You Manage It! 4: Customer-Driven HR IBM’s 401(k) Plan Sets the Standard
IBM currently uses its 401(k) defined contribution plan as the primary retirement benefit for all of its 100,000 U.S. employees. The company has devoted a lot of resources to designing its 401(k) plan with many of the latest features. These efforts have reduced some of the uncertainty that employees face about their financial security because most companies, including IBM, have dropped paternalistic defined benefit pension plans in favor of the riskier defined contribution plans. Defined contribution plans require that employees take responsibility for managing the allocation of their financial assets for retirement and bear the risk if their investments do not perform up to their expectations.
When designing its 401(k) retirement plan, IBM adopted many of the best features from plans at other companies and negotiated low fees from investment companies that manage employees’ retirement assets. The IBM 401(k) plan boasts a 94 percent participation rate among U.S. employees and an average balance of $127,000, which is more than double the national average. The following are some of the key features of the IBM 401(k) plan:
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▪ IBM matches 100 percent of employee contributions to the 401(k) plan, up to 6 percent of base salary. The typical company match in industries in which IBM competes is only 50 percent of employee contributions, up to 6 percent of base salary.
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▪ IBM provides financial coaches to assist employees and their families with decisions about allocating their retirement funds into different types of investments in financial securities. The financial coaches are paid by IBM to give one-on-one advice to employees about any aspect of their financial lives. Most companies do not offer this service to employees and expect them to figure out how to invest their retirement funds on their own.
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▪ The IBM 401(k) plan uses an opt-out feature that automatically enrolls employees into the retirement plan unless they decide to opt out. Another feature is auto-escalation, which automatically increases employees’ contributions each year to coincide with annual raises in pay, unless employees opt out.
Critical Thinking Questions
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12-22. The opt-out feature of the 401(k) plan is designed to increase the enrollment of employees in the plan because, without this feature, 25 percent of employees on average are not likely to enroll in it. What do you think would happen if the IBM 401(k) plan had an opt-in feature instead? [An opt-in feature would mean that all IBM employees must take positive steps to enroll in the 401(k) plan, because the default position is that an employee is not enrolled in the 401(k) plan.] In the majority of companies, employees must opt in to a 401(k) plan. Are there any advantages to a company that uses an opt-in requirement for enrolling employees in the plan?
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12-23. By offering its employees one of the best 401(k) plans available, how does IBM benefit from this investment in its employees? How might employee behavior and performance be affected by the IBM 401(k) plan in its current form? What changes in employee behavior and performance would you expect if IBM decided to modify its 401(k) plan to be just average in the market (for example, a 50-percent company match to employee contributions, up to 6 percent of base salary) compared to what other competing firms offer for employee retirement?
Team Exercise
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12-24. According to Fidelity, one of the largest financial services firms, the average 401(k) fund lost 31 percent of its value between 2007 and 2009 in the aftermath of the financial crisis. People who were close to retirement realized that they would need to work for several additional years to have enough savings to be able to retire. Exacerbating this situation was the fact that many companies needed to economize their labor costs during the recession and decided to eliminate the employer matching funds for employees’ 401(k) accounts until their economic prospects improved. In light of these events, does it make sense for employees to continue to contribute to their company 401(k) plan? With a group of three or four classmates, decide whether it still makes sense for employees to contribute to their company 401(k) plan or not. In your presentation, compare the 401(k) to other alternatives that employees have for saving for their retirement.
Experiential Exercise: Individual
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12-25. This exercise is designed to raise your awareness about 401(k) retirement plans. Assume that the company you work for has a 401(k) retirement benefit—most companies do have these plans. Answer the following questions concerning 401(k) retirement benefits:
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12-25a Will you enroll in the 401(k) plan as soon as you join the company? If yes, why did you decide to join right away? If no, when will you decide to enroll in the 401(k) plan?
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12-25b What percentage of your base salary (between 1 and 15 percent) will you set aside to contribute to your 401(k) plan? What factors affect how much you will save in your 401(k) plan?
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12-25c What percentage of your retirement contributions will you put into mutual funds that invest in stocks? What percentage of your retirement contributions will you put into mutual funds that invest in bonds?
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12-25d What would you do if there is another financial crisis, similar to the one during 2007 to 2009, and your retirement investments in your 401(k) fund drop in value by 40 percent?
Be prepared to share the answers to these questions with other members of the class if called upon by the instructor.
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