Is Changing the 401K to an RBA a Good Idea for Employers? - American Society of Employers - Anthony Kaylin

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Is Changing the 401K to an RBA a Good Idea for Employers?

Some organizations are changing from a 401k plan to RBA. IBM is one such organization that is changing its traditional 401K plan to a new approach.  IBM currently matches the first 5% of salary that employees contribute to their 401(k) accounts, dollar for dollar, and provides an automatic 1% contribution for a total of 6%.  Instead, it will offer a secondary plan. 

The new plan is called a Retirement Benefit Account (RBA).  According to IBM, each employee who has served at least a year will receive a “monthly account credit” up to IRS limits and a one-time salary increase, separate from the company’s annual pay plan, to “offset the difference between the current company 401(k) contribution rate” and the new credit.  In other words, each employee who is eligible, about 97%, will be credited monthly with an amount equal to 5% of their eligible pay with no employee contribution required in the RBA.

This approach allows IBM to save money and actual cash flow.  By shifting its employee 401(k) contribution from 6% to a 5% RBA contribution, that's a 16.66% savings.  Before this change, IBM would match up to 5% plus contribute an additional 1% automatically. Further, assuming IBM holds and manages its RBA contribution, it doesn't have to pay anything out at all until the employee leaves the company.  It is essentially an IOU to the employee, payable upon termination or retirement. 

For the RBA, IBM will guarantee a 6% return for two years and starting year 3, the interest rate will track the 10-year yield for Treasury Bonds. That's about 4.25% in today’s market, but if inflation subsides as expected, it could end up closer to 2% or less.  Under a traditional 401K plan, employees could invest their retirement savings into the stock market, which has averaged about an 8% or higher return on average. 

There is a question whether the RBA would be considered a pension account that is covered by ERISA,  the Employee Retirement Income Security Act of 1974.  Under ERISA requirements qualified employee-sponsored retirement plans need to be funded with real dollars.  This approach is simply a balance sheet liability and likely unfunded.  If IBM went bankrupt, the RBA may be considered a general liability, and would be a creditor of IBM, and get whatever is left, but far from likely $1 for $1 in a bankruptcy proceeding.

IBM's RBA is said to be part of the company's existing IBM Personal Pension Plan.  Interestingly enough, IBM is being sued by Cohen Milstein in a class action lawsuit for their Personal Pension Plan.  The complaint alleges that the Plan uses outdated mortality tables to determine the value of joint and survivor annuities, resulting in married retirees receiving less than the actuarial equivalent of the benefit that ERISA protects.  The lawsuit is still pending.

The fear among financial advisors is that IBM is a leader in retirement account approaches.  When it started its 401K in 1984, companies followed suit.  Assuming the RBA passes court muster, other companies may follow suit.  They also believe that if employees think they are getting guaranteed money, they may invest less in the traditional 401K, hurting their future selves.  Also, the salary increase, which is taxable, is one time only, and if the bond market tanks, there are no additional increases to make up the losses.

IBM tends to push the envelope.  In this time where union agitation is high, this could be the straw that breaks the camel’s back.  It could also lead to possible ways to reduce older employees, without a reduction in force, who will likely try to find jobs to preserve their retirement.   Assuming that IBM grows younger, it will achieve further cost savings with salaries and associated benefits.  Only time will tell if this approach is considered “legal” and becomes the new way for employers to “fund” retirement plans of employees.


Source: MarketWatch 11/20/23, USAToday 11/9/23, Morningstar 11/9/23, The Register 11/2/23, Cohen Milstein


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