In a move to rein in retirement plan costs, IBM announced changes to its 401(k) defined contribution plan in December 2012. Starting in 2013, the company will no longer match employee contributions made via paycheck deferrals throughout the year. Instead, it will make a cumulative, end-of-year lump-sum matching payment into employees' 401(k) accounts, typically matching employee contributions up to 6 percent of pay. Plan participants who terminate employment before Dec. 15 will not qualify for the match unless they reached normal retirement age when leaving the firm.
"IBM is a $100 billion company with an enormous payroll and certainly huge 401(k) match. The float (earnings) on these dollars is enormous," said Ed Rataj, CCP, managing director of compensation consulting at CBIZ Human Capital Services, to SHRM Online. He noted that IBM will financially benefit from not paying a match to employees who leave during the year, and that "While this will be partially offset by prorating the match for new employees, with the size of IBM, there is a large benefit to the change."
Negative Impact on Savings Growth
Typically, employee morale and engagement drop when workplace benefits are perceived as being reduced or eliminated, and Rataj noted two ways that paying the match once a year could affect investment returns for employees' 401(k) accounts negatively. It could do so first by removing the employee’s access to market returns on match dollars throughout the year, so that "essentially, IBM gets the float at the expense of its employees' investment returns." Second, paying the match on an annual basis shifts investment funding with these dollars away from the principle of dollar-cost averaging throughout the year, "making future returns on the match amount dependent on whether the market happens to be high or low on Dec. 31 of a given year," Rataj said.
Turnover Impact Limited
On the other hand, while employees may gripe about the change, an end-of year cumulative "super match" might be viewed as an inducement for them to stay put—at least until year-end. Rataj, however, isn't so sure.
"From an HR perspective, I doubt that the change to the 401(k) would cause someone to rethink accepting another job offer," he said. "Most employees are looking for at least a 10 percent increase in pay to consider leaving their current employer; in many cases, they receive even more once they start looking. As a result, a year-end 401(k) match—even IBM’s rich 6 percent match—is probably not a sufficient carrot to keep them from leaving. Additionally, in the event that it does change an employee’s behavior, it will impact timing alone and not the ultimate outcome. The employee will still leave, they may just wait a few months to do so."
Moreover, "with the skills that many IBM employees have, most would find it very easy to negotiate a 6 percent signing bonus to make up for foregoing the IBM match," Rataj noted.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related SHRM Articles:
401(k) Match: 'Thresholds' Drive Participation More than Rates, SHRM Online Benefits, July 2012
Encourage Employees to Defer Adequate Pay to 401(k)s, SHRM Online Benefits Discipline, May 2012
Educate Employees on 401(k) Contribution Limits and Matches, SHRM Online Benefits Discipline, March 2012
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