IBM shows how companies can use surplus to reopen pension plans

IBM's recent decision to reopen its defined benefit plan with a cash balance component provides a real-world example of how corporations can take advantage of their pension plan surpluses, said Jared Gross, managing director, head of institutional portfolio strategy at J.P. Morgan Asset Management, in a Dec. 11 interview.

The end of 2022 represented the first time in 15 years that U.S. corporate DB plans were fully funded on average. Publicly traded companies with the 100 largest pension plans had an average funding ratio of 100.2% as of Dec. 31, according to a Pensions & Investments' analysis of their latest 10-K filings.

IBM boasted one of the largest funding ratios as of that date, at 116.8%. The company originally froze its defined benefit cash balance plan to future benefit accruals as of Dec. 31, 2007. Since then, the IBM 401(k) Plus Plan has been the primary retirement plan for active employees, and in 2022, the company contributed just over $489 million to the plan, according to its latest 11-K filing.

In November, IBM announced it was scrapping its 401(k) corporate match and replacing it with a cash balance component called a retirement benefit account.

Gross said the move has a very tangible benefit to IBM, in that the new cash balance plan will be funded from the pension surplus while 401(k) contributions come from the operating business balance sheet.

"You are sidestepping an operating business cash obligation, which is the match to the 401(k), at least partially, and I think the interesting question will be to see how much they reduce their 401(k) contributions relative to any contribution they ultimately make to the DB plan," Gross said.

"Even though the (DB) plan is overfunded and they probably don't have any required contributions, if they all they do is sort of spend down the surplus, then this sort of new model will have a finite life," Gross said. "If they allow the returns on those assets to generate a sufficient performance to subsidize most of the costs, they may still put some money in the plan over time, but it will be less money than they have contributed to the DC plan."

"And I think you can very easily see how the sponsor comes out ahead," Gross said, "And then the question for the participants is: How do you value the sort of transfer from a DC in-kind match to a DB benefit that has longevity protection?"

Gross said the IBM move provides another powerful argument for companies with existing defined benefit plans to keep them around, even if it simply means giving participants the option of choosing the DB plan if they value the longevity protection or the DC plan if they value the portability.