On Jan. 1, IBM cut dollar-for-dollar 5 percent employee ownership under its 401(k) plan and began providing a portable “retirement account” to most of its U.S. workers.
In other words, the company eliminated part of its defined contribution plan and added something like an old-school pension.
While traditional defined benefit pensions remain in short supply in the private sector, IBM's move could inspire other companies to rethink their approach to retirement plans.
“We expect to see further development and even the emergence of additional types of employer-based retirement plans,” Dylan Tyson, president of Prudential Retirement Strategies, told Yahoo Finance.
How IBM flips the switch on retirement plans
IBM (IBM) contributes 5% of an employee's salary into the accounts, which provide a guaranteed, tax-deferred return of 6% for the first three years. And from 2027 to 2034, they offer a guaranteed return equal to the 10-year Treasury rate (currently about 4.2%).
“It helps automatically save for retirement without the employee having to contribute, and they can continue to contribute to their 401(k) plan as before,” an IBM spokesperson told Yahoo Finance. The new benefit “is stable, well-funded and also helps diversify their retirement portfolios.”
IBM will contribute 5% of employees' salaries to a retirement account rather than a 401(k). (AP Photo/Richard Drew) (ASSOCIATED PRESS)
When someone switches from Big Blue, the money accumulated in the account can be paid out as a lump sum (and rolled over into an IRA or 401(k) plan) or as an annuity that pays monthly benefits for the life of the participant or his or her survivors.
Even if this structure sounds familiar, the concept is not entirely new. The IBM account has the ring of a traditional defined benefit (DB) pension: employers contribute, invest and manage retirement funds for their employees, who receive guaranteed monthly checks for life after they retire.
However, the special plan introduced by IBM is called a Cash Balance plan and is a little different from a classic DB plan. With a cash balance plan, employees do not have individual accounts; Instead, the plan “defines” a benefit that it will pay out of its general assets.
The story goes on
For many employees, the guaranteed return of this non-employee account might be a relief for several reasons.
First, it's part of everyday life for 401(k) retirement savers, who watch their balances rise and fall, often with little knowledge of how to adjust as they sweat the swings of the market.
Second, without encouragement, it is difficult to get people to save for retirement at all. When I was starting out in my career, it wasn't easy because I wasn't making much and I felt like I needed every penny to pay my bills. Luckily, thanks to my dad's nagging, I started and I quickly realized that I didn't really miss it when the pre-tax funds were cut off.
Starting in 2025, the SECURE 2.0 Act will require companies with new 401(k) plans to automatically enroll their employees at a minimum contribution rate of 3%. However, employees can opt out.
This approach has already made a significant difference in the amount people have been able to save for retirement. According to Vanguard's 2023 report “How America Saves,” the average total retirement account contribution rate for employees is 11% of their salary for those in auto-enrollment plans, nearly 40% higher than the 8% rate for those under one Voluntary enrollment can be discontinued.
Read more: Retirement Planning: A Step-by-Step Guide
Automatic enrollment plans had higher overall contribution rates across all demographic variables, with gaps greatest among younger, less temporary, and lower-income workers.
IBM's move leverages an employer advantage that becomes a noticeable advantage among job seekers. (Getty Creative) (Portrait via Getty Images)
Pensions as a recruiting tool
IBM's move unlocks an employer perk that is becoming a well-known perk among job seekers.
“After decades of declining pension access, a pension can help employers differentiate themselves from their competitors,” Glassdoor senior economist Daniel Zhao told Yahoo Finance.
“Employees consistently rate pension benefit packages better than 401(k)-only packages,” he said.
Further evidence of the appetite for the old-style retirement account: About four in 10 workers with 401(k)s said that “investment options that provide guaranteed retirement income” would be the most valuable improvement to their plan, according to an Employee Benefit survey Research Institute (EBRI) and Greenwald Research.
“I've gotten more calls about pensions in the last year than I have in the last decade,” Jonathan Price, national pension director at Segal, a benefits and human resources consulting firm, told Yahoo Finance.
“Recruitment teams are recognizing that pensions play a critical role in attracting top talent,” he said. “I expect at least two more companies to announce their own pension plans in 2024.”
A Brief History of Pensions
Let me come back and briefly review this seismic shift in the world of retirement.
More than two decades ago, droves of employers began eliminating traditional defined benefit pensions in favor of 401(k) retirement plans, into which employees themselves contributed a small portion of the employer's funds. Today, only 11% of private employers offer pensions, compared to 35% in the early 1990s. According to the Bureau of Labor Statistics, more than half of private sector workers have a 401(k) plan.
While pensions still predominate in the public sector at state and local employers, they have all but disappeared in the private sector.
That's why IBM's move is causing excitement in the retirement industry.
“The idea that companies that have frozen defined benefit pension plans could unfreeze them for a number of reasons has been talked about for more than a year,” Mark Miller, retirement expert and author of Retirement Reboot, told Yahoo Finance. “First, many DB plans are overfunded at this point, so dollars are available. Second, pensions are seen as a desirable perk in the fight for talent. Finally, more and more employers are recognizing that many retirees will find it difficult to generate sufficient retirement income from savings and social security.”
However, don't expect a fundamental change just yet. “The sponsors of the plan have approached it cautiously,” Miller added.
Notably, IBM is typically a leader in the corporate world when it comes to employee benefits. “In fact, IBM was one of the first major employers to announce a move to a defined contribution (DC) retirement plan in 2006,” Miller added. “And that proved to be a harbinger of a decline in the number of employers offering traditional pensions in subsequent years.”
More and more employers are recognizing that many retirees will have difficulty generating sufficient retirement income from savings and Social Security. (Getty Creative) (Shapecharge via Getty Images)
The retirement maturity crisis
One reason for the interest in a defined pension is that many employees have been retired for decades and do not have enough savings.
While the average employer-provided 401(k) balance was $107,700, according to a Fidelity Investments report released last fall, a large portion of working Americans simply aren't saving. According to a Federal Reserve report, while nearly three-quarters of non-retired adults had at least some retirement savings in 2022, about 28% had none, up from 25% in 2021.
At the same time, the retirement gap is widening for older, low-income Americans. According to a recent analysis by the U.S. Government Accountability Office, only one in 10 low-income earners ages 51 to 64 had anything saved for retirement in 2019, compared to one in five in 2007.
And let's raise another red flag. This year will see the largest increase in the number of Americans turning 65 in U.S. history — about 4.1 million. A new report from the Alliance for Lifetime Income calls it the “Peak 65 Zone.”
By 2027, over 4 million Americans will turn 65 each year, or more than 11,200 per day.
What's so magical about age 65? In general, you are now eligible for Medicare health insurance, and this will likely lead to more formal retirements, as many workers delay retirement until they no longer need employer-provided health insurance.
For many workers, this means that their peak earning years are in the rearview mirror and they are beginning to draw on their accumulated retirement and Social Security savings. That's problematic for Americans who haven't saved enough or who lack the financial acumen to figure out how to spend their savings without surviving on their nest egg.
“The country's public and private sector pension systems are outdated, as is the now outdated approach to retirement planning, which focuses solely on accumulating a lump sum of savings rather than the actual income people need for a 20-year retirement , 30 or … could take more years,” Jason Fichtner, chief economist at the Bipartisan Policy Center, told Yahoo Finance.
“Actual income” for retirement is exactly what IBM’s plan promises — and why it’s getting so much attention.
Read more: How much money should I have saved by age 40?
If not a pension, then “pension-like”
Still, no one is predicting a “large-scale comeback of traditional pensions,” Tyson said.
Jessica Sclafani, senior defined contribution strategist at T. Rowe Price, called IBM's new accounts an “interesting structure” but expects adoption of such plans will be limited.
Most sponsors of 401(k) and similar plans don't make an effort to “implement retirement income solutions, but they are significantly more committed to the issue,” she added.
For example, Fidelity Investments, which manages accounts for more than 43 million participants and 24,000 employers, on Thursday announced a Guaranteed Income Direct Option that allows employees to convert all or part of their retirement savings – from 401(k), 403(b) or 457( b) Account – into an immediate income annuity to provide annuity-like payments throughout retirement.
“The transition to retirement can certainly be a stressful time, as many people fear not having enough money to live on,” Fidelity's Keri Dogan, senior vice president of financial wellness and retirement income solutions, told Yahoo Finance. “This allows employees greater choice when planning their retirement income.”
Kerry Hannon is a senior columnist at Yahoo Finance. She is a workplace futurist, career and retirement strategist, and author of 14 books, including In Control at 50+: How to Succeed in The New World of Work and Never Too Old To Get Rich. Follow her on X @kerryhannon.
Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retiring and more
Read the latest financial and business news from Yahoo Finance