Do IBM's big retirement changes mean I've been misled?
By Kevin Startt
Like a nuclear explosion, employee benefits bellwether IBM recently unleashed its most recent overhaul of its retirement plan in grand fashion, announcing a complete reshuffling of its 401(k) plan to make a lump sum payment at year end instead of monthly matching contributions. Pretty soon, it will be a gold watch and a retirement dinner which will give employees one more chance to be fed up with the company.
IBM’s contributions, which generally ranged from 6 percent to 10 percent of pay and are compounded 360 times or more over a 30-year career, depending on the investment, took place on December 31. Furthermore, workers who left the company December 15 didn't even qualify for the year end contribution. IBM’s salvo is the latest attempt by companies to rein in retirement expenses, but it is greasing the skids for many under-saved employees who depend on a company match and regular contribution. IBM has effectively taken the vitamin K out of their (k) plan and made it more of a straight profit-sharing plan.
Inadvertently, other companies have already followed suit after cutting matching contributions during the Great Recession, and this will provide the impetus for companies to provide incentives for employees to take early distributions that they will either blow or invest in a lifetime income annuity that provides more optional benefits, such as long-term care, chronic illness benefits and inflation protection. IBM’s move also gives the government more incentive to take over the private retirement system or take required mandatory distributions or force employers to invest in government bonds. In addition, through paying a year end lump sum payment, IBM undermines the benefit of dollar cost averaging in which investors are buying stock and bonds at various times in market cycles, thus lowering the price at which shares are bought and reducing sequence risk while improving diversification. Now IBM is increasing the potential for an employee to experience sequence risk by making a large payment that could be invested at a market high and impact the employee's overall retirement. The biggest impact will be on older employees, but let’s look at the severe impact less compounding has on younger employees.
For a 40-year-old employee making $8,000 per month and putting in $1,000 to start a plan, IBM’s 3 percent monthly match to a contribution of the employee's 3 percent or $240 monthly earning 6 percent would amount at age 70 to $488,189. With a year end lump sum contribution of the same amount earning the same 6 percent, the employee's balance would be only $338, 934 — a difference of $150,000, or nearly 50 percent.
Although the Department of Labor may take issue with IBM’s move, IBM made a move in the 1990s that impacted older workers negatively with the implementation of a cash balance option. They say you can always tell the guest of honor at a retirement dinner because he or she is the only one yawning after the boss’s favorite joke. No one is yawning after this drastic move among the IBM workforce. One employee who started with the company in 1976 put it best when he said, ” It’s a huge change because you lose a year's worth of interest on the money and if they lay you off on December 1, you get nothing."
It sounds like there was plenty of coal in IBM employees' retirement stockings at Christmas and many employees took a long, hard look at income annuities that offer at reasonable fees market-linked returns and the opportunity to take advantage of daily compounding while sleeping well at night, knowing their lifelong savings are protected.