Furthering corporate America's move away from pensions, International Business Machines Corp. said Thursday it will freeze its $48 billion pension plan in 2008 and instead enhance its 401(k) benefits for its 125,000 U.S. workers.
Nearly all IBM's U.S. employees _ everyone hired before Jan. 1, 2005 _ have pension benefits accruing under a traditional annuity-like plan or a cash-balance plan, which gives workers interest-bearing funds that they can take with them if they leave the company.
But these "defined-benefit" plans are becoming rarer. Companies say the plans carry too many uncertainties, largely because swings in interest rates and investment performances change accounting considerations and the amounts businesses must contribute to their pension funds in a given year.
Industrial giants such as IBM and airlines that still carry pension obligations say the costs and complexities hamper their ability to compete with younger, more nimble rivals that aren't saddled with pension obligations.
Beginning in 2008, then, IBM workers' pension benefits will be locked in place, based on salary and length of service. The accrual of benefits will stop, meaning future raises or additional years with the company will not signify bigger pension checks upon retirement.
Instead, IBM will increase its contribution to its 401(k) plans, in which workers get a defined, predictable amount from the company that they're responsible for investing. IBM will double the percentage of employees' contributions that it matches, to 6 percent of salary; certain employees will be eligible to receive more.
Current retirees will see no changes.
IBM executives said that by no longer having to account for pension accruals that would have mounted after 2008, the Armonk, N.Y.-based technology giant will save between $450 million and $500 million this year alone and up to $3 billion from 2006 through 2010.
However, the change will result in a $270 million charge in the just-completed fourth quarter of 2005.
The action mirrors steps IBM has already taken in other countries, and follows IBM's decision to offer 401(k) plans only _ no pensions _ to workers hired after Jan. 1, 2005. Similarly, rival Hewlett-Packard Co. decided last year to offer only a 401(k) plan to U.S. workers hired this year and beyond.
Patrick Kendall, a pension expert at Diversified Investment Advisors, a consulting firm specializing in retirement plans, said the "hard freeze" IBM announced Thursday was almost inevitable considering the company's earlier "soft freeze" of closing the plan to new employees.
"I think a lot of these sponsors would like to get out of (defined-benefit plans) entirely, just terminate the plan," he said. But many companies find that termination fees and other complications negate that strategy, he said.
Pensions have been a touchy subject for IBM, which was hit with a federal lawsuit _ settled for up to $1.4 billion _ filed by employees who contended that IBM committed age discrimination when it shifted to a cash-balance plan.
Randy MacDonald, IBM's head of human resources, said the decision was unrelated to the lawsuit.
"It's all about cost-competitiveness, so that we could continue to be the financially viable company that we are," he said.