General Motors announced Tuesday that beginning Jan. 1, 2007, it will put the freeze on its pension plans for its salaried employees, thereby reducing its pension liabilities by a total of $1.6 billion. The new plan does not, however, affect union workers.

Any salaried worker hired before Jan. 1, 2001, will continue to receive their vested defined benefits up to that date, but benefits between 2001 and 2007 will be capped at 1.25% of their average monthly base salary. For employees hired after Jan. 1, 2001, GM will contribute 4% of their annual salary to their 401(k) through 2007. Then, beginning Jan. 1, 2007, for all employees, GM will simply match 50% of contributions up to 4%.

"These changes will reduce financial risks and future costs for GM, while protecting current retirees' and employees' earned pension benefits and providing competitive and fair retirement benefits," said GM Chairman and CEO Rick Wagoner. "As noted on Feb. 7, when we announced significant additional actions to support GM's ongoing turnaround plan, these decisions are difficult, but necessary to position GM for future success and preserve employees' earned retirement benefits."

GM expects the shift from defined benefit to defined contribution plans will reduce its pre-tax pension expense by $420 million in 2007. However, this year, GM expects to take a $120 million charge for remeasurement of its long-term pension liability. Going forward, the company projects its 401(k) contributions this year and next will cost it $15 million annually, and, beginning in 2007 when it fully converts to a 401(k), $70 million a year.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.