International Business Machines, better known as IBM (IBM), has set the retirement industry abuzz. Rather than doing a 401(k) match, the tech giant will contribute to a “retirement benefit account,” a type of benefit that is more similar to a pension. Yahoo Finance Senior Columnist Kerry Hannon explains the plan and why it’s shaking the retirement industry up.
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Editor’s note: This article was written by Stephanie Mikulich.
– Pensions are back, sort of. IBM is saying goodbye to its 401(k). Instead, employees will now have access to a plan reminiscent of an old-school pension. Here to break down the details is Yahoo Finance’s Kerry Hannon. Kerry.
KERRY HANNON: Well, yeah, this is sort of how the retirement industry abuzz for a while now. And starting in January, IBM kicked off this new option. Now, it’s not getting rid of their 401(k). But what they are doing is instead of the employer match to your– the 5% employer match, they’re taking that 5% and putting it into what’s like a cash balance account.
And if– so you can continue to contribute to a 401(k) if you’re already there. But what this benefit does is that it allows you– they’re going to take that 5%– if you’ve been there for a year, they’ll take 5% of your salary, put it in this account. And you don’t have to make any investment decisions.
And when you choose to leave, you can take it with you. It’s portable. You can take a lump sum. Or you can have it moved into an annuity that will pay you out a benefit for the rest of your life. This is kind of a really interesting option to shift back to their guaranteeing, I think, for the first three years the 6% return. And then it will be tied to the 10-year Treasury.
But what’s interesting is it’s trying to solve a problem where people are panicked about, will they outlive their money? And they kind of want– they yearn for those days of pensions where only about 11% of private employers’ plans have a pension option. But they want somebody that they know they’re going to have some kind of income stream.
So this is kind of a big deal in the industry. I don’t know how much more of this we’re going to see. But I do think it’s a movement to pay attention to people who have that inertia about starting to save for retirement. And more retirees than ever are sick– more individuals are turning 65 this year than ever before in history.
So we’re going to see more people retiring. And these kinds of lifetime annuities, perhaps, will be a version of this. But guaranteed income is starting to edge back into the retirement scenario. So stay tuned.