IBM to join trend of freezing pensions in favor of 401(k)s

WASHINGTON — IBM said Thursday it will freeze the pension plans of some 120,000 employees in the United States, effective at the end of next year, and will offer instead a more generous 401(k) plan.

IBM's move is part of a corporate stampede away from traditional pension plans. IBM officials called the change essential to remain competitive with foreign and domestic information-technology rivals.

The freeze means that benefits earned by current workers up to Jan. 1, 2008, will be preserved, but after that date they will not increase. The company already had eliminated traditional pensions for new hires starting last year.

The company said it expects the changes announced Thursday — along with changes it expects to make this year for workers in other countries — to cut worldwide retirement-related expenses by $450 million to $500 million this year and by $2.5 billion to $3 billion through 2010.

The action adds IBM to a growing list of U.S. employers that have frozen or terminated pension plans to cut costs or, in some cases, to emerge from bankruptcy. Such changes are especially common in industries where foreign competition is tough, such as steel, or where new domestic competitors have arisen — such as airlines and high-tech — that do not offer traditional pensions.

Last month, for example, Verizon, the nation's second-largest phone company, froze its traditional pension plan for 50,000 managerial workers and boosted benefits through its 401(k) plan. Verizon said it expected the change to save it about $3 billion over the next decade.

Rival Hewlett-Packard decided last year to offer only a 401(k) plan to U.S. workers hired this year and beyond.

A survey last year by the government agency that insures traditional pensions, the Pension Benefit Guaranty Corp. (PBGC), found that 9.4 percent of existing plans are frozen. However, some experts say that the PBGC figure is too low. The trend has been accelerating, they say, and some surveys suggest that 15 to 20 percent of employers with traditional pensions are considering freezing or terminating them.

IBM's change means that some 80,000 employees under the cash-balance plan, as well as 30,000 who were grandfathered into an older plan, will earn no new benefits under those plans, regardless of how much longer they remain with the company. Typically benefits under pension plans increase as the number of years worked accumulates and as salaries rise.

Instead, IBM employees will be eligible for a 401(k) plan that IBM called "one of the richest in U.S. business." Under it, the company will contribute as much as 10 percent of pay annually to the accounts of current pension-plan participants. IBM plans to double the current company match to dollar-for-dollar on up to 6 percent of salary deferrals, and to make additional automatic contributions into those accounts equal to 1 to 4 percent of employees' pay.

The company will also open accounts for workers who have not elected to participate in the 401(k) plan and will contribute 1 to 4 percent of pay to those accounts.

The changes to the traditional plans will not affect IBM's 125,000 current U.S. retirees, former employees with vested benefits or workers who retire before Jan. 1, 2008, IBM said.

Information about Hewlett Packard provided by The Associated Press.