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Don't Let Your Pension Plan Discourage Older Workers

Older workers sometimes are forced to retire and go to work for another company, even through their original employer would benefit from their staying.

November 26, 2003

A key strategy for retaining older workers is phased retirement. Rather than simply retire, many employees prefer to cut back on their work hours, which often means they continue working on a part-time basis long past traditional retirement age. Many companies don’t realize, however, that their pension plans unnecessarily discourage phased retirement, says Valerie Paganelli, senior retirement consultant for Watson Wyatt Worldwide.

    Most companies have defined-contribution benefit plans, also known as 401(k)s. Many of these plans are not set up to permit employees to take out loans against their retirement holdings, withdraw money in installments rather than in one lump sum or make hardship withdrawals before age 59. However, all of these things are permitted by the Internal Revenue Service and can be quite appealing to phased retirees.

    Many companies have chosen to forgo the administrative details of more flexible plans because they didn’t think they were important, Paganelli says. However, many retirees would prefer to have access to their money in a more measured fashion. Indeed, in some cases, older employees who wish to continue working yet draw their pension are forced to retire and go to work for another company, even though their original employer would benefit from their staying.

    Carl Gustafson, corporate vice president of human resources for Baptist Health South Florida, believes this happened at his firm before the retirement plan was changed to allow more flexibility. "Before, we had people who would have to officially retire, wait to collect their pension, and come back to work," he says. "And I have no doubt that during that time we lost some of them to Wal-Mart and other companies."

    Sometimes pension changes are rather simple. When St. Mary’s Medical Center launched a program to coax retired nurses back into the workforce, some were concerned that returning to work part-time would lower their retirement benefits. The amount of their check was based on their last five years of salaries. St. Mary’s fixed this by changing the formula to their five highest annual salaries.

    Other companies are retaining their key employees by safeguarding their benefits while they "try out" retirement. Baptist Health’s Bridgement of Service policy states that anyone who quits and comes back within five years picks up where they left off in terms of years of service, perks and time off. Ten to 20 people take advantage of that every year.

    In certain cases, Volkswagen permits a "rehearsal" retirement. In this instance, an older worker who is thinking about retirement can take an unpaid sabbatical, keeping benefits, for one to three months. If the employee wishes to return, the position is kept open. "The employee gets a taste of what retirement is like," says Steve Stephens, Volkswagen’s human resources leader. "In some cases, they’ll decide to keep working for another few years. Either way, they’ll know if they made the right decision."

Workforce Management, December 2003, p. 52 -- Subscribe Now!