Corporate bellwether's move to annual lump sum match seen as coming attraction; new planning required
News that International Business Machines Corp. plans to make its contribution to workers' 401(k)s on an annual basis — rather than with each paycheck — has non-IBM workers spooked.
Reports of IBM's change to the frequency of its contributions, typically amounting to 6% to 10% of workers' pay, were initially published by The Wall Street Journal and heralded as an example that other employers would follow. Starting next year, Big Blue's match will be contributed as a lump sum on Dec. 31. Workers who leave IBM before Dec. 15 won't be able to get that year's match unless they are retiring, according to the Journal.
Not surprisingly, advisers working with IBM employees say the change has hurt morale. “They're disappointed,” said David L. Blain, president of D.L. Blain & Co. LLC. “Psychologically, it's a big deal for them.”
The concerns are not limited to IBMers. Advisers say some of their clients are worried that the move will be aped by other employers.
Indeed, one such client reached out to R. Alan Dossett, an adviser with Waypoint Financial Planning LLC. “I told the client that his worries are probably justified,” Mr. Dossett said. “I told him that he is right, and other companies will follow suit.”
Advisers note that this might be a good time for workers to think about the role they play in shaping the outcome of their own retirement — particularly if they lose the benefit of having an employer match at each paycheck and have to contend with a large lump sum at the end of the year. One obvious problem: Workers lose the benefit of dollar cost averaging under such a setup.
Suzanne Krasna, president of Krasna Financial Group LLC, suggested that employees holding a lump sum could benefit from creating their own dollar cost averaging system. The lump-sum match could go into a money market fund or other cash alternative in the plan, and the worker can have a set portion of that money allocated to funds selected within the plan over the course of the year.
“I would implement this for employees immediately,” Ms. Krasna said, adding that workers could supplement IBM's match with an increase in their own contributions — to the maximum amount allowed, if possible.
Mr. Blain disagreed with dollar cost averaging the lump sum into the market, noting that investing the money immediately with everything else in the 401(k) was less labor-intensive and avoided charging commissions with each trade.
“We will likely invest the match with everything else that's in the 401(k), so it depends on where the market is,” he said. “If stocks are up a lot and bonds are down when the money comes, we'll put the money in bonds.”
With the lump sum coming in at year-end, employees could end up a year behind in overall growth if they miss out on a year of gains preceding the match's arrival, said Kent Kramer, an adviser with Foster Group Inc. But he noted that in terms of long-term retirement security, “this loss isn't necessarily a panic button issue.”
Still, it might be a good time to talk to clients about other areas where they can ramp up retirement savings. Socking away money outside the plan, particularly if the client will already be contributing at next year's 401(k) limit of $17,500, is a good conversation to have, Mr. Kramer added.
That way, the client is preparing for a tax-efficient income withdrawal strategy in retirement and ensuring that the bulk of savings isn't stashed in the 401(k).
“The client could choose to save money in the same way outside the plan,” he said. “We think having a mix of after-tax and pretax savings is great: You get to retirement and you have a combination that allows you to manage your taxes more efficiently when you get there.”
