Is IBM the Innovator in the 401(k) Business?

Let's face it - it's a bad time to talk 401k to employees.  With a market that topped at 14,000 in the dow and dropped all the way down in the 7,000 range, most employees who were fully invested in stocks took haircuts in the range of 30-40% of total assets.  That means when it comes time to pump up the old 401k, the audience isn't exactly receptive in most companies to benefit and HR pros - in fact, it can be hostile.

One of the areas I've struggled with in the past few years is running HR shops for companies that fall below the Fortune 500 space.  Buying power is a big deal in the 401k business, and if you are a venture capital-held firm with a couple of hundred employees, you've got limited power to minimize the things you might be able to control for employees - plan design, mutual fund fees, etc.  As an example, I was told last year that in order to enter the 401k space with Vanguard (a mutual fund company that believes in "indexing" and thus is among the best in the company at keeping fees low), you need at least 25 million in assets in your 401k.  Less than that?  You need not apply.

I give you that intro as a backdrop to a recent BusinessWeek article on 401ks at IBM, which recently dropped its pension line to create a supercharged 401k for its employees:

"Back in January 2008, IBM (IBM) replaced the last of its pensions with a new-and-improved 401(k). The plan came with plenty of enticements, befitting a company that earned more than $10 billion on $99 billion in revenue the previous year. There were generous matching contributions, super-low fees, custom-designed portfolios, free access to financial coaches, and more. Even so, critics hammered IBM's move as one more sign of retreat from the secure retirement benefits of the past.

Today, hardly anyone is complaining about IBM's 401(k), least of all the participants. The plan is sumptuous compared with offerings from most companies. Across the U.S., 401(k)s have been bludgeoned by the financial crisis. Balances have shrunk to a fraction of their former value, and many companies have slashed matching contributions. Yet IBM is sticking with its plan—one of the largest in the U.S., with $27 billion in assets. "In my job, I often hear horror stories," says J. Randall MacDonald, senior vice-president for human resources, who led the shift from pension to 401(k). "I don't hear horror stories about the 401(k)."

IBM's creation isn't revolutionary in design or implementation. But it combines most of the best features of 401(k) plans at other companies, then leverages IBM's size to wrangle cut-rate fees from investment firms that want to manage its retirement assets. With 94% participation among more than 100,000 active U.S. employees, the plan boasts an average employee balance of $127,000, more than double the national average. Fees, which have a bigger impact on long-term results than most people realize, typically are just 10 basis points, or 0.10%. "IBM takes a very paternalistic and serious attitude in terms of the quality and the cost to participants," says Ted Benna, chief operating officer of pension consultant Malvern Benefits and the man considered to be the father of the 401(k).

Having weathered the recession, at least so far, IBM is now toying with some truly radical ideas. MacDonald hopes someday to meld retirement and health benefits into compensation, leading to a performance-based 401(k) through which top performers could be rewarded with better benefits. Given IBM's size and clout, any trail it blazes in this area could alter the retirement landscape dramatically.

 

Is there any doubt that size matters?  One example - fees in the IBM plan are .10% on average?  That's clearly related to the purchasing power of the small nation that is IBM.  A small company is lucky to have one or two funds out of 15 that have fees of .30%, with the rest of them moving toward 1.00% in a pretty quick fashion...

So, the IBM plan is great, but the biggest benefits are a reflection of the size of the company...

Comments

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A long partnership gave IBM a good view of what was under the hood at Ounce, and despite a rosy announcement by Ounce Labs earlier this year, IANS assumes IBM was able to strike a very favorable price for the company which eased some of the pain early investors must be experiencing.