Sometimes you don't appreciate what you have, until it's taken away from you. So it is with defined benefit plans.
Compare the tempest over IBM Corp.'s move to adopt a cash balance plan with Kmart Corp.'s abandonment of its defined benefit plan five years ago. In Kmart's case, no one seemed to care.
Donald L. Morford, Kmart's director-employee benefits, explained at the time the company's motivation to freeze the plan, which had $1.2 billion in assets: "No one knew much about it or cared much about it."
Kmart, which already then had a 401(k) plan, added a profit-sharing plan in place of its defined benefit plan.
Mr. Morford's remark and other statements captured an attitude shared by many others in general, employees and managements, about defined benefit plans and their impact on employee motivation and morale.
Cash balance plans were created in part to overcome the lack of understanding of, or appreciation of, defined benefit plans.
At IBM, the cash balance plan raised the level of enthusiasm in an unintended way, as many of its workers rose up in opposition to it and now have taken the issue to shareholders in the form of a dissident proxy resolution that seeks to retain the defined benefit plan for any worker who wants it.
IBM might have handled the transition to conversion in a poor fashion. But the rhetoric condemning cash balance plans is out of a fantasy world, a world where no one competes, where nothing changes. None of the rhetoric has addressed the central issue IBM faces in trying to stay competitive, in trying to accommodate better the majority of workers who move from job to job in this increasingly dynamic economy. Nor does the rhetoric expound on the reasons the number of defined benefit plans has withered to the point where they are on a path to extinction.
Companies voluntarily provide retirement benefits, the amount and form motivated mostly by competition for employees.
The IBM conversion has to grant employees all accrued benefits. But future benefits can be changed, just as future salaries can be changed. IBM could have terminated its plan, leaving employees without even the cash balance option, which is a type of defined benefit plan. Thousands of companies have eliminated their defined benefit plans.
The IBM issue has become thoroughly politicized, with proposals in Congress and on IBM's proxy ballot. Do shareholders want to vote on a company's employee pension plan? CalPERS and the National Electrical Benefit Fund do -- last week they announced their support for the resolution against the company. The vote will take place at IBM's shareholders meeting April 25 in Cleveland.
A possible outcome would be a victory for the proposal. Then what? IBM still could terminate its defined benefit plan. If IBM concedes the demands in the shareholder resolution, will it be more competitive?
As IBM officials have noted, and other sources have pointed out, 75% of the company's competitors don't offer a defined benefit plan; even fewer offer retiree medical plans, which is another issue in the resolution. According to IBM, less than 10% of employees who join IBM will work there for 30 years, the longevity that makes a defined benefit plan lucrative to participants. And some 40% of its employees have been with IBM for less than six years.
The company obviously wants to move away, as it states, from "the age and years of service model that rewarded longevity and which provided little incentive in attracting and retaining employees."
Not all employees at IBM agree. But why aren't employees at its competitors agitating at their companies for defined benefit plans and lobbying Congress to force the companies to start such plans? These employees don't have the broad array of plans IBM has.
Maybe IBM simply should terminate its defined benefit plan and enrich its tax-deferred savings plan. Who could blame IBM's management? They could throw the responsibility of saving for retirement on to the employees, as so many employers have. In addition, because employees can take their defined contribution plan assets with them when they change jobs, the younger employees would be pleased.
IBM could have done that last year instead of trying to preserve the defined benefit plan in the form of a cash balance plan. It tried to preserve most of its unusually rich employee benefit package in highly competitive times, and was criticized for it.
Some employees and some companies do want defined benefit plans, or their cash balance versions. The problem is it might be too late to save them without killing their sponsoring companies.