IBM Cutting Major Employee 401(k) Benefit

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.