Shifting the Burden

9 January 2006

IBM Drops Pension Plan, Offers 401(k)

IBM used to be the gold standard in computing. “No one ever got fired for buying IBM,” according to the old adage. Part of that value came from its in-house talent. IBM will have less of that talent locked into a long-term relationship now that it has decided to freeze its pension program and offer in its place a 401(k) plan to its employees.

The entire American retirement system is untenable. The mix of pensions, Social Security, private savings programs and such all have one thing in common – the belief that people shouldn’t have to work after an arbitrary age. For reasons more historical than practical, that age has been 65 for decades despite the growing life expectancies. This means a huge financial burden is artificially created by the perceived need to have sufficient resources to keep someone unemployed at a comfortable standard of living for twenty or so years – longer than their childhood.

Against that backdrop, most companies have moved away from a pension plan to a 401(k). The two are designed to achieve the same thing, generating sufficient rents on existing capital to obviate the need for working. The difference is in who carries the risk. Under a traditional pension with defined benefits, the employer carries that burden. If the stock, real estate or bond investments made turn sour, that’s too bad for the employer. Monthly checks to retirees are still required. For that purpose, there is even federal pension insurance to make sure bankruptcies don’t cut off the elderly. The 401(k), named after the part of the bill that created it, does much the same, but the employee is the one carrying the risk. If the investments made don’t pan out, the employee is in trouble, and there's no taxpayer bail-out.

IBM was one of the last big companies to offer a pension in the traditional sense. As of 2008, the burden moves to the worker. Randy MacDonald, IBM's head of human resources, explained “It's all about cost-competitiveness, so that we could continue to be the financially viable company that we are.” This was part of a denial that an age-discrimination, class action lawsuit over pension benefits had anything to do with the end of the existing plan. Other companies have done the same without such a legal threat, so his explanation still rings true.

However, IBM will discover as many others have that employees won’t stick around as much. IBM workers get offers from other places all the time, and one of the reasons for staying was to get the pension. Without that, because a 401(k) can be “rolled over” (essentially taken with the worker when he leaves), there will be less incentive to stay unless salaries and wages rise substantially. Turnover is not a good thing for a company that has only its employees’ skills to sell. So, IBM has diminished its financial risks, but at a price in human talent that it will pay until the end of time.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent.
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