When a company provides nearly $900 million in matching contributions to employee 401(k) plan accounts, that company might be forgiven from a financial perspective for wanting to hold onto that money as long as possible.
That certainly seems to the motivation behind IBM's recent announcement that it would no longer be matching employee 401(k) contributions each pay period. Instead, the company will be making a single annual match each December 31st starting next year. Moreover, employees who leave the company either voluntarily or involuntarily before December 15 of any given year will receive no match at all for that year.
At first glance, this change is not surprising. This is not the first time IBM has been among the first to undertake a major change in employee benefits. Back in the 1990s, IBM was an early adopter of a cash balance plan into which it funneled employees after freezing its traditional defined benefit pension plan. IBM is also a large global company that is competing in a global marketplace and needs to consider every way to manage costs and remain competitive.
Although a small number of companies have long had a once-a-year match, IBM's move is still potentially paradigm changing. If it is okay for IBM to do this, other companies might be more willing to do so as well. In fact, at some point, we may look back on IBM's change to the timing of its 401(k) plan match as just another stage of the evolution of employee benefit programs. However, looking at this move from a broader perspective, this change could also be seen as a negative development on a number of levels. Therefore, CFOs should think carefully before following suit.
From a regulatory standpoint, there is nothing to keep companies from following IBM's example. However, if more employers take this approach, the ensuing outcry could get regulators' attention and lead to new rules prohibiting or limiting this practice. After all, annual matches take away the benefits of dollar cost averaging by allowing employees to invest the match gradually over time.
This new approach will invest an entire year's match at once unless employees manage the money carefully and invest it in increments on their own. Frankly, given the general inertia that characterizes most employee 401(k) account management, that scenario seems unlikely for most participants. And if that is the case, an annual match could have an negative impact on employees' retirement savings. If regulators—and lawyers—agree, companies could face a new set of 401(k) plan regulations and potential lawsuits, neither of which is a welcome prospect to CFOs.
CFOs should also carefully consider the employee relations implications of this move. Without even getting into the investment implications and details of an annual match, employees are likely to view the all-or-nothing aspect of the match in a negative light. This is especially true if a company ever has layoffs on any date approaching the date the match is made.
Finally, companies need to consider why they are providing a 401(k) plan in the first place. If employers are trying to remain competitive in the job market and help employees be prepared for their retirement, CFOs need to carefully consider whether shifting to an annual match will help the company to achieve those goals.
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