IBM recently revived a defined benefit pension plan and said it will stop contributing to employee 401(k) accounts, in a move that is expected to boost its bottom line and could lead other companies to follow suit.
The change is likely to benefit shareholders, as the halt on 401(k) contributions will save hundreds of millions of dollars per year. Further, the company likely won’t need to add money to the revived pension plan for a few years as it already has significant funds.
Under the new plan, employees are vested immediately and can take the funds with them if they leave the company. However, many employees would have fared better with the previous 5 percent matching contributions and 1 percent automatic contributions to 401(k) accounts, which employees were vested in after one year with IBM.
Pension consultants say other companies with fully funded, closed or frozen pension plans could follow suit. “This isn’t a return to the richer benefits for long-tenured employees provided by traditional defined benefit plans,” notes markets and finance columnist Jeff Sommer. “But perhaps cash balance plans combined with 401(k)s are the best that most big companies are likely to be offering.”
