In the recent sudden burst of enthusiasm for defined-benefit plans, IBM has been at the center of the conversation.
Indeed, IBM IBM, +1.26% is making changes to its retirement plans. Starting in January 2024, IBM will end its 5% matching contribution and 1% automatic contribution to employees’ 401(k) accounts in favor of an automatic 5% contribution to a “Retirement Benefit Account.” Candidly, I have never heard of a “Retirement Benefit Account.” Apparently, IBM is bringing back the cash balance component of its defined-benefit plan. The company had “frozen” its defined-benefit plan effective Jan. 1, 2008—that is, participants stopped accruing new benefits. The plan had been closed to new participants since 2005. Cash balance plans are defined-benefit plans that retain “notional” individual accounts throughout the asset accrual phase. Like traditional defined-benefits, the employer makes the contribution, owns the assets, selects the investments, and bears the investment risk. In addition, the employer credits the employee’s notional account with interest, usually based on the yield of Treasury securities. Employees receive regular statements and can withdraw the balance as a lump sum when they retire or terminate employment. Unlike 401(k) plans, cash balance plans are required to offer employees the ability to receive their benefits in the form of lifetime annuities.
