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Thursday, August 28, 2014

Retire at 65This recent Reuters article paints a rosy picture of the phased retirement offering that the federal government is extending to its employees.  It sounds like a great win-win.  The government saves money; employees get to continue to save for retirement, but also get to cut back on hours.

However, the article goes on to lament the “slow” employer response:

Worker interest in a flexible glide path to retirement is strong, and it’s not limited to the federal payroll. A survey this year by the Transamerica Center for Retirement Studies found that 64 percent of workers – of all ages – envision a phased retirement involving continued work with reduced hours….

The Society for Human Resource Management reports that 11 percent of employers provide some version of phased retirement, with only 4 percent having formal programs.

What the article fails to discuss is that tax code nondiscrimination rules make phased retirement a hard sell for many employers.  Under those rules, if employers want to use their existing tax-qualified pension plans for this purpose, they can impose some eligibility conditions, but they generally have to be careful to make the program available to a significant section of non-highly compensated employees.

In some cases, where “brain drain” is the concern, employers would like to offer a program to keep employees with certain skill sets around (especially if the alternative is losing them), but they also may not want a mass partial-exodus of their non-highly compensated workforce.  Often, the rules make drawing a workable line practically difficult.  For federal government employees who have been “frozen” in place without promotion, there is hope that many senior people will phase out in order to open up their positions for advancement by others.

Phased retirement may not be attractive to many employees, too.  Employees need to consider the value of phased retirement to them personally.  It makes sense for many people to enjoy phasing out of a job over time instead of going “cold turkey” into retirement.  However, if the employee is covered by a final pay average defined benefit plan, there may be a consequential reduction in the employee’s retirement benefit resulting from part-time pay during the phase out period.  Lower pay during the phase out years for those participating in defined contribution plans often means smaller employer and employee contributions for people who have not yet saved enough for retirement.

The federal government, of course, sets the rules and therefore does not have to play by the ones they choose to avoid.  Which is why, as the article notes, “Each federal agency will write its own eligibility rules, and phased retirement won’t be a guaranteed right for all workers.”  There is no analog for this type of slicing and dicing in the private sector.  And, of course, there is no way yet to gauge the popularity of the new rules that go into effect on November 6, 2014.

This is not to be critical of the federal program or even the nondiscrimination rules.  Those rules serve a very good purpose in ensuring that retirement benefits go to a broad group of employees.  But if the government wants phased retirement to take off in the private sector, it will need to liberalize the existing rules as they relate to phased retirement to provide employers with the flexibility they need to implement these programs.

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