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IBM to Curtail Pension Plan

Big Blue plans to lock in pension benefits in 2008, and enhance its 401(k) program.
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(IBM) - Get International Business Machines Corporation Report

announced plans Thursday to reduce its pension burden by curtailing its defined-benefit pension plans and shifting its retirement focus entirely to an augmented 401(k) program.

The moves, effective in 2008, are expected to save the IT giant $2.5 billion to $3 billion over the next four years.

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IBM plans to stop the accrual of benefits in its pension plans in 2008, and will redesign its 401(k) plan to give pension participants a company contribution of up to 10% of pay. Big Blue will double its current 401(k) dollar-for-dollar match to up to 6% of salary contributions, with additional automatic contributions of 1% to 4%. Employees who don't contribute directly to their plan also will receive an automatic 1% to 4% company contribution.

"We're taking these actions to better control retirement plan expenses, position the company for business growth and competitive strength, and preserve employees' earned retirement benefits, while instituting a leading-edge 401(k) plan that will be one of the richest in the country and a standard in the United States," said Randy MacDonald, IBM's senior vice president, human resources. "We also believe these are prudent and balanced steps at a time of uncertainty and conflicting legislative and regulatory directions about defined benefit retirement plans in the United States."

The changes don't affect IBM's roughly 125,000 retirees, former employees with vested benefits or employees who retire before Jan. 1, 2008. Retirement benefits earned before that date will be fully preserved.

IBM plans to record a pretax charge of $270 million for its recently ended fourth quarter as a result of the new plan. The company expects retirement-related savings of $450 million to $500 million for 2006, but noted that it still expects its retirement plan costs this year to rise $400 million to $500 million over 2005 levels.

According to IBM, its 401(k) plan is the largest in the country, with $26 billion in assets. More than 90% of its U.S. employees participate in the plan. The company's pension plan had about $48 billion in assets at the end of 2005.