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IBM Cutting Major Employee 401(k) Benefit

This article was written by in Career and Work. 12 comments.


When you’ve proceeded beyond the series of interviews and salary negotiations, there are few better feelings than signing the offer letter and accepting a new job — particularly if you’re moving to a new position away from one that was less than satisfying.

You sign this letter and you have some expectations for how the income and benefits will make your life better. It’s great when both sides live up to their expectations for each other. You do your work as you indicated you could during the interviews, putting in extra effort and striving to succeed with the challenges placed before you, and your employer gives you that paycheck every other week, provides you with affordable health insurance, and helps you secure your retirement.

Something somewhere almost always breaks down in this happy employee-employer relationship, and it can come from either side. Maybe you’re not living up to your boss’s expectations. I would say that if you’re a regular reader of Consumerism Commentary, that’s probably not the issue. You probably work hard, whether for yourself, your boss, or your clients, recognizing the value of put in the effort when the goal is financial independence. If you’ve ever dealt with a large corporation, however, you may recognize exactly what’s happening with one of the country’s biggest companies — certainly one of the most influential in the second half of the twentieth century — IBM.

When we think of technology companies today, we look at Google, Apple, and Microsoft. We think of the next generation of tech start-ups, born in Silicon Valley, Austin, Seattle, or another progressive city. Facebook, Twitter, and small companies that are funded privately are moving technology forward. IBM is more in the background today, even though the company is working on major technological advances that will change the world, not just allow you to share photographs with your friends.

IBM has been a leader in employee relations — not because they always do what’s best for their employees but because the changes they make are copied by other companies. This technology company was one of the first to eliminate pensions in favor of 401(k) plans, effectively moving the onus for retirement saving from the employer to the employee. Whether you agree with this philosophy of the individual being responsible for his or her own retirement is irrelevant — it’s a reduction in company-funded benefits, putting more risk in the hands of the employees, and helping boost the financial industry and the companies that manage funds in 401(k) and administer the plans.

The rest of the country’s corporations followed IBM’s plan, greatly reducing their future expenses by reducing and eventually eliminating pensions.

Because of IBM’s leadership, it’s important to note when they decide to make changes to their employee benefits. The company recently announced that it is making significant changes to its 401(k) plan. Through the recession, many companies cut costs and took advantage of a workforce that felt trapped in an environment of high unemployment by reducing benefits. Although the recession is technically over, workers are still concerned about their job mobility, so many companies haven’t restored the removed benefits.

Usually one of the first benefits to be on the chopping block is the employer’s matching contribution to employees’ 401(k) plans. IBM isn’t eliminating the company’s matching contribution, but they’re making one change that’s going to save them a lot of money while still allowing them to claim they match employees’ contributions. Rather than contributing a percentage of an employee’s salary with each paycheck, IBM is waiting until the end of the year to match employees’ full year of contributions.

With this change, IBM will join the 9 percent of companies that already match 401(k) contributions only once a year. More companies are sure to follow now that IBM has reduced this benefit.

IBM currently matches at least 6 percent of an employee’s pay. So if you earn $150,000 a year and contribute 6 percent of your salary to your IBM 401(k), you contribute $9,000 and IBM contributes $9,000. That’s the kind of immediate return you can’t find anywhere other than a 401(k). Normally, this works in each paycheck. Every other week, $346 is deducted from your paycheck and $692 is moved into your 401(k). When you accept a job offer, you keep this in mind as part of your compensation when you evaluate your decision.

With the change, you will only receive your additional $9,000 at the end of the year. There are two big disadvantages to the employee. The first is the smaller of the big disadvantages: you don’t get to take advantage of the stock market on that money throughout the year. So if the stock market or whatever you happen to invest in with your 401(k) goes up, you lose a bit of that increase. In the same vein, if your intend investments decrease throughout the year, you could end up buying more shares at a lower price by waiting until the end of the year. But over the long term, investments tend to go upwards, so looking at the bigger picture, this is a worse deal for employees.

The second disadvantage is the most harrowing. How many people do you know leave their jobs, either by their own choice or by their company’s choice, on January 1, right after they’d supposedly receive the matching contribution from the full previous year? People leave jobs at any time during the year, and now when they do, they’d forfeit the matching contribution for the portion of the year for which they’ve already worked. The company now has an incentive to let employees go right before the company distributes its matching contributions.

You see the same corporate behavior happen around the time companies issue annual bonuses, and I will tell you there are few things more insulting and aggravating, from a financial perspective, than being laid off right before bonuses are issued. But you accept it and move on, and if you have built up your
human capital
and are prepared financially, you don’t need to worry about the state of the economy when finding possibilities for replacement income or a new job.

For the most part, though, this is not a way for IBM to eliminate employees and pay less money (although that will certainly happen over the course of their business as usual). It’s simply a way to get out of paying a significant amount of benefits. According to the Wall Street Journal, IBM paid $875 million in matching and automatic contributions to its employees’ 401(k) plan, and this move will reduce that expense.

Photo: Flickr
Wall Street Journal

Published or updated December 12, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar krantcents

I think IBM did this for a variety of reasons. It saved money and slows down any departures. Over time, the once a year match will even out because it is going into the market the same time every year.

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avatar tom

If IBM lays off someone, there will be lawsuits over the 401(k) payments. I highly doubt those that were laid off will lose the entire payment.

I’m willing to bet this is exactly as krantcents said… to slow departures. IBM is a major consulting firm with many big name competitors. There is a lot of company hopping in this field that has huge impacts to in-work projects. This was probably designed to slow that as much as possible, while saving money. If you voluntarily leave, you lose your payment, so you had better stay, at least until the beginning of the year.

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avatar jim

Yeah ask Krankcents said, after the first year the impact of once a year contributions versus monthly contributions will flatten out. Over the long term annual contributions looks pertty similar to monthly contributions, they’re both dollar cost averaging but just over different size periods.

My company already does annual contributions to our retirement fund so I guess I’m in the minority here.

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avatar Ceecee ♦53 (Newbie)

I wouldn’t have thought of that second downside—I would have assumed that the contribution would be pro-rated when a person terminated employment. I can see where this will save the co. a lot of money. That said, it is better than laying off a large number of workers.

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avatar Nicole @ The Penny Frugalista

My company has been doing something similar, but they only match the first $1,000 of 401k contributions. So when you reach $1k, they match it immediately, rather than at the end of the year. I’d hope IBM would give the match that’s earned if an employee decides to leave before the end of the year.

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avatar Brian

“and now when they do, they’d forfeit the matching contribution for the portion of the year for which they’ve already worked. The company now has an incentive to let employees go right before the company distributes its matching contributions.”

Where is your source on this? I highly doubt they will be letting an employee go December 15th so they can not pay any matching for the entire year. They’d be sued by every exiting employee post-haste.

You can do bonuses this way because bonuses are, by and large, not guaranteed income and if you’re not employed when they are given, you’re out of luck.

However, 401(k) contributions are different, and, very similar to most profit sharing, you still receive pro-rated contributions based on when you leave. So if a company pays profit sharing on January 31st based on profits from the previous year, and you left July 1 of the previous year, you would still qualify for 50% of profit sharing. Nearly all companies I’ve seen operate this way because of the mere threat of legal action.

Not to mention any company that operated this way would have a seriously hard time attracting quality talent – this current option may already present enough concern to make talent harder to come by.

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avatar Luke Landes ♦127,500 (Platinum)

The quote you pulled, at least the second sentence, is my opinion… it could well be wrong. The first sentence, well, perhaps I should say that it’s possible that the would be forfeiting the remaining matching contribution. It’s pretty clear from the various news articles that have covered this topic that this is a cost-saving measure for the company, and the only way that is true in any significant manner is if it allows the company to not pay “accrued” matching contributions when an employee leaves mid-year, and I believe this analysis is correct.

From the WSJ article: “Workers who leave the company before Dec. 15 won’t qualify for the match, unless they retire.”

I believe that you’re right in that it is common for companies with once-a-year matching payouts to pay “accrued” matching contributions when someone leaves at some other time throughout the year. And in some cases, when you can work out a severance package, it’s something you can take into account. But the lower you are on the corporate ladder, the less those options are available to you. I an confident there’s no regulation that says a matching 401(k) contribution has to be paid in a certain manner, or that all of a “promised” benefit needs to be paid to an employee at the event of their termination. If the benefit is that matching contributions take place at year end, the benefit documentation will likely include words to the effect of, “You’ll need to be an active employee at the time of the distribution to receive this benefit,” and thus, the company has fulfilled its end of the “bargain.”

I agree that policies like this make companies more unattractive, but a lot of potential employees ignore this type of information, particularly if they feel desperate for work.

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avatar Brian

In sync with other reports on this change, quite different if an employee voluntarily leaves and chooses, by that decision, to forfeit. Well within their right to stay or go and understand the consequences. Though IBM will still probably face a few legal challenges by employees hired before the change. They would probably simply pay the match and make them go away. And yes, that would be an effort in cost savings. Same as an employee leaving before bonus time though, onus is on the employee.

Very different if, as your sentence seemed to imply, the company started using this to let go of people right before payout via layoff, etc. The regulatory folks would jump at that and this landscape could change pretty quickly.

Keep in mind too, this isn’t the 100 employee company that may have a few hundred thousand in accrued contributions. Their payout last year was almost a Billion Dollars in contributions. Hanging on to that sort of coin throughout the year is going to look better on balance sheets, not to mention give them a lot more options (like paying down higher interest notes throughout the year with those dollars and negotiating lower ones for the payout commitment, and many other options.)

Not saying I agree either way, I dislike the move personally.

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avatar Lance @ Money Life and More

It is sad but I am not surprised at all. I interviewed with my company and at least they were up front and said they’d be lowering the matching contribution from 6% to 4% so I could accept that. If they switched after though I’d be pretty upset.

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avatar wylerassociate ♦162 (Cent)

I can’t say that I’m surprised & more companies will follow IBM’s lead in cutting 401K benefits.

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avatar Richard Cato

Perhaps we should move to an environment where employers are only allowed to offer salary and personal time off . That way, you can judge an employer on his/her integrity, business model, work environment, and career potential, rather than benefits. Employers should also be required to offer only specified time contracts to all employees. When you are hired you are guaranteed a position for a specified time at a certain price, just like pro athletes and actors. That takes the timing and the politics out of firings, downgrades, or punitive actions. An employer can let you go if he pays you what he agreed for the term of the contract with no explanation. You can quit, but you forfeit all pay for the remainder of the contract.

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avatar dan

from the wiki…While CEO of IBM in 2009, Palmisano earned a total compensation of $21,159,289, which included a base salary of $1,800,000, a cash bonus of $4,750,000, stocks granted of $13,517,401, no options, and other compensation of $1,091,888.[16]

at least the board is not hurting, while they hire more in India and china and lay off in the US.
I worked at one of the outsourcing centers in Greenville, they laid of 92 employed programmers and opened up 92 contract positions. then told the folks they could apply through manpower…

not a nice company to work for in most ways. you are a tiny cog in a huge machine.

just sayin…

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