I.B.M., which has long operated one of the nation's largest corporate pension funds, said yesterday that it would freeze pension benefits for its American employees starting in 2008 and offer them only a 401(k) retirement plan in the future.
The company said that the shift, which is expected to spur still more major companies to move away from traditional defined-benefit pension plans, would save it as much as $3 billion through the next few years and provide it with a "more predictable cost structure."
I.B.M.'s announcement came at a time when a number of large employers have been freezing their pension plans, meaning that employees no longer build up retirement benefits to reflect higher pay and additional years of employment. Verizon, Hewlett-Packard, Motorola and Sears are among those that have recently frozen pension plans for many employees.
But the move by I.B.M., a financially healthy company, shows that even some of the most secure businesses in the country no longer want to bear the risk or the expense of providing a firm promise of a lifetime pension.
While I.B.M. expects to reduce its labor costs substantially, its action bears little resemblance to the recent efforts to cut or freeze pensions at troubled companies in the steel, airline and auto industries. Those companies say they are unable to generate enough cash to have any reasonable hope of making good on their pension promises. I.B.M. has pumped about $6 billion into its pension fund in the last four years and says that its plan is fully funded.
The change will affect its 117,000 current employees in the United States. The benefits flowing to 125,000 American retirees who are already receiving pensions will not change.
I.B.M. provides the nation's third- largest corporate pension plan, with about $48 billion in assets. It said it planned to make similar changes across its international operations, but did not indicate how many people would be involved. The company said it held about $79 billion in its worldwide pension funds.
It had already taken the smaller step of closing its pension plan to new employees at the end of 2004. Those employees were instead offered 401(k) plans similar to the one I.B.M. now intends to give to all employees as of 2008.
In freezing a pension plan, a company stops letting employees build up their benefits with every additional year of service. Employees still get the benefits earned before the freeze, and the company operates a pension fund to pay for those.
The sponsor of the biggest American corporate pension fund, General Motors, has not signaled an intention to freeze its plans, and the United Automobile Workers union could be expected to mount fierce opposition if it did. Officials at General Electric, which has the nation's second-largest such pension fund, did not return a phone call asking whether the company was considering a freeze.
I.B.M., which competes against other technology companies that in general rely exclusively on 401(k) plans, said that the move fit into a broader strategy aimed at avoiding financial risk to its long-term future.
J. Randall MacDonald, the senior vice president for human resources, said I.B.M. thought that the change to a 401(k) plan would give it competitive advantages both in attracting employees and containing labor costs. "This is all about what we started five or six years ago," he said, "a global strategy of shifting from defined-benefit to defined-contribution plans."
In a defined-benefit plan, a company promises employees a predetermined benefit when they retire, and invests money ahead of time to make sure that it can make good on its promises. Such plans are covered by a government guarantee. Defined-contribution plans are not.
In a defined-contribution plan, employers provide a framework in which workers set aside money and invest it for their own retirement. In some cases, including I.B.M., the company matches those employee contributions to some degree. The employee, though, is responsible for investing the money.
I.B.M. projected that it would save $2.5 billion to $3 billion over the next five years as it carries out the change worldwide. It will take a $270 million charge against earnings in the just-completed fourth quarter to account for costs in freezing the pension plan.
Mr. MacDonald said that even though the new benefits would be cheaper for I.B.M., they would "far exceed any average benchmark" in their attractiveness to employees.
Dallas Salisbury, president of the Employee Benefit Research Institute, said I.B.M.'s planned 401(k) program appeared to be "in the top 5 percent in generosity, and probably in the top 1 to 2 percent" of all 401(k) plans offered in this country.
The proposed plan is attractive because of certain unusual features. One is automatic contributions to employees' retirement accounts, which I.B.M. proposes to make even for those employees who choose not to put any of their own money into the accounts. The automatic contributions are to be a percentage of each worker's pay, which will vary depending on the type of benefits that he or she has.
Such a feature is almost unheard-of among employers with 401(k) plans. The promise of an automatic company contribution "overcomes one of the primary criticisms that there has been of 401(k) plans," Mr. Salisbury said. "With most 401(k) plans, you have people who choose not to participate so there is no asset buildup whatsoever."
In addition to the automatic contribution, I.B.M. proposes to match employees' contributions dollar for dollar up to 5 percent or 6 percent of their pay, depending on the worker's hiring date. Dollar-for-dollar matching has become infrequent among employers with 401(k) plans in recent years; most companies provide no more than 50 cents on the dollar in matching funds.
I.B.M.'s pension plan is closely watched not only because of its size but because of a lawsuit, filed against the company by a group of employees, over changes it made to its pension plan in the late 1990's. The employees contended that the changes deprived older workers of benefits they had previously been led to expect.
A federal judge found that I.B.M.'s plan illegally discriminated against older employees; the company is appealing the decision.
Other companies with that type of pension plan, sometimes called cash-balance plans, have complained about the legal uncertainty and warned that it might make them decide to drop the plans altogether. Mr. MacDonald said that I.B.M.'s decision to freeze pensions had nothing to do with the legal problems.
"Quite the contrary," he said.
I.B.M.'s treasurer, Jesse J. Greene Jr., said the company's current financial climate had been an important factor in its decision to freeze pensions. Unexpectedly low long-term interest rates made the American plan cost about $100 million more in 2005 than I.B.M. projected at the end of 2004, he said, and about $300 million more in other countries where it operates. Federal Reserve increases in benchmark short-term interest rates in 2005 caused $200 million more in unexpected costs.
The cash-balance design that I.B.M. adopted is more vulnerable than traditional designs to rises in short-term rates, even though it was promoted by actuaries in the 1990's as cost-effective. Lawsuits at companies like I.B.M. with cash-balance plans were motivated in part by the anger employees felt at seeing the companies increase profits and executive bonuses at the expense of their own retirement benefits.
Mr. Greene said that demographic changes affected costs as well.
"These plans were never designed," he said, to cover obligations that "run as long as people are now living.
"It's important for companies to take actions to deal with this before these plans drag them into trouble."