IBM Sets a Stingier 401(k) Standard

Jack VanDerhei is research director for the Employee Benefit Research Institute, a nonprofit think tank in Washington, D.C.

KIPLINGER: Starting this year, IBM will make a single end-of-year contribution to each employee’s 401(k), instead of traditional periodic contributions throughout the year. What impact does a lump-sum policy have on workers’ savings?

VANDERHEI: If you assume a positive rate of return on 401(k) investments, then getting the entire employer contribution at the end of the year, as opposed to uniformly throughout, gives you, on average, a half-year less time to earn a return. But the longer you’re in a plan, the less the impact. Based on data on millions of employees in more than 60,000 plans, my research shows that the overall reduction in the median 401(k) balance in a traditional plan for a 25-year-old would be 4.3% by the time that worker reaches age 65. For workers automatically enrolled in plans throughout their career (and therefore likely to be participating more of the time), the reduction is just 2.4%.

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Will IBM set a precedent?

It’s too early to tell. But back in 2006, IBM was one of the first companies to start freezing pension accruals for active employees. Some employers prior to that had frozen their defined-benefit plans, but very few for existing employees. Once IBM did it, the floodgates opened.

How many companies already make once-a-year 401(k) contributions?

The consulting firm Aon Hewitt says 9% of companies do it, but a lot of them have always done it that way. Employers either have been doing this for decades or will start to do it now.

What can workers do to keep their retirement savings on track?

Workers facing this type of change will have a whole lot of incentive to stay with their employer through the end of the year, or whatever the cutoff date is going to be. If you leave before that, you’ll end up losing a full year’s employer contribution. Workers might also want to put most of the lump-sum contribution in a money market fund and gradually shift some of it to the stock market at regular intervals, replicating the dollar-cost averaging they’d have if their employer had kept its periodic contributions. That way you won’t risk investing the whole contribution all at once when the stock market is at a peak.