Easing Into Retirement An Alternative to an Abrupt End

November 30, 1999
Issue: Losing a career service employee at retirement is never easy. Valuable expertise and knowledge walk out the company doors when the employee retires, and the retiree is abruptly faced with the prospect of having nothing but time on his or her hands. In recent years, however, employers have begun to look at the advantages of phased retirement programs. Under phased retirement arrangements, job responsibilities and work hours are gradually reduced at the end of an employee’s career, giving the employer and employee the opportunity to adjust to the eventual separation of service. With increased pressures on recruitment and retention, what do you need to know to determine whether phased retirement is right for your company?

Challenges presented.
Phased retirement arrangements are not implemented without challenges, however. According to a Watson Wyatt Worldwide study three important questions employers should ask are:

  1. How will the arrangement tie in with existing employee benefit programs?
  2. How will eligibility be determined?
  3. What specific arrangements should be made available to employees?

For instance, with respect to pension plans, Bethesda, Maryland-based consulting firm Watson Wyatt cautions that IRS rules prohibit a qualified pension plan from making distributions to employees before the plan’s normal retirement age. Yet employees working in a phased retirement arrangement may need the extra income to supplement reduced pay. One solution may be to reduce the plan’s normal retirement age. Employers will also have to decide whether phased retirees should be allowed to participate in the company’s general health plan or a retiree health plan.

A phased retirement program will undoubtedly attract employees. How should eligibility be determined? According to Watson Wyatt, many employers (45 percent) choose to base eligibility on job level or position. A small percentage (24 percent) use length of service, with 10 years of service being the most common determinant.

Which works best?
An employer can choose from a host of phased retirement arrangements. The most popular arrangement is using phased retirees as temporary or part-time workers. However, consider these options:

  • Hire retirees as consultants.
  • Provide extended leaves of absence.
  • Offer job transfers.
  • Offer reduced workdays, workweeks or both.
  • Offer job sharing arrangements.
  • Hire for seasonal help.

Future of the program.
The programs are a welcome addition to the labor market. The Watson Wyatt survey showed that 16 percent of employers now offer some type of phased retirement arrangement—and three out of four employees would prefer to reduce work hours gradually rather than abruptly. And, despite the challenges, Watson Wyatt predicts that phased retirement arrangements will only increase in popularity in the upcoming years—with at least half of employers having such programs in place within a decade.

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The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.