Will the 1 in 401(k) Stand for Once Upon a Time?

An important shift in our industry was reported this week. It's not about compensation if you stick with the formal definition, but it really is. You'll see.

IBM has announced that the company is reducing it's 401(k) contribution schedule in 2013. The Company will now make only one 401(k) contribution a year, on December 31. Workers who leave the company before Dec. 15 will not receive the match unless they are retiring.

Wow. To give you a rule of thumb, Aon Hewitt's 2011 survey indicated that 84% of U.S. employers match contribution each pay period, 3% match monthly and 3% match quarterly. Only 9% match annually and odds are those contributions have a profit-sharing rationale.

Contributions made throughout the year compound, of course, so IBM employees will be losing that investment advantage (aka higher long-term returns). The once-a-year match also undermines the wise investment strategy of dollar-cost averaging, enabling employees to invest regularly so they can smooth out the impact of the market's ups and downs. And then there are those employees who are motoring toward retirement without the fuel that their financial planning had relied on.

You also might be wondering what the new schedule is going to do to IBM's turnover patterns, with most people leaving for greener pastures in the first quarter?  You would think they have that all worked out, wouldn't you?!?

Forbes and The Wall Street Journal picked up on the story as, "the latest in a series of moves big companies have been making to rein in retirement-plan expenses in recent years . . ." As we know, IBM is famous for making sweeping retirement plan changes that serve as inspiration for other companies itching to shake up the status quo as long as a good amount of money falls out.

The Wall Street Journal reports IBM's explanation as a change that, "reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment." Which may be true, but the explanation is a pretty chilly use of words.

When I read the news, which also got billing in the Daily Stat blog of the Harvard Business Review, I thought that this was a topic that we would want to keep an eye on -- for a lot of reasons. What do you think?

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She joined Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- "Everything You Do (in Compensation) Is Communication" -- at the WorldatWork 2012 Conference. Margaret brings deep expertise in total rewards and communications to the dialog at the Café. Before founding re:Think Consulting, she was a Principal in Total Rewards, Communications and Change Management with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

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Comments

[Joe Rice]

I guess to fully assess the move, you'd have to know IBM's entire welath/retirement package. But on the face ot it, I have a pretty strong dislike of the move for all the reasons you stated. Given that 401(k)s were introduced as a cost savings to DB plans, to see them now slowly erode away is troubling as it's well documented that we have trouble saving enough for our retirement goals.

I particulary hate the dollar-cost averaging aspect of it.

The flip side is that workers need to start voting with their feet. If IBM doesn't see a hit to recruiting or retention, it just shows that companies can get away with these cuts.

[E. James (Jim) Brennan]

Sense that IBM is a pale shadow of its former great iconic giant self, having outsourced so many of its former internal support functions.

[Margaret O'Hanlon]

Joe, thanks for your thoughts. I agree that we don't have enough information about the Total Rewards to put ourselves in employee shoes but some facts about what it means to them have been out in the public. Since salary opportunities continue to be limited, retirement savings is harder than ever before. I wrote this because IBM is considered a "bellweather" for other companies and from a retirement standpoint, it's quite a shift. When IBM changed their DB plan into a cash balance plan it made a lot of news because it was so unpopular among employees and the media seemed very skeptical. IBM didn't keep it for very long, and shifted to the 401k as its sole vehicle, so long service IBM employees have experienced a long of change in their retirement benefits.

[Margaret O'Hanlon]

Yep, Jim, it will be interesting to see whether the press follows this story any further.

[John A Bushfield]

Big Blue ain't what it used to be. In my view this is just a blatant exercise in reducing cost at the expense of employee satisfaction. The poorly worded and manipulating explanation provided only pours salt into the wound.

It may also be a calculated move to increase turnover in 2013 so they can reduce the expense of a planned reduction in force.

One thing IBM isn't is stupid.

[Margaret O'Hanlon]

John, your assessment of the reduction in force "strategy" aligns with the Compensation Cafe philosophy that everything you do in compensation is communications. 2013 will likely bring more news at IBM as you point out, a company that seems to want to be transparent about their cold indifference to their employees. Let's hope their style of prevarication doesn't catch on -- it's been popular before, as you know.

[Dan Walter]

The press will pick up on this the next time IBM has a big RIF. Especially if it happen in q3 or q4 next year.

This is what all public companies need to be careful about. When shareholders are focused on returns of 3 years or less AND they have strong influence on management decisions, we will see this kind of change.

Management kind of dug their own grave with this. By a greedy few paying themselves without credible evidence of performance shareholders got a voice. By things not changing shareholder got power. Now, it seems, some may get their just desserts

[Tanya@paydayloans]

If they can get away with that, they will soon aim to only make a contribution every five or ten years. They'll tie in making a contribution to the length of the time that an employee has spent with them.

Unbelievable. It's not like they are strapped for cash. They are cheating the employees of the interest that would have been earned for all of that time.

[Margaret O'Hanlon]

I agree Tanya and Dan, let's keep an eye on how this plays out over 2013. It does sort of seem like a backhanded intro into layoffs, as you point out, Dan. If so, it may be this Recession's version of an "early out" retirement offer. We all know how well those worked -- intellectual capital heads for the hills, leaving a depleted company. What's the quote about those who don't know history are doomed to repeat it? (Edmund Burke's, I believe.)

[E. James (Jim) Brennan]

thought the "history" line was George Santayana's, but I'm too lazy to cheat and look it up...