IBM pension-plan change sparks worries

Experts say other firms may decide to follow suit

December 10, 2004|By Tami Luhby | Tami Luhby,NEWSDAY

Employees' chances of retiring with a guaranteed pension suffered another setback this week with IBM announcing it was closing its cash-balance pension plan to new employees - fueling concerns that other companies would follow suit.

The move by IBM, whose pension shifts have been closely watched by employers, legislators and employee groups, is the latest blow to the nation's old-style defined benefit system, which has shriveled as employers shift the responsibility of saving for retirement onto workers through 401(k) plans.

At IBM, workers hired after Jan. 1 will be offered only a 401(k) plan, albeit with a more generous company match and benefits than the one available to current employees. IBM will match as much as 6 percent of an employee's contributions, double that available in the current plan.

Also, to ensure they save for their retirement, new employees will be automatically enrolled in the plan at 3 percent of their salary, a spokeswoman said.

The company's cash-balance plan has been under attack since it was created in the 1990s to replace an older version of the traditional pension plan. Long-time employees complained that the formula used in the newer version cheated them out of benefits built up over decades.

In September, the company agreed to pay current and former employees $320 million to settle in part a class action lawsuit and may be on the hook for an additional $1.4 billion if it loses an appeal. The agreement came a year after a federal judge ruled IBM discriminated against older workers when it converted its traditional pension plan.

Now that IBM has given up on its cash-balance pension for future workers, experts are concerned that others will do the same.

Companies have increasingly viewed traditional pensions as a burden they can no longer afford to finance. Instead, many turned to 401(k) plans, which are funded mostly by employee contributions, but the benefits can vary widely depending on how skillfully employees manage their accounts - a dubious proposition, according to recent studies.

Cash-balance pensions, which gained popularity in the 1990s, were seen by many as a compromise, allowing employers to continue offering a guaranteed payment - known as a "defined benefit" - through a plan that's often cheaper and easier to maintain.

"This is setting a bad precedent for other companies to dump their defined benefit plans," said Karen Friedman, policy director at the Pension Rights Center.

More than 1,200 companies offered hybrid plans such as cash-balance pensions in 2000, according to the Pension Benefit Guaranty Corp., a federal agency that insures pension payouts. Meanwhile, the total number of pension plans plummeted to 29,500 in 2003, down 21 percent in just four years.

Many of them are underfunded, prompting calls on Congress to tighten the rules in 2005. The danger, experts say, is that legislators may make the requirements so onerous that employers eliminate their plans.

Newsday is a Tribune Publishing newspaper.

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