IBM is making changes to its employee benefits that may cause other large corporations to follow suit. The technology company will begin making contributions to employees’ 401(k) accounts in lump-sum annual payments, rather than at the time of each paycheck. It’s a move that will help the company cut retirement plan expenses.
Employees were notified this week that matching contributions will be made just once annually, on Dec. 31, beginning next year. “This change reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment,” IBM spokesman Doug Shelton said.
The end-of-the-year 401(k) match won’t be unique to IBM, but experts say the company’s move could lead other major employers to consider making less frequent contributions.
“IBM is one of the world’s most influential plan sponsors,” said Mike Alfred, CEO of BrightScope Inc., which rates corporate 401(k) plans. It places IBM’s among the top 30 plans at large employers. “Everyone in the benefits industry will pay close attention to whatever IBM does.”
Across the country, some 60 million workers participate in 401(k)s, which have become a key source of retirement savings. Most companies match from 3 percent to 6 percent of the amount the employee contributes to the account. Contributions are exempt from income tax, and investment earnings grow tax-free until withdrawal.
Although the amount employees will receive won’t change, those who leave IBM prior to Dec. 15 won’t receive that year’s 401(k) matching contribution, unless they’re retiring. That’s a disincentive for those considering jobs outside IBM.
IBM matches an employee’s 401(k) contribution dollar-for-dollar up to 6 percent of eligible pay, for those hired before 2005. Those hired later are eligible to receive up to 5 percent of pay. IBM also makes automatic contributions, ranging from 1 to 4 percent of pay, even if the employee doesn’t contribute to the account on their own behalf.
IBM paid $875 million last year in matching and automatic contributions to the more than 200,000 eligible employees. The company, based in Armonk, N.Y., had some 433,000 employees globally at the end of last year, when it reported nearly $107 billion in revenue.
IBM’s switch to an annual lump-sum matching contribution puts it among a relatively small number of employers taking that approach. About 7 percent of employers offering 401(k)s make contributions once a year, benefits consultant Mercer estimates. About 88 percent make contributions each pay period, with a smaller number using monthly or quarterly distribution schedules.
Companies switching to end-of-the-year matches typically save money because they don’t provide matching contributions for employees who leave during the year, other than those retiring. “The amount of the cost that is saved would vary significantly depending on the turnover within the organization,” said Alison Borland, a vice president with consulting firm Aon Hewitt.
Also, with annual contributions, Borland noted that a company has more freedom to allocate cash reserves as it sees fit during the course of a year, rather than regularly having to dip into accounts for biweekly matching contributions. Ultimately, however, the contribution must be made, in lump-sum at the end of the year.
Although annual contributions could help the company better manage its finances and cut costs, Alfred, of BrightScope, said IBM’s shift away from biweekly matches isn’t a positive for employees on the whole. Employees could miss out on some investment gains depending on how the financial markets perform during a given year. That’s because the company will have the cash available until year-end, rather than putting it in employee accounts where it would be invested throughout the year. However, that could be a plus for employees if markets decline.
For long-term employees, any savings differences resulting from an annual match rather than biweekly contribution could be marginal by the time a worker reaches retirement, given the ebb and flow of the markets.
A company’s policy of making matches annually rather than biweekly may not be a decisive factor for an employee considering leaving, or for a potential hire who might join, Borland said. The amount of matching contributions is what employees focus on, rather than the timing.
But the potential hit to retirement savings for an employee leaving could be significant.
Take this example of an employee who earns $45,000 a year, and receives a matching contribution capped at 4 percent. That employee would get an $1,800 match from the company. But if the worker leaves at the end of September under a policy like IBM’s new one, he or she would give up an accrued value of about $1,405, compared with what the worker could have received in biweekly matches. That example assumes a monthly average investment return of 0.4 percent.
Whatever a company’s matching policy, employees need to be saving more for their retirements, Borland said.
Aon Hewitt estimates that employees will typically need a retirement fund worth 11 times their annual end-of-career pay, beyond Social Security, to cover their needs when they stop working. Currently though, Americans are on track to accumulate funds worth only 8.8 times their final salaries, according to the consulting firm’s most recent research.
More Related Stories
- London machete attack could be linked to terrorism
- Conservative group blames military sexual assault on "Don't Ask, Don't Tell" repeal
- Lois Lerner, IRS disaster
- Donald Rumsfeld worried that marriage equality will lead to polygamy
- Experts: Fox News spying scandal a game-changer
- San Francisco Giant Jeremy Affeldt apologizes for homophobic past
- 9-year-old slams Rahm over Chicago schools
- Stockholm riots rage for third day
- Wall Street firm's "Golden Pitchbook" is totally sexist, full of lies
- Must-see morning clip: Toronto's eccentric and allegedly crack-smoking mayor
- Federal court strikes down Arizona abortion ban
- Jodi Arias: I deserve a second chance
- Oklahoma residents return home to pick up the pieces
- Florida man with connection to Tsarnaev killed by FBI
- FBI identifies 5 Benghazi suspects
- Here come the tornado truthers. Already
- Peace Corps to allow gay couples to volunteer together
- Moore officials: Funds for "safe rooms" were held up by red tape
- Rand Paul: Congress should apologize to Apple, not the other way around
- Rescue crews race to find tornado survivors
- Looting in Oklahoma?
Featured Slide Shows
The week in 10 picsclose X
- 1 of 11
Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
Credit: AP/LM Otero
Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
Credit: AP/Matt Rourke
A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
Credit: AP/Jenny Aicher
Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
Credit: AP/Molly Riley
Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
Credit: AP/J. Scott Applewhite
Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
Credit: AP/Carolyn Kaster
O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
Credit: AP/Las Vegas Review-Journal/Jeff Scheid
Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
Credit: AP/NASA/Chris Hadfield
When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
Credit: AP/Jacquelyn Martin
A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
Credit: AP/The Duluth News-Tribune/Clint Austin
Recent Slide Shows
- 1 of 11