Skip to main content

Will 401(k) plans keep getting worse?

By Teresa Ghilarducci, Special to CNN
December 12, 2012 -- Updated 2222 GMT (0622 HKT)
IBM plans to contribute only once every December to its employees' 401(k) accounts.
IBM plans to contribute only once every December to its employees' 401(k) accounts.
STORY HIGHLIGHTS
  • IBM said it would contribute once every December to its employees' 401(k) plans
  • Teresa Ghilarducci: This type of payment benefits the company rather than workers
  • She says relative to other companies, IBM actually has a good retirement plan
  • Ghilarducci: Most companies are reducing retirement benefits; workers lose

Editor's note: Teresa Ghilarducci is a professor of economics and director of the Schwartz Center for Economic Policy Analysis at The New School.

(CNN) -- IBM, one of America's largest companies, shook the employee compensation world when it announced recently that it would contribute only once every December to its employees' 401(k) accounts. Any employee who leaves before December would not be able to collect the company's match.

Workers at IBM aren't marching to the picket line like Walmart workers and longshoreman who protest pay and working conditions, but you just never know.

Only about 9% of the nation's employers make matches once a year. IBM's move is paving the way for big companies to go down this road.

If I were an IBM manager, I would love this once-a-year lump payment. First, my buddies in Human Resources would have much less hassle with fewer deposits to make. By delaying payment to the end of the year, "the float" -- interest accrued -- would go to the company instead of the workers. In other words, the company saves money.

Moreover, few IBM workers are going to voluntarily leave before December, which means projects can be planned better and employees can be asked to do more.

QUIZ: The ultimate portfolio -- 15 questions to help you define your financial goals

A few years ago, in 2008, IBM made news by transforming its traditional defined benefit plan, a pension, into a 401(k)-type plan. That move saved money, but the company lost an important personnel tool.

Defined benefit plans are designed to encourage employees to exit or retire when it is optimal for the company. A 401(k) is cheaper, but it is a "cash and carry" account that does not have the element of timing finesse. A 401(k) plan does not reward loyalty, and its value is not predictable as it fluctuates all over the place depending on the financial markets.

How important is saving for retirement?
Investment options for a 401(k)?

By making workers stay until December before they can receive the company's 401(k) match, IBM is putting back, albeit with an anemic substitute, a reward for workers to stay at least until December.

The company can be pretty sure that there will be very few workers exiting during crunch time season: September, October and November. It would really be IBM's choice in determining which employees to let go. This incremental addition to IBM's control over their employees is surely the main reason IBM changed its 401(k) payment timing.

But let's step back. Relative to other companies, IBM actually has a good retirement plan. It matches more than 6% of a worker's contribution, which is above the national average. Only 7% of companies do not make matches to 401(k) plans, so at least IBM is, for now, in the majority of companies that match their employees' contributions. Not many people know that just because a company sponsors a 401(k) plan doesn't mean that it will pay a cent.

In the Great Recession of 2008 to 2009, more than 11% of companies stopped their 401(k) match. Because they are voluntary, most workers do not even have a retirement account plan, which means many middle-class and upper-middle-class workers will only have Social Security to rely on for retirement.

These workers face considerable chance of downward mobility later in life because Social Security is not designed to replace pre-retirement living standards for anyone but the lowest paid workers. Middle-class workers will need at least a $500,000 payout on top of Social Security checks to have a chance of remaining middle class when they retire. Most of us could only dream of accumulating that amount or its equivalent by saving for retirement at work or being in a pension plan.

IBM looks better than most companies because most companies are whacking their workers' retirement plans or don't sponsor any at all. GM offered its salaried, white-collar workers a lump sum -- the worst way to get a retirement account because people spend a lump sum too fast -- instead of an annuity. Ford will follow GM's example next year. Fortunately, very few auto managers and workers are taking up such an offer; they must know an annuity is more valuable.

What is there to stop companies from ending retirement accounts altogether? Nothing.

Unions represent less than 11% of the private sector workforce and the unemployment rate is high enough that anyone who has a job feels lucky to have a job. I don't see anything on the horizon that will encourage companies to maintain or improve retirement programs at the workplace.

Political leadership and bravery is needed to call out the failure of the voluntary retirement system and to secure retirement income and savings for all American workers.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of Teresa Ghilarducci.

ADVERTISEMENT
Part of complete coverage on
April 23, 2014 -- Updated 1641 GMT (0041 HKT)
Robert Hickey says most new housing development is high-end, catering to high-earners.
April 23, 2014 -- Updated 1317 GMT (2117 HKT)
Alexander Motyl says as Russian President Putin snarled at Ukraine, his foreign minister was signing a conciliatory accord with the West. Whatever the game, the accord is a major stand down by Russia
April 23, 2014 -- Updated 1229 GMT (2029 HKT)
Les Abend says at every turn, the stowaway teen defied the odds of discovery and survival. What pilot would have thought to look for a person in the wheel well?
April 22, 2014 -- Updated 2247 GMT (0647 HKT)
Q & A with artist Rachel Sussman on her new book of photographs, "The Oldest Living Things in the World."
April 22, 2014 -- Updated 1958 GMT (0358 HKT)
Martin Blaser says the overuse of antibiotics threatens to deplete our bodies of "good" microbes, leaving us vulnerable to an unstoppable plague--an "antibiotic winter"
April 22, 2014 -- Updated 1737 GMT (0137 HKT)
John Sutter asks: Is it possible to eat meat in modern-day America and consider yourself an environmentalist without being a hypocrite?
April 22, 2014 -- Updated 1538 GMT (2338 HKT)
Sally Kohn notes that Meb Keflezighi rightly was called an American after he won the Boston Marathon, but his status in the U.S. once was questioned
April 22, 2014 -- Updated 1256 GMT (2056 HKT)
Denis Hayes and Scott Denman say on this Earth Day, the dawn of the Solar Age is already upon us and the Atomic Age of nuclear power is in decline
April 21, 2014 -- Updated 2036 GMT (0436 HKT)
Retired Coast Guard officer James Loy says a ship captain bears huge responsibility.
April 21, 2014 -- Updated 1708 GMT (0108 HKT)
Peter Bergen says the latest strikes are part of an aggressive U.S. effort to target militants, including a bomb maker
April 21, 2014 -- Updated 1345 GMT (2145 HKT)
Cynthia Lummis and Peter Welch say 16 agencies carry out national intelligence, and their budgets are top secret. We need to know how they are spending our money.
April 21, 2014 -- Updated 1235 GMT (2035 HKT)
Julian Zelizer says President Obama knows more than anyone that he has much at stake in the midterm elections.
April 22, 2014 -- Updated 1255 GMT (2055 HKT)
Eric Sanderson says if you really want to strike a blow for the environment--and your health--this Earth Day, work to get cars out of cities and create transportation alternatives
April 21, 2014 -- Updated 1408 GMT (2208 HKT)
Bruce Barcott looks at the dramatic differences in marijuana laws in Colorado and Louisiana
April 18, 2014 -- Updated 2047 GMT (0447 HKT)
Jim Bell says NASA's latest discovery supports the notion that habitable worlds are probably common in the galaxy.
April 18, 2014 -- Updated 1817 GMT (0217 HKT)
Jay Parini says even the Gospels skip the actual Resurrection and are sketchy on the appearances that followed.
April 18, 2014 -- Updated 1752 GMT (0152 HKT)
Graham Allison says if an unchecked and emboldened Russia foments conflict in a nation like Latvia, a NATO member, the West would have to defend it.
April 18, 2014 -- Updated 1311 GMT (2111 HKT)
John Sutter: Bad news, guys -- the pangolin we adopted is missing.
April 21, 2014 -- Updated 1825 GMT (0225 HKT)
Ben Wildavsky says we need a better way to determine whether colleges are turning out graduates with superior education and abilities.
April 18, 2014 -- Updated 1026 GMT (1826 HKT)
Charles Maclin, program manager working on the search and recovery of Malaysia Flight 370, explains how it works.
April 18, 2014 -- Updated 1250 GMT (2050 HKT)
Jill Koyama says Michael Bloomberg is right to tackle gun violence, but we need to go beyond piecemeal state legislation.
April 17, 2014 -- Updated 1845 GMT (0245 HKT)
Michael Bloomberg and Shannon Watts say Americans are ready for sensible gun laws, but politicians are cowed by the NRA. Everytown for Gun Safety will prove the NRA is not that powerful.
ADVERTISEMENT