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.
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.
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