire year of matching contributions.
IBM's U.S. workforce has shrunk over the past ten years from 160,000 to just 92,000, according to Alliance@IBM, which tracks workforce trends at the company. The workplace group worries the 401(k) changes could prompt the company to lay off workers late in the year to save money on the match.
"IBM employees recognize how good the 401(k) plan is, but the company has done a tremendous amount of job outsourcing to places like China and the Philippines. We're worried this will incentivize IBM to make even more job cuts in the U.S." said Lee Conrad, Alliance@IBM's national coordinator.
"Would they do a mass layoff just before the date-of record?" asks Wohlner. "I'm not saying IBM is anything but an ethical employer, but if this trend took hold and layoffs occur in early December, you'd have to wonder if that's part of the reason. It raises a lot of questions."