Invest In A 401(k)? The Massive Changes IBM Just Made Could Impact You

Summary

Starting January 2024, the change in retirement planning from IBM will switch from a 401(k) with a generous employer match to a Retirement Benefit Account (RBA) which is more similar to a pension. The benefits of this are for the next 9 years there are guaranteed returns with no employee contribution needed. 

However, the downsides are that the projected returns are EXTREMELY low which may not best serve those with a 5+ year retirement time horizon. This new structure also incurs availability risk, since cash is not transferred into the employees account regularly like it does in a 401(k), the RBA acts as an IOU, which does hold the risk of not being available when employees retire and attempt to draw on this amount.

The Old 401(k) Structure

Under the old structure, IBM would match employees' contribution up to 5% plus an additional 1% automatic contribution, totalling 6%. 

Most employers who offer a match do so around 3 - 5%, so a 6% contribution was a generous amount for an employer to offer.

The New Retirement Benefit Account (RBA)

An RBA acts more like a pension than a 401(k). In a 401(k) structure cash is transferred to the employee’s account, as opposed to a pension or RBA is an IOU which does not transfer cash to the employee, but is a promise to pay benefits at time of retirement. 

The Benefits: 

• No employee contribution needed, an automatic 5% contribution is made from the employer

• The RBA has guaranteed return structures, with 6% guarantees for the next three years and the next six years will follow the returns of the 10 year treasury with a guaranteed minimum of 3%.

• Over the six years where returns follow the 10 year T-Bill, returns are set to adjust monthly as opposed to being locked in as if you would purchase these bills on your own*

The Downsides:

• Very low returns are the biggest downside here. At the guaranteed rates of return the RBA will essentially keep pace with inflation and not much else. Investments in the 10 year T-Bill represent the LOWEST returns offered in the investment markets due to their low risk. This is not ideal for those who have 5+ years on their retirement time horizon.

• There is also risk of the RBA not being available when employees go to cash in their benefits. Since the RBA acts like a pension, cash is not deposited into the employees account regularly. Instead, the RBA acts as an IOU. It is not unheard of that employees go to cash in their pension plans and the full amount of benefits promised isn’t available. 

Conclusion

Overall, the switch from a 401(k) structure to the RBA allows IBM to hold onto cash now while also incurring slight market risk by guaranteeing returns over the next nine years. The cost to the employees with this change is the return profile of the RBA will essentially match inflation and not much more.

One key thing to look for is if other companies will follow IBM with these changes. In the short term this would allow companies to hold onto more cash at the expense of future market risk.

* Example: You can purchase a 10-year Treasury bill for 4.5% locked in for 10 years. If rates increase to 5%, you are still locked in at 4.5%. Under this structure, the RBA can reap 4.5% returns the month of purchase and if the next month rates increase to 5%, the returns will adjust.