updated 3/7/2006 3:26:15 PM ET 2006-03-07T20:26:15

General Motors Corp., following in the footsteps of other large employers trying to cut pension costs, said Tuesday that it will shift its pension program for salaried employees from a defined benefit plan to one that relies more heavily on employee contributions.

Effective Jan. 1, GM will freeze the accrued pension benefits for approximately 40,000 U.S. salaried employees. The change won’t affect retirees.

Salaried employees hired on or after Jan. 1, 2001, will move exclusively to a defined contribution plan. Those employees currently have a cash balance plan, which works like a traditional defined benefit plan but allows participants to collect their benefits in a lump sum at retirement instead of in monthly checks. GM said those employees will continue to earn annual interest on the balance in their plans. Those employees also will get a contribution of 4 percent of their annual pay to their 401(k) program.

Salaried employees hired before Jan. 1, 2001, will remain in a defined benefit plan but will get reduced benefits under a new formula. A separate plan for executives also will be frozen and aligned more closely to the new plans, GM said.

In addition, GM said it will match half of what all U.S. salaried employees contribute to their 401(k) plans up to 4 percent of base salary. GM said that change will increase its pretax expenses by $70 million each year.

GM announced last month it would alter its salaried retirement plans to reduce its pension costs. The changes are expected to reduce GM’s year-end 2006 pension liability by approximately $1.6 billion.

GM Chairman and CEO Rick Wagoner said the automaker is competing with non-U.S. companies whose pension benefits are more heavily subsidized by their governments, putting GM at a huge disadvantage. The automaker lost $8.6 billion in 2005 as it continued to struggle with falling U.S. market share and rising health care and pension costs.

“These changes will reduce financial risks and future costs for GM, while protecting current retirees’ and employees’ earned pension benefits and providing competitive and fair retirement benefits going forward,” Wagoner said in a statement.

GM is the latest large employer to shift away from a traditional defined benefit plan. Earlier this year, International Business Machine Corp. froze its pension plans and began contributing more to employees’ 401(k)s. In 1985, 89 percent of Fortune 100 companies offered defined benefit plans, compared to 51 percent in 2004, according to Watson Wyatt Worldwide, a human resources consulting firm.

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