IBM Scraps Pension Plan for New Hires in Favor of 401(k)

In a surprising announcement that may have a ripple effect throughout corporate American, International Business Machines Corp. has stated that as of January 1, 2005 it will no longer offer its cash-balance pension plan to newly hired employees. Instead, new hires will be able to participate in a new "401(k) pension" plan with a promise of a generous 6% dollar-for-dollar match from employer IBM.

While current employees will not be affected by the change, all new employees will no longer be eligible to participate in either the company's cash-balance plan or the traditional defined benefit plan. IBM's cash-balance plan was enacted in 1999 and has been the subject of a legal controversy over the issue of whether the plan discriminates against older workers. Earlier this year IBM agreed to a partial settlement of $300 million after losing a court battle over the discrimination issue. IBM intends to appeal the judgment.

A cash-balance plan is a hybrid of a defined benefit plan and a defined contribution plan wherein the retirement benefits are payable for life but are based on the fund balance at retirement. Cash-balance plans also allow an option for a lump sum payout, either at retirement or at termination of employment, even if that termination is prior to retirement age. Investments in a cash balance plan are managed by the employer, and employee contributions are not allowed.

At IBM, the cash balance plan that was in place required employees to work for five years before vesting. With the new 401(k) pension plan, employees will be vested in the employer contribution to the plan after one year.

Randy MacDonald, senior vice president of human resources at IBM indicated that the company's switch to the 401(k) pension plan is the sign of a trend. "We're just following the leads of a lot of other companies in deciding to go with a defined contribution plan," he said in a recent interview with PlanSponsor.com. He cited recent regulatory and legislative acts as obstacles to maintaining a defined benefit plan.

Approximately 25% of large employers now have a cash-balance plan, according to a survey conducted by benefit consulting firm Hewitt Associates. Survey results also disclosed that more than half of employers plan to make some type of change in their cash-balance or pension equity plans within the next year.

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