International Business Machines Corp., taken to court by workers over changes it made to its traditional pension plan, has decided to stop offering any such plan to new employees.
IBM will continue to defend its current "cash-balance" pension plan in court against charges that it violates federal age-discrimination laws, IBM Senior Vice President Randy MacDonald said in a telephone interview yesterday, but will offer workers hired after Jan. 1 only an enhanced 401(k) plan.
An IBM official said workers hired after Jan. 1 would only be offered an enhanced 401(k) plan.
(Alden Pellett -- AP)
IBM becomes the latest employer to drop traditional "defined-benefit" pensions. Defined-benefit plans still cover more than 40 million workers, though the number of plans, which totaled more than 100,000 during the 1980s, has fallen sharply to about 30,000. The plans offer workers a benefit that is typically based on pay and years of service.
In recent years, more employers have shifted to "defined-contribution" plans, such as 401(k)s, to which they sometimes make a contribution but the worker does much of the funding and bears all of the investment risk.
Until now, IBM has offered workers both a defined-benefit pension and a 401(k). But last year it lost an age-discrimination suit brought by a number of current and former workers after it changed its pension to a cash-balance plan, which would have provided less generous benefits to long-serving workers.
The Bush administration proposed regulations that would have deemed cash-balance plans not to be age-discriminatory, but critics on Capitol Hill, led by Rep. Bernard Sanders (I-Vt.), have blocked those rules.
Rep. John A. Boehner (R-Ohio), chairman of the House committee overseeing pension legislation, said the IBM announcement "highlights the need" for a pension overhaul package he hopes to introduce early in the new year.
MacDonald noted that with its cash-balance pension, "IBM is voluntarily offering a plan that's under constant scrutiny that some of our competitors don't even offer." The constant criticism "does come into our thinking," he said. The changes were first reported on the Web site of Plan Sponsor magazine, a trade publication.
Employers are allowed to set aside tax-deductible contributions in such plans, but the investment risk is borne entirely by the company, and many have found it difficult to meet their obligations as the stock market slumps and interest rates remain low.
Cash-balance plans are the only type of defined-benefit plan that has been growing. In a cash-balance plan, the employer typically sets up a hypothetical account for each worker and then credits that account with a percentage of pay each year plus annual interest credits. The retirement benefit is the value of the account at the end of the worker's career.
Benefits in a cash-balance plan accumulate more rapidly in the early years, while those in a more-traditional plan build up very rapidly near the end of a long career. The result, typically, is that workers who change jobs often do better under a cash-balance plan, while long-serving employees do better under a traditional plan.
Defenders of cash-balance plans argue they are better for today's mobile workforce, while critics say they short-change people who stay years with one employer.
MacDonald said new hires at IBM will be offered a 401(k) plan in which the company will match 100 percent of an employee's contributions up to 6 percent of pay, "one of the highest matches" in such plans, he said. IBM's match is half as much for current workers, and will remain so for them.
In addition, new workers will be offered the right to buy disability insurance that will cover their contributions if they are temporarily disabled -- an option officials believe is unique -- and assistance in purchasing an annuity at retirement for those who prefer to assure themselves of a stream of income.
IBM employs 140,000 people worldwide, not all of them covered by the defined-benefit plans. MacDonald said that the number of new hires is uncertain and would depend on the state of the economy and IBM's business, but would probably total 4,000 or 5,000 workers in 2005.