Benefits July 23, 2020

Phased Retirement Programs Offer Perks for Employees and Employers

A phased retirement program can help employers address workforce issues and help employees make a smooth transition, and it should include education and advice.
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Art by Katherine Streeter

A phased retirement program can ease the transition for some older workers who are preparing to leave the workforce.

Phased retirement programs, widely used to assist workers in their shift away from the workforce, allow employees to modify their workload, either by transitioning to part-time work or by having their hours reduced. From there, workers will eventually “phase” into retirement. These programs allow employers to reduce staff and benefits costs, retain institutional knowledge held by those employees approaching retirement and create advancement opportunities for younger employees, says Christina Cutlip, senior managing director of client engagement and national advocacy at TIAA.

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A phased retirement program gives employees a controlled path to retirement with a less demanding work schedule, she adds.

“Employees may choose a phased retirement approach due to financial readiness concerns or simply because they still enjoy the social and professional fulfillment from their work,” Cutlip explains. “It’s interesting to note that many employees may not realize they are financially able to retire, but find they are in a much stronger financial position after running their retirement numbers.”

While the conventional retirement path means pre-retirees work one day and immediately retire the next, increases in longevity, along with changes in health and diet, mean pre-retirees have continued working, notes Scott Francolini, head of strategic relationship management and consulting at John Hancock Retirement. These workers may want to still contribute to the workplace in a meaningful way, but not necessarily by working a 40- to 50-hour workweek, he says.

“Increasingly, we see a desire to blend the two,” Francolini says. “Scaling back work somewhat, but not entirely, as an initial phase and then gradually transitioning out of the workplace over a period of perhaps a few years.”

The Pluses for Employees and Employers

As employees face furloughs, layoffs and reductions in work hours and pay triggered by the economic downturn caused by COVID-19, employers may consider implementing a phased retirement program to workers retiring in the near future. Even before the pandemic, 43% of Baby Boomers in the workforce envisioned a gradual transition into retirement, according to survey findings featured in a report from Transamerica Center for Retirement Studies. Catherine Collinson, CEO and president of the center, says the option adds flexibility without sacrificing costs.

“By offering opportunities for older workers to transition into retirement, employers may find that they have some takers—which could alleviate some of their payroll-related pressures,” she says.

Beyond acting as an alternative to layoffs, phased retirement programs can be part of a regular retirement package, but the implementation of such a benefit depends on the employer and its goals. It’s also important for plan sponsors to consider how willing employees would be to participate in such a program, Francolini says.

Yet, he remarks, employers will likely be surprised at the number of workers willing to accept reduced hours or a lighter workload. As the world has shifted to remote work—and, for some, the possibility of working remotely permanently—implementing flexible arrangements can attract newer talent searching for flexibility. 

“COVID-19 has opened that possibility in the minds of many people,” Francolini says. “Employers that proactively think about developing a path to phased retirement, or even for early-to-mid-career people who want time to pursue something else without completely stepping away, I believe will have a significant advantage going forward.”

Support Included in a Phased Retirement Program

There are multiple moving parts to consider when offering a phased retirement program, and that includes answering the who, what, why and how questions, says Cutlip. Who is this program benefiting, and what employee groups will be eligible for the plan at what age? What is the length of the transition period between part-time employment and retirement? Why are employers adding these programs—to quickly reduce expenses or to open up career opportunities for younger workers? And how will the program work? Employers should consider how to define part-time work, the effect of existing benefits, such as defined benefit (DB) payout formulas and health care coverage, and the ability of part-time employees to receive retirement benefits based on age and other considerations.

Employers looking to successfully transition their workers into retirement must ensure employees have access to a competitive retirement benefits offering and an effective employee engagement program, Cutlip says. The benefits offering should include a diversified investment menu with guaranteed lifetime income options, educational resources and personalized advice options.

Cutlip says employee engagement programs must motivate participants to take part in the plan, seek personalized advice and education that lets them know their retirement readiness, create a comprehensive retirement savings and income plan, and periodically add reviews.

“Employees need the right building blocks and help implementing them to prepare for a lifetime of income in retirement,” Cutlip says. “Preparing for life in retirement extends beyond financial considerations, it should also take into consideration an employee’s emotional readiness and what comes after their professional life.”

Working with retirement plan providers and benefit advisers can also help employees smoothly transition out of the workforce, Collinson says. They can offer information about the plan’s distribution options, financial planning seminars and counseling on how to make savings last. “Plan sponsors who wish to implement a phased retirement program should work with their benefits advisers and retirement plan providers to identify any potential conflicts and harmonize their plan design with the program,” she recommends.

Plan sponsors may also want to provide the ability to participate in training, succession planning and mentoring, she says.

Program design can come with a number of legal considerations, so Collinson suggests employers also seek the advice of legal counsel.

Administration July 21, 2020

Frozen DB Plans Still Require Much Attention

There is nearly as much work to do when a DB plan is frozen as when it’s open, and ignoring it could come at great cost.
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A frozen defined benefit (DB) plan is one in which there are no more accruals—no more growth in benefit—for any individual, says Ari Jacobs, senior partner and global retirement solutions leader at Aon in Norwalk, Connecticut. He clarifies that this is different from a closed DB plan, in which there are still accruals for participants who were already in the plan before it was closed to new participants.

With frozen plans, for the most part, plan sponsors still have to do everything they had to do with an ongoing plan, says John Lowell, Atlanta-based actuary and partner with October Three Consulting LLC. “They don’t get a lot of breaks from that standpoint. That is where a lot of people go wrong; they think since they’re not giving anything to employees anymore, the staff they had dedicated to the plan is not necessary,” he says. “To a large extent, they stop paying attention to it. They’re really just relying almost entirely on what advisers, including actuaries and accountants, tell them to do.”

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Lowell explains that DB plan sponsors may have relied heavily on advisers when their plans were open, but, when a plan is frozen, he says that is “a bit trickier.” He says consultant firms are generally looking for relationships that are going to generate long-term revenue for them and long-term profitability. “If they don’t think they will get that, the natural business reaction is to do what they can to generate revenue in the short-term,” he says. “If a client wants to terminate the DB plan in the next three years, and after three years, the consultant will not have the business, it can do one of two things: bring ideas likely to generate revenue or sit back and wait for the client to ask questions. It probably is not going to bring a lot of creative solutions in the hopes of building a relationship.”

A frozen DB plan still has a fixed set of promises based on when individuals will leave the company and get payments for life, Jacobs notes. Plan sponsors still need to continue to manage the risk associated with those promises, which he explains is the asset/liability mismatch. “Assets will move with the market and liabilities change with discount rate moves, and these can lead to changes in funded status,” Jacobs says. He adds that plan sponsors also need to make sure they understand their amount of underfunding and what cash is needed to put into the plan to fill the gap.

As for expectations from service providers, Jacobs says the biggest change is that calculations for growing benefits are no longer needed. In many cases, benefit calculations that would have had to be done over years could be completed early. However, Jacobs notes, plan sponsors will still need to make required contributions each year.

“There is only somewhat less work to do with a frozen plan than an ongoing plan. There is a limited amount of information still needed from service providers. But, generally, a frozen plan should be managed the same as an open plan,” he says.

A plan sponsor may have saved money by not having a person or department dedicated to its DB plan, but Lowell contends the costs of not having such a person or department far exceed what they saved. “For example, if the sponsor is not paying attention, it can miss out on strategies that might reduce PBGC [Pension Benefit Guaranty Corporation] premiums,” he says. “For some, there may be no cost or some cost because they are not paying variable premiums or they are getting advice and getting it right, for some small cost, but I’ve seen some paying millions of dollars in premiums a year that didn’t have to. If someone was paying attention to the plan, the costs would have been less.”

As another example, Lowell says companies that are tight on cash this year that don’t have a conversation about that with an actuary may get a recommendation from the actuary to put a lot of money into the plan. “Plan sponsors expect actuaries to ask questions and know how to advise them, but actuaries are expecting plan sponsors to ask questions. This wouldn’t occur if a portion of someone’s job was to maintain the pension plan,” Lowell says. “Unnecessary costs for frozen plans come from omissions, things plan sponsors are not thinking about that a dedicated person would think about.”

A plan with no internal staffing may also not be getting a highly proactive actuarial consultant, Lowell adds. “It’s not that the plan sponsor is not taking opportunities presented to it, it’s that it is not asking questions and the consultant is not asking questions to get to know the sponsor’s situation,” he says.

Lowell also warns about “random advice.” For example, a consultant company may push liability-driven investing (LDI) for all clients or push lump-sum windows. He says plan sponsors should ask, “Is that right for our plan? Why do you think so? Show me how you determined this is right for us.” Consultant companies have initiatives for every client, Lowell says, so plan sponsors should determine if the advice is for them or for random company X.

Over time, a frozen plan will get to the point where it is fully funded. Jacobs says plan sponsors need to think about when the time is right to reduce its liability by settling some of it through a lump-sum window or selling the liability to an insurance company. “It’s not a necessity, but plan sponsors would want to do that because, at some point, they will have something on their balance sheet that could be effectively managed by someone else,” he says. “Do they want to have that liability on their balance sheet and worry about investing and managing assets when there are organizations that do that for a living?”

Jacobs explains that there is limited difference on a plan sponsor’s balance sheet for a frozen versus an open plan. “There is a difference on the income statement because the service cost for accruing new value disappears for a frozen plan. But the promises of the plan still sit on the balance sheet the same way,” he says.

One challenge with keeping a frozen plan comes from what Jacobs calls a lack of “institutional knowledge.” The plan could be around a long time—until every participant is paid out, he notes. “Plan sponsors still need to adhere to government requirements and continue filings. As time goes on, fewer will know the plan and its requirements, and the risk of operating appropriately can’t be ignored.

“What we’ve seen is that most frozen plans fall on the bottom of plan sponsors’ to-do lists when there are still many solutions to work through,” Jacobs says. “There needs to still be interaction between finance and HR [human resources] to understand the ownership of the plan. It’s important that the focus on it doesn’t drop. Plan sponsors should continue a strategic focus on asset/liability matching solutions, funding solutions and settlement solutions.”

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