IBM Halts Pensions in Favor of 401(k)s

By Albert B. Crenshaw
Washington Post Staff Writer
Thursday, January 5, 2006; 5:45 PM

International Business Machines Corp. said today it will freeze the pension plans of some 120,000 employees in the United States, effective at the end of next year, and will offer instead a more generous 401(k) plan.

IBM's move is part of a corporate stampede away from traditional pension plans. IBM officials called the change essential to remain competitive with foreign and domestic information technology rivals.

The freeze means that benefits earned by current workers up to Jan. 1, 2008 will be preserved, but after that date they will not increase. The company already had eliminated traditional pensions for new hires starting last year.

The company said it expects the changes announced today, along with changes it expects to make this year for workers in other countries, to cut worldwide retirement-related expenses by $450 million to $500 million this year and by $2.5 billion to $3 billion through 2010.

The action adds IBM to a growing list of American employers that have frozen or terminated pension plans to cut costs or, in some cases, to emerge from bankruptcy. Such changes are especially common in industries where foreign competition is tough, such as steel, or where new domestic competitors have arisen -- such as airlines and high-tech -- that do not offer traditional pensions.

Last month, for example, Verizon Communications Inc., the nation's second-largest phone company, froze its traditional pension plan for 50,000 managerial workers and boosted benefits through its 401(k) plan. Verizon said it expects the change to save it about $3 billion over the next decade.

A survey last year by the government agency that insures traditional pensions, the Pension Benefit Guaranty Corp., found that 9.4 percent of existing plans are frozen. However, some experts say the PBGC figure is too low. The trend has been accelerating, they say, and some surveys suggest that 15 to 20 percent of employers with traditional pensions are considering freezing or terminating them.

Traditional pensions, which typically promise a specific benefit based on pay and years of service, today cover some 34 million workers and retirees. They pay out some $120 billion in benefits annually, according to employer-group estimates.

Roughly 29,000 of these plans remain today, down from 112,000 in 1985. The surviving plans tend to be very large -- most of the decline has come at small employers -- and are concentrated in older, unionized industries such as the auto industry.

"We are doing this because ultimately this new way allows us to control our retirement expenses and at the same time preserve benefits. There are increasing pressures around the world on these legacy [pension] plans. We are one of the few in all of the IT industry that have these . . . plans," said J. Randall MacDonald, IBM senior vice president, human resources.

IBM over the past 15 years has revamped its pension offerings several times, most recently converting a number of workers to a hybrid "cash-balance" plan, which is operated by the company but delivers benefits in a form that resembles a 401(k).

Unhappy workers sued the company over the cash-balance conversion, charging that such plans violate federal age-discrimination laws. A federal judge in Illinois agreed with the workers. That decision is now on appeal. MacDonald said that suit was not a factor in IBM's decision to freeze its pensions.

The move also comes as members of Congress struggle to rewrite the rules to tighten the funding requirements for traditional "defined benefit" pension plans, possibly raising costs further, but MacDonald said it was not related to the pending bills.

The change means that about 80,000 IBM employees under the cash-balance plan, as well as 30,000 who were grandfathered into an older plan, will earn no new benefits under those plans, regardless of how much longer they remain with the company. Typically, benefits under pension plans increase as the number of years worked accumulates and as salaries rise.

Instead, IBM employees will be eligible for a 401(k) plan that IBM called "one of the richest in U.S. business." Under it, the company will contribute as much as 10 percent of pay annually to the accounts of current pension plan participants. To accomplish this, IBM said, it plans to double the current company match to dollar-for-dollar on up to 6 percent of salary deferrals, and to make additional automatic contributions into those accounts equal to 1 to 4 percent of employees' pay.

The company will also open accounts for workers who have not elected to participate in the 401(k) plan and will contribute 1 to 4 percent of pay to those accounts.

The changes to the traditional plans will not affect IBM's 125,000 current U.S. retirees, former employees with vested benefits or workers who retire before Jan. 1, 2008, IBM said.

© 2006 The Washington Post Company