Plan sponsors may follow IBM's lead, reopen pension plans, consultant says

The dramatic news that IBM is replacing its 401(k) corporate match with a cash balance component in its previously frozen defined benefit plan may give other plan sponsors the impetus to move ahead with similar plans, said John Lowell, partner at October Three Consulting, an actuarial consulting firm specializing in defined benefit and cash-balance plans.

"When companies are looking to make significant changes, so many of them say 'We don't want to be the first kid on the block to do that,' but when IBM does it, it becomes kind of permissible, so to speak," said Lowell in a Dec. 4 phone interview.

He added that for some time, he has been in conversation with a number of employers that have at least one member in the C-suite who has been championing some kind of reopening of their defined benefit plans to their fellow executives.

Those companies range from one firm that Lowell said has more employees than IBM, down to multiple firms with hundreds of employees.

He would not name the companies, but he did say that the C-suite executive at the giant firm said to him following the breaking IBM news: "We make changes like this really slowly. I'm on this side. If you're willing to, I want you to take this journey with me understanding that."

Lowell also said a chief financial officer at another firm said that following the IBM news, he is going to his CEO with the recommendation to reopen their DB plan.

Lowell said that while the IBM plan appears to be a traditional fixed-rate cash balance plan, he said a plan structure that is gaining some traction is what he calls a market-return cash balance plan.

That type of plan would be where the interest crediting rate is tied to the investment management of the plan rather than a fixed rate, he said. "One of the things about it is if a plan sponsor chooses to invest their assets exactly the same way as the notional account balances being credited, then you have — give or take a timing difference — you've got a perfect hedge," said Lowell. "If I tell you your account balance is going to grow exactly the rate as the investments, then I do have a perfect hedge. Then my assets and liabilities are necessarily moving together, and I don't have that volatility."

Lowell said one of the things that has been standing in the way of those types of plans being implemented is a "little bit of an issue on the accounting side."

While he would not identify the type of issue, he said he knows it is "very likely about to be solved."

Overall, Lowell said, when it comes to plan sponsors considering reopening their DB plans in some form, he said the IBM news has "moved the needle from a little bit on the red side of center to somewhere on the green side of center."