IBM certainly wanted to design a 401(k) that could be deemed competitive with the plans offered by other technology companies, many of which were launched in the post-defined benefit era and tend to offer features that are in tune with their highly mobile work forces. At the same time, Ms. Salinaro said, IBM wanted a plan that would provide employees with a level of stability — and investing sophistication — seen in its traditional defined benefit pension.
To achieve those goals, IBM is making considerable contributions to its new plan. To help participants build an appropriate foundation for their 401(k) accounts, IBM will give all its employees an automatic contribution starting this year. The company's contribution can range from 1% to 4% of employee pay, depending on the employee's previous pension coverage. (Some older employees who were covered by the defined benefit plan can also get an additional “special savings award” of another 5% of pay each year, Ms. Salinaro added.)
In addition to the automatic contribution, IBM doubled its matching contribution this year, and now gives participants a dollar-for-dollar match on up to 6% of their overall pay. By comparison, most companies that match employee contributions give 50 cents for every $1 a worker puts in the 401(k), according to the Profit Sharing/401(k) Council of America, Chicago.
David Wray, president of the council, said that more and more companies are boosting their 401(k) match after they freeze their defined benefit pension plans, while others are electing to make automatic contributions instead. “But it's extremely rare to come across a company that offers a dollar-for-dollar match plus an additional company contribution,” he said, noting that just 4% of companies match 100% of an employee's contributions on up to 6% of pay, while only a third of all companies make an automatic contribution.
While IBM's contributions are hefty, the company expects to realize big long-term savings compared with the cost of maintaining its traditional pension plans. IBM estimates all the changes to its various plans will allow it to reduce worldwide retirement expenses by a total of $2.5 billion to $3 billion by 2010 — substantial savings, even for a company that generated $10.4 billion in income last year off almost $100 billion in revenue. Not to mention the reduction in hassle: IBM's switch to a cash-balance pension plan in the late '90s led to a lawsuit alleging the plan discriminated against older workers, a charge that a federal appellate court rejected in 2006.
So it's no surprise that IBM's chief financial officer, Mark Loughridge, was “intimately involved” in the design of the company's new retirement framework, Ms. Salinaro noted. “Figuring out what the next generation of our retirement benefits was going to look like had to be a true partnership between finance, benefits and legal.”
Crafting the new retirement platform was about more than just giving IBM's employees money toward their retirement. Ms. Salinaro said IBM executives felt it was critical to provide 401(k) participants with more flexible, yet efficient, ways to save, invest and also draw down their 401(k) assets — and to allow them to do this at a relatively low cost.
“401(k) plans are not the center of most workers' lives, but they are at the heart of their retirements,” observed Alan Glickstein, a senior retirement consultant at Watson Wyatt Worldwide in Dallas. “Employers need to find cost-effective ways to adequately prepare participants who are not inclined to be actively engaged in every step of the retirement planning process.”
Perhaps the best example of this at IBM involves its use of life-cycle funds, which the company now customizes for its 401(k) participants. The new plan offers multiple life-cycle funds, including target-date funds, which are based on an employee's expected retirement date, and life-stage funds, which are tailored to the participant's risk tolerance.
IBM constructs these in-house funds — which automatically invest in a mix of stocks, bonds and other assets (now including commodities, for example) — for participants using the core funds on its 401(k) platform. “It's much more cost-effective for our employees if we customize these funds, as opposed to taking something off of the shelf,” Ms. Salinaro said, adding that cost is even more crucial now that IBM participants are automatically defaulted into target-date funds unless they independently choose another investment option. A typical target-date fund at IBM would cost a participant just 0.10% of assets — significantly lower than the 1.24% expense ratio of the average target-date fund, according to Morningstar.
Given their role in the 401(k) plan, IBM's life-cycle funds now sit at the top of the four-tier offering of funds the company has created, which essentially ranks funds based on the level of investment sophistication a participant might desire.
In the second tier, below life-cycle funds, are IBM's core funds, which include some relatively basic bond and passive equity funds. The third tier, called the “expanded choice funds,” consists of a mix of passive and active domestic, international and emerging equity strategies and several fixed-income strategies.
The fourth tier, dubbed the “mutual fund window,” allows for more investment flexibility, providing participants with access to roughly 200 more exotic mutual funds, such as global or international small-cap equity funds. IBM tapped five asset managers to provide all the funds for this window, allowing the company to negotiate for lower fees on many of the funds.
Another essential ingredient in IBM's 401(k) Plus, Ms. Salinaro said, is an annuity option that the company added. While many participants pay attention to accumulating assets, few focus on what some call the “de-cumulation phase,” and few workers have strategies for appropriately withdrawing money from their 401(k) plans to cover the entire span of their retirement.
