Federal pension reform laws passed in 2006 were intended to ease restrictions on retirement-age employees who wanted to work a reduced schedule but still be able to collect payouts from defined-benefit pension plans.
In reality, the reforms have raised more questions than they’ve answered. On top of that, the same pension reform laws included mandates unrelated to phased retirement that companies are required to make right away, leaving them little time or incentive to work on anything else.
At many companies, that’s put formal phased retirement programs on the back burner. Until things get sorted out, companies appear content to stick with informal arrangements.
The most common of those are ad hoc deals with executives or other employees who are close to retirement age and valued because of their position, experience, skills or customer relationships, according to company managers, retirement experts and HR industry consultants. In these situations, if the valued workers are over 62, they can remain working in some capacity and start collecting pension benefits.
As an alternative, some companies encourage employees to retire completely, wait for a period of months to pass, and then return as independent contractors, allowing workers to collect their full pension benefits and the company to retain their brainpower.
Other businesses are contracting with contingent worker organizations like YourEncore Inc. or staffing agencies like Kelly Services to manage retiree workers on their behalf. In the past few years, an increasing number of Fortune 1,000 companies have established relationships with such outside organizations, including the Principal Financial Group, Procter & Gamble, Boeing and General Mills.
Still others haven’t even started to address the issue. "It’s like a ballgame," says Jeri Sedlar, author of Don’t Retire, Rewire and a senior advisor on mature workforce issues for the Conference Board. "Some companies are at the bottom of the first, some are in the second. But some don’t even know there’s a game going on; they haven’t bought a ticket."
Retirement and industry experts question whether formal phased retirement programs will ever materialize. A common concern is that if a company establishes a formal program, it must be available to everyone.
That might not be feasible, says Lynn Dudley, retirement policy vice president at the American Benefits Council, a Washington lobbying group for major U.S. employers.
"Not every job lends itself to being a phased retirement job," Dudley says. Companies "want workers to be happy, but they’re in business, and if it doesn’t help them succeed in business they won’t do it. You’d have an issue with your shareholders if you did."
One piece of good news is that pension reform regulations did not affect defined-contribution plans, which more companies are using. Under defined-contribution plans such as 401(k)s, employees can begin withdrawing funds after age 59½ without penalty—whether or not they continue to work. But even that arrangement doesn’t help employees who want to cut back on full-time work and start collecting benefits before they turn 59½.
Working after retirement
There’s no question more people are continuing to work after retirement. According to a December 2007 report from the Employee Benefit Research Institute, job-related earnings accounted for 23.7 percent of annual income for Americans over 65 in 2006, with the balance coming from pensions, annuities, Social Security and assets.
Younger retirees are even more likely to rely on a paycheck to boost their annual income. In 2006, job earnings accounted for 39.1 percent of annual income of retirees ages 65 to 69, a 69 percent increase from two decades ago, according to the EBRI report.
The Pension Preservation Act of 2006 sought to help more people retire, work if they wanted and collect their pensions by allowing companies to offer a phased retirement program to employees at 62.
In reality, many companies offer some type of early retirement option to employees at age 55, a policy held over from the days when they needed then-older employees to retire early to make room for baby boomers, according to retirement experts, industry analysts and consultants.
"Companies aren't going to be successful in offering phased retirement if their plan
design adversely affects
those nearing retirement."
—Deborah Russell, director of workforce issues, AARP
That’s no help for employees between 55 and 62 who want to start receiving pension benefits in order to supplement decreased hours, says Tonya Manning, chief actuary with Aon Consulting’s U.S. retirement practice.
Because of that catch, some employees would be better off leaving their current employer, starting to collect pension benefits and going back to work at a competitor, Manning and other experts say.
At some companies, the design of the pension plan itself is a barrier to phased retirement. If pension benefits are calculated on a person’s last three to five years of employment, a reduced work schedule during that time would negatively affect their benefit payout, according to Deborah Russell, director of workforce issues at AARP.
In those cases, implementing a phased retirement program might also mean amending a plan, so benefits are calculated on an employee’s three to five highest-paid years, Russell says. "Companies aren’t going to be successful in offering phased retirement if their plan design adversely affects those nearing retirement," she says.
Major questions also remain over how to put federal reform regulations into practice. The Treasury Department issued guidelines for interpreting the regulations in May 2007, but was silent on such issues as how to treat early retirement subsidies. The IRS, which approves the tax consequences of changes companies make to their defined-benefit pension plans, collected public comment on the matter last year but hasn’t issued any rulings, experts say.
In the absence of such guidelines, it’s difficult for a corporation’s benefits manager to make decisions that could affect defined-benefit plans, says William Miner, a consulting actuary with Watson Wyatt’s retirement practice in Chicago. "Benefits managers and directors don’t get paid for taking legal risks," he says.
Informal programs prevail
Meanwhile, many companies are hedging their bets with informal programs.
Deere & Co. is one. Since 2001, the $6.1 billion agriculture and outdoor equipment manufacturer based in Moline, Illinois, has made part-time work available if it’s appropriate for an employee’s position, approved by the supervisor and "in keeping with business needs," says Glenn Huston, Deere’s employee benefits manager.
Deere is a good example of how complicated it can be for a company to track the effects of phased retirement programs on pension benefits.
The company maintains two defined-benefit pension plans. One is closed to new hires, and in it, pension benefits are calculated based on the five highest-earning years in the last 10 years someone works. For these employees, going to phased retirement wouldn’t affect a person’s pension as long as they didn’t go to part-time status for more than five years, Huston explains.
Deere employees hired after 1996 are enrolled in a separate defined-benefit pension plan. For it, benefits are calculated based on career earnings. "So if you reduced your schedule, you’d reduce your career average but you would keep growing your service, so the specific impact couldn’t be quantified without looking at the individual’s situation," Huston says.
Deere also offers all employees a defined-contribution 401(k) program, with a 6 percent company match. If an employee goes to part-time hours, they’ll make less money in their 401(k), but it’s comparable to what they’re earning, Huston says.
"Benefits managers and directors don't get paid for taking legal risks."
—William Miner, consulting actuary, Watson Wyatt
Huston doesn’t know how many Deere employees have taken advantage of the company’s staged retirement program.
Huston is working to ensure that his phased retirement offerings comply with final interpretations of federal regulations. But because Deere’s fiscal year doesn’t end until October 31, he can wait to see how the dust settles. "We’ve got the luxury of time, so we’ll evaluate those as they become more clearly defined," Huston says.
In addition to its informal phased retirement program, Deere brings hundreds of its approximately 25,000 U.S. retirees back to work through a contingent worker management company, Volt Services Group, a Rosemead, California-based division of Volt Information Sciences. In the past year, 503 Deere retirees worked at the company in some capacity, according to AARP, which included Deere in its 2007 list of best employers for workers over 50.
AARP has also recognized First Horizon National Corp., a Memphis, Tennessee-based banking and mortgage company with locations in 40 states, as a top employer for workers over 50 for the past four years. About 23 percent of First Horizon’s 10,000 employees are over 50, according to company and AARP data.
To hang on to valued older employees, First Horizon created an informal phased retirement program that allows people to work a "prime-time," or part-time, schedule and retain their pension and health care benefits.
One employee who has taken advantage of the program is Betty Goodpaster, who four years ago left her full-time operations manager job at one of the company’s First Tennessee Bank branches in Franklin, Tennessee, and switched to a prime-time position as a bank teller in another branch in the area. At the time, Goodpaster was 56, selling her house and about to become a first-time grandmother, so cutting back seemed like a good idea. Then a tornado struck the area, damaging the house she and her husband were selling, which made the move to part time "a real blessing," she says. "It was very emotional. I was lucky to find this position."
Today, Goodpaster works three days a week and one Saturday a month. She contributes to a 401(k), which First Horizon matches at 50 percent. Goodpaster plans to work until she’s 65, when she’ll be eligible to start collecting pension benefits, which are based on her average income.
"With not as many hours worked, I won’t have the income average that I would have if I had worked full time," she says. "But in this day and age, any amount will help with expenses. If you’re on a fixed income, every $100 makes a difference."
Industry Task Forces
Some industries that anticipate being hit hard by the retirement of the baby boomers have organized coalitions to determine the value of offering formal phased retirement programs. One such group was formed in 2007 by a coalition of aerospace and defense companies including IBM, GE, Ball Corp., Boeing and BAE Systems, in conjunction with the HR Policy Association and the American Benefits Council. According to spokespeople for two trade organizations, the study group is developing a white paper on the topic but is still in the information-gathering stage of the project.
If they haven’t already, individual companies can take a cue from such study groups and perform workforce assessments to see how many near-retirement-age workers they have and how that could affect their future talent management needs, according to retirement consultants and HR industry experts.
"You have to know where your population is, where you have retirement risks, and then figure out how you’re going to address them," says Sedlar, the author and senior advisor for the Conference Board. "Sometimes companies are hesitant to see where their risks are because they may be so great, but then they do an assessment and it’s not so bad."
At some companies, phased retirement proposals have bubbled up from line managers faced with losing some of their best talent to retirement, says Anna Rappaport, an expert on retirement and aging and a senior fellow on pensions and retirement with the Conference Board.
In other places, phased retirement programs have been team efforts. They involve business unit or department managers; finance, which calculates the financial aspects of putting a program into place; and HR, which bears the final responsibility for putting a program in place, Rappaport and other experts say.
While phased retirement programs might not cost anything to start, companies could incur costs related to them. For example, if certain employees switch to part-time status and other people have to be hired to make up the difference, a company could end up with higher administrative expenses, says Manning, the Aon Consulting actuary.
Another potential cost: holding employee seminars to outline the financial consequences of participating in phased retirement programs. Companies aren’t legally bound to explain what early payouts could mean to an employee’s pension down the road. But it’s a good idea to do it anyway, Manning says.
"Ultimately those are retirement benefits, and if you get too much of them in years where you could be working, you could have insufficient income as a retiree," she says.
Workforce Management, February 4, 2008, p. 27-31 -- Subscribe Now!