What the end of IBM's 401(k) match could mean for the future of retirement plans

Beginning in 2024, IBM will no longer match employee contributions to their 401(k) plans. The news broke in early November, and reactions to the end of the match — which will be replaced by a 5% retirement benefit — have been mixed, sparking conversations about what the move could mean for the future of retirement plans. 

In addition to the new automatic 5% benefit provided by IBM, called a Retirement Benefit Account (RBA), employees will receive a one-time 1% pay increase. For the first three years of this new plan, all employees are guaranteed a 6% annual interest rate, at which point IBM guarantees 3% of the rate on 10-year treasuries. Compared to a 401(k), IBM employees have expressed concern around lower returns and less control over their retirement funds. 

"The optics of this — depending on how you read it and who you are as a reader — are varied," says John Lowell, partner at October Three Consulting, a benefits and retirement advisory that champions the combination of 401(k) offerings along with cash-balance pensions. "There's been a lot of negative reaction, but there are a lot of positive things that this does, and positive ways this affects certain constituencies." 

Read more: October Three's John Lowell is bringing the best of 401(k)s and pensions to retirement

IBM has long been a trendsetter in this space. In the early aughts, the tech giant froze its defined benefit pensions in favor of defined contribution plans. Will this latest shift drive far-reaching change again? 

Lowell spoke with EBN about the upsides and downsides of IBM's latest move, why he doesn't think a cascade of defined benefit plans from other employers will follow, and why there's still work to be done when it comes to how organizations speak to workers about lifetime income.

Why, in your opinion, has much of the reaction to this shift been negative — and what's your take as an expert in the space? 
The IBM workforce, I would imagine, is still a pretty highly paid, highly educated workforce. I'd expect that most of those people had been deferring enough to get the full match from their 401(k), which would make this new plan a 6% for 6% trade. But if they really think they can beat a 6% return on investment consistently, then I can understand why they wouldn't be happy. 

But, if what you're looking for from retirement is lifetime income, you can get it on a better basis from this new retirement benefits account, or cash balance plan, than you can from the 401(k) plan because there's no intervening party or middle man. 

Read more: Could a return to pensions solve the impending retirement crisis?

So from your perspective, this could possibly shore up savings accounts. What employee groups may most benefit from this?
IBM — like virtually every large company in the country right now — has a DEI initiative that they're pretty open about. And the groups that DEI initiatives aim to support are actually the ones that have been hurt the most by the disappearance of pension plans and by the predominance of 401(k)-only arrangements. 

Women and people of color have gotten killed, financially. Let's think about it. Take women as the example. Think about a [heterosexual] married couple, and both of them are deferring enough into their 401(k) to get a full match from their plan. In my experience, if at any point they have to cut back, the woman cuts back. It's a societal thing, and I've seen it happen even when the woman is getting a better match. Numerous studies have shown that women are more risk averse, and more likely to want to have a rainy day fund — which means saving outside of the plan. They're less likely to use the plan as much as they can. Another part is that, because women do this thing called having kids from time to time, they're more likely to have breaks in employment, which can mean periods of time when you're not saving. When we look at the Black and Hispanic populations, [these discrepancies] are even more pronounced.

Read more: Boomers may outlive their 401(k) savings — unlike predecessors with pensions

What are the implications of this change? Do you think other companies will follow suit and we'll see pensions make a comeback? 
I think that some of the companies that were perhaps on the edge of making a change might be pushed over the edge and make that change. For companies that weren't thinking about it, this isn't going to get them to think about it, in my opinion. I don't see that level of follow-the-leader here. I could be wrong — I actually hope that I'm wrong. 

From the perspective of the employer, what could this mean for IBM's bottom line? 
Interest rates have gone up fairly precipitously over the last couple of years, which means that pension liabilities have gone down. IBM's pension plan was pretty well funded. When interest rates went up, it got more well funded. My expectation is that this cash balance money that they are giving the participants has no immediate cash cost, so what they're getting would appear to be improved cash flow at a time when cost of cash has gone up. So in the immediate short run, the cost of this might be zero, or it might be the 1% pay raise only. 

Read more: Why women can't afford to retire

For their employees, the 401(k) plan still exists, just without the match. How would you advise taking advantage of that? 
The pension is a core benefit, and let's assume people will use that for lifetime income. From an investment standpoint, lifetime income is essentially a fixed income investment. If you as an individual believe that 60/40 is the right investment mix, you've probably already got that 40 from the pension. That means you can invest your entire 401(k) in equities or in aggressive investments, return-seeking investments. But most people don't think about it that way. 

If other organizations do follow suit here, what should they consider? 
The messaging is important for companies looking at this in the future. And whether that "future" is today or tomorrow, messaging is probably more important than their actual actions. If you get the messaging right, and you make people think positively about this, they'll at least give it a chance. If you blow the messaging, it doesn't matter how good [a plan] is.