IBM advice offering to 401(k) participants signals trend

NEW YORK — IBM Corp.’s announcement that it will offer financial planning services to all 127,000 of its U.S. employees is the biggest sign yet that companies are increasingly interested in providing workers with more individual — and effective — counseling on financial topics.
The Armonk, N.Y.-based technology giant said earlier this month that it plans to spend $50 million over five years on the program, which includes seminars and unlimited phone counseling about a full range of financial topics with representatives from Fidelity Investments of Boston and The Ayco Co. LP, a Saratoga Springs, N.Y.-based subsidiary of The Goldman Sachs Group Inc. of New York.
The initiative is one of the enhancements IBM is making to its retirement benefits as it prepares to freeze its cash balance pension plan at the end of this year, leaving employees with just a 401(k). It will also begin automatic enrollment and increase the company contribution by matching 100% (instead of 50%) of the first 6% employees defer and making an additional payment of 1% to 4%, depending on an employee’s tenure.
Clint Roswell, an IBM spokesman, noted that 91% of the company’s U.S. employees have a 401(k), and the average balance tops $115,000. “There is certainly a need for this kind of counseling and guidance,” he said.
The shift from defined benefit pension plans, in which employers make all the investment decisions, to defined contribution plans, in which workers decide how much to save and how to invest their savings, places more responsibility for retirement planning on employees. Yet research shows that many workers are unfamiliar with basic financial concepts.
A 2006 study that posed three basic questions — about interest compounding, the effect of inflation and risk diversification — to people 50 and older found that just 34.3% could answer all three questions correctly.
“Over and over, when we ask people what they know, they seem to know little,” said Annamaria Lusardi, a co-author of the 2006 study and a professor of economics at Dartmouth College in Hanover, N.H.
Providing employees with “some form of individualized information and service is critical,” she argued.
“One of the features about savings and investment behavior is how different people are — in preferences, economic circumstances and planning costs,” Ms. Lusardi said. “One size fits all, the approach that is taken in many initiatives, is not likely to be effective.”
Ms. Lusardi applauded the IBM program for dealing with many of the financial questions that employees might have, not just how they invest their retirement savings. Workers who are saving for retirement could be making costly mistakes in other aspects of their finances, she said.
“Retirement wealth is only one component of total wealth,” Ms. Lusardi explained. “Most people have a house, and they are doing other financial transactions.”
Financial planning services traditionally have been a perk for executives rather than a benefit for all employees, and there are no statistics on how many companies make them available to the rank and file. But Ayco says that it provides broad-based financial planning services to about 500,000 employees at 231 companies. Ernst & Young LLP of New York says that it provides financial planning to 1.7 million employees at 40 companies.
Verizon Communications Inc. of New York began offering Ayco’s financial planning services to its 75,000 non-union employees last May. So far, less than 10% of eligible employees have taken advantage of the financial counseling.
Like IBM, Verizon began to offer the benefit as it discontinued accruals in its traditional pension plan and increased its 401(k) match. Donna Chiffriller, Verizon’s vice president of benefits, said the company decided the start of the higher match would be a good time to offer financial counseling, and help employees assess whether they were making the right investment choices in their 401(k)s.
Ms. Chiffriller said that when Verizon looked for a company to provide the service, “we wanted objective financial advice through a firm like Ayco that does not pick any particular products,” rather than a company that would push its own products.
At IBM, neither Ayco nor Fidelity representatives receive any financial compensation related to employees’ choices of products. The Pension Protection Act, which was enacted last summer, frees plan sponsors from fiduciary liability for offering advice, but Mr. Roswell, said the provision had no bearing on the company’s decision.
CNS