This story from last week did not get enough attention in the media, financial or otherwise. As a corporate leader, if other companies begin to take the step IBM announced in their 401k program, the changes across the marketplace and for workers will be immense. Not only would December 31st become one of the most skewed days of investing every year, countless millions of Americans who quit their job anytime between Jan 1 and Dec 15 would no longer be eligible for a 401k match. Further, every worker in such a plan loses the benefits of dollar cost averaging and instead is subject to buying "all in" on one day a year. Last, you lose a multitude of days for potential appreciation OR interest payments (f you are going in conservative investment vehicles) each and every year – essentially losing on average 182 days a year. That adds up over 25-35+ years – there goes a lot of the power of compounding.
- International Business Machines Corp., a bellwether for employee benefits, is overhauling its retirement program to contribute once a year to employee 401(k) accounts in a lump-sum payment. Starting next year, IBM's contributions, which generally range from 6% to 10% of pay, will take place Dec. 31. Workers who leave the company before Dec. 15 won't qualify for the match, unless they retire.
- IBM's switch is the latest in a series of moves big companies have been making to rein in retirement-plan expenses in recent years—and the financial implications for employees could be significant. Many U.S. companies cut their 401(k) match in 2009 during the economic slowdown, and some of them have only partially restored it. In 2011, 7% of employers made no contributions at all to their plans, up from 2% in 2001.
- Benefits experts say IBM's shift could start a trend among other large employers.
- For IBM, the latest move could help save millions of dollars a year in compensation expenses, and keep valued workers who want to ensure they receive the match more tethered to their jobs—at least until the end of a given year. In 2011, it paid $875 million in matching and automatic contributions.
- Financial planners say the lump-sum contributions undermine one big advantage of 401(k) plans: "dollar-cost averaging," in which investors are buying stock and bonds at multiple prices over time, leveling out risk and return. It is a particular concern for older workers who are closer to retirement and have less time to make up for short-term losses, said Jason Chepenik, a certified financial planner and retirement-plan consultant in Winter Park, Fla.
- Some IBM employees are unhappy. "It's a huge change," said Andy Maher, a 59-year-old IBM customer engineer in Victorville, Calif. Mr. Maher, who started at the company in 1976, was an early adopter in the company's retirement offerings, eventually increasing his savings to 12% of pretax pay while raising five children. Now, he said, he is concerned that "you lose a whole year's worth of interest on that money. And if they lay you off Dec. 1, you don't get anything. It adds a whole other level of unnecessary uncertainty."
- All told, about 9% of employers pay out their 401(k) match once a year, according to Aon Hewitt. But most of those employers have older plans that never switched to regular matches, said Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt.
- "When a large organization like IBM makes the change, others are going to watch and see, and if they're struggling with the same issues from a cost-pressure perspective, and they are, it wouldn't surprise me if other companies followed suit," she added.
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