Could Company 401(k)s Go the Way of IBM?

John Rekenthaler, vice president of research for Morningstar Research Services, discusses IBM’s 401(k) plan change and why many workers would want something similar. Nic Owens, an industrials equity analyst for Morningstar Research Services, talks about how Boeing’s 737 safety issues affect the company’s outlook and stock.

Taiwan Semiconductor Manufacturing’s Improved Outlook

Citigroup’s Disappointing Q4

BP’s New CEO

IBM Retirement Accounts

IBM’s Retirement Benefit Account vs 401(k) Match Plan

Why Did IBM Switch from a 401(k) Match to the Retirement Benefit Account?

Advantages and Disadvantages

Will Other Companies Follow IBM’s Lead?

Boeing’s Manufacturing Flaws

FAA Safety Alert Targets Older Boeing 737s

How Is Boeing Improving Safety Standards?

Boeing Stock Outlook

Read about topics from this episode.

Taiwan Semiconductor Earnings: Upbeat Guidance and Lower 2024 Capital Expenditure Encouraging

Citigroup Earnings: Turnaround Remains Complex, Expense Management Is Promising

Despite Trimming Some Targets, BP Still Holds One of the More Aggressive Transition Strategies

Boeing: We Quantify the Fallout from 737 Manufacturing Defects Between $1 and $30 Per Share

Has IBM Built the Next Generation’s 401(k) Plan?

What to watch from Morningstar.

Why Now Is the Time for Value Investing

AI Can Help Restaurants Innovate, But Will It Deliver Profits?

Betting Big on Stocks Rarely Beats Boring Investing

5 Pieces of Good News for Investors as 2023 Wraps Up

Read what our team is writing:

Ivanna Hampton

John Rekenthaler

Nicolas Owens

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Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. IBM’s new 401(k) plan changes how it funds employees’ retirement savings. I’ll talk with John Rekenthaler from Morningstar Research Services about the hybrid plan. The vice president of research will also weigh in on whether other companies could follow IBM’s lead. Plus – Boeing’s safety reputation worsens. The Morningstar analyst who covers the aerospace company will share his outlook on Boeing’s future and stock. And – the demand for AI is expected to help power a big chipmaker’s revenue for years to come. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Taiwan Semiconductor Manufacturing’s outlook has picked up. The world’s largest contract chip maker’s full-year forecast for 2024 surpassed Morningstar's expectations. TSMC has reduced its capital spending plan. That should erase investors’ concerns about an underwhelming recovery and potential excess inventory soon. Management upped its AI expectations for the next several years since more customers are working with its chips. The demand is expected to grow as devices like smartphones and factory equipment adopt the technology. The chip maker’s high-growth phase will likely continue. Meanwhile, TSMC predicts first-quarter revenue will fall about 6% to just over $18 billion from the previous quarter. Its first-quarter and full-year revenue forecast of up to mid-20% year-on-year growth looks achievable. Morningstar lifted its estimate for what Taiwan Semiconductor’s U.S.-listed shares are worth to $151. The stock looks undervalued. Morningstar does not think it’s too late for investors to jump on it.

Citigroup remains a complex turnaround story with substantial uncertainties. The big bank is planning to cut 20,000 jobs. Morningstar thinks reducing expenses will remain a goal for management since it’s necessary for achieving higher returns. Citi delivered a disappointing fourth quarter with nearly $2 billion in losses, mostly thanks to various one-time charges. The list includes an FDIC special assessment for covering uninsured deposits tied to last year’s banking crisis. Despite the lackluster results, the 2024 outlook is encouraging. Management expects revenue to rise as high as $81 billion. It also forecasts a rebound in investment banking and wealth businesses. Net interest income or what banks earn from making loans is expected to modestly decrease due to lower interest rates. Citi is predicting just under $54 billion in full-year expenses. That would be down a bit from 2023. Morningstar thinks Citi’s stock is worth $66 and undervalued.

BP has named interim CEO Murray Auchincloss to the role on a permanent basis. His new leadership post went into effect on January 17th. The oil giant launched the recruitment process back in September after Bernard Looney resigned. He failed to disclose past personal relationships with colleagues. The announcement doesn't change Morningstar's estimate for what BP's stock is worth. Shares look cheap and are trading at a large discount. The uncertainty surrounding who would become CEO likely weighed on the stock. The market seems to be pleased with BP’s choice. Morningstar thinks the bigger challenge for BP stock is the company’s plan to transition from the integrated oil business to integrated energy. This involves greater investment in lower-return low-carbon energy projects. Auchincloss was involved with the strategy’s creation and has affirmed that it will remain in place.

Boeing's already damaged safety reputation is taking another hit. The FAA has now called for inspections of older 737 jets with a similar design to the newer 737 Max 9s. A door plug or a panel fell off a 737 Max 9 during an Alaska Airlines flight on January 5th. So, what do these issues mean for Boeing and the airlines that have 737's in their fleets? Nick Owens covers Boeing and major North American Airlines. He's an industrials equity analyst for Morningstar Research Services. Thanks for making time today, Nick.

Nick Owens: Thanks for having me, Ivanna.

Hampton: So, let's start with Boeing's last few weeks. On December 28th, Boeing issued a warning to airlines about loose bolts found on a tail rudder assembly. January 5th comes. A panel fell off mid-air. The FAA grounded 737 9s, and recently called for inspections of older 737's explained. What's going on, Nick?

Owens: Yeah. Well, big picture, Boeing has had and has been uncovering and reworking and manufacturing flaws for the last couple of years. With this incident though, the FAA, the NTSB and Boeing are taking it much more seriously, as they should. Luckily, no one was seriously injured in this case. The narrow question I'm anxious to hear more about is how many of these Maxes are affected, how long it'll take them to get them back up in the air. But there are broader questions because of the fact that there's a series of mishaps, and it seems that a more pervasive manufacturing problem probably exists.

Hampton: The grounded 737 Max 9s are an Alaska Airlines and United Airlines fleets, but the new FAA's safety alert affects more than them. Who else? What are they finding?

Owens: So, they are ordering inspections of the 737-900ER, which is basically the predecessor of the Max 9. The next biggest fleet for those is also at Delta. So, Alaska and United also fly them. There's a handful of others, but those are the three biggest fleets. It is disturbing to think that whatever they found in the process that leads to that, the way that door panel is put on, could have existed in the process before. I will say, it sounds like they're ordering them to be inspected, not grounded. So, it may be everything in the name of safety.

Hampton: Now, Boeing says it will improve safety standards. What does that look like, and how can they regain the public's trust?

Owens: Great question. So in terms of regaining trust, I give CEO David Calhoun some credit here. He's been doing and saying some things that his predecessors did not. He's in the spotlight because when he took over as CEO in 2019, after his predecessor was let go for mishandling the initial crashes of the Max 8s, if you recall, you could say it was his focus to fix this issue. In terms of regaining trust, he's speaking for Boeing. He said things like, "This is our mistake." He visited the shop floor at Boeing, the shop floor at Spirit Arrow, which applies a large portion of the 737. What I found important was he said, "Every detail matters." I think that's the right posture. The company is trying to be very transparent and proactive, and let in inspectors and customers to watch the assembly process. But I'm scratching my head, why didn't do some of that before? Because they've been uncovering these manufacturing problems for the last three years.

Now, the doors weren't blowing off then. So, maybe that's human nature, but it's not confidence inspiring. As for what improving quality looks like, I think it's in that 'every detail matters' point, which is that at every step of the way, it has to be done according to the design, and they have to cross the T's and dot the I's without fail, before they deliver the plane. There's been business pressure to move fast, because customers are waiting for these planes, but if they can't do it without billing them to the safety standard, there's almost no point. I'll also add that these planes are designed to be safe and the vast majority of flights of 737s and other planes go up without a hitch. Many of the safety features that are built into the planes are redundant. So, more than one thing has to go wrong, but that's also why every detail is so important. So, one bolt might actually be reinforcing a part that has other bolts on it, but if they're not both there, then something could fail more easily.

Hampton: You've written as 737s are part of Boeing's bread and butter. How is this situation affecting your outlook for the company and its stock?

Owens: Well, long-term, the 737 and whatever future versions they have are responsible for about half the value of Boeing as a company, by my math. So, the bigger this gets and the more planes that are affected and the longer it takes, the more their future could be at stake. The Airbus is already taking market share and orders for A 320s and deliveries, and over the years, that will add pressure to Boeing to keep the 737 assembly line healthy. If their production numbers go below their capacity, that would be very bad. We're far from that. We're a year closer, potentially, but we're far from that. This is a relatively slow moving industry. The decision to launch the Max instead of design a brand new plane was made over a decade ago by a totally different management team. So, that said, I also ran some numbers for investors who are following the story, to be able to contextualize some of the impact.

So, focusing on the 737 assembly line, if that gets slowed down for another year or two years, where they have extra costs because they're reworking, as they have been, I think that would cost $14-30 off the value of Boeing, which I have as a $232 fair value estimate. Another tidbit would be with 600 million shares outstanding. Basically, if $600 million of financial damage happens to Boeing, that's a dollar off the value of the company.

So, if hypothetically FA fines them $300 million tomorrow, that would be 50 cents of value or damage to the company, which in the short term, they have it. But I really hope they dig deep and fix these manufacturing issues, and can restore trust in the flying public and in their customers on this plane.

Hampton: I know you'll be paying attention to this situation.

Owens: Sure thing.

Hampton: Thank you for your time today, Nick.

Owens: Thank you, Ivanna.

Hampton: IBM has reimagined how it will fund employees' retirement accounts. The tech giant ended its 401(k) match program at the start of 2024. It's now offering a plan that comes with a guaranteed rate of return. So, has IBM created a blueprint for other big companies to follow? John Rekenthaler has examined what this change could mean. He is the Vice President of Research for Morningstar Research Services.

Thanks for being here, John.

John Rekenthaler: Sure thing, Ivanna.

Hampton: So, let's start with an explainer. Can you describe what IBM's retirement benefit account is and how it differs from the previous 401(k) match plan?

Rekenthaler: Yes, instead of – well, the retirement benefit account we think as outsiders is what customarily has been called a cash balance account. So, this is actually one of the ways that companies have structured pension plans before. And what IBM has done is instead of matching – I think they had a 6% match or something like that of the salary that would go into a 401(k), instead they drop that money into this separate pool, this retirement benefit account that earns a guaranteed rate of return. The current rate of return on that for the next couple of years is set at 6%. But it will be something like the rate of cash plus a little bit more. And that's something that IBM automatically does for the employee. So, it just dropped in there as with the traditional pension plan. The nice thing is, whereas traditional pensions didn't travel with employees, so if you left the company and you'd been working there for a while, you might not take your pension with you. That happened with my parents, for example. Whereas a cash balance plan will travel, it's portable. So, it's a good version of a traditional pension.

Hampton: And is there any noticeable differences? Is there's not a match anymore?

Rekenthaler: It's a trade-off for employees because they get this retirement benefit account that's set up for them automatically, in a sense, free money. Although nothing is ever free because this affects IBM's compensation that they pay employee, and they pay just as with health insurance, and they think about it with their overall salaries. If this didn't exist, the salaries would likely be a little bit higher. But to get that benefit, they are giving up the match, that's customary match that most large companies have on a 401(k) plan and that IBM had. And actually, for existing IBM employees, it's slightly less. The amount that's going into the cash balance is slightly less than the theoretical match that they could have had. So, some of them are not terribly happy.

And I can understand that. However, I think, if you step back and you think about a structure of what a pension plan or retirement system might look like just across this country, I'm not saying IBM has done something that other companies will emulate, we'll have to see. But I like this idea of a hybrid partly defined contribution 401(k) system and partly defined benefit plan. Because right now, people they want – there's a lot of nostalgia for back in the days when there was a defined benefit, the company would take care of things for you. There was a safety and a security associated with those assets that were in some sort of guaranteed rate of return. I think it's nice to have a mix where you have that as an anchor for investors, for their employees. Then in the 401(k) plan, they can take some risk and potentially supplement that anchor.

Hampton: So, talk about why IBM switched from the 401(k) match to the retirement benefit account.

Rekenthaler: Well, that's technical as it turns out. As you might expect, it's in IBM's interest. It has to do with the details of their internal funding for their traditional pension or their historic pension. And they end up saving quite a bit of money by setting up this structure. So, IBM didn't necessarily look at it from the point of view that. I'm examining it and saying, is this the sort of new version of the retirement plan for America? It was a more practical and pragmatic decision according to those who have looked at the books and are expert in retirement accounting. But I really don't care what the motivation was. I like the outcome. I think that it could be something that – there should be something that other companies look at.

Hampton: And you touched on this before, like, let's just make it clear, like, what are the advantages of this plan and then what are the disadvantages. Let's put them in columns.

Rekenthaler: Okay. Well, the advantage is if you don't do anything, the company is automatically setting money down for your retirement. It's making money. The savings are getting put in there. It's making a 6% return. You don't have to do anything, and you can take it with you. The disadvantage is there's now less money for your 401(k) plan and less money in particular to invest in stocks. So, the investors who are most likely to take advantage of a 401(k) plan, invest the maximum and who are going to invest aggressively in equities, and generally, those are the more wealthy and sophisticated investors, may not be as well off under this system. But it will benefit the broad range of employees, particularly lower and middle-income employees who are less likely to take full advantage of the 401(k) plan.

Hampton: And IBM and other big companies led the shift from funding pensions to provide these 401(k) plans. Could others follow IBM this time around?

Rekenthaler: Well, I hope so. As I said earlier, we don't know. It's not clear that they've kicked off or IBM has started a trend. We do know from surveys that employees would like that. Many employees, millions, tens of millions of employees across the country would like this to happen. There's a tremendous amount of desire not to take on all the risk of retirement investing themselves in a 401(k) and have to companies take on some of that burden. So, it would be popular with employees. But whether that occurs, it will depend a lot on how companies view this from a financial perspective.

Hampton: Well, John, thank you for your insights today.

Rekenthaler: Thank you, Ivanna.

Hampton: That wraps up this week’s episode. Thanks for listening. If you enjoy hearing market trends and analyst insights on our podcast, feel free to leave a five-star review on Apple Podcasts. It will help others find us. Thanks to senior video producer, Jake VanKersen. I’m Ivanna Hampton, a lead multimedia editor at Morningstar. Take care.