The pension scrapheap grows

01/06/2006

By Paul J. Lim
US News & World Report

When it comes to providing employee benefits, corporate America doesn’t try to think out of the box—it tends to follow its leaders. And when it comes to pension plans, IBM is one of those leaders, running the third-biggest pension plan in the country, with around $48 billion in assets.

This is why workers who favor traditional pensions (sometimes referred to as “defined benefit” plans) are getting nervous.

Yesterday, IBM said it intended to freeze its existing pension plan for American workers starting in 2008. The move will not affect IBM workers who have already retired and are collecting pension checks, the company said. Nor will it affect workers who are on track to retire before Jan. 1, 2008.

However, the pension accounts of U.S. workers still with IBM will stop growing in value after Dec. 31, 2007. Instead, the company promises to direct more money into workers’ existing 401(k) plans, an altogether different type of retirement account known as a “defined contribution” plan.

In a defined-contribution plan like a 401(k), the worker—not the employer—makes all the investment decisions and takes on all the investment risk associated with the account. Retirement income isn’t guaranteed. The benefit for corporations is that 401(k)’s are cheaper to run than pension plans.

Indeed, IBM said this move, along with other steps being considered that will affect employees in other countries, should save Big Blue $450 million to $500 million this year and nearly $3 billion between now and 2010.

“We’re taking these actions to better control retirement plan expenses, position the company for business growth and competitive strength, and preserve employees’ earned retirement benefits, while instituting a leading-edge 401(k) plan that will be one of the richest in the country and a standard in the United States,” Randy MacDonald, IBM senior vice president for human resources, said in a statement.

He added that “in recent years, IBM has been following a global strategy to move toward defined-contribution retirement plans for both existing employees and new hires. These changes are consistent with this direction and will give us more predictable retirement plan costs, along with benefits that remain ahead of—but more in line with—our competitors.”

As MacDonald notes, Big Blue isn’t the first big U.S. corporation to freeze its pension. Last month, the telecommunications giant Verizon said that starting June 30, 2006, its management employees will no longer earn new pension benefits. However, like IBM, Verizon said affected workers will retain the pension benefits they’ve already earned and will see their 401(k) plans bolstered.

Last year, 71 Fortune 1000 firms froze or scrapped their pension programs, according to the consulting firm Watson Wyatt Worldwide. That was up from 45 in 2003.