IBM Endeavors to Link 401K Plan to Pay for Performance

Earlier this week, I read a great Business Week article by Amy Feldman on how IBM is reinventing their 401K Plan to link it to pay for performance. The reason it was so interesting is that it reveals ways they've successfully transitioned their old pension plans into new, highly successful 401K plan based upon industry comparison. And it elaborates on how they intend to link their 401K plans to reward and enhance the retention of their best performers.

At the beginning of 2008, the IBM corporation phased out the last of its pensions with a brand new 401K plan flush with enticements.  These included very low fees, personalized portfolios, one-on-one financial coaching, and more.  As a company who earned more than $10 billion on $99 billion in revenue at year-end 2007, they could well afford to enhance both the new plan's benefits and features.

While 401K employee account balances have been slashed from their former value for most of us (now commonly known as the 201K...), IBM's 401K plan has a 94% participation rate with more than 100,000 active employees.  Their average employee account balance is $127,000 which is more than twice the national average.  Investment fees have been whittled down to a mere 10 basis points, or .10% to enable greater compounding  and return on assets.

"IBM takes a very paternalistic and serious attitude in terms of the quality and the cost to participants," says Ted Benna, chief operating officer of pension consulting firm specialists, Malvern Benefits.

Because of their 401K plan's enhancements and participation levels, they've managed to survive the recession in good shape so far.  Now they're toying with some "truly radical ideas" to blend health benefits and retirement into compensation, in which their top performers would be rewarded more richly in these plans.  And because they're such a huge player in the employment marketplace, everyone's taking notice and watching to see just how they'll do this.

"Suppose you made a 401K plan that was performance-based?" asked J. Randall MacDonald, senior vice-president for human resources, who was responsible for the pensions' conversion into the current 401K plan.  "If everybody gets paid on performance, shouldn't there be benefits based on performance?  That's what it means to be a performance-based culture."

Details are not forthcoming yet.  But the vision includes a pay-for-performance 401K contribution, coupled with stock options or deferred compensation plans that will serve to differentiate between employees.  Because of discrimination testing, extra benefits would need to be spread across top performers.  Offering a possible solution, retirement consultants recommend comparing workers at similar levels, within the same salary range.

Though IBM will no doubt be thorough in their approach to changing their 401K benefits plan to link it to performance, they also understand that whatever design is recommended going forward will be highly tested.  As the pioneer in linking pay for performance to 401K plans, MacDonald says, "That's why I like it.  It's only a matter of figuring out when, why, and how."

Flickr photo courtesy of Michal Osmenda

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products.  A former Corporate Human Resources Director (10,000 employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Comments

[David Janus]

Interesting post.

There's another BusinessWeek article from March that discusses the issue of differentiated benefits: http://bit.ly/aH89I. In that article there's some discussion not only of trying to bring a pay-for-performance model to benefits, but also of being able to fit benefits to individual preferences - for example, younger workers being able to swap an expensive health insurance plan for more vacation time.

At the moment, of course, all these ideas are little more than theory. Besides the fact that employers would run afoul of the law, there are real questions as to how to make sure such radical changes don't backfire. The goal of any such changes would be to increase employee engagement and motivation, but it would seem that, if not well designed, such programs could instead lead to resentment and dissatisfaction among employees.

[Becky Regan]

David,

Thxs for the link to the additional BW article. I'm a fan of customizing benefits and rewards based on employee performance and job responsibilities. It makes a lot of sense to me design programs that take extra care of your top 20% of employees in this time of diminished salary budgets. It'll be interesting to see how this all plays out over the next 5 year timeline as predicted in your recommended article.

Best,
Becky

[Klaus]

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[Long Time IBM'er]

This sounds bad for employees . It sounds like they will not give best(10%)employees
more , but take away from the poor and
average employees , which make up the other 90% of the IBM workforce !
From a company with record profits , the
workers take it on the chin....