IBM Shifts Employees From 401(k) to Hybrid Pension

IBM has notified its employees that it will suspend its current match and 1% automatic contribution to employee 401(k) plans as of January 1, 2024. In lieu of contributing to a 401(k) plan, the industry leader will provide a monthly account credit toward a new Retirement Benefit Account (RBA). Employees also will receive a one-time salary increase to offset the difference between the current 401(k) contribution and the monthly retirement account credit.

Under the new retirement plan scheme, employees can still contribute to a 401(k) plan and direct their investments. However, employees cannot invest funds that they contribute to the RBA. Instead, investments will grow at a fixed rate. IBM will guarantee a 6% return on investments through 2026 and the 10-year Treasury yield through 2034, which is currently about 4.5%.

Based on IBM’s descriptions of the plan, some retirement industry experts have characterized it as a “hybrid” retirement plan that has features of both defined benefit and defined contribution plans. Others have dubbed the new IBM benefit offering a “cash balance” plan. Interestingly, IBM was an industry leader in the mid-eighties when it moved away from the traditional defined benefit pension plan to a defined contribution 401(k) plan, which led many other large companies to do the same.

Some advantages of the RBA include the fact that it is portable, in that employees can continue contributing to it even after they have left their employment with IBM. Employees also are 100% vested at the time that they become eligible to participate in the plan. The RBA also allows employees to collect the employer’s monthly credit even if they cannot contribute their funds during a certain period, which could lead to higher participation by the workforce. Finally, an RBA could give an employee the guaranteed lifetime income a cash balance plan offers.

On the other hand, the one-time salary increase for equalization purposes will not be made with pre-tax dollars, like a 401(k) contribution so that the employees will pay taxes on the increase. Employees may have less incentive to contribute to the RBA without a match from the employer to their contributions. Furthermore, the employees may have a reduced long-term rate of return due to their inability to invest their funds in equities and being limited to a fixed interest rate. Finally, employees would be unable to access their funds through a loan like they do with 401(k) plans.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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