Employers can learn many lessons from the IBM Corp. cash balance plan fiasco. They would do well to heed them. Two weeks ago IBM was forced by employee reaction, negative publicity and congressional interest to give all employees who are 40 years of age or older and have 10 years of service a choice of whether to stay in the old defined benefit plan or join the new cash balance plan.
The negative publicity has harmed cash balance plans (and IBM's image). But good may yet come from the mess if companies heed the lessons. First, any change that cuts benefits for all or some employees must be carefully explained and fully justified by the company's financial or competitive position, or there will be loud opposition.
IBM's position that it needed to change to a cash balance plan for competitive reasons was not credible, not only because the company has been doing well, and not only because Chairman Lou Gerstner has been doing very well personally, but also because employees learned the company stood to gain a $200 million earnings boost from the change.
It seemed to the midcareer employees whose benefits would be reduced that the $200 million was coming from their pockets.
Second, the furor should dispel the myth that employees do not understand or appreciate a traditional DB plan. It might be true for younger employees, but those older than 40 clearly begin to pay attention to their retirement benefits. It was these employees who raised the outcry over IBM's new plan.
Companies that want to keep traditional DB plans should build on the over-40 group's interest to generate appreciation for this expensive benefit among all employees. One way would be to give all employees more information about the traditional plan.
Third, the Internet and a computer-savvy work force mean employees can find information that would have been difficult to locate in the past, and can easily share that information with colleagues around the country.
Using the Internet, they can build a critical mass of protest quite easily, often without the employer's being aware of it. In addition, they can communicate with members of Congress and the media. Even if the employer is aware of the situation, it can do nothing to stop it, if the employees communicate on their own time and through their home computers. Employees no longer can be treated like mushrooms -- that is, kept in the dark and fed manure.
Fourth, employers will not easily be able to change employee benefits in ways that appear to disadvantage one group or another. The employees will notice and protest.
Fifth, companies won't be able to use "wearaway" periods to reduce the transition cost or recapture surplus assets from the DB plans. That means cash balance plans will become more expensive to implement.
Unfortunately, IBM's miscalculation has damaged cash balance plans in the eyes of employees and Congress. From now on, companies will have to spend more money, time and educational effort to persuade skeptical employees that cash balance plans are to their advantage, and not just a way for the company to profit.