IBM 401k plan still the largest, and one of the best
IBM sponsors the largest private defined contribution plan in the United States, which is widely regarded as excellent. Its DC plan features a matching contribution, an automatic company contribution, and immediate vesting. BrightScope rates IBM’s plan near the top of its peer group, and in 2014 IBM’s plan cracked the top 30 plans with over $1B in assets.
IBM Company Background
Headquartered in Armonk, NY, IBM (International Business Machines Corporation) has been in the technology business for over 100 years. In recent years IBM has been ranked the No. 1 company for leaders, No. 1 green company in the U.S., and No. 2 most respected company. IBM is a true global organization with 12 research labs spread across the globe and more than 400,000 employees worldwide. IBM has 3 retirement offerings all administered by Richard Carroll.
Retirement Program Details
Two of IBM’s three retirement offerings are currently active; the IBM 401k Plus Plan and the IBM Secured Benefit Arrangement. Both are defined contribution plans, but the IBM Secured Benefit Arrangement is dwarfed in size and assets by the IBM 401k Plus Plan. The Plus Plan has $48B in assets, more than any other defined contribution plan, and over 90,000 participants. The Secured Benefit Arrangement has just $1.1M in assets and 4 active participants. IBM also sponsors the IBM Personal Pension Plan, a frozen defined benefit plan with $54B in assets and 56,000 participants. Being that the IBM Personal Pension Plan is frozen to new participants and the IBM Secured Benefit Arrangement has just 4 participants, they will be omitted from our analysis.
|Plan Name||Plan Type||Plan Assets||Frozen|
|IBM 401k Plus Plan||DC||$48B||No|
|The IBM Secured Benefit Arrangement||DC||$1M||No|
|IBM Personal Pension Plan||DB||$54B||Yes|
The IBM 401k Plus Plan's assets have grown by 30% since 2010 to $48B in 2014, its largest asset total to date. Conversely, net flows from the Plus Plan have been trending negatively over the same time span. The growth in assets can mainly be attributed to market growth and the decline in flows to a drop in active participants.
Over the course of the last year IBM has been in the news about potential layoffs and “workforce rebalancing”. In late January 2015, IBM gave this statement to Business Insider:
"IBM is aggressively positioning itself for continued leadership in cloud, analytics, mobile, security, social and cognitive computing, and we are investing in and staffing these priority areas. This is not new news. IBM announced a $600 million workforce rebalancing charge in 4Q, 2014."
Given IBM’s rebalancing plan it would not be surprising to see participant counts to continue to decrease. However, IBM is unlikely to lose its crown as the largest private DC plan anytime soon, despite its negative flows.
IBM’s 401k Plus Plan has achieved excellent ratings for the past 5 years. Since 2010 the plan has earned a rating of 86 or 87, well above its peer group average of 67 and only a few points shy of the peer group leader rating of 93. In 2014 BrightScope ranked IBM as the 24th best 401k plan with more than $1b in assets. Unsurprisingly, IBM does almost everything well when it comes to their 401k offering. They offer a solid match of 100% up to 5%, give investors a diversified array of funds to choose from, and keep fees low.
IBM’s DC plan design has many elements that boost retirement savings, as is evidenced by its 96% participation rate. The plan’s high participation rate is encouraged by IBM’s enrollment policy in which employees are automatically enrolled at a 5% contribution rate after 30 days of employment. This is an excellent way to jumpstart employee retirement savings and it is effective at increasing participation. To achieve the top rating in participation IBM would need to be in the top 15% of plans in its peer group, which would require a participation rate of 98.8%. So while participation is the only component rating that IBM does not receive a rating a “Great”, it is also the most competitive and IBM is still only a few percentage points away from the best plans in its peer group.
IBM provides an automatic contribution of 1% and a matching contribution of 100% on 5% of eligible compensation. Employees become eligible for company contributions after they complete 1 year of service and the contributions are made at the end of the plan year. The contributions provided by IBM drive the high company generosity, salary deferral and account balance ratings the plan receives.
So, while the plan design is strong almost across the board, if there is room to improve the plan design for participants, it would be through the following changes, in order of priority:
- Provide company contributions every payroll rather than once annually.
- Consider removing the 1 year waiting period before participants become eligible for company contributions.
- Consider lowering the 30 day waiting period before employees are eligible for the 401k plan.
These changes are admittedly small, and a few of these policies undoubtedly have good reasons to keep them as they are. But, the proposed changes are also undoubtedly good for participants. Any changes would make an already good plan even better.
IBM uses two primary service providers; Fidelity and State Street. Fidelity handles recordkeeping duties for the plan and has for the last 5 years. In 2014 IBM plan participants paid roughly $60 per account to Fidelity for their recordkeeping services ($5.3m in total). State Street Bank & Trust (SSB&T) takes care of trustee and custodian duties for the plan. SSB&T has been working with the plan 2009. Participants paid State Street a total of $10m in fees in 2014, though a big portion of those fees came from investment management, not custodial services.
The IBM 401k Plus Plan has 27 investment options which includes a small allocation of IBM company stock, a large assortment of collective trusts, a custom target date fund, and a mutual fund window. There is a substantial allocation of IBM separately managed funds that covers a variety of sectors including the bond market, inflation protected bonds, long-term bonds, emerging markets, international stock markets, and high yield debt. 46% of the investment menu is invested in index funds, a percentage that has not varied much over the last 5 years.
Outside of the funds listed on IBM’s core investment lineup are a suite of Life Strategy funds and Life Cycle funds, the latter including IBM’s custom target dates. These funds are available to IBM employees and based on their selection IBM’s investment team appropriately allocates the assets. The Life Strategy funds offered by IBM are broken down in the table below.
|Fund||% Stock Allocation||% Bond Allocation|
|Income Plus Life Strategy||25||75|
|Conservative Life Strategy||50||50|
|Moderate Life Strategy||65||35|
|Aggressive Life Strategy||90||10|
IBM’s Life Cycle funds are structured in a similar fashion to IBM’s Life Strategy funds. Plan participants can choose target date funds with landing dates from 2005 to 2055, with the funds constructed assuming a retirement age of 60. As with most target date funds, the glidepath is designed to lower investment risk as participants approach retirement. Should a participant not make an investment election when enrolling in the plan they will be placed in an IBM Life Cycle fund that corresponds to the year in which they will reach 60.
IBM does a great job of offering target date funds to its plan participants. By utilizing their custom target date funds as the plan’s QDIA IBM keeps risk and fees low for participants, both positives in BrightScope’s book. In addition, IBM plan participants are also utilizing target date funds found in the brokerage window provided by IBM. It is interesting to see investors avoiding the custom target date series and utilizing a different series through a brokerage window. Investing through a brokerage window comes with higher fees and more risk. Unless an experienced and savvy investor, BrightScope recommends utilizing IBM’s custom target date series and core investment lineup for retirement savings.
Investment Menu Changes
IBM has added a handful of funds to its 401k investment menu over the last 5 years. 2013 was the biggest year for fund additions with 4 new offerings making their way on to the investment menu. The two most interesting additions were the AQR Global Risk Parity Enhanced Liquidity fund and the Bridgewater All Weather Portfolio III. Both funds are alternatives that are exceedingly rare funds in the 401k universe - though are more common in DB plans. The Bridgewater All Weather Portfolio III is found in just six 401k plans, while the AQR Global Risk Parity Enhanced Liquidity fund is found in just two 401k plans. IBM has shown a willingness to adopt DB diversification techniques within their 401k lineup.
|Year||Added Fund||Removed Fund||Assets||Asset Class|
|2013||Bridgewater All Weather Portfolio III||None||$627M||Allocation Funds|
|2013||AQR Global Risk Parity Enhanced Liquidity||None||$207M||Large Cap Stock|
|2013||IBM Emerging Markets Debt, IBM High Yield Debt||None||$245M||Bond Funds|
|2012||Vanguard Emerging Markets Stock Index||None||$15M||International Stock|
|2010||IBM Mutual Fund Window||None||$3.3B||Large Cap Stock|
|2010||SSgA Government Short Term Investment Fund||None||$2.7M||Cash/Stable Value|
IBM has provided a stellar retirement plan to its employees for years. The company contributes generously to participant accounts and provides a balanced investment lineup. IBM’s 401k Plus Plan is clearly in the upper echelon of plans in its peer group but it could improve a few facets of its operation to move towards the top spot. To begin, IBM should eliminate the 30 days participants must wait before entering the plan and the 1 year waiting period before employees can receive company contributions. Growing the company match from 5% to a higher rate would also go a long ways in bolstering IBM’s plan. With these few changes IBM could take its already strong retirement plan to the top spot in its peer group.