<i>Dear Workforce</i> How Should We Structure Our Early Retirement Package
ADear Future Planning:
Early retirement packages generally are structured as a retirement incentivewithin a pension plan, providing an increased benefit to employees who elect toretire during a "window" period. This window period might be a specificthree-month period that starts sometime in the near future. Employees who do notretire during that period do not receive the incentive.
The group that is eligible for the package can be defined in many ways,provided it is not discriminatory under the rules that apply to pension plans,as well as other applicable discrimination rules. For example, the group mightbe defined as all employees who are currently over 50 with 10 years of service,or all employees in division A that are over 50 with 10 years of service, aslong as that group is not discriminatory.
The incentive that is offered can take several forms, the most common beingthe addition of some number of years to an employee’s age and/or service withthe employer (five years or three years is often used). This provides a greaterbenefit since more service is credited and also might allow an employee to betreated more favorably with respect to the plan’s early retirement provisions.
An example would be to treat employees who accept the program as being fiveyears older than they actually are, and as having five years more service. If,in this example, the plan allows early retirement at 55, an employee who is 50would be considered eligible for early retirement.
Other types of packages might include the ability to take the benefit as alump sum, when a lump is not available under the regular plan. There also mightbe temporary supplemental benefits offered for a period, such as until age 62 orage 65.
Your concerns have to do with the group that accepts the package and thefinancial consequences to your company. Once you decide on the structure of theprogram, you cannot control who accepts. Some of your most talented employeesmight accept and you could have trouble replacing them. Also, you may have moreor fewer employees accept it than you had wanted. Therefore, it is important todesign the package in a way that is most likely to be attractive to the groupthat you would like to accept the offer, taking into consideration the legalrequirements for these programs. Employees will consider the following factors:can they get another job, will they have medical insurance after retiring, whatother income might be available, and if the company might have layoffs in thefuture. If your company does not offer retiree medical benefits, it may bedifficult to give people incentive to accept any but the most generous package.
It is very important to clearly communicate the package and give employeesenough time and information to make their decision. You will probably want toprovide benefit statements that illustrate the additional benefit they wouldreceive if they accept the offer.
The financial consequences of the program have to do with the cost of theadditional benefit, the impact of employees retiring earlier than assumed, andthe accounting rules that apply to pension plans. The affects of the accountingrules are not intuitive. Therefore, for this and other reasons mentioned above,you should consult your actuary when you begin to think about implementing thistype of program.
SOURCE: Merril S. Delon, National Retirement Consulting Practice Leader, BuckConsultants, Inc., New York, New York, Feb. 7, 2002.
The information contained in this article is intended to provide usefulinformation on the topic covered, but should not be construed as legal advice ora legal opinion. Also remember that state laws may differ from the federal law.