401k Plan Changes?  Episode 360

In this video, Tom discusses significant 401k plan changes are coming (soon!) to one of the oldest and largest  401k plans in the United States.

Recently (early November), IBM announced they were no longer making employer matching contributions to the 401k plan!   The news sent tremors around the IBM employee circuits, as well as the 401k community.  To many participants, this feels like a slap, or, rather, a pay cut.  While there have been some tweaks over the years, this represents one of the largest 401k plan changes to date.  Participants in the IBM 401k had been accustomed to seeing routine 5% – and sometimes 6% employer matches.

This is all coming to an end, and rather abruptly.  Beginning in january 2024, IBM will take that employer match and set it aside in a new account, called the “RBA” or Retirement Benefit Account.  Essentially, IBM is un-freezing their old personal pension plan.  That plan was frozen in 2008 and no one has been able to join that plan since 2005.

This could be an early harbinger or 401k plan changes in the future, and worth your attention:

Links for 401k Plan Changes:

The Register – IBM to scrap employ matches
Plan Sponsor: IBM Plans to End matches
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Transcript for 401k Plan Changes – Episode 360

In episode 360, we want to talk about what may be coming on the horizon for 401k plan changes.

We wanted to talk to you about something that may be coming on the horizon for many 401k plans in the future.

Because one of the biggest – and oldest – retirement plans in the country just made some significant 401k plan changes.

IBM announced – at the beginning of November, 2023 that – starting in January 2024, there will be no more employer matches.
And that’s a big deal.

Because, IBM matches 5% – and in some cases 6% – of employer contributions to their 401k plans.

They announced this is all coming to an end. And people get mad, when they see that something they were counting on, is going away.
But it’s not actually going away.

Here are the terms of what they’re talking about.

IBM announced they are no longer going to be making this matching contribution. Instead, they’re going to be taking 5% of every employee’s compensation, and putting it into what’s called a retirement benefit account, or “RBA.”

Where did that name come from? They just made it up!

So the money is actually going into the old IBM “personal pension plan” which was frozen in 2008. And you couldn’t join it, 2005! So it’s been — do the math — a long time, since anybody could get into the pension plan!

But IBM has announced this is the way they’re going to go.

So 5% employee compensation is going to (now) go into this retirement benefit account – RBA – is what they called it.
It basically unfreezes the old plan.

So they stated that this change will help diversify the employees retirement funds – their retirement sources. And they’re right.

Because part of the money you’re going to get in retirement is NOW going to come from the IBM pension plan — renamed the “Retirement Benefit Account.”

And part of it will come from your 401k plans.

Think of it another way. Part of the money that you have for retirement — you’re going to manage — because it’s your own 401k plan.
And part of the money you’re going to get in retirement — you’re NOT going to manage. Because it’s coming from this IBM new plan.

IBM even went so far as saying “hey – we realize this 5% match, that we used to do — now you’re not going to be getting it.

And so what we’re going to do – instead – is we’re gonna give everybody a RAISE.

I actually think that’s pretty cool they’re doing that. They don’t have to do this.

Understand this is one of the largest defined contribution plans, the IBM 401k plan – one of the largest retirement plans in the country.

And so they’re going to be one of the “early movers” to go from a defined benefit plan – to a defined contribution plan — back to, in some ways, a defined benefit plan.

It’s actually kinda cool.

There’s plenty of people on message boards who are “doing the freak” because they’re like “this is a pay cut!!”
And some advisors are hopping on the bandwagon saying “it’s going to remove an incentive for people to put money into 401k plans at work!”

Listen. If you’re participating in a 401k plan, ONLY because you get a company match; you’re doing it wrong.

It’s like bringing a boom-box to the beach – you are doing it wrong.

Understand, not everybody at IBM participates in the 401k plan. There’s 288,000 employees at IBM. Not all of them are in the 401k plan. But — everyone — is going to get this retirement benefit.

Whether you’re in the 401k plan, or not.

I just wanna take one little bit here, before the end of the video, to point something out.

If you’re business owner: this is actually pretty smart.

IBM, when they started doing “the company match,” years ago, they were putting money in – on a monthly basis – into employee employee’s 401k plan.

Then they said “no, we’re not gonna do that.”
“We’re just going to put the employer match in on December 15th, at the end of each year.
If you left before December 15th, you didn’t get it.

NOW what they’re doing is they’re putting it into the defined benefit plan.
They don’t even have to put the cash in now.
They can just promise you the money, in the future.

From a cash flow perspective, it’s pretty smart.

A lot of things (may be) happening in the future with defined contribution, and 401k plans.
And that is what I wanted to talk to you about today, in episode 360.