In early November, IBM made news by announcing it would end the company’s 401(k) matching contribution, effective at the end of this year. IBM’s 401(k) plan offered a generous dollar-for-dollar match on the first 5% of salary from employee contributions. IBM is replacing the 401(k) match with a 5%-of-salary contribution to a retired benefit account (RBA), which appears to be essentially a cash balance plan. IBM says funds inside the RBA will earn a fixed rate of 6% for the next three years.
Why did IBM do this? This change allows IBM to switch its retirement contribution from a defined contribution of the company to a defined benefit of the employee. At year-end 2022, IBM had $53 billion in defined benefit assets and an overfunded pension of roughly $15 billion. The change will free up substantial cash for the company since the 401(k) match required current funding, while the RBA contribution may not require funding, given IBM’s overfunded pension.
IBM was one of the first large companies to adopt the 401(k) in 1984, so it’s possible other large companies with overfunded pensions may follow suit and end company contributions to 401(k) plans.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If your employer terminates its 401(k) match, what should you do?
Revisit the asset allocation of your 401(k) contributions. If the company 401(k) match shifts to a cash balance-type plan, like IBM, then it may be appropriate to increase the equity allocation of your 401(k). Cash balance plans offer a fixed rate of return, so think of this account as delivering bond-like returns.
Under a 401(k), the employee controls the investment allocation of both their contributions as well as the company’s match. Under a cash balance plan, the investment allocation of the company contribution is now under their control. It’s not uncommon for the annual company match to a 401(k) to equate to roughly 25% of the total annual retirement contribution for an employee. With that 25% now locked into bond rates of return, participants may need to be more aggressive in how they invest their 401(k) contributions going forward.
Increase your employee deferral. If the expected return of your retirement nest egg is reduced because of more bonds in your portfolio, you may need to increase your contribution rate to meet your long-term goals. Let’s assume you’re 25 years from retirement with a current 401(k) balance of $100,000 and you’re contributing $20,000 a year to your 401(k) with a goal of $2 million. If you earn a 7% annualized return, you’ll be nearly $200,000 short of your goal. Increasing your contribution by just $2,000 a year gets you to your goal!
Consider a Roth IRA. Roth IRAs offer an excellent savings vehicle. Unlike a traditional IRA, contributors don’t receive a tax deduction, but earnings and distributions are tax-free (with some holding period requirements). While there are income limits for making direct Roth contributions, the backdoor Roth IRA loophole enables those with incomes over the limit to still make such contributions. Backdoor Roth IRAs can be tricky, so be sure to consult your tax or financial professional.
Now, more than ever, achieving retirement security requires constant vigilance. A benefit that many employees took for granted may soon disappear, so if you aren’t already maxing out your employer match, now’s the time to start.
Related Content
- Benefits of Doing Roth IRA Conversions Early in Retirement
- Are Roth IRAs Really as Great as They’re Cracked Up to Be?
- Inflation Relief: Workplace Benefits Can Be a Big Help
- Can I Hire a Financial Adviser to Manage My 401(k)?
- Four 401(k) Mistakes to Avoid While Saving for Retirement
-
8 Rules for Choosing the Right Financial AdviserNot all advisers are created equal. Here's how to find one qualified to manage your wealth and protect your legacy. From verifying credentials to trusting your gut, follow these rules to find a financial adviser.
-
A Hated TSA Rule Was Finally Phased OutAfter nearly 20 years, the TSA is ending its shoes-off policy. Travelers will still need a Real ID, and advanced screening remains in place. Here’s what to expect on your next flight.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually MagicalDo you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful BillThe law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market JittersMarket volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the SidelinesForget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
Can You Be a Good Parent to an Only Child When You're Also a Business Owner?Author and social psychologist Susan Newman offers advice to business-owner parents on how to raise a well-adjusted single child by avoiding overcompensation and encouraging chores.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial IssuesMany caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for RetirementCash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
