Most employers believe their employees expect to work past age 65. A recent survey by the Transamerica Center for Retirement Studies states that one reason for staying on the job longer is that so many older workers experience a shortfall of retirement savings. Another is that many employees don’t want to go cold turkey on the social interaction, stimulation, and sense of accomplishment they get from work.
More than 80% of surveyed employers say they support the idea of employees working past 65. But only about a third of them allow staff members to downshift from full- to part-time status ― also known as “phased retirement.” This may change as employers recognize the need to keep experienced workers on board longer.
Employees who welcome the opportunity to switch to part-time work may be even more productive after the change. And employers can benefit greatly by having these seasoned employees available to transfer their skills and job knowledge to the younger workers who come after them.
Labor shortages in certain fields and geographic regions also play a role in the changing retirement landscape. The Government Accountability Office (GAO) recently issued a study on phased retirement programs, noting that “Industries with skilled workers or labor shortages are motivated to offer phased retirement because their workers are hard to replace.”
The GAO study also cited data from the Society for Human Resource Executives (SHRM). A member survey stated that phased retirement programs are common among employers with technical and professional workforces. Overall, 5% of SHRM members offer such programs.
And while some employers examined by the GAO had to clear a few regulatory hurdles — specifically structuring benefits in a way that doesn’t violate ERISA anti-discrimination regulations — employers “were able to address various design and operational challenges,” according to the report.
Variety of Models
The study found an assortment of approaches that employers are taking. Here are examples of phased retirement programs used by four unidentified companies:
Example 1: Workers work 80% of full-time for 80% of full-time pay.
- Primary advantages: Retention of workers and development of future leaders and the ability of the employer to do workforce planning.
- Who is eligible: U.S. employees at least 55 years old with 10 or more years of service who have achieved or exceeded performance expectations and have management’s permission.
- Hours reduction allowed: 20%.
- Length of phased retirement: Any length of time is permissible assuming program standards are met and the manager approves.
- Knowledge transfer: Workers spend time transferring knowledge, skills and expertise. For each year the worker participates, he or she creates a proposal that includes a knowledge transfer plan with recommendations on how it will ensure business continuity.
- Effect on health benefits: None.
- Effect on 401(k) plan: The employer contribution is based on a worker’s full-time salary.
Example 2: Workers and managers develop a structured plan to transfer knowledge and transition to retirement within two years.
- Primary advantages: Helping the company with workforce planning by encouraging workers to inform the company about their retirement plans and to help transfer their knowledge before they retire.
- Who is eligible: All workers at least 60 years old who have been employed by the company for five years or more and have permission from their managers and the human resources department.
- Hours reduction allowed: Automatic approval to reduce work hours by 20% to 50%. Those wishing to work less than 50% may submit a request to do so, though they would lose eligibility for health benefits.
- Length of phased retirement: From six months to two years.
- Knowledge transfer: This is a large program component, with many tools and guidelines.
- Effect on health benefits: Benefits remain the same as for full-time employees (with the caveat above for those wishing to work less than 50% of full-time).
- Effect on retirement benefits: No plan contribution formula change, but pay upon which the employer contribution is based changes in proportion to the worker’s reduced salary.
- Other: The employer maintains a group of standby workers to fill in throughout the company if a spike in work demand occurs.
Example 3: Phased retirement program is available to workers in units that have implemented the program.
- Primary advantages: Worker retention and knowledge transfer, training and mentoring of remaining staff.
- Who is eligible: At management’s discretion. Can begin at any age.
- Hours reduction allowed: Participants typically work 60% of full-time.
- Knowledge transfer: An expectation that participants will mentor or train staff, but there’s no formal program to ensure that this happens.
- Effect on health benefits: If employee works more than 60% of full-time, no reduction in benefits. Health benefits stop at age 65 for all workers.
- ·Effect on retirement benefits: None.
Example 4: Workers must transition into full retirement within three years.
- Primary advantages: Participants gain the ability to adjust to full retirement by reducing their workloads gradually while still contributing to their business units.
- Who is eligible: Certain workers who are age 57 or older and have completed at least 10 years of service.
- Hours reduction allowed: 25% to 50%.
- Length of phased retirement: A maximum of three years.
- Knowledge transfer: No such requirement.
- Effect on health benefits: None.
- Effect on retirement plans: Employer contributions are proportionally reduced during phase-out period.
These examples illustrate some of the diversity of existing phased retirement programs. If you’re not sure how beneficial such a program would be for your business, perhaps launch one on a trial basis and then assess the results. Also, keep in mind that navigating the legal and regulatory implications of implementing such a program ― particularly with respect to employee benefits ― requires guidance from a qualified attorney.