3M to freeze pension plans in 2028: Will other companies follow suit?

Manufacturing conglomerate 3M announced it will freeze its U.S. pension plans for non-union employees in the United States at the end of 2028. The firm said the move is part of its long-term plan to transition from a pension plan structure to a 401(k) retirement plan structure.

Many large companies have been engaged in a transition away from defined benefit plans in favor of defined contribution plans over the past several decades, including Boeing, General Motors, UPS and FedEx.

As part of its plan, 3M in 2009 closed Portfolio II of its U.S. pension plan to newly hired employees and rehires. The pension freeze applies to employees of 3M and Solventum, the independent health care company which will be spun off from 3M this year. According to a company press release, pension-eligible employees will continue to accrue benefits under the pension plans until Dec. 31, 2028. Former employees with vested pension benefits and those currently receiving pension annuity payments are not impacted by the action.

“This is an important decision for 3M as it helps to set up both companies for future success,” said 3M Chairman and CEO Mike Roman. “This was also a difficult decision because it impacts employees across the United States. To help those impacted, we are providing five years of advance notice to ensure our employees can plan alternative strategies to meet their post-retirement income needs.”

The announcement raised some eyebrows as news outlets noted Roman stands to collect millions from his pension while retirement benefits are reduced for workers.

IBM embraces pensions

Meanwhile, IBM, once a leader in the shift away from defined benefit plans to defined contribution plans in the United States beginning in 1984, announced in November that it is heading in a new direction with its retirement savings benefit for employees. The firm suspended its 401(k) match and 1% automatic contribution as of Jan. 1 and will instead make a monthly account credit toward a new “Retirement Benefit Account” that industry observers described as a hybrid pension/401(k).

“We have seen a trend of companies moving away from traditional pension plans since the dot-com bubble,” said Kimberlene Matthews, managing director of pension and enterprise solutions at PNC Institutional Asset Management. “The 3M plan freeze is a continuation of that trend driven by higher and/or unpredictable employer costs caused by market volatility, interest rate uncertainty, as well as increasing administrative costs like PBGC premiums. With IBM’s shift to bring back their pension to the forefront of their retirement benefit package, the industry now has another strategy to consider that can be used to solve different challenges.”

Matthews said IBM took advantage of conditions we have not seen with pension plans since the financial crisis, with more plans like IBM having a surplus than in the past. As they utilize their surplus to fund defined benefit costs for several years, they could also improve participant outcomes by allowing them to easily access cost-effective lifetime income benefits through their pension plan, said Matthews.

Follow the leaders/?

Large companies making changes to their pension and retirement plans often attract attention from peers within their industry and lead to other companies evaluating and assessing their own strategies to ensure an optimal fit.

Related: 2024 outlook for plan sponsors: Do your retirement offerings work for all employees?

“The extent that companies follow suit can vary significantly from situation to situation.

If a well-known company implements a change and it is well received, it may serve as a catalyst to encourage others to follow suit in the same industry,” said Matthews. “Conversely, if a change results in a negative outcome we would typically see comparable firms move away from making a similar or related change. Companies are generally looking to weigh multiple factors, including their specific financial situation, workforce demographics, and the competitive landscape when deciding whether to follow other companies’ lead in adjusting their retirement plans.”

Among the trends to watch in the retirement plan space? A further shift from defined benefit to defined contribution plans, increased flexibility and personalization options, and a larger emphasis on managing costs associated with retirement benefits, said Matthews.