RSM Resources

After years of youth-oriented employment trendsdesigned to attract new recruits, many companies are shifting their focus toretaining older employees — and their substantial experience, knowledge andskills — by creating a more gradual transition from active employment to fullretirement. These "phased" retirement plans challenge the notion thatcareers end at age 65 and offer the flexibility to redefine how, and how long,older workers can contribute to a company’s success.

With phased retirement, employees can continue toearn compensation from their employer while beginning to receive retirementbenefits. Typically, an employee on phased retirement works fewer hours or in adifferent capacity for less income, often changing the scope of their responsibilitiesor moving from a full-time to part-time schedule.

Phased retirement not only responds to thedramatic changes under way in the demographics of America’s workforce, it reflectsshifting perceptions about aging. And it provides a valuable alternative foremployees who want or need to earn and save beyond traditional retirement age.

Key considerations for a phased retirement plan
Offering a phased retirement plan hasclear advantages for employers and employees alike. Companies can enhanceworkforce stability and provide a competitive benefit while retaining provenemployees who bring unique skills, resources and expertise. Employees gainflexibility, maintain continuity and stay active while still earning an incomethat supports their needs.

If you’re interested in implementing a phasedretirement plan, here are some important first steps:

• Reach out to your workforce. Hold roundtable meetings with current staff, focusing especially on long-term and older employees, to understand their hopes and concerns about retirement. Ask them to describe how they see their own path to retirement and then rank what phased retirement options they would find most attractive.
• Create succession plans. Phased retirement means reduced hours for some of your most tenured staff, whether through a move to part-time status, job sharing, seasonal and temporary employment, or contract work. Make sure you’ve planned ahead not only for how an older employee will transition to phased retirement, but how you plan to hire, mentor and promote younger and less-experienced employees to fill the gap.
• Understand the Internal Revenue Service (IRS) implications. Employees can withdraw funds from their 401(k) plans after age 59-1/2 without penalty, even if the employee continues to work. However, the IRS historically has prohibited payments from pension plans prior to age 65, including both defined-benefit plans (including cash-balance plans) and money purchase pension plans. Recently, the IRS issued proposed rules that would allow pension distributions to start while an employee remains at work. A phased retirement program must be carefully structured to fit within the proposed structure, and it’s important to keep in mind that these rules are not yet final.
• Determine whether plan participants would continue to accrue retirement benefits. Retirement plans typically require an employee to have at least 1,000 hours of service during the year in order to receive a share of that year’s profit-sharing contribution, earn that year’s 401(k) matching contribution, accrue another year of service under the benefit formula of a defined-benefit pension plan, or get credit for another year of service under the plan’s vesting schedule (if not already 100 percent vested). For employees who want or need to earn and save beyond traditional retirement age, provisions that keep them from participating in the company’s retirement plan could be an unexpected disappointment.
• Evaluate the effect on other benefits. How will phased retirement affect other company programs, such as medical benefits, life insurance and disability coverage? Be sure to examine the potential legal implications that phased retirement can have on all your benefit offerings and policies.
• Clearly communicate roles and responsibilities. Even when everyone is supportive of a phased retirement, there is always an adjustment period when a worker moves from an established role to a new position, especially when that can mean pulling back from former job accountabilities. Help the transitioning employee and his or her coworkers understand how the team’s structure is evolving and how it supports each person’s career goals.

A dynamic older workforce
The rapidly aging U.S. populationunderscores the need for companies to consider offering phased retirementprograms. Census Bureau projections show that the number of people age 55 to 64will grow 73.5 percent from 2000 to 2020, while growth in the 25- to54-year-old age group will stay flat. At the same time, the Bureau of LaborStatistics anticipates only a nominal change in the civilian workforce foryounger adults. By 2012, the number of American workers age 15 to 54 isexpected to grow 0.5 percent annually, compared with a 4.1 percent yearlyincrease for workers age 55 and older. Already, the age of America’sworkforce is climbing. In 2006, the median age of an American worker will riseto 40.6 years, compared with a median age of 30 in the 1960s.

Americans also are living longer and enjoyingbetter health. In 1960, the average 65-year-old was estimated to live another14 years and five months; in 2002, that life expectancy grew to an additional18 years and two months. The percentage of 65- to 74-year-old men who say theyhave a work disability fell to 23 percent in 2004 from 31 percent in 1995.

While it was once assumed that an employee of acertain age would collect a gold watch and head straight to the rocking chair,research shows that employees plan to stay on the job longer. According to a2004 study, 63 percent of those age 50 to 70 say they would like to workpart-time before full retirement, and 80 percent of baby boomers expect to workafter retiring from their primary occupation. AARP reports in another studythat, of workers who specifically expressed interest in phased retirement, 53 percentwould like to reduce their weekly schedule by 12 hours, and 39 percent wouldlike to cut back by 10 or fewer hours. Those relatively small reductions in theamount they expect to work indicate that these older workers have a strongdesire to stay actively involved with their employers and will remain highlyengaged with the work they do.

The intangibles associated with a lifetime ofexperience also make older workers an asset to their employers.

"They know when to panic and when to be morerelaxed when a problem arises, because they’re more likely to have seen itbefore," says Susan Meisinger, president of the Society for Human ResourceManagement. "They are also dependable. Showing up for work on time is asimple thing, but it’s important."

That dedication also pays off for the employeeswho can extend their earning potential and long-term savings through phasedretirement plans. According to a briefing from the Congressional Budget Office,"Because people who retire at 62 can expect to live another 20 years, eachyear they postpone retirement reduces their need for retirement savings byabout 5 percent. An extra year of work also increases their Social Securitybenefits by several percent. Taken together, those effects lessen the totalamount that people need to save, and the additional year gives them time tosave more and earn returns on the assets they have already accumulated. As aresult, households can make up for earlier shortfalls in retirement savingswith surprisingly modest changes in behavior."

In a speech titled, "The End ofRetirement," AARP Executive Director and CEO William Novelli emphasizedthe revolutionary change in how Americans perceive the golden years of theirprofessional careers: "The old models are being tossed out the window.Retirement is ending. And in its place, something much more satisfying anddiverse and unpredictable is emerging. The future ain’t what it used to be.It’s going to be much better, and much more interesting."