Thursday, January 05, 2006

IBM Scoreboard: 401(k) +1, Pension -1

Big news today out of Big Blue, the computer company is doing away with its pension plans. It is being reported that this will save them almost $3 billion over the next 4 years.

As you may have guessed, since this is my place of employment, I was a little worried about my retirement plans when I initially got the note about this change. After rereading the note several times and speaking with some others in the office, it doesn't look like it will have that much of an effect on me. What they are doing to offset the pension removal is making our 401(k) plan better. Our 401(k) used to be matched at 50% of our 6% and it will now be moved up to 100% of our 6%.

DISCLAIMER: All of the following information only applies to my situation. This is because, as of a few years ago, there are actually 3 different pension plans that IBM was maintaining for people with various years of service with the company (no wonder it was costly).

With the old pension plan, IBM would put 5% of our salary into the plan. Doing some quick calculations, we were getting 8% from IBM before the change, here is the math on that.
5% + (.5*6%) = 8%

After the changes, it appears that we are only 6% from them. So, what about the difference? They are handling this by adding 2% automatic contribution for us, to bring us up to 8%.
2% + (1*6%) = 8%

At first glance, it may seem like a wash for me, but I actually think that it could be good. Previously, 5% of my salary was being put into a pension account that was only earning 3%. Now, I will be getting the full 8% into my 401(k) to invest as I see fit. I am fairly certain that I can beat 3%, especially over the next 25-30 years.

This brings up a couple of key questions though.
  1. What about the money that we have already accumulated in our pensions?
    I currently assume that it will just sit there earning ~3% until I retire or leave the company. I am not thrilled about this and would love for them to roll it over to my 401(k).

  2. When is this 2% automatic contribution paid?
    Will it just be added each paycheck with my existing contributions or will it be added once a year in a lump sum?

That is all of the information for the part of the plan that I will be participating in. Now it will get really confusing...remember that I said there were 3 pension plans before? Well, there are 3 different branches of the new plan now too. The other 2 plans that are as follows:
  • For those that have been with the company for longer and were qualified under the old pension, they will be getting the following:
    4% automatic + (1*6%) = 10%

  • For new hires and people hired since 2005, they will get:
    1% automatic + (1*5%) = 6%
That is not a typo up there, they will only get their 100% match on 5% of their contributions. I am not really sure why IBM did this, it seems like it is just another calculation to keep track of. They could have just done 100% of 6% contributions and gotten their 6% figure as well. I guess that it must benefit them in some way, otherwise they wouldn't have done it. I guess that it works out OK for the new hires in that they only have to put in 5% of their salary to get 6%.

I will have to look into all of this a little more and gather some more opinions, but it seems OK to me so far. I would much rather have full control of my money than have it just sitting making 3%. Did I miss something?


Anonymous Anonymous said...

If you are an IBMer, I would like to compare more detailed notes with you. I am 18 years @ IBM under the Cash Balance Plan because I was less than 40 back in 1999, so we already got screwed when they converted us off the Old Pension Plan.

On RMAC's Matrix to the troops from last night, I am in the Second Row of that chart... "PPA-Cash Balance"

My initial view of the 2008 announcement is that I should actually be mildly ahead with the new 08 plan vs. the current PPA plan; however those that are in their late 40s on PPA with the Mid-2009 Transition credits version of the PPA, I think that cohort just took another little hit against themselves. I haven't run the spreadsheet for them yet

1/06/2006 12:19 PM  
Blogger 2million said...

fyi - I believe IBM's cash balance plan has a yield of 5% for 2006 - the rate is set in January, much better than last year's yield.

1/06/2006 1:29 PM  
Blogger RS said...

The transition credits and the savings award are parts of the note that I did not fully understand. I was waiting for some more info on that...I just assumed that since I didn't know what they were that I was not eligible.

1/06/2006 1:33 PM  
Blogger RS said...

Rumor Alert:
I heard that this change will have a negative impact on IBM's bottom line in the fourth quarter and this could possibly have an impact on our variable pay this year.

1/06/2006 2:26 PM  
Anonymous Anonymous said...

I'm on a leveraged sales plan like most of S&D, so Variable pay for us was eliminated about 3 or 4 years ago and allegedly rolled into PCO-3 payments that you rarely achieved.

1/06/2006 8:49 PM  
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