IBM has recently announced a major overhaul to its retirement contributions plan. Instead of the traditional model where employees can make periodic contributions, the change only allows a single lump-sum deposit at the end of the year. Since the contributions aren’t dispersed, employees will have approximately 6 months less time to earn interest with the lump-sum plan.
The new move by IBM is one of many in which large corporations have been trying to reduce their retirement-benefits budget. For new employees, this means approximately 4.3% less of a return by retirement versus a reduction of 2.4% for workers already halfway through their career. This policy change by IBM has set a new precedent that other companies and CFOs will have to consider while reviewing their retirement-plan expenses.
What This Means for CFOs
While not every CFO may be the fiduciary of a 401(K) plan, they are still involved with retirement management discussions and may occasionally face tough questions from employees. Each CFO has a different level of involvement in managing retirement plans ranging from having direct discretionary authority over the plans to only being updated about 401(K) statuses.
Regardless of where CFOs stand, 401(K)s are at a crossroads. Approximately 9 percent of employers already use the once a year lump-sum method. With IBM’s recent overhaul, however, the path may have been paved for more companies to follow. Remember that it was IBM that in 2006 was a leader in freezing pension accumulations for current employees. Once IBM made the move, the precedent was set and the standard changed.
For CFOs whose companies have or will decide to adopt this standard, the best thing they can do is ensure that employees are educated on the best 401(K) practices available. In fact, if long-term planning is involved in 401(K) investments, the impact of this new lump-sum policy will be minimal.
If employees are informed how they can still keep a healthy 401(K) account despite the changes, they’ll be happier, and employers can worry less about disgruntled employees. After all, education is one of the top priorities for CFOs who are 401(K) fiduciaries. Recent research shows that over 25% of employees are withdrawing money before retirement in order to pay for mortgages, debt, and loans. With so many money management issues at hand, the lump-sum overhaul isn’t the worst thing that could have happened.