By Albert B. Crenshaw and Amy Joyce
Washington Post Staff Writers
Friday, January 6, 2006; A01

International Business Machines Corp. said yesterday that it will freeze the pension plans of some 120,000 employees in the United States, effective at the end of next year, and will offer instead an improved 401(k) plan.

IBM's move is part of a corporate stampede away from traditional pension plans. IBM officials called the change essential to remain competitive with foreign and domestic information-technology rivals.

The freeze means that benefits earned by current workers up to Jan. 1, 2008, will be preserved but that after that date, they will not increase. The company had already eliminated traditional pensions for new hires starting last year.

The company said it expects the changes announced yesterday, along with changes it expects to make this year for workers in other countries, to cut worldwide retirement-related expenses by $450 million to $500 million this year and by $2.5 billion to $3 billion through 2010.

Reaction to the announcement was mixed among current and former IBM workers. Retirees, though they are not affected, pointed to the role pension benefits have played in their economic security.

"To me, this is a dangerous move," said Lee Conrad, a former IBM worker who is national coordinator for the Alliance at IBM, a labor-organizing group formed in 1999 to protest IBM's conversion from cash-balance plans. "Employees are going to be losing out on all kinds of benefits. You've got to wonder what's going to happen to the next generation of workers."

IBM's action adds the company to a growing list of U.S. employers that have frozen or terminated pension plans to cut costs or, in some cases, to emerge from bankruptcy. Such changes are especially common in industries in which foreign competition is tough, such as steel, or in which new domestic competitors have arisen -- such as airlines and high-tech -- that do not offer traditional pensions.

Last month, for example, Verizon Communications Inc., the nation's second-largest phone company, froze its traditional pension plan for 50,000 managerial workers and boosted benefits through its 401(k). Verizon said it expected the change to save it about $3 billion over the next decade.

A survey last year by the government agency that insures traditional pensions, the Pension Benefit Guaranty Corp., found that 9.4 percent of existing plans are frozen. However, some experts say that the PBGC figure is too low. The trend has been accelerating, they say, and some surveys suggest that 15 to 20 percent of employers with traditional pensions are considering freezing or terminating them.

Traditional pensions, which typically promise a specific benefit based on pay and years of service, cover some 34 million workers and retirees. They pay out some $120 billion in benefits annually, according to employer-group estimates.

Roughly 29,000 of these plans remain, down from 112,000 in 1985. The surviving plans tend to be large -- most of the decline has come at small employers -- and are concentrated in older, unionized industries such as the auto industry.

"We are doing this because ultimately, this new way allows us to control our retirement expenses and at the same time preserve benefits. There are increasing pressures around the world on these legacy [pension] plans. We are one of the few in all of the IT industry that have these . . . plans," said Randy MacDonald, IBM's senior vice president of human resources.

IBM over the past 15 years has revamped its pension offerings several times, most recently converting a number of workers to a hybrid "cash-balance" plan, which is operated by the company but delivers benefits in a form that resembles a 401(k).

Unhappy workers sued the company over the cash-balance conversion, charging that such plans violate federal age-discrimination laws. A federal judge in Illinois agreed with the workers. That decision is now on appeal. MacDonald said that suit was not a factor in IBM's decision to freeze its pensions.

The move also comes as members of Congress struggle to rewrite the rules to tighten the funding requirements for traditional "defined-benefit" pension plans, possibly raising costs further. However, MacDonald said the pending bills, like the lawsuit, played no role in IBM's shift.

IBM said its traditional pension plans are fully funded, with assets of more than $48 billion at the end of last year.

The change means that some 80,000 IBM employees under the cash-balance plan, as well as 30,000 who were grandfathered into an older plan, will earn no new benefits under those plans after 2007, regardless of how much longer they remain with the company. Typically, benefits under pension plans increase as the number of years worked accumulates and as salaries rise.

Instead, IBM employees will be eligible for a 401(k) plan that IBM called "one of the richest in U.S. business." Under it, the company will contribute as much as 10 percent of pay annually to the accounts of some current pension-plan participants. To accomplish this, IBM said, it plans to double the current company match to dollar-for-dollar on up to 6 percent of salary deferrals, and to make additional contributions of up to 4 percent in some cases.

The company will also open accounts for workers who have not elected to participate in the 401(k) plan and will contribute 1 to 4 percent of pay to those accounts.

The changes to the traditional plans will not affect IBM's 125,000 current U.S. retirees, former employees with vested benefits or workers who retire before Jan. 1, 2008, IBM said.

MacDonald said the full benefits of the new 401(k) plan will closely match those that employees would have gotten under the cash-balance plan.

However, Shaun O'Brien, assistant policy director with the AFL-CIO, said a consequence of dropping the plans is less guaranteed money for all workers.

Under a traditional pension, including cash-balance plans, the employer bears the investment risk, and the pension, up to a point, is insured by the PBGC. With 401(k) plans, no matter how generous the company match, the worker's ultimate benefit depends substantially on the performance of his or her investments.

"We're looking at very large companies who have had traditional pension plans for a very long time getting rid of them," O'Brien said. "This is corporate America getting out of the pension game and saying to workers 'you're on your own.' "

Staff writer Ellen McCarthy contributed to this report.