3M will freeze its US pension plans for non-union US employees in five years.
The move, effective Dec. 31, 2028, applies to both 3M and its new healthcare spinoff, Solventum, the company said in its announcement yesterday (Jan. 8).
Pension-eligible 3M employees will accrue benefits until then. Former employees with vested pension benefits, 3M or 3M Health Care retirees, and those currently receiving pension annuity payments aren’t affected, it added.
The Maplewood, Minnesota–based company isn’t alone in turning the tap off on traditional pension plans, also known as defined benefit (DB) plans. They’re still a mainstay of public sector jobs, but over the past few decades, most private companies have moved away from the model, which promises a specified monthly benefit at retirement, based on years on the job, average salary, and other factors.
These plans can be costly for the employer and unpredictable for employees. Especially after the dot-com crash at the turn of the century, when interest rates and stock prices both crashed—pushing up the value of pension liabilities while the value of the assets held to meet them fell—America Inc. reevaluated this system.
In contrast, a defined contribution (DC) plan, such as a 401(k), an employee stock ownership plan, or a profit-sharing plan, doesn’t promise a specific amount of benefits at retirement. Instead, the employee, the employer, or both contribute to the employee’s individual account, which people can invest and use as they choose.
“The move from a pension plan structure to a 401(k) retirement plan structure has been underway at 3M for many years,” 3M said in its statement. “By moving to a 401(k) retirement plan structure, the company is focused on providing employees with more flexibility and control when it comes to investing in their future.”
However, recent research suggests that DB plans have a leg up on their DC counterparts. After all, in some states, switching to DC plans has led to ballooning taxpayer costs and high worker attrition, Dan Doonan, executive director of the National Institute on Retirement Security, wrote for Forbes. An analysis by J.P. Morgan Asset Management also votes yes to a pension revival of sorts. DC plans alone aren’t providing enough security.
Defined benefit plans at 3M and elsewhere, by the digits
Fewer than 9,000: Active participants in the 3M pension plan affected by the freezing of the company’s US pension offerings. A small number of workers out of the company’s total 92,000 headcount are impacted because back in January 2009, 3M closed pension plans for new hires
97%: Share of the primary US qualified pension plan that was funded at 3M as of 2022
145: How many years ago American Express introduced the first private pension in the country for some employees
15%: Share of US private sector workers with access a defined benefit pension, according to the Congressional Research Service. For defined compensation plans, the share is 65%
12 million: Pension participation in the US private sector as of 2020, well below its peak of almost 30 million in 1975. During the same period, active participants in private sector DC pensions soared from 11.2 million to 85.3 million
Half: Share of American households, including many with 401(k)s, that have insufficient funds to retire at their current standard of living
Quotable: Switching from pension plan to 401(k)
“This shift has occurred for a number of reasons. For employers, DC plans may be administratively easier and their costs tend to be both lower and more predictable than DB plans. For employees, the shorter vesting requirements and portability of DC plan balances at job change or retirement are advantageous features. However, because DC plans, unlike DB plans, do not provide a guaranteed benefit for life, this shift has raised concerns about whether households are adequately saving for retirement.”
A non-exhaustive timeline of companies scrapping US pension plans
March 2006: General Motors decides to end pension plans for its 40,000-plus salaried workers in the next year.
March 2014: Aerospace company Boeing chooses to stop pension plans for all of its 68,000 workers at by 2016.
July 2014: Boeing rival Lockheed Martin decides to fully freeze its pension plan by 2020.
June 2017: Courier company UPS decides to freeze its pension program for 70,000 non-union employees in five years and replace it with 401(k) accounts. The year before, it had already taken away the provision for new hires.
October 2019: Eight years after General Electric’s pension plans for new hires shut down, the utility giant decides to freeze plans for more than 20,000 employees in 2021.
November 2019: FedEx, which froze its traditional pension plan back in 2008, decides to stop offering it to new hires and put them in an expanded 401(k) plan in 2021.
Exception to the rule: IBM
IBM was among the early movers when it came to scrapping traditional US pension plans. The tech titan cut back its pension plans in the 1990s, then closed them to new participants in 2006 and froze them in 2008.
But in November 2023, IBM decided to bring back the traditional pension plan.
Starting this month, Big Blue is ending its 5% matching contribution and 1% automatic contribution to employees’ 401(k) accounts, in favor of an automatic 5% contribution to a “Retirement Benefit Account.”
This doesn’t necessarily mean other companies will follow suit, though. For one, the pitfalls remain—employees get a guaranteed but most likely lower rate of return. Second, IBM is unique. It has amassed a $3.5 billion surplus in its overfunded plan, an advantage that most companies don’t share.