IBM reopening pension plan turns industry heads

When it comes to dealing with an overfunded frozen pension plan, International Business Machines is putting into action what some of its peers are thinking about.

The company recently confirmed that it will cancel its defined contribution plan company match and replace it with a component within its IBM Personal Pension Plan, a defined benefit plan, on Jan. 1. The 401(k) match is 5% of an employee’s salary.

The IBM 401(k) Plus Plan had $53.2 billion in assets as of Dec. 31, according to the latest 11-K statement. The company contributed $490 million to the DC plan in 2022 and $488 million in 2021.

Defined benefit plan experts said the replacement appears to be a cash balance component. They can’t predict if IBM’s action could start a trend, but they said it will provoke conversations by employers with overfunded pension plans.

“By introducing this retirement benefit within the IBM’s Personal Pension Plan, which is stable and well-funded, IBM is able to provide a benefit to employees that also helps diversify their retirement portfolios,” Timothy Davidson, an IBM spokesperson, wrote in an email.

IBM calls this a retirement benefit account, adding that no contribution is required from employees.

“The RBA adds a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and option,” Davidson said. “Employees can continue to contribute to their 401(k) plan as they do today.”

Davidson declined to provide details, although some experts and consultants said they saw the publication of a purported internal IBM memo outlining the RBA details. Pensions & Investments could not independently confirm the details.

“A number of clients have been calling saying ‘I think we should be talking about this,’” said Michael Archer, managing director and head of retirement-North America for Willis Towers Watson, referring to the memo.

He noted that one client with an open DB plan canceled the 401(k) match and increased benefits to the DB plan. He declined to name the company or discuss details.

“I expect we will see more of this,” said Archer, referring to different uses for a DB plan surplus. Companies will act “only if it makes financial sense for them and financial sense for their employees.”

For such a strategy to work, “it’s a benefit to have a strong surplus,” he said. Also, companies should evaluate how to invest assets “to maintain stability and not create volatility,” he added. “This isn’t for everybody.”

Corporate pension plans have benefited from higher interest rates, leading many to enjoy surpluses.
“There are a lot more fully funded pension plans than a few years ago,” said Justin Owens, director and co-head of strategic asset allocation at Russell Investments.

Referring to IBM’s action, he said: “This is proving to be a subject of high interest for overfunded plan sponsors, and we have been discussing these new developments with our clients.”

IBM’s decision is the “first time I’ve heard of a large sponsor” using an existing DB plan’s surplus “to fund a benefit intended to replace a DC plan benefit,” Owens said.

The IBM Personal Pension Plan — closed to new participants since 2005 and frozen since 2008 — had a funding ratio of 116.8% and a pension surplus of $3.6 billion last year, according to the latest 10-K statement. The DB plan “is in a very good position,” Owens said. The pension plan had $25.1 billion in assets last year.

Owens said he didn’t know whether IBM’s action could lead to a “small trend” of companies moving back to their DB plans from DC plans, but he added that he expected employers with fully funded pension plans to investigate.

Owens said one typical strategy for dealing with an overfunded frozen DB plan is to terminate the plan via a pension risk transfer to an insurance company.

Another typical approach is to let the plan “hibernate” by allocating a large amount to fixed income, paying benefits and “possibly pursuing smaller risk transfers” while allowing the plan to deplete on its own over time, he said.

In a Nov. 7 analysis of the IBM decision, Owens wrote that removing the company match means “the participant does lose some of the incentive to contribute directly,” adding that “many employees are motivated, knowing the employer will match their contribution.”

Removing a match from a DC plan “could impact the employee’s ability to retire in the long term if they contribute less,” he wrote. In IBM’s approach, “participants will also not have any control over how assets are invested for the employer portion.”

Cash balance plans, long used among companies with frozen DB plans, could be offered as a defined benefit component next to a 401(k) plan, said Aaron Chastain, senior investment consultant for NEPC.

“While cash balance prevalence has often been thought of as a substitute for a frozen traditional pension, we have seen more plan sponsors considering the role a cash balance plan could play as part of a total benefit offering alongside a 401(k),” he said.

“Instead of the pendulum swinging from traditional pension plans all the way to 401(k) only, cash balance plans as part of a retirement benefits package can help provide a middle ground and work towards solving many of the issues seen in the retirement industry,” he added.

A cash balance plan “defines the benefit in terms that are more characteristic of a defined contribution plan,” says a Department of Labor fact sheet. “A cash balance plan defines the promised benefit in terms of a stated account balance.”

By contrast, a traditional DB plan defined an employee’s benefit as a series of monthly payment for life beginning at retirement, the DOL says.

For employers, cash balance plans “can often represent cost savings without the significant interest rate risk of a traditional pension,” he said. "They also have a potentially more predictable cash contribution profile similar to a 401(k) match.”

For participants, cash balance plans compared to 401(k) plans can “provide an ability to annuitize the benefit, a guaranteed return on contributions, and ability to defer more dollars than with a 401(k) alone,” he said.

“The cash balance contribution can be beneficial to lower-income employees and lower savers since the contribution is agnostic to the 401(k) deferral, unlike a 401(k) matching contribution,” Chastain said.

Several NEPC clients in recent years have incorporated new cash balance benefits alongside their 401(k) plans “without fully eliminating the company match is there was one,” he said.

Among employers with overfunded frozen DB plans “it’s very common to ‘discuss what can we do with the surplus,’” Chastain said. “Can we increase benefits? Or can we reopen the plan? Are there other strategic actions or uses for the surplus?”

Linking to a DC plan may emerge as another possibility. “Can the 401(k) plan alone get participants across the finish line?” is a question sponsors have been asking for many years, he added.