The past couple of years have seen an accelerating trend away from traditional, defined benefit pension plans for American workers. The trend is away from fixed retirement benefits, paid over a retiree’s lifetime, to a less certain world in which we all have to rely on our own savings — 401(k)s, IRAs, and other savings. In the On-your-Ownership society, individuals rather than corporations or government take all the investment risk, and all the risk of outliving our savings. Today, IBM laid another brick in this wall.
IBM announced that it plans to freeze its pension plan in 2008, opting instead to enhance its 401(k) plan contributions for 125,000 US workers. Nothing will change for current retirees, and the shift to 401(k)-only retirement benefits is already in place for employees hired in 2005 or later. The change is that current employees will no longer accrue traditional pension benefits after 2008. Their benefits will freeze at that point, and after that IBM will only add to their 401(k) accounts.
IBM says that they will enhance the 401(k) plans that will now provide every employee’s main retirement benefit. According to the AP,
IBM executives said that by no longer having to account for pension accruals that would have mounted after 2008, the Armonk, N.Y.-based technology giant will save between $450 million and $500 million this year alone and up to $3 billion from 2006 through 2010.
How does a change that doesn’t happen until 2008 save IBM money now? It has to do with the pension promise. IBM is big enough that its actuaries can predict pretty accurately how much the pension benefits today’s employees would accrue in 2008, 2009, and beyond, would be worth. To pay these future benefits, IBM may have to put cash into its pension fund this year, planning to invest that money until the benefit payments come due. By canceling the future benefits, IBM relieves itself of the need to fund them. Apparently, the amount by which the company will expand 401(k) benefits is smaller. Even if not, 401(k) benefits really aren’t a dollar-for-dollar substitute for a traditional pension plan.
IBM receives another, potentially more important benefit by shifting to a 401(k) plan. In a traditional pension plan, the sponsor bears all the investment risk, and the risk that retirees live longer than expected. In a 401(k) plan, the employee bears both risks.
IBM’s is not going to be the last pension freeze announcement we will hear. The trend among large employers to move in this direction seems to be gathering momentum. For individuals, the implication is simply this: You’re increasingly on your own, and your 401(k) isn’t likely to be enough by itself to fund a comfortable retirement. So save now, and learn to invest.
