Retirement is changing. Many employees no longer aim to quit work entirely when they reach a certain age. Instead, they simply want to dial things down by working fewer hours, gaining more flexibility in their schedules, and stepping off the high-stress promotion track.
Unfortunately for many companies, older workers often decide that the best way to achieve these goals is to retire from their current employer and seek part-time or contract work with another organization. That is, unless the employer offers a phased retirement program.
Phased retirement is nothing new. Companies and individual supervisors have long structured informal part-time or alternative work arrangements for valuable older employees who want to ease up as they approach retirement, says Steve Vernon, a vice president with Watson Wyatt Worldwide, a global consulting firm focused on human capital and financial management, in Los Angeles. Formal arrangements -- companywide programs with specific policies and procedures that must be followed in every situation -- are less common, though. "It's the formal programs that have not caught on, largely because of the pension issues involved and because many com-panies have not thought through how to accommodate a part-time workforce," explains Vernon.
The legal and regulatory uncertainty surrounding these programs adds to companies' reticence. Pension and employment laws have not caught up with the realities of the graying workforce and, as a result, lawmakers and authorities have been slow to provide guidance on the best way to structure phased retirement. (See The Legal Issues below.) "There is growing interest in these programs, but for the most part the interest is higher than the level of activity," says Ginny Olson, a principal with professional services firm Towers Perrin in Atlanta.
The Legal IssuesAlthough there is growing interest in formal phased retirement programs, some obstacles to implementing them remain. "A lot of employers want to offer an alternative to 'work hard or leave,' but there is regulatory and legal uncertainty associated with phased retirement programs that companies don't like," says John McGowan, a partner with the law firm Baker Hostetler LLP in Cleveland. "There is concern that rolling out these programs could set the stage for potential litigation." The critical areas of concern are employment laws that prohibit discrimination based on age or ability. The risk is that individuals could sign up for phased retirement and change their employment status or work arrangements, then rescind or recant their intention of going to phased retirement and sue for age discrimination. For example, employees could allege that they were unfairly denied promotions or other opportunities because of their age. Even though they may not be able to structure phased retirement programs to avoid these risks entirely, companies can take steps to protect themselves. "I would advise companies to err on the side of disclosure and clarity," says McGowan. "To prevent misunderstanding, make sure the phased retirement proposal is clear and comprehensive and spells out the financial consequences of moving to phased retirement and the options employees have if they have buyer's remorse or their situation changes." For instance, if an employee in phased retirement wants to come back to full-time employment and sues the company for discrimination because there are no positions available, the company needs to be able to show that the employee knew and understood the circumstances and potential risks when he or she signed up for the program. More discrimination-related questions could arise if a business offers health and other benefits to part-time workers in phased retirement but not to other part-time employees. Because so many variables are involved, organizations should thoroughly understand these issues and their potential ramifications before implementing a phased retirement program. Other potential obstacles include IRS regulations governing defined benefit pension plans, which require a complete break in service for an individual to begin receiving pension benefits. Some companies have applied for and received an exemption to this requirement, and the IRS has proposed regulations designed to remove this barrier to phased retirement, but those regulations are not yet final. The newly signed Pension Protection Act of 2006 allows defined-benefit pension plans to make in-service distributions to employees who are 62 or older even if the normal retirement age of the plan is later than age 62. |
Some companies have been fostering and benefiting from phased retirement programs for decades. For example, since the 1980s, The Mitre Corp. has offered a program that enables employees over age 55 with at least 10 years of service to transfer to part-time status. The not-for-profit company provides systems engineering, research and development, and information technology support to the government. "The goal is to provide potential retirees with a flexible option to see if retirement is what they want," says William Albright, director of quality of work life and benefits at the McLean, Va. office. "It works out for the company, too, because it can hold on to valuable employees."
An employer that offers a phased retirement program can reap solid gains. Like Mitre, many organizations find that they increase their chance of retaining older employees with the critical skills they need. Another perk is that by keeping these individuals working longer, organizations have more time to ensure a smoother transition for the novice members of the workforce. Some companies encourage older employees to become mentors to younger workers in order to transfer knowledge and experience to the next generation.
For older workers, the benefits of phased retirement are considerable. "Studies have shown that older workers are not looking for career-building or promotion opportunities," says Olson. "Instead, they want to offer something of value to the organization and have a reason to come to work."
In some industries, having a formal phased retirement program is critical for companies that want to avoid losing newly retired employees and their knowledge to competitors. Given the chronic shortages of health-care workers, especially in nursing and other skilled professions, the need to retain employees for as long as possible has reached a critical level for St. Louis-based SSM Health Care. The organization owns, manages and is affiliated with 20 acute care hospitals and two nursing homes in the Midwest.
Several years ago, SSM Health Care began to tackle its retention problems by developing a program to entice older workers to remain with the company beyond typical retirement age. "We knew that about one-third of our employees were within 20 years of retirement and our capacity to get new people was unlikely to produce enough people to fill the resulting vacancies," explains Steven M. Barney, senior vice president of human resources. "By extending the careers of older workers, we would be able to reduce the number of those vacancies." The company was aware that those inching into retirement would take with them an enormous amount of experience. "We would see a lot of employees retire at 60 and immediately move on to work for a competitor," says Barney. "We lost all of that expertise."
At the time, the company's pension rules did not allow employees who took early retirement to return to work for SSM facilities until after they turned 65. When the company developed its phased retirement program, it obtained an exemption from the IRS that enabled it to change the terms of its pension plan to allow newly retired employees aged 60 and older to receive a pension and return to work immediately on a reduced or flexible schedule. Now employees in the programs continue accruing pension benefits during their phased retirement period, and their benefits are recalculated upon full retirement to reflect those additional credits.
SSM Health Care currently has 145 employees who are over age 60 but under age 65 in the phased retirement program, as well as 274 people over age 65, for a total of 419 employees or about 2 percent of the company's total workforce. "That may not seem like a lot, but that means that we don't have to find replacements for that 2 percent of our employee population in a very competitive health-care labor market," notes Barney.
Some companies provide employees with phased retirement by forming what amounts to labor pools made up of highly skilled retirees who are available for work assignments on a temporary basis. St. Louis-based agricultural firm Monsanto Co. established its resource re-entry center (RRC) in 1991 to match retirees and former employees to short-term assignments and to help the company improve the quality and standardize the costs of its temporary labor. To ensure a clear break in service, the company requires a six-month waiting period between the employee's last date of service and his or her RRC start date.
Monsanto's RRC currently has more than 300 active individuals, 175 of whom are on assignment in various areas of the company including engineering, finance, law, IT, and R&D. "We plan to more actively promote our program as the need for it increases," notes Deb Lebryk, Monsanto's director of external relations. "We see this program becoming more of an integral part of temporary staffing at Monsanto, especially as our workforce ages and looks for flexible options." The company includes the RRC enrollment packet -- an application and details on the program -- in employee exit paperwork. "This is one way to tap into existing resources before it's too late or, rather, before the knowledge leaves," adds Lebryk.
Overall, Monsanto has realized many benefits from the program. For one thing, "the company has been able to maintain relationships with retired employees with valuable, and often very specialized, skills that are difficult to find or replace," says Lebryk. "And their work-schedule flexibility allows us to staff them for job-sharing or cyclical spikes."
In addition, the company has succeeded in reducing temporary employee turnover rates, increasing the productivity of part-time workers. Because the newly retired employees in the program are familiar with the company, they are more reliable and productive than other temporary workers and require less management time to get them up to speed. All of this has helped the company reduce its temporary labor costs. An added bonus is that the RRC enables the company to avoid paying the markup charged by temp agencies.
Of course, offering part-time work is a small piece of the puzzle in implementing a phased retirement program. "As more employees ask for phased retirement, companies must understand which skill sets and jobs are the best fit from a structural standpoint and in terms of the company's business plan," says Olson. However, more and more companies are finding that the results are worth the effort. And the threat of labor shortages will only increase as the baby boom generation approaches retirement age.
The Health Insurance QuestionA key question to answer when developing a phased retirement program is whether the company will provide enrolled employees with access to health insurance, which is a vital concern for retirees who are not yet eligible for Medicare. Organizations that offer older workers health benefits during phased retirement may see those fees increase. Each company will need to determine whether the productivity, skills and experience offered by older employees counterbalance the potentially higher costs. However, costs could be offset if the company is able to avoid paying the price of replacing individuals with skill sets that it needs. SSM Health Care in St. Louis owns, manages and is affiliated with 20 acute care hospitals and two nursing homes in the Midwest. To retain as many of its retirement-approaching baby boom employees as possible, the organization has injected additional flexibility into its health insurance plan. Adult family members living with employees, who would not generally be covered under a traditional health insurance plan, are included in SSM's program. These types of enticements will become crucial as the number of potential retirees in the company doubles or triples over the next decade, says Steven M. Barney, senior vice president, human resources. |