IBM's announcement late last year that it was switching its 401(k) employer match from twice a month to once a year garnered a lot of attention and drew fire from Alliance@IBM, an employee group affiliated with the Communications Workers of America, which says on its website the company's decision "short changes IBM employees."
The amount employees receive isn't changing, but workers who leave the company before Dec. 15 won't get their employer match. And while the move has raised the specter of other employers following IBM's path, at least one investment consultant doesn't expect a lot of other employers to jump on board.
"Until IBM made this announcement, there wasn't much noise about this," says Byron Beebe, retirement market lead with Aon Hewitt. "Since they made the announcement, we've certainly gotten a number of inquiries from other companies that are thinking about it and trying to understand what [a similar move] might mean for them. But they're not on the doorstep of implementing anything right away."
However, IBM has one of the largest private 401(k) plans in the country, with roughly $36 billion in assets.
"They are a leader in the 401(k) field," says Brooks Herman, head of research with analytics firm BrightScope. "For them to make a change like this, it will have a lot of 401(k) specialists, HR departments and CFOs examining their plans and asking if this is the right move. We could see similar announcements in the coming year. That wouldn't surprise me at all."
'Not the norm'
About 9% of employers have once-a-year matching contributions, according to an Aon Hewitt survey of 546 U.S. employers (representing more than 12 million employees and $780 billion in assets). "It's not the norm," says Beebe.
Nevertheless, as employers start planning for 2014, "it's quite likely we'll see more interest [in annual matches]," says Bill McClain, principal with Mercer. According to Mercer's database, the majority of employers (88%) offer their matches on a per-pay-period basis, while 7% match annually.
Annual matches are "a strategy that's been around for awhile," says McClain. "One of the themes we've been seeing for quite some time now is doing more with less. That's really what this relates to. By applying the match only to people who are still with you at year-end, you're funneling contributions away from those who are leaving and toward those who are staying. If you look at it from an organizational standpoint, it's a more efficient way of providing contributions to your ongoing employees."
Effect on turnover
IBM's move could affect turnover, as employees who may be considering leaving the company during the fall months may decide to stick around until at least Dec. 15 to get the employer match. "We don't have a lot of data on this, but certainly you'd expect there to be a bit of a spike in turnover in late December, early January, that they don't see today," says Beebe. "I wouldn't expect more people to leave, necessarily, but the timing of when they leave may change."
Companies that look to annual matches as a cost-saving measure are at least saving money on the right people, says Beebe. "They're looking at total benefits costs, health care premiums, other retirement plan changes they could make, and this is a change that has little impact on the people who stay with them from year-to-year," he says.
Loss of dollar-cost averaging benefits
However, even for employees who stay with the company, moving from a twice-monthly employer match to a once-a-year match means employees miss out on the benefits of dollar-cost averaging.
"If you've been contributing to the 401(k) plan for 20 years and you've got a fairly sizeable balance, the missed opportunity for that person is relatively small," says Beebe. "But for new people coming in, that's something employees will experience over the course of their whole career."
IBM's 401k Plus Plan ranked No. 14 on BrightScope's recent year-end Top 30 401(k) Plans list, climbing eight spots from the 22nd place it held on the list in 2011. BrightScope analyzes over 200 data points in broad categories such as total plan cost, company generosity and investment menu quality, to assign a numerical value for each 401(k) plan.
BrightScope doesn't get information about when companies make their match, so IBM's decision to move to an annual match wouldn't affect its placement on the list, says Herman. However, if the company has a high-turnover year and makes less of a match this year, its rating could be affected.
"If a lot of people either left or were fired, hypothetically, their company match would be lower, and we do see that data," says Herman. "By and large, in our analytics, less company generosity will generally hurt your rating."
Key statistics from BrightScope's 2012 Top 30 list include:
* Target-date funds are making inroads. The average top-30 plan in 2012 has 4.9% of its assets in a target-date fund, compared to 3.6% on the 2011 list.
* Index funds also continue to grow. Index funds account for 29.5% of assets in the top 30 plans of 2012, compared to 25.4% in 2011.
* Brokerage windows represent 3.8% of 401(k) assets in the 2012 list, compared to 2.8% in 2011.
* Plans on the 2012 top-30 list average over $12,700 in salary deferrals per participant, up from $11,600 on the 2011 list.
* 28.7% of the assets in the top-30 list were in collective trusts, up from 24% in 2011.
"Companies that are generous with their match tend to do very well in our ratings, as well as [companies with] participants who defer a lot of income into their 401(k)," says Herman. "The better you can grow your accounts, the better you do in our ratings."
Fees also play a role. "You won't see plans on our list with very high fees," says Herman, noting the average fees for plans on the 2012 list were 29 basis points, compared to 33 basis points just a few years ago.
Top 30 plans
BrightScope's list covering 401(k) plans with more than $1 billion in assets:
1. Marathon Oil Company Thrift Plan
2. The Savings Plan of Saudi Arabian Oil Company
3. Southwest Airlines Pilots' Retirement Savings Plan
4. Wellington Retirement and Pension Plan
5. Amgen Retirement and Savings Plan
6. United Airlines Pilot Directed Account Plan
7. Employees Savings and Retirement Plan of Credit Suisse
8. Sanofi-Aventis US Savings Plan
9. Southern California Permanente Medical Group Retirement Plan
10. Bristol-Meyers Squibb Company Savings and Investment Program
11. Google Inc. 401k Savings Plan
12. ExxonMobil Savings Plan
13. Bayer Corporation Savings and Retirement Plan
14. IBM 401k Plus Plan
15. Genentech, Inc. Tax Reduction Investment Plan
16. Chevron Employee Savings Investment Plan
17. BASF Corporation Retirement Savings Plan
18. The Roche Savings and Pay Deferral Plan
19. Ernst & Young Partnership Retirement Plan
20. Anadarko Employee Savings Plan
21. Cisco Systems, Inc. 401(k) Plan
22. BP Employee Savings Plan
23. Shell Provident Fund
24. UBS Savings and Investment Plan
25. Altria Client Services, Inc. Deferred Profit-Sharing Plan for Salaried Employees
26. ConocoPhillips Savings Plan
27. Goldman Sachs 401k Plan
28. Bechtel Trust & Thrift Plan
29. GlaxoSmithKline Retirement Savings Plan
30. Deloitte Profit Sharing Plan
