Big Blue to rein in pensions

01/06/2006

401(k) plans to get beefier

By Craig Wolf
Poughkeepsie Journal

ARMONK — IBM Corp. went the final distance Thursday in its steady shrinking of pension plans by announcing a freeze on company contributions after the end of 2007.

It also juiced up the 401(k) savings plan for all employees affected by the change, doubling the IBM match and adding some bonus money.

“This is an evolving global strategy that we have had for five years and we are now implementing in the U.S.,” said Randy MacDonald, senior vice president for human resources, in a phone interview. “This is all about cost-competitiveness. This is not about profits.”

MacDonald said it gives IBM a pension system “that’s very competitive.” Costs of running its plans have often been cited by IBM as it downsized its pension offerings in several controversial moves in recent years, some of which have led to lawsuits and financial settlements. Thursday’s announcement was not a part of a court case.

Linda Guyer, president of the Alliance@IBM union, said employees would have to sit down with a financial analyst “and figure out if it’s better or worse.” But she added, “If it doesn’t benefit IBM, there’s no reason for them to do it.”

“It means less for employees and more for executives,” Guyer said.

MacDonald laid out these changes:

Accrual of future benefits in the defined-benefit pension plans stop after Dec. 31, 2007. That means no additional company contributions are made. But he said interest earnings would continue to accumulate.

The 401(k) plan for pension participants will see doubling of IBM’s match for all employee salary contributions, going from 50 cents on the dollar to a dollar-for-dollar level up to 6 percent. Those hired after Dec. 31, 2004, get matched up to 5 percent.

Automatic contributions from IBM will be 1 percent of pay for anyone hired after Dec. 31, 2004; 2 percent for those in the newer cash-balance pension plan; and 4 percent for participants in the older, pension equity plan.

On top of that, for employees deemed non-exempt under the Fair Labor Standards Act, which means mostly staff in the lower pay bands, IBM will give a 5 percent annual savings award.

There are no changes for retirees, MacDonald said.

IBM will take a charge against earnings of about $270 million in the fourth quarter as a result of the curtailment of the defined-benefit plans, the company said in a news release.

A 401(k) plan is not comparable to a pension because retirees have more rights under pension laws, said John Hotz, deputy director of the Pension Rights Center in Washington. He added, “We’ve seen other companies in the past make grandiose 401(k) promises in the wake of a big trim to the defined-benefit plan only to alter those promises a short time later.”

Asked whether the new plan would pay off as well as the old one, MacDonald stopped short of saying yes, pointing out variables including employee contribution level. But the participants would be getting a combination of their pension payout as well as their 401(k). They could take the payouts in separate streams or one, and are allowed to have annuities, he said.

More than 90 percent of IBMers participate in the 401(k) plan “and they tend to participate at a rate of 8 to 9 percent” of pay, MacDonald said.

Patrick Kendall, a pension expert at Diversified Investment Advisors, a consulting firm specializing in retirement plans, told the Associated Press the “hard freeze” IBM announced Thursday was almost inevitable considering the company’s earlier “soft freeze” of closing the plan to new employees.

“I think a lot of these sponsors would like to get out of (defined-benefit plans) entirely, just terminate the plan,” he said. But many companies find termination fees and other complications negate that strategy, he said.

IBM expects the plan changes, along with ones being considered for other countries, to save $450 million to $500 million for 2006 and $2.5 billion to $3 billion for 2006 through 2010. But pension expenses will continue to rise by $400 million to $500 million.

The Associated Press contributed to this report.