It wasn’t welcome news among employees when IBM announced recently that it would freeze its traditional pension plan in 2008, but there was a pleasant flip-side to the story: changes to the company’s 401(k) plan that most American workers would envy.

Hopefully, IBM will be a trendsetter.

Traditional pensions offer a guaranteed benefit based on the employee’s years on the job and final salary, while the 401(k)’s retirement benefit depends on the employee’s investing choices and luck. Make the wrong decisions – or have an employer who doesn’t offer good investing options – and you could run short of money when you’re old.

When it kicks in Jan. 1, 2008, IBM’s enhanced 401(k) will be the Cadillac of plans, offering a company-funded contribution equal to as much as 10 percent of the employee’s annual pay, and in some cases more.

To do that, IBM will double its current 401(k) match by contributing a dollar for every dollar put in by the employee, up to a maximum of 6 percent of the employee’s salary. Big-companies typically limit the employer’s match to about 3 percent of pay.

In addition, IBM will make an automatic annual contribution of 1 percent to 4 percent of pay.

Making it automatic

Another feature of IBM’s plan is especially important: automatic enrollment.

IBM will set up plans for all its workers and make the 1 percent to 4 percent automatic contribution even for employees who don’t put anything in on their own.

This matters because study upon study has shown that too many workers fail to make the most of their 401(k)s.

A 2005 survey of 2.5 million employees by Hewitt Associates, the Illinois human-resources consulting firm, found that 30 percent of eligible employees failed to put anything into 401(k) plans.

The study also found that workers tended to be too conservative with their investments, stunting their long-term growth, and that about a quarter of them were borrowing against their 401(k) assets.

Employees on average had 27 percent of their 401(k) assets in their employer’s stock, with about a quarter of them investing more than half their assets this way. That’s far too many eggs in one basket. As a rule of thumb, 10 percent should be the maximum, but it’s often best to avoid the employer’s stock altogether.

What causes all this self-defeating behavior?

A big part of the problem is inertia: People tend to do what comes easiest. Often, they just don’t get around to signing up for the 401(k). And if they do, they often don’t monitor their plans, failing to think carefully about how best to divide their holdings and neglecting to reassess that mix as they age.

So, whatever you think of IBM’s decision to freeze its traditional pension, the company should be applauded for enhancing its 401(k) – especially for making enrollment automatic.

About a quarter of big companies do that now, but another Hewitt study recently found that another quarter plan to add this feature this year. Hopefully, more will follow.

Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownjphillynews.com.

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AP-NY-01-23-06 0559EST

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