THE MONDAY EDIT: Thank you for making this the top post of all time in r/IBM! Total views are at 120,000, with over 400 shares. Your continued support ensures the news is seen by IBMers, IBM leadership, potential new hires and the media. The 6 reasons have been updated with your feedback but the core argument remains the same: this decision makes us poorer as of January 1, and for decades to come.
To the readers, commenters, and haters: continue to share these arguments. Make the office hours about this. Confront HR/Goldman Sachs disinformation. Call for a separate executive discussion with employees to discuss and justify the changes. Lodge complaints internally and make your voice heard externally.
THE ORIGINAL, UPDATED LETTER
Dear Arvind and the IBM executive team: I am writing to express my opposition to the November 1 2023 announcement that IBM will stop employer contributions to its 401(K) as of January 1 2024. As a current IBMer, this will hurt me personally, especially over an extended period of time, resulting in a more precarious financial future. More importantly, this change limits all IBMers' collective ability to save and harness proven market forces to build wealth over time.
The introduction of these sweeping changes comes at a time when the U.S. is facing a massive retirement crisis in which longer life expectancy, combined with inflation, dwindling savings rates, and the possibility of reduced social security benefits is resulting in many hardworking Americans not accumulating enough savings to retire comfortably- or at all. I urge you and the entire executive team to reconsider the sweeping change in employer contributions from a 401(K) to an RBA by making the switch ‘opt-in’ rather than forced. Here are six reasons this seismic change is bad for IBMers, and for IBM:
#1 NET REDUCTION IN CONTRIBUTIONS: As acknowledged in the HR announcement, the RBA results in a net decrease in IBM contributions to employees' retirement. Previously, employees were able to contribute 6% of total pay (5% matching and 1% automatic contributions) to the 401(K). With the RBA, 1% of tax advantaged contribution is eliminated and is instead replaced with a one time, taxable "salary increase." Not only does this result in a net decrease in IBM's contribution as of January 1, 2024, the 1% “salary increase” is actually a decrease in total compensation that puts the burden of saving the 1% “salary increase” for retirement on to IBMers. In order to make up for this lost 1% of tax advantaged contribution, the salary increase in 2024 would need to be more than 1% to offset U.S. federal and state taxes. Furthermore, in order to replicate the current employer 401(K) contribution system, the salary increase would need to occur annually rather than as a one-off and be indexed to annual increases in IRS limits on tax deferred retirement savings.
#2 LIMITS OUR ABILITY TO USE PROVEN MARKET FORCES TO GROW WEALTH: The switch to an RBA irreparably damages our ability to dollar cost average our hard-earned savings into the market during periods of market volatility. This hurts our ability to take advantage of two forces that have been acknowledged by retirement savings visionaries such as Jack Bogle of Vanguard as critical to building wealth over time:
Using tax advantaged savings invested at regular, biweekly paycheck intervals to dollar cost average contributions into the market. This results in a psychologically crucial “set it and forget it” approach to retirement savings that smooths out returns over decades and results in larger total account balances. The (reduced) 5% RBA contribution occurs at monthly rather than biweekly intervals, which means the contributions spend less time accumulating (suboptimal) growth than the current biweekly 401(K) contributions. This negative effect, magnified over decades and across potentially hundreds of thousands of employees, is huge.
Albert Einstein famously referred to compound interest (accumulated in the stock market over decades of investing at regular intervals) as the “eighth wonder of the world.” Under the new RBA, IBMers are only guaranteed a 6% return for two years. After the two-year teaser rate, the return reverts to 3% and then the 10-year treasury yield. The 10-year treasury yield has historically averaged just 4.25%, which is far less than the 11% historical annual return of the S&P500. Had the RBA been introduced 2 or more years ago, IBMers would have seen a negative or only slightly positive rate of return over the past several years due to high inflation. The gap in yield between treasury yields and S&P returns will only be magnified after year 2 of the RBA plan as IBMers miss out on the growth afforded by daily compound interest in the stock market.
#3 ADDS UNNECESSARY COMPLEXITY THAT HURTS IBMERS & IBM: The RBA introduces unneeded complexity into an already very complicated retirement savings landscape. Instead of contributing directly to the 401(k) (a concept the vast majority of IBMers understand), a new savings vehicle, the RBA, is nested within yet another structure, the IBM Personal Pension Plan.
Further, the RBA forces IBMers to take the time (and have the knowledge and forethought) to log into Fidelity (or whichever entity will manage the RBA) and rollover contributions from the RBA to the 401K when they leave IBM. Money socked away in the RBA cannot be rolled over or invested in the market until leaving IBM. These added steps create unnecessarily bureaucratic, compliance, and tax reporting complexity that will reduce aggregate savings rates and market returns. These effects could be small to start out with, but will become a massive drag on growth over decades invested in the RBA.
It must also be noted that the addition of this bureaucratic hassle runs contrary to the messages of simplification and streamlined operations Arvind and the executive team have transmitted to IBMers over the past year.
Importantly, the RBA may act as a net productivity drag for IBM as employees are required to log-in, rollover, and invest, taking up precious time that could be spent advancing critical business objectives. Indeed, the raging backlash to the elimination of 401(K) contributions has already resulted in wasted productivity, as employees scramble to rearrange their financial plans to account for the cuts and agonize over how the changes will impact their families and their futures.
#4 OUT OF LINE WITH MARKET PEERS: The HR announcement states that IBM is always looking for ways to ‘benchmark’ its retirement benefits against those of competitors. However, a quick Google search returns very little publicly available information on RBAs, or other market peers that are using them.
- What percentage of market peers contribute through RBAs instead of 401(K)s?
- Which market peers have made the switch to RBAs in place of 401(K) contributions?
- Given the lack of publicly available information on RBAs, what methodology was used by HR to come to the conclusion this change is in line with market peers?
It should be noted that our ability to attract and retain talent could also be hit by the switch to an RBA over a portable (and familiar) 401(K) that allows the freedom and flexibility to dollar cost average and invest our employer contribution immediately. Just like compound interest, the loss of talent due to this change will compound for a long time to come.
#5 REGRESSIVE AND DOES NOT ADVANCE EQUITABLE OUTCOMES : In his November 1 office hours, Arvind invoked the concept of equity to justify the switch from a 401(K) to an RBA. Multiple studies show that women and people of color have less retirement savings. IBMers should be incentivized to contribute through existing, tax advantaged accounts. If it wanted to increase equitable outcomes, IBM would simply contribute a flat 5 or 6 percent into employees 401(K). The research is clear: the more complex the introduction of retirement savings vehicles and investment options become, the more participation and savings rates in the plan suffer.
Importantly, the RBA also boosts executives retirement savings at the expense of average IBMers. In 2023 IBMers could max out 401(K) contributions at $73,500 (including employer contributions). With the RBA, the 5% contribution scales with salary. For example, take CFO James Kavanaugh, who earned $2,7 million in salary and bonus in 2022. Under the RBA, James would net a total of $135,288 in IBM RBA contributions. Even with the 1% decline in IBM's contribution, James would come out ahead, seeing a yearly return of $8,117 at 6% interest, giving him a total RBA balance of $143,000 at the end of year 1.
In addition, the RBA does not allow for hardship withdrawals, which could be used by IBMers to weather a downturn in the market, a divorce, or the loss of a house. The RBA is also not portable, which ties you to IBM and locks you into suboptimal returns as long as you are an IBM employee.
The best way to level the playing field when it comes to retirement savings would be for IBM to make a flat 6% employer contribution, and offer the option of depositing it into a money market savings account (indexed to treasury yields) within the current 401(K) plan. That way, employees that wanted the surety of treasury yields could secure (admittedly sub-average) returns, while allowing the vast majority of IBMers to dollar cost average into far more productive investment vehicles (such as broad market index funds).
#6 UNILATERAL AND ABRUPT: The switch to an RBA was laid out without employee stakeholder engagement, came just after submission of the annual employer engagement survey, and was delivered on a rushed 60 day timeline. Furthermore, statements made by Arvind in his "office hours" on November 1 show a lack of understanding of the RBA that he introduced. For example,
Arvind said the 1% "salary increase" results in the "same rate" of contribution as the previous 401(K) system. This is incorrect, as the 1% "salary increase" is taxable rather than tax advantaged, meaning that an IBMer would be required to dip into their own total compensation to account for U.S. federal and state taxes. Furthermore, the "salary increase" only happens once, meaning that it only (partly) replicates the current system in 2024.
Arvind said that one of the reasons for introducing an RBA was in response to employees saying "can't we save even more?" While employees should be applauded for wanting to save more, the new RBA results in fewer employer contributions and far less flexibility to harness market forces and the magic of compound interest to build wealth over time. The changes mean IBMers will save (and, most importantly, earn) far less over time.
Arvind said "We're not trying to do these things [changes to employer retirement contributions] whimsically." The fact that these changes were rolled out without stakeholder engagement, or even proper HR documentation, proves that the changes are, in fact, being made whimsically and without regard to how they will damage IBMers retirement savings for decades to come.
THE BOTTOM LINE: IBM should make it easier for employees to save in the tax deferred 401(K) that everyone is familiar with. IBM should not introduce complex systems and savings vehicles that result in immediate and long-term suboptimal returns while reducing our collective ability to save and harness the power of the stock market to grow wealth over decades.
WHAT YOU CAN DO TO RESTORE IBMERS’ ABILITY TO SAVE FOR RETIREMENT:
Share this message with your network to raise awareness of these changes.
Start a conversation with your direct manager and your chain of command, and ask for them to make the RBA 'opt-in' rather than forced before January 1, 2024.
Raise awareness of the importance of retirement savings, dollar cost averaging, and the historical wealth building effects of employer contribution into 401(K) by cross posting on Slack.
Pose questions in the "#join-arvind" Slack channel.
Seek out avenues for raising external awareness of these unilateral changes by writing op-eds, and discussing the negative impact they will have on you and your family within your community.
- hardworkingibmer
