IBM To End U.S. Pension Plan Contributions in 2008IBM To End U.S. Pension Plan Contributions in 2008

IBM on Thursday said it would stop contributing to its U.S. pension plan starting in 2008, hoping to save billions of dollars by moving all employees over to its 401(k) savings plan.

The Armonk, N.Y., tech giant said workers participating in the current defined benefit pension plan would stop accruing new benefits effective Dec. 31, 2007. In essence, retirement benefits would be frozen as of that date, but would be available to participants when they leave the company, under the same payment options currently in effect.

In January 2008, all employees would receive the company's enhanced 401(k) savings plan. IBM plans to double the current company match to up to 6 percent of salary deferrals and to make additional automatic contributions of 1 percent to 4 percent of employees' pay into their accounts.

To ensure 100 percent participation in the plan, IBM will open accounts for employees who do not contribute to the plan, and contribute an amount equal to 1 percent to 4 percent of their pay.

The changes do not affect IBM's 125,000 current U.S. retirees, former employees with vested benefits or employees who retire prior to Jan. 1, 2008, the company said.

Companies in general have been dropping defined pension plans in favor of 401(k)s, saying they can no longer afford to guarantee lifelong pensions and medical benefits for retirees.

"In recent years, IBM has been following a global strategy to move toward defined contribution retirement plans for both existing employees and new hires," Randy MacDonald, senior vice president of human resources for IBM, said in a statement. "These changes are consistent with this direction and will give us more predictable retirement plan costs, along with benefits that remain ahead of -- but more in line with -- our competitors.

IBM said it expects the announced changes, along with 2006 changes under consideration in several other countries, to cut worldwide retirement-related expenses this year by $450 million to $500 million. From 2006 through 2010, the company expects to cut costs by $2.5 billion to $3 billion.

Because of the changes announced Thursday, however, the company plans to record a one-time pre-tax charge of about $270 million in the fourth quarter.

IBM's shift away from its pension plan hasn't been easy. Last September, the company agreed to pay up to $1.4 billion to settle a class-action suit by employees who claimed the company's pension plan formulas discriminated against older employees.

IBM's move is similar to steps announced last summer by rival Hewlett-Packard Co. Starting this month, HP froze the pension and retiree medical-program benefits of employees who did not meet defined criteria based on age and years of company service. Instead, HP increased its matching contribution to most employees' 401(k) plans to 6 percent of pay from 4 percent.