IBM's plan for once-a-year 401(k) match draws mixed views
By Robert Steyer | December 7, 2012 5:37 pm
IBM's change to a year-end corporate match payment from bimonthly for its 401(k) plan should save the company money, defined contribution experts said, but whether or how much the switch will affect participants' savings and investing activities is not clear.
IBM Corp., Armonk, N.Y., sent a letter to employees last week saying it was changing the timing of the 401(k)'s employer match to once a year.
Participants receiving the annual match “must be employed on Dec. 15 of each year,” said the letter from Randy MacDonald, senior vice president for human resources. ”For eligible participants, the match and automatic contribution “will be deposited … on Dec. 31, 2013 (and on the last business day of each subsequent year).”
The letter emphasized that the percentage of the IBM match would not change.
“The research is mixed on the impact of matching contributions on participant behavior,” Lori Lucas, executive vice president and defined contribution practice leader at Callan Associates Inc., San Francisco, said in an e-mail. “Switching to an annual matching structure could reduce employee savings in the 401(k) plan, as participants usually list the match as the No. 1 reason they invest.”
Noting that many plans now have automatic enrollment, Ms. Lucas added that “because of inertia, employees are less likely to opt out even with an annual vs. bimonthly match.”
Year-end match payments aren't new, said Byron Beebe, Cleveland-based U.S. retirement market leader at Aon Hewitt. Nine percent of sponsors have such payment schedules called “last-day rules,” he said.
“We haven't seen a lot of companies do what IBM is doing” by switching to a year-end payment from bimonthly, Mr. Beebe said. Companies making once-a-year contributions most likely started with that strategy, he added.
Mr. Beebe said he expected IBM would save money.
However, he pointed out that companies contemplating switching payment schedules must take into account multiple factors — such as turnover, vesting schedules, employee demographics, pay levels and savings rates — before determining how much they might save.
“Of course, individuals would rather have the money sooner than later, but I doubt this will affect participant savings behavior or investing behavior,” Mr. Beebe said. In fact, it could provide an incentive for employees to remain with the company for a full calendar year rather than leave early, he added.
IBM contributed $875 million to its employees' 401(k) plan for the 12 months ended Sept. 30. Employees contributed $1.2 billion. IBM had $40.53 billion in 401(k) assets as of Sept. 30, according to Pensions & Investments data.
“Your personal contributions are not affected by these changes,” said the Dec. 5 IBM letter to employees. “(Those) who retire at any time … will receive their match and automatic contribution upon retirement, based on the eligible pay received during that calendar year.”
However, some workers were unhappy with the decision.
“We want IBM to reverse its decision,” said Lee Conrad, a former IBM employee and national coordinator of Alliance@IBM, Local 1701 Communications Workers of America, Binghamton, N.Y. The union represents 300 dues-paying workers but does not have a collective bargaining agreement with IBM.
“If you lose your job on Dec. 1, you don't get your match,” Mr. Conrad said. “The workers are very angry.”
Douglas Shelton, IBM's director of corporate communications, said in an e-mail that “this change reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment.”
If an employee contributes to the plan, IBM will match the savings dollar-for-dollar up to 6% of eligible pay for people hired before Jan. 1, 2005, and up to 5% for those hired after that date, Mr. Shelton wrote.
“We also make automatic contributions to their IBM 401(k) Plus Plan account, even if the employee doesn't participate in the plan,” he added. The amount of automatic contribution earned — 1%, 2% or 4% of pay — depends on the pension plan formula an employee is eligible for on Dec. 31, 2007.”
The range of company contributions to employees ranges from 6% to 10% of pay, Mr. Shelton added.
“This is not a big deal,” Thomas Kmak, the Kansas City, Mo.-based CEO and co-founder of consulting firm Fiduciary Benchmarks Inc., wrote in an e-mail, referring to the new IBM policy. “In fact, why would you give away benefits to someone that is no longer part of your firm and potentially working for a competitor?“
Mr. Kmak said he doesn't think the new system would have much impact on employees' retirement savings or their retirement strategy. “The timing of the match does not have a huge impact on ultimate account balances,” he said.
As for IBM saving money on the new system, “the only savings would be for people leaving IBM getting a match before Dec. 15,” he wrote.
Mr. Kmak doubted that IBM's decision would create any ERISA issues because the year-end payment practice is “common.”
Consultant Donald Stone, managing partner and chief investment officer of Plan Sponsor Advisors, Chicago, agreed. In an e-mail, he said IBM could save some money on matches for people who leave before the end-of-year corporate match.
Although the new system is “unlikely” to affect participants' overall savings behavior, “since they will receive the match later than before, it will have a negative impact on their savings in up markets and conversely potentially a positive impact in down markets,” Mr. Stone wrote.
“Delaying receipt of thematch does mean that participants will not have the benefit — or penalty in a down market — of having the match assets invested,” Toni Brown, San Francisco-based director of U.S. client consulting and head of U.S. defined contribution for Mercer. “Contributing the match in a lump sum may increase participant awareness of the match and participants may then place greater value on the benefit of receiving a match.
“It will be interesting to see results over time because it could make employees more engaged in the 401(k) and more willing to increase their own contribution,” she added.