On Thursday, IBM (NYSE:IBM) announced a major shift in how it provides for its employees' retirements. No longer will IBM offer new employees the option of receiving set amounts of pension payments paid regularly when they retire, offering instead a 401(k) pension plan. As 401(k) plans go, IBM's new offering is pretty generous: Employees can contribute up to 6% of their salaries to the plans, with the company matching contributions dollar for dollar. Still, this is a pretty significant shift being made by one of America's business stalwarts.
To steal a phrase from Secretary of Defense Donald Rumsfeld, America continues to transform into a nation of "Old Workers" and "New Workers." In Old Worker America, a social contract existed between employers and employees. The employers promised: "If you give us the best years of your life, show loyalty, work hard, and never leave us for a rival, we will provide for you in your golden years. We'll prudently invest a portion of your compensation on your behalf, and, when you retire, we'll take upon ourselves the risk that we invested wisely, and guarantee you fixed retirement benefits for life."
Employees by and large upheld their end of the deal, but employers -- caught between economic realities and shareholder demands on the one hand and promises made to employees on the other -- began to renege. Employees were laid off. Companies declared bankruptcy and shifted their pension obligations to the government's Pension Benefit Guaranty Corporation (which slashed the benefits). The final straw came when the "New Economy" arrived in the mid-1990s. Their faith in employers' promises destroyed, employees abandoned Old Economy companies in droves to join start-ups in the New Economy. They traded in high salaries and uncertain future pensions at companies such as IBM and General Electric (NYSE:GE) for lower salaries, stock options, and 401(k)s at start-ups such as Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY).
Not everyone has made the switch, of course. But as the broken promises pile up at pension-burdened Old Economy employers such as Lucent (NYSE:LU) and legacy airliners such as Delta (NYSE:DAL) and American (NYSE:AMR), the tide is clearly turning. Employees in the 21st century can no longer afford to trust their employers to keep promises about pensions to come. They need to "self-insure" to take control of their financial security. It's a sad truth, but a truth nonetheless.
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Fool contributor Rich Smith owns no shares in any company mentioned in this article.
