Advisory Council Report on Phased Retirement

This report was produced by the 2008 Advisory Council on Employee Welfare and Pension Benefit Plans, usually referred to as the ERISA Advisory Council (the “Council”). The Council was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not represent the position of the Department of Labor (DOL).

Executive Summary

The Council established a special working group (the “Working Group”) to examine the issues facing employers who wish to create phased retirement plans, the issues facing employees who wish to take part in phased retirement programs, and the various legal and regulatory obstacles to the implementation of a phased retirement arrangement. The Working Group examined whether there were any actions needed to facilitate an improved system of phased retirement.

The Working Group of the Council received testimony from six witnesses on July 17, 2008 and from eight witnesses on September 9, 2008. These witnesses represented a wide variety of views on the topic, including employers, employees, plan participants, multiemployer plans, professional consultants, academia, and the Federal Treasury Department. The Council submits the following recommendations to the Secretary of Labor for consideration:

Recommendation 1: Serve as a Catalyst to Remove Legislative and Regulatory Impediments to Phased Retirement Arrangements

The Council recommends that the Department of Labor initiate, facilitate and engage in efforts to assist the development of sound retirement security policy that addresses phased retirement programs. Despite the fact that substantially all of the major impediments to phased retirement that witnesses identified are not under its jurisdiction, the Department of Labor’s general jurisdiction over labor and retirement security issues makes it a natural choice to be a thought leader in this area. Specifically, the Department of Labor could serve as an influential catalyst to achieving necessary reforms by passing along to Treasury the following Council recommendations, for Treasury’s consideration in developing a legislative program to meet the retirement security needs of American workers and employers’ desire for workforce flexibility: (a) tax-qualified pension plans should be permitted to make in-service distributions beginning at early retirement age (with our without early retirement subsidies), and (b) tax-qualified 401(k) plans should be permitted to make in-service distributions without penalty beginning at early retirement age/age 55

Recommendation 2: Ensure that any Phased Retirement Regulatory Regime is Reasonable

The Council recommends that the Department of Labor initiate, facilitate and engage interaction between the appropriate regulatory agencies to make sure that any regulatory requirements applicable to a phased retirement program strike a reasonable balance between protecting employees and not imposing unnecessary requirements on employers and plan sponsors that could undermine the goal of increasing phased retirement opportunities. In the spirit of doing no harm, we recommend that the Department of Labor use its influence to prevent any new legislative or regulatory scheme from imposing too many new requirements.

Recommendation 3: Develop Expanded and Updated Educational Materials

The Council recommends that the Department of Labor create new resources or revise previous resources pertaining to phased retirement. The Department of Labor could issue a new publication that provides assistance to employers and employees who are struggling to cope with the challenges of any phased retirement opportunities. Such assistance should specifically explain the implications of continued employment vs. early distribution on the employee’s lifetime retirement income. Alternatively, the Department of Labor could update one of its existing publications, such as Taking the Mystery Out of Retirement Planning. The Department of Labor could use its website or training seminars to provide this type of assistance to employers and employees.

Richard Helmreich, Working Group Chair
Mary Nell Billings, Working Group Vice-Chair
William Scogland, Council Chair
Patricia Brambley, Council Vice-Chair
Robert Archer
Edward Mollahan
Edward Schwartz
Randy DeFrehn
Stephen McCaffrey
David Evangelista
Elizabeth Dill
Sanford Koeppel
Marc LeBlanc
Kevin Wiggins

Introduction

The Working Group on Phased Retirement studied several interrelated issues. This report addresses the scope, the questions presented to witnesses (along with a summary of all the witnesses’ testimony), the analysis of the phased retirement issues, and the Council’s ultimate recommendations to the Secretary of Labor.

Scope

The basic objective was to determine the need for an improved system of phased retirement opportunities. In this regard, the Working Group examined both sides of the employment equation by evaluating the issues facing employers who wish to create phased retirement plans as well as the issues facing employees who wish to take part in phased retirement programs. The Working Group also studied how a phased retirement arrangement might affect employees’ retirement savings, pension benefits and Social Security benefits. Specifically, the Working Group examined whether there are any legal impediments in the American retirement system that discourage American workers from continuing to work during their retirement years.

As part of this process, the study considered the roles and concerns of three separate forces in the retirement system: employees, employers, and government. Specifically, the study sought to determine whether governmental action, including regulations or other guidance, could:

• Remove barriers to the availability and utilization of phased retirement programs;
• Assist employers and employees in determining the efficacy of different types of phased retirement programs best suited to their individual needs;
• Encourage the appropriate type of advice and education to employees concerning the opportunities and consequences of phased retirement helping, to ensure that employees understand the financial ramifications of selecting phased retirement; and
• Facilitate broader use of phased retirement systems.

Questions for Potential Witnesses

The witnesses received materials explaining the scope of inquiry for the Working Group. The witnesses were asked the following questions as a starting point to generate thought and discussion.

What types of phased retirement efforts are American employees currently utilizing? What are the advantages and disadvantages of different efforts?

What types of phased retirement programs are employers currently implementing? What are the advantages and disadvantages of different programs? What employers or institutions have already implemented phased retirement programs either successfully or unsuccessfully, and what made those phased retirement programs successful or unsuccessful?

Do American employees now have a greater need or desire to remain in the workforce beyond the traditional retirement age? If so, what pressures or systemic changes have led to this development? What types of employees are most severely impacted by this need?

Do American employers now have a greater need to retain employees beyond the traditional retirement age? If so, what developments in the American employment system have prompted this change? What types of employers are most severely impacted by this need? How will the introduction of phased retirement affect productivity in the workplace?

Are there specific legislative, regulatory or other governmental obstacles that serve to directly or indirectly prevent more widespread implementation of phased retirement programs? If so, what changes would need to be made to remove these obstacles? Is there any specific action the DOL could take to remove such obstacles?

Are there any other obstacles to the implementation of phased retirement programs on a more widespread basis? If so, what changes would need to be made to remove these obstacles? Is there any specific action the DOL could take to remove such obstacles?

What types of phased retirement programs should be available or encouraged? What are the advantages and disadvantages to participants? Do employers currently have the ability to identify any existing or future opportunities to implement phased retirement programs best suited to their needs? If not, what could be done to improve employers’ awareness of such opportunities? Is there any specific action the DOL could take to improve such awareness or this educational process?

What type of systematic changes should be implemented to help facilitate increased opportunities for phased retirement? Are specific institutions better suited to help implement phased retirement programs?

Is there anything that could or should be done to encourage employers to implement phased retirement programs? Is there anything that could or should be done to encourage employers to provide appropriate advice or education to employees concerning the opportunities of phased retirement? Is there anything that could or should be done to encourage employers to provide appropriate advice or education to employees concerning the financial ramifications of selecting phased retirement?

Analysis of the Phased Retirement Issues

What is Phased Retirement?

Based upon the testimony provided to the Working Group, different perspectives can produce rather different conceptual ideas of what constitutes retirement and phased retirement. The traditional employment system in the United States produced retirement practices in which employees have historically transitioned directly from working on a full-time basis to being completely retired. Formal or informal “phased retirement,” however, presents an alternative to this traditional retirement model.

As a starting point, it is helpful to address the basic question; what is phased retirement? Not surprisingly, there is no single definition that works in all situations. At its essence, however, phased retirement is an employer-employee relationship that is different from the traditional model in which the employee converts from a full-time employee to a full-time retiree.

A common view of a phased retirement arrangement is an employment relationship in which an employee gradually begins to works less and less. Another common trait of a more sophisticated phased retirement arrangement is where the overall income of the employee is kept relatively level. This leveling is typically accomplished by offsetting the gradual decreases in the employer-provided compensation with gradual increases in the amount of the employee’s retirement income, whether though a defined benefit pension plan, a defined contribution retirement plan or other retirement savings.

Phased retirement can also be viewed differently in the two different directions from normal retirement age. If normal retirement age were considered to be age 65, some would view phased retirement as the ability to start phasing into retiring early (e.g., begin to phase into retirement beginning at age 55 or some other early retirement age). Conversely, others would view phased retirement as the ability to continue working past normal retirement age.

In practice, phased retirement can take different shapes and forms, including reduced work schedules, job sharing, rehiring retired workers—sometimes with the employee working with the same employer in these phased retirement arrangements and sometimes with a different employer.

The retention of workers through phased retirement provides employers with a number of tangential benefits as well. Employers who retain trained employees through phased retirement programs are able to reduce costs associated with training new employees. The older, more experienced workers are able to provide on-the-job training to younger new-hires, saving the employer training costs and ensuring that the knowledge base of the older workers is not lost when they retire. This allows for a smoother transition when the baby boomers fully retire. In addition, because employees entering phased retirement shift from full-time work to part-time work, employers are able to decrease salary and benefits expenses.

A Changing Landscape

Much of the testimony and other information provided to the Working Group helped to confirm that the demographic profile of the American workforce and other related factors are undergoing dramatic shifts. There are a number of these changes.

First, over the past generation, life expectancies have increased dramatically. Second, the bubble in the American population known as the “baby boomers” have begun to enter their traditional retirement years. In 2008, the ages of those in that group generally ranges between 54 and 62, which is on the doorstep of historical retirement ages. Third, traditional employer-provided defined benefit pension plans and retiree health benefits have become significantly less prevalent in the workplace. Fourth, the savings rate among American workers has been on a steady decline for the last generation.

Need for Phased Retirement

The Working Group heard significant testimony that these recent demographic and related shifts are causing both employers and employees to have an increased need for phased retirement opportunities. Consequently, there is an increasing need to change the traditional American model of converting from work to retirement.

Aging workers are expressing increased need or interest in phased retirement opportunities. Advances in medicine have had a dual effect on working lives. Modern medicine has permitted aging workers to remain active longer, thus eroding health barriers to longer working lives. Advances in medicine have also increased life expectancies, which inherently creates additional monetary needs for retirees. Compounding this financial pressure, fewer private-sector employers are offering defined benefit pension plans to their employees and, among those employers offering pensions, most offer 401(k) plans or defined contribution coverage. Employees are also choosing to work into retirement because they need access to group medical benefits. As a result of these factors, an increasing number of employees will have the ability to and the need to continue working later in life in order to maintain their standard of living and avoid poverty issues.

These recent demographic and related shifts have also resulted in some employers facing critical worker shortage issues. With a substantial number of older workers preparing to leave the workforce, some employers are concerned about a shortage of certain type of strategic workers in their labor pool. At the same time, the number of workers entering the workforce has declined. As a result, many American industries are currently facing, or will soon face, critical, strategic workforce shortages. For some companies, the potential risks of having an insufficient workforce could be catastrophic. Some of the most impacted industries include national defense contractors, public utilities, universities, pharmaceutical companies, hospitals and health care providers.

The principal potential resource for qualified employees for most companies starts with the ability to retain their current workforce. In some cases, the employers’ own defined benefit pension plans are surprisingly incentivizing valuable employees to retire early by providing subsidized early retirement benefits. Because these early retirement subsidies are generally lost if the employee continues to work until normal retirement age, a common problem is that employees are retiring at early retirement age and going to work for a competitor or another employer.

Because of these shortages, many employers are looking to implement phased retirement programs so that they can retain their aging workers on a part-time basis beyond the traditional retirement age.

Nature of the Impediments to Phased Retirement

Though phased retirement arrangements could help meet the evolving challenges facing both employers and employees, the Working Group received significant testimony that legal, regulatory, and institutional barriers have prevented widespread implementation of these programs.

First, the principal impediment preventing employers from implementing more formalized phased retirement program result from the tax laws. Until recently, the tax regulations prevented a tax-qualified pension plan from making benefit payments before an employee fully separated from service or reached normal retirement age. Thus, it has not been feasible for an employer to use its pension plan as part of a phased retirement arrangement.

Recent legislative action attempted to address this significant hurdle and ease the way for the implementation of these phased retirement programs. In 2006, Congress passed the Pension Protection Act, which amended the law to permit employers to design their pension plans to allow employees to receive in-service distributions from the plan as early as age 62. This opportunity for employers to implement new phased retirement plans beginning at age 62 has had a luke warm response at best in large part because it does not address the problem some employers are facing of having employee shortages due to pension plans with an early retirement (age 55) benefit.

Second, there is a similar tax rule that prevents 401(k) plans from making benefit payments before an employee fully separated from service or reached age 59½. Though this restriction is 2½ years more flexible than the rules for pension plans, it still is not effective for addressing the issue.

Third, the risk of IRS enforcement of the no-in-service-distribution rule has had the unfortunate impact of encouraging some employers to adopt policies and procedures that discourage any type of rehiring former employees. Some employers want to ensure that their pension plans remain qualified and do not want to be accused of violating the in-service distribution rules with any type of retire/rehire sham. Therefore, in an abundance of caution, some employers adopt overly conservative policies and procedures that impose minimum time periods before an employee can be rehired or that completely prohibit rehiring of former employees. These types of policies are making a difficult environment even worse.

Current Environment of Phased Retirement

Much of the testimony and other information provided to the Working Group confirmed that the traditional American model of converting from work to retirement is undergoing some significant changes.

The demographic and other related shifts discussed above have resulted in employees working beyond the traditional retirement age. The data indicates that the percentage of people age 62 and older who work in paid employment has risen over the past several years. In many cases, the employees are going back to work in their retirement years with a different employer than their primary pre-retirement employer.

Despite the barriers discussed above, many employers with potential worker shortages are looking to implement phased retirement programs so that they can retain their aging workers on a part-time basis beyond the traditional retirement age. Some employers have implemented formalized phased retirement arrangements where employees are entitled to gradually reduce the amount the employee works while any decreases in the employee’s compensation is replaced by payments of retirement income from the company’s retirement plan. Due to the impediments explained above, these types of formalized, sophisticated programs are rather rare.

It is far more common for employers to implement other informal programs that take the form of reduced work schedules or rehiring retired workers. Some employers have gone so far as to implement a program in which they rehire retired employees as independent contractors employed by a staffing/leasing organization. Most employers, however, have even less formal policies in which they offer some version of a phased retirement arrangement on an employee-by-employee basis shaping the arrangement to meet the needs of both the employer and employee. This includes retire/rehire arrangements where the employee retires completely, waits for a period, and then returns as an independent contractor.

Future Regulation of Phased Retirement

With the backdrop of a tremendous need for employers and employees to move away from the traditional retirement model, the witnesses before the Working Group delivered a message that there is a better phased retirement model than the one employers and employees are currently implementing.

To the extent that any developments in this area are to be made, Congress would have to act to remove the significant impediments to phased retirement programs. Specifically, this means that (a) tax-qualified pension plan should be able to make in-service distributions beginning at early retirement age, and (b) tax-qualified 401(k) plans should be able to make in-service distributions beginning at early retirement age/age 55.

While there have been some developments that represent progress towards greater implementation of phased retirement arrangements, one dominant theme of the testimony to the Working Group was that the witnesses remain somewhat skeptical. If any types of changes are implemented, participant rights groups expressed concern that any type of relaxation of the ability to implement a more formalized phased retirement arrangement might open the door for an employer to discriminate against older workers by forcing them to begin to retire earlier. However, there was much stronger support for the notion that these concerns are unfounded. Instead, the desired changes to the law would allow employers to retain employees to work longer, not force them out earlier. In addition, there were repeated reminders that there are already laws that protect workers from age discrimination.

Most notably, there were repeated calls that any changes “do no harm.” There was a significant amount of trepidation that any new legislative scheme might impose too many new requirements for employers putting in a new phased retirement program. There were many specific examples of how a phased retirement new legislative scheme might be too restrictive, including:

• Phased retirement programs should not be included on the list of protected benefits that cannot be eliminated. Instead, the new legislative scheme could reverse the adverse impact of the Heinz⁽¹⁾ case.
• Employers who offer phased retirement programs should not be required to offer any type of other employee benefit program on a basis that is different from any other part-time employee.
• Phased retirement programs should not be subject to any special nondiscrimination testing that is not already in place. The current nondiscrimination testing rules applicable to benefits rights and features is sufficient protection.
• Employers who offer phased retirement programs should not be required to provide any special type of notice. The current disclosure requirements under the summary plan description rules, the qualified joint and survivor notice rules, and the relative value rules provide sufficient protection.

As an example, the IRS’ attempt to develop an omnibus phased retirement regulatory structure was repeatedly described as too complicated to use. Employers and their consultants explained that if any relief from the impediments were accompanied by too many conditions, the efforts would be meaningless because employers will simply not use such a phased retirement program.

Recommendations

The Council analyzed these issues and has attempted to determine whether there are any steps that the Department of Labor can take to facilitate this process. After careful debate and analysis of the issues and transcripts, the Council submits the following recommendations to the Secretary of Labor for consideration:

Recommendation 1: Serve as a Catalyst to Remove Legislative and Regulatory Impediments to Phased Retirement Arrangements. The Council recommends that the Department of Labor initiate, facilitate and engage in efforts to assist the development of sound retirement security policy that addresses phased retirement programs. Despite the fact that substantially all of the major impediments to phased retirement that witnesses identified are not under its jurisdiction, the Department of Labor’s general jurisdiction over labor and retirement security issues makes it a natural choice to be a thought leader in this area. Specifically, the Department of Labor could serve as an influential catalyst to achieving necessary reforms by passing along to Treasury the following Council recommendations, for Treasury’s consideration in developing a legislative program to meet the retirement security needs of American workers and employers’ desire for workforce flexibility: (a) tax-qualified pension plans should be permitted to make in-service distributions beginning at early retirement age (with our without early retirement subsidies), and (b) tax-qualified 401(k) plans should be permitted to make in-service distributions without penalty beginning at early retirement age/age 55.

Recommendation 2: Ensure that any Phased Retirement Regulatory Regime is Reasonable. The Council recommends that the Department of Labor initiate, facilitate and engage interaction between the appropriate regulatory agencies to make sure that any regulatory requirements applicable to a phased retirement program strike a reasonable balance between protecting employees and not imposing unnecessary requirements on employers and plan sponsors that could undermine the goal of increasing phased retirement opportunities. In the spirit of doing no harm, we recommend that the Department of Labor use its influence to prevent any new legislative or regulatory scheme from imposing too many new requirements.

Recommendation 3: Develop Expanded and Updated Educational Materials. The Council recommends that the Department of Labor create new resources or revise previous resources pertaining to phased retirement. The Department of Labor could issue a new publication that provides assistance to employers and employees who are struggling to cope with the challenges of any phased retirement opportunities. Such assistance should specifically explain the implications of continued employment vs. early distribution on the employee’s lifetime retirement income. Alternatively, the Department of Labor could update one of its existing publications, such as Taking the Mystery Out of Retirement Planning. The Department of Labor could use its website or training seminars to provide this type of assistance to employers and employees.

Witnesses

List of Witnesses

In addition to the submission of written testimony, the Working Group received testimony on the following dates from the following individuals (listed in order of presentation).

July 17, 2008

William Bortz, U.S. Department of Treasury
Dallas Salisbury, Employee Benefit Research Institute
David L. Wray, Profit Sharing/401(k) Council of America
Anna Rappaport, Anna Rappaport Consulting
Chantel Sheaks, Buck Consultants
Robert Campbell, NiSource Inc.

September 9, 2008

Aliya Wong, U.S. Chamber of Commerce
F. Pierce Noble, Mercer
David Certner, AARP
Joyce Mader, O’Donoghue & O’Donoghue
Maria Norman, Northrup Grumman, on behalf of the American Benefits Council
Pamela Paulk, Johns Hopkins Healthcare System
Chai Feldblum, Georgetown Law/Workplace Flexibility 2010
Norman Stein, Pension Rights Center

Summaries of Witness Testimony

The following are summaries of the testimony presented to the Working Group.

Testimony of William Bortz, U.S. Department of Treasury

Mr. Bortz opened his presentation by describing the history of the regulation of phased retirement within the Department of Treasury. It effectively began in 1956, when Treasury adopted regulations that required defined benefit pension plans to pay out only upon retirement. Subsequently, Congress passed laws premised on the 1956 regulations. Accordingly, the Treasury Department believes the 1956 regulations may have the effect of a legislative enactment.

In 1990, Treasury began considering phased retirement. Treasury noted that, in the modern workforce, employees live longer, stay healthier longer, and thus are able to work later in life. Treasury considered whether it would be, and should be as a matter of policy, legally permissible to permit in-service distributions of defined benefit pensions. Treasury was concerned that in-service distributions could cause leakage of retirement savings such that employees would not have enough money to retire.

In 2002, the Treasury requested comments on phased retirement. Specifically, the Treasury requested comments on (1) the problem of leakage, and (2) the prohibition on in-service distributions in the 1956 regulations. Commentators responded by arguing that a person in phased retirement has partially retired, and thus should be treated as partially retired for purposes of the 1956 regulations. Commentators also noted that a partial payment would mitigate concerns regarding the leakage of retired savings.

In 2004, Treasury issued proposed regulations that would allow phased retirement with a pro-rata payout proportionate to the number of hours worked. The 2004 proposed regulations did not require an employee to work for a specified number of service years, but did prohibit phased retirement prior to age 59 ½. Treasury believed it did not have authority to permit phased retirement prior to age 59 1/2 due to the requirements of Internal Revenue Code § 72(c)(3)(B).

Treasury requested comments on the 2004 proposed regulations. Commentators noted that it is difficult to track pro-rated hours. The IRS was working on phased retirement regulations when Congress enacted Internal Revenue Code § 401(a)(36) pursuant to the Pension Protection Act of 2006, which allows for in-service distributions at age 62.

In 2007, the Treasury Department issued IRS Notice 2007-7. In that Notice, the Treasury Department asks three questions:

1. Does the PPA allow the value of benefits commencing at age 65 to be paid at age 62 (early retirement subsidy);
2. Would such a payment be considered an early retirement subsidy; and
3. If the payment is not an early retirement subsidy, then what is it?

Characterizing the payment as an early retirement subsidy could cause legal complications. First, there is no vesting requirement for early retirement subsidies. Second, the Age Discrimination in Employment Act (“ADEA”) does not apply to early retirement subsidies.

The comments to Notice 2007-7 generally consisted of two views. The slight majority view was that employers should be able to pay out the full value of the age 65 benefit early (but without a requirement to do so), and that such payment should be considered an early retirement subsidy. The slight majority also wanted Treasury to maintain its phased retirement program if the program could be simplified. The minority view was that, under a phased retirement program, employers should not be able to pay out the full value of the age 65 benefit at an early retirement age. The minority also advocated that any full payment not be considered an early retirement subsidy. The minority did agree, however, that a phased retirement program would be useful, but that the age should be raised to age 62.

Next, Mr. Bortz spoke about early retirement subsidies from a labor point of view. Specifically, how early retirement subsidies cause people to engage in artificial behavior. As people work beyond early retirement age, they lose a portion of the value of any early retirement subsidy. Thus, employees may engage in a sham retirement solely for the purpose of getting an early retirement subsidy. They will either retire and return to the same employer or possibly move to a different job. One particular arrangement designed to address this problem is the “DROP,” which is commonly used by governmental plans. Under DROPs, the plan sets aside the lost value of the early retirement subsidy for the benefit of the participant, and then pays that amount with interest to the participant at retirement. DROPs can be very expensive, but they are one way governments are dealing with artificial behaviors induced by early retirement subsidies. The problem is people are engaging in behavior for pension dollars rather than for what makes sense for them, their family, or their job.

Looking forward, we need to reduce artificial barriers to continued employment. These include (1) early retirement subsidies, and (2) reducing benefit accruals for service worked beyond normal retirement age.

Testimony of Dallas L. Salisbury, Employee Benefit Research Institute (“EBRI”)

Dallas Salisbury opened his presentation by referencing a recently completed EBRI survey of recent retirees. The survey started out as a survey on phased retirement, but changed when it became clear that issues related to plan design were far from the most important issues with respect to the ability of employers to get individuals to continue working. The initial hypothesis of the phased retirement study was that the overriding change that was needed was related to ERISA. However, the survey revealed that a tremendous amount of difference could be made simply by traditional effective employee relations activities by the employers themselves. Phased retirement is not likely to be effective without other changes in education and regulation as well. For example, effective employee relations to encourage delayed retirement, employer flexibility in scheduling, Tax Code changes to permit health coverage for part-time employees of retirement age, and one-on-one communication with employees on their rights in retirement and actual retirement assets are greater determining factors in encouraging employees to continue working.

The workforce is aging, and life expectancies are increasing. At the same time, a declining birth rate in the US means lower growth in the labor force. Some workers are staying in the labor force longer due, in large part, to a lack of adequate retirement savings. Most retirees who plan to work longer are motivated primarily by economics and secondarily by the availability of health insurance. There is, however, a very common pattern of individuals retiring earlier than expected. Declining health and disability (their own or a spouse’s) are the primary reasons, followed by issues of corporate downsizing. In addition, while most employees would prefer to continue working in retirement to supplement their income, only 1 in 4 actually does.

The survey found that the decision to retire is often based more on emotion and a lack of financial literacy than economics. Aside from health reasons, job satisfaction is a significant issue influencing retirement decisions. Retirees reported that if they had simply been asked to stay or made to feel that their contribution to the company was valued, a significant percentage would have changed their minds about retirement. Further, retirees often made the decision to retire without any budget or any idea of what their income would be in retirement. Moreover, retirees also reported fear of employers withholding or reducing benefits—indicating a lack of knowledge about their pension rights.

While phased retirement could help overcome economic incentives to stop working, encourage preservation of public and private retirement benefits, and help employers retain experienced workers, current Tax Code and ERISA provisions preclude pension payments to active employees and preclude benefits for particular segments of the employee population. Thus, employees retire and seek work with competitors or other employers at a reduced workload. Arguments against phased retirement cite earlier employee retirement, cost-savings for employers, and unfair implementation of part-time programs. Further, in certain industries, plan design and economic circumstances encourages early retirement.

Education, rather than regulation, seems to be the key to increasing the number of employees in the work force. Much of what needs to be done in the area of phased retirement lies outside the Department of Labor (DOL). Changes in plan design are industry specific, and the declining number of companies with defined benefit and defined contribution plans makes this a less significant issue going forward. Previous education initiatives by the DOL could be continued and would be more effective if focused on providing information in a way that can be better absorbed and understood by employees. Outreach to plan sponsors rather than pure regulation would be more helpful to encourage improved communication with employees.

Testimony of David L. Wray, Profit Sharing/ 401k Council of America

Mr. Wray started his testimony by noting that, in his view, people who continue working into their later ages are generally healthier and happier.

That being said, not many companies today offer only defined benefit plans. However, even though defined contribution plans will be far more dominant going forward, defined benefit plans will not disappear. The emergence of defined contribution plans is a positive development because they are conducive to phased retirement.

The law should be changed so that the same systematic withdrawal rules for IRAs (that allow for avoidance of the 10% penalty tax) can apply to 401(k) plans and other qualified defined contribution plans.

Many older workers have multiple defined contribution plan balances. Most people, whether they have one balance or multiple balances, make their decisions to retire too quickly and too abruptly. People should begin the decision-making process starting around age 50. Overall, it should be a longer and more deliberate process.

Fear-based decision making is highly prevalent. Fear often drives the preference for lump sum distributions. Many people fear that their retirement money or their employer will not be around in the future. They may surmise that they are better off taking all their money now. The Department of Labor (DOL) needs to offer positive and affirmative messages to offset the enormous media portrayal of negative employee benefit conditions throughout our country. The DOL has the responsibility to be the “guardian” and “truth teller” as it relates to these matters, and cannot allow the media to dominate communication channels with American workers. The misguided and negative media must be refuted by the DOL.

Although loans can be abused within qualified plans, they are critical if used and communicated properly. Loans are an important way to encourage maximum participation in a plan.

In general, defined contribution plans work very well. Credible studies, from the likes of Harvard and Dartmouth, bear this truth out. Great progress has been made over the years on the accumulation side of defined contribution plans.

In order to consolidate and make oversight easier, employers should encourage new employees to bring their retirement assets forward from previous employers’ plans.

Retention of good employees should be based more on overall compensation and employee treatment, and less on potential adjustments to employees’ benefit programs. The phenomenon of recent surpluses of potential workers and outsourcing of employees has run its course. The supply of high quality employees, going forward, will be tighter. As such, scenarios where employers look to “force out” excessive or older employees will become less of an issue in the coming years.

Testimony of Anna Rappaport, Anna Rappaport Consulting

Anna Rappaport opened her presentation by stating that she is both a proponent and student of phased retirement, and someone who has experienced the value of phased retirement firsthand. Further, her comments throughout the presentation addressed questions pertaining to the rehiring of retirees.

The government (Social Security) recognized the notion of phased retirement when it adjusted the rules on earnings for individuals who worked past normal retirement age. In addition, phased retirement is of particular concern to women because of their longer life expectancy. However, in examining how the concept is implemented, important questions were raised regarding worker classification impediments and how to foster creative flexible work arrangements.

Notably, most of the action around phased retirement relates to rehiring retirees. Some employers require a time delay (3 -6 months) between the period an individual retires and is rehired as an independent contractor to deal with the concept of bona fide separation of service. In addition, some limit the number of hours one can work as a retiree (e.g., less than 1,000 hours). One suggestion is that the Department of Labor (DOL) takes a leadership role in the process by providing safe harbors for employers.

With respect to those who engage in phased retirement through Independent Contractor Status, getting the contract negotiated is frequently a problem. Therefore, the DOL should publish an information publication that addresses the decisions an employer needs to consider. Similarly, a companion publication should be considered for individuals who wish to participate in these types of arrangements to help them understand what is involved.

Other publications suggested for possible consideration by the DOL include:

1. Safe Harbors for contracting with retirees;
2. Defining a new classification of workers in “Encore Careers” for mid-to-late career employees who wish to change employment, (often to take on a job with a socially responsible focus); and finally
3. Educating the public on the implications of retiring at different ages.

The lack of clear and accurate information results in confusion and misinformation. Publishing correct information will help dispel false information so people can make informed decisions. Moreover, the Department could create training programs for encore careers.

Phased retirement opportunities can take a variety of forms depending on what works best for the employer and the employee. In addition to project and short term assignments, part-time or “floating” arrangements can provide phased retirement job opportunities. Moreover, many people who contemplate phased retirement are interested in purpose driven jobs. Such arrangements can provide career options for caregivers—especially for women who face increasing demands as the primary caregiver for family members. They also provide options for individuals with changing priorities or those who can no longer deal with the demands of high-stress jobs.

In the future, third-party arrangements can also provide phased retirement opportunities for groups of individuals with needed skills during periods of acute needs. Examples include pools of retired utility workers, teachers, and healthcare workers.

Testimony of Chantel Sheaks, Principal, Buck Consulting

Ms. Sheaks started her testimony by noting that phased retirement is not a new concept. However, the actual implementation of such programs remains elusive, in part because there is “no legal definition of phased retirement.” Phased retirement program designs vary from employer to employer depending on a variety of factors such as whether the employer is public or private, the nature of underlying business fundamentals, employee demographics, and other available employee benefit plans.

The most common form of phased retirement program in the private sector is the use of a retiree pool, which allows retirees to return to their prior employer as either an employee or an independent contractor on an ad hoc basis. Another form of phased retirement allows employees to reduce their hours or responsibilities gradually before full retirement, while remaining with their current employer. Whether such employees are allowed to supplement their reduced compensation through their pension or retirement plans depends on the employer's plan design and the age at which the employee enters into the program.

One of the purposes of the Employee Retirement Income Security Act of 1974 (ERISA) was to protect plan participants and beneficiaries. This is accomplished in large part through ERISA's participant disclosure and fiduciary requirements.

Under ERISA, plan administrators are required to disclose information about employee benefit plans to employees through SPD’s, summary of material modifications, plan documents and other instruments through which the plan is operated or established. These disclosure requirements apply to the plan rather than the Trust or employment event. However, both ERISA and the Internal Revenue Code (Code) require plan administrators and plans to provide certain disclosures upon an actual employment event. The plan administrator must provide notices to individuals who intend to fully retire as well as to those who may lose healthcare coverage because of a reduction in hours.

A phased retirement program that includes a reduction in hours affects not only an individual's compensation, but also an individual's benefits under all employee benefit plans.

Disclosure within the current regulatory or legal framework does not align well. For example, if a pension or retirement plan were amended to include a phased retirement option, the amendment would be communicated to employees through a summary of material modification. Likewise, if an individual is no longer is eligible for healthcare coverage because of a reduction in hours, the individual would receive a COBRA notice. Neither of these disclosures would comprehensively inform an individual of the impact that entering into a phased retirement program may have on other employee benefits before the individual enters into the phased retirement program. Although information may have previously been communicated to employees through the various summary plan descriptions, employees may not be in the best position to make the connection between entering into the phased retirement program and the impact on other benefits.

Employers are in the best position to inform an employee of the impact that entering into a phased retirement program may have on employee benefits. That said, both cost and legal considerations come into play. Larger employers would bear larger potential exposure in terms of both cost and litigation risk. The DOL could issue sample notices or perhaps minimum required notice information to aid employers in meeting the obligation and perhaps in minimizing litigation risk.

ERISA's disclosure requirements are separate from the fiduciary requirements. Under ERISA's fiduciary standards, a fiduciary is not required to provide information to each participant or beneficiary. The DOL could issue guidance relating to this issue that would protect employers from breach of fiduciary claims while still providing employees with relevant and necessary information.

Furthermore, the DOL, in conjunction with the IRS, could foster meetings aimed at sharing best practice techniques. Lastly, the DOL might conduct research and share that research with Employers via DOL web tools.

Testimony of Robert Campbell, NiSource Corporate Services Company

Mr. Campbell testified that NiSource Inc. (the public utility holding company for which he is currently employed), other utilities and other industries nationwide are facing the reality of an aging workforce—leaving employers without the necessary workforce to meet industry goals. Companies such as NiSource have felt the effects of this demographic shift. The ability of companies such as NiSource to retain highly skilled employees through phased retirement programs would be beneficial. The potential risks of having an insufficient workforce could be catastrophic if there are not enough workers to handle the baseline functions required to provide the electric or natural gas power to the American people who are the customers.

The principal potential source of the workforce needs for NiSource and similar companies are to retain their current, already-trained employees. However, the company’s qualified, defined benefit plan is actually serving as a tool to encourage many of their most productive and valuable employees to retire early (i.e., at age 55) rather than to continue to work. The pension plan provides early retirement benefits that contain a very valuable employer subsidy that evaporates if the employee continues to work until normal retirement age (age 65). Therefore, a common situation is for an employee to retire at age 55 and go to work for a competitor.

Mr. Campbell indicated that NiSource has investigated whether it could implement a formalized “phased retirement” arrangement in which employees could elect to begin their pension benefits at early retirement age (or perhaps a portion of their pension benefit) while continuing to work (perhaps on a reduced schedule). Unfortunately, the Internal Revenue Code, the Employee Retirement Income Security Act, and the Age Discrimination in Employment Act provide barriers to the implementation of this type of a formalized phased retirement program. Since none of these laws provides any guidance or framework on the proper implementation of these programs, one option would be for government to consider a specific statute amending the three laws to explicitly provide for formal phased retirement.

Until these changes are made, employer facing these types of workforce issues will be forced to cope with critical problems for which there are no good solutions. Employers facing these type of critical worker shortages often times just end up trading employees, which is less than ideal due to the direct and indirect re-training costs. Mr. Campbell also indicated that he recognizes that employers are sometimes implementing creative, informal phased retirement arrangements whereby they rehire or contract for the services of certain retired employees in critical positions. He indicated that they have been very careful to implement these types of arrangements within the bounds of the law.

Even with limited exposure to these types of arrangements, it is clear that there are many benefits to phased retirement. The retirees mentor less experienced employees and ensure that the skill and knowledge gained by retired employees is passed on and ultimately retained by the company. Additionally, the retired employees are able to complete necessary engineering design work that ensures that the day-to-day operation of the company runs smoothly. Both employers and employees want flexibility when creating phased retirement programs, so that their respective needs may be met through such a program. For instance, an employee may have a preference as to whether he or she works on a part-time or seasonal basis. Likewise, the employer may have specific workforce needs only a few months of the year based on particular production demand.

Testimony of Aliya Wong, U.S. Chamber of Commerce

Ms Wong is the Director of Pension Policy at the US Chamber of Commerce. The Chamber is the world’s largest business federation representing more than 3 million businesses and organizations of all sizes. Positions on National issues are developed by a cross section of the chamber members. In recent months, the Chamber has created a task force specifically for benefit issues, including phased retirement. The Chamber generally feels Phased Retirement programs could be equally advantageous to workers and employers.

An number of demographic and economic factors are changing the way Americans think about retirement Increased life expectancy, lifestyle, work force needs and the desire to increase income. Laws that were established more than 30 years ago are no longer adequate to consider these changing trends and concerns. Employers concerned about labor shortage and the probable brain drain want to find a way a way to retain experienced skilled employees.

Barriers to phased retirement include legal fiscal, policy and practical issues. These issues include when benefits can be paid, the cost of employing older workers, and how accruals should be calculated during phased retirement.

It is the Chamber’s feeling that phased retirement programs should be narrowly tailored to meet certain needs that any rules or regulation should be viewed with certain goals in mind: (1) to combat labor shortages in specific industries and job categories, (2) to keep experienced workers in place to ensure a transfer of knowledge to younger generations, and (3) to remain competitive. It was noted that the quality of labor is also critical to improvements in productivity -- as older workers retire, the economy loses valuable human capital in the form of work experience. This can be particularly vexing in certain industries where highly specialized skills are critical.

The Chamber is highly concerned about exclusivity. Employers want discretion over who is eligible to participate in phased retirement programs Current proposals are protectionist in nature and there is a desire to move away from that standard. It seemed the Chamber is concerned that phased retirees may have a different standard.

Ms Wong went on to make a series of recommendations linked to the previously stated goals.

Flexibility - Phased Retirement programs and practices should remain a discretionary arrangement that it is mutually agreed upon by both the employer and the worker.

In-service Distributions - Should be allowed at the early retirement age as defined in the plan. Should allow for access to assets in a 401-K plan to purchase long-term care insurance.

Distribution Options - Should be made under the terms of the plan as if the person was retiring at that time. If the plan provides for an early retirement subsidy and the worker would qualify but for remaining in-service, the subsidy would be paid out as well.

Health Care Benefits - Should not be mandated for phased retirees. Should be subject to the employers practices as established for all workers generally.

Her conclusion: phased retirement programs could be advantageous to employers, workers and the overall economy. However, we must be careful to not promulgate rules that may create unintended negative consequences or create disincentives to establishing and maintaining phased retirement programs. She urged implementation of statutes and regulations that encourage employers to implement phased retirement programs that provide attractive benefits and incentives for workers to stay with their employer.

Testimony of F. Pierce Noble, Worldwide Partner, Mercer

Mr. Noble’s opening remarks focused on actual or perceived obstacles to employers that wish to adopt a phased retirement program. Such a program may vary by company size and industry based on need. For example, some have a limited need for such a program and a desire to retain only a limited number of employees with specialized skills, while others have a much broader need. Stated another way, some may have a need for specialized knowledge, others for skilled manpower. From the employees perspective, the incentives are often more basic; such as a need to continue to work to maintain access to health benefits beyond normal retirement age, supplement their income, or accommodate personal family obligations.

An ideal program would include access to distributions from DB or DC pension benefits and health care benefits. Most employers believe that the need for such a program should include maximum flexibility for employers to ensure that the job to be performed under the phased retirement program fits into their business plans.

The phased retirement provisions of the PPA were largely inadequate, mainly because of the proposed rules that such a program be subject to IRC Section 411(d)(6) anti-cutback provisions (a requirement that has had a chilling effect on the creation of phased retirement programs). In addition, the rules governing phased retirement programs should not be subject to the non-discrimination rules where a plan’s tax qualification could be jeopardized after the fact, such as when the non-discrimination testing is performed.

Ideally, phased retirement benefits should be able to commence at an earlier age. Employers want to have flexibility to permit distributions including 401(k) lump-sums to maximize the program’s ability to respond to the desires of the employee.

Application of other non-discrimination rules will prevent employers from adopting phased retirement programs. One suggestion is that changes could be made to the Social Security program, including raising the age of eligibility for early retirement benefits. Similarly, because of the secondary payer rules governing Medicare that make employer health programs primary, the health plan cost implications also cause employers to hesitate to implement such a program. A viable alternative would be to have the Medicare rules amended to make Medicare the primary payer for employees who work a severely reduced work schedule (such as 15 hours per week).

In the future, changes to the rules governing adoption of phased retirement programs would make programs more attractive to employers without making such programs subject to the anti-cutback requirements and other restrictions that exist under the PPA or the proposed Treasury regulations.

Testimony of David Certner, AARP Foundation

A 2006 AARP report found that those who chose phased retirement tended to be better educated, have greater household wealth and income, and were more likely to be managers in white-collar, highly skilled positions. They were less likely African American, less likely to face constraints on reducing hours, and less likely to participate in defined benefit plans. Phased retirement programs tend to be negotiated on a case-by-case basis. Higher paid, more skilled workers have a better opportunity to negotiate an individual arrangement.

The goal of a phased retirement program should be to encourage employees close to retirement to remain in the workforce longer than they otherwise would, while preserving the adequacy of their retirement benefits when they fully retire. Phased retirement programs could boost the economy through longer workforce participation by experienced employees. They could expand the work options for older workers and allow them to ease into retirement. Moreover, these experienced employees may help employers ease the workforce crunch, to mentor new and current employees, and to transfer corporate memory.

Easing into retirement offers advantages to workers. Phased retirement workers can test retirement before full retirement, and thereby reduce the stress that accompanies sudden retirement. They can continue to earn income, contribute to Social Security, save more, and thus have enhanced financial security in retirement.

Workers want phased retirement for different reasons. Number one, they need the money they would earn in phased retirement. Also, they want to stay mentally and physically active, remain productive. Many need the health benefits they receive while working. They want to continue to pool pension benefits; having a reduced pension was identified as one of the least important reasons for phased retirement.

Many workers surveyed were concerned about age discrimination. One concern that AARP has is that phased retirement could be used as a subterfuge for age discrimination.

The appropriate age for phased retirement is debated. AARP recommends age 62 and older. Age 62 is the earliest age for Social Security benefits. Those surveyed had the most interest in phased retirement at age 60 – 64. So AARP thinks that age 62 is the appropriate age. An older age helps workers’ financial security, but some workers are also allowed to elect full pensions at younger ages. If it is set too low, workers may elect phased retirement at the earliest possible age, jeopardizing their own income security.

There are benefit issues. AARP recommends that workers receive the portion of the subsidized early retirement benefits relating to the hours that have been reduced. For purposes of calculating and determining who highly compensated employees are, AARP recommends using the full-time equivalent of wages for reduced work for calculating the benefits. The participant's phased retirement benefits should be recalculated based on the amount of additional accruals and any pro rata portion of the early retirement subsidy. AARP also supports maintaining lifetime income streams so phased retirees do not deplete their pension benefits. Benefits should accrue while the participant works. Spousal consent provisions should be clarified to make sure that these apply to in-service distributions.

The Department of Labor can play an important role in the development of phased retirement programs. It has an opportunity to educate participants and employers. In particular, employees need to understand the financial ramifications of retirement, whether they can actually live on a reduced amount of money. In addition, the DOL could help provide material to employers on issues surrounding phased retirement, including the value of older workers. Older workers are generally good for the economy. The DOL could suggest comparative charts that compare phased retirement information such as the value of phased retirement benefits, the salary the worker would receive, and the benefits the worker would get depending on whether the worker retired immediately or later in a phased retirement program.

Testimony of Joyce Mader, O’Donoghue & O’Donoghue

Ms. Mader testified on behalf of employee organizations whose members are covered by multiemployer plans. She stated that her firm represents approximately 120 plans, the bulk of which are multiemployer or collectively bargained. She stated that there should be a workable means to provide phase retirement opportunities for Multiemployer plans.

During the early existence of ERISA there were a variety of plan designs which could be employed to encourage early retirement for employees. Many of the employees represented by the plans, which she represented in the eighties and nineties, were in the building and construction industry, engaged in hard physical work, and wanted to retire early without any interest in returning to work after they retired. However this has changed because of participants’ and their employers’ desire to continue to work at reduced levels.

She testified that there are a number of policy reasons which now favor phased retirement. In the industry she represents, the availability of a phased retirement option would help employers offset the expected skill shortage resulting form the retirement of Baby Boomers and would help preserve the Social Security program by postponing early payment of the benefits. She stated in her testimony how multiemployer pension and 401k plans paid early retirement benefits when an individual could no longer work and was unable to receive disability. The plans would modify their plans and design them with incentives to encourage early retirement with heavy subsidization by the employers and penalties for employees who continued to work after reaching certain age or service levels. These plans would be modify the plans suspension of benefit rules as needed under different employment situations. This was the practice employed by many employers until the Heinz decision. The U.S. Supreme Court in the Heinz decision determined that a modification of the plan’s suspension of benefit rules was a prohibited cutback of an accrued benefit. This result now prevents employers, both single and multiemployer, from modifying these rules and eliminated the flexibility that employers had to adjust their benefit plans when addressing their changing needs of their industries.

Ms. Mader testified that the Heinz decision could yield the result that any phased retirement program adopted by an employer could be an accrued benefit which could not eliminated after it accomplished its intended purpose. This result could cause a significant disincentive for employers and plans to explore phased retirement options.

Ms. Mader next described the future of phased retirement and the various legislative and administrative efforts to encourage early retirement, but stated that they do not go far enough to eliminate the disincentives to adopt phased retirement flexibility. Proposed legislation might help.

She concluded by stating that an increasing number of workers are expressing an interest in a gradual retirement and policy makers must adopt legislation to counter the impact of the Heinz decision; allowing short time adoption of amendments without forcing them to become permanent.

Testimony of Maria Norman, American Benefits Council

Ms. Maria T. Norman is the Corporate Director of Benefits Strategy and Design for Northrop Grumman Corporation and she testified on behalf of the American Benefits Council. Ms. Norman supports the idea of the U.S. Department of Labor acting as a “catalyst” for other agencies to move forward on the issue of phased retirement. Ms. Norman is encouraged that the Council is addressing the issue and she urged particular focus on how the phased retirement recommendations can satisfy the needs of employers and employees.

Ms. Norman explained that Northrop Grumman is a large aerospace defense contractor, whose main customer is the U.S. Government. She detailed the fact that many senior longstanding employees are approaching retirement, and the available replacement work pool is insufficient. Ms. Norman stated that the labor shortage will aggravate the backlog in work mandated by her firm’s contractual arrangements.

Based on the surveys referenced in her presentation, she believes that at least 60% of workers would continue to work under such a program “even if they had enough money to live on comfortably for the rest of their lives.”

Ms. Norman stated that under a joint initiative with the HR Policy Association, her firm is developing a “tool kit” program that targets employees who are at or near retirement eligibility and helps employers to launch pilot programs in this area. Ms. Norman notes that there are opportunities without phased retirement programs under the current law. Nevertheless, the law contains significant impediments to the shared goal of employers and employees to work longer. Since the law generally precludes qualified retirement plans from making payments to current employees, this often causes some older employees to retire completely in order to receive an early retirement subsidy, a large lump sum, or supplemental retirement income. Alternatively, they may work for another company while receiving retirement paid benefits from their first employer.

Phased retirement regulations issued by the Treasury Department, as well as Section 905 of the Pension Protection Act, leave much of the flexible retirement needs unaddressed and they would not stop the “brain drain” of workers leaving to take advantage of early retirement subsidies.

Ms. Norman encouraged the Council to take a very close look at these and other obstacles to the impediment of flexible retirement programs. However, she urges the Council to be very careful in shaping policy changes, so that these programs provide maximum flexibility to employers and employees, and remain attractive to both interests. Ms. Norman believes that the imposition of too many restrictions and hurdles simply reduce the likelihood of employers utilizing flexible retirement programs, so that any new rules promulgated would have little or no effect.

Testimony of Pamela Paulk, Johns Hopkins Healthcare System

While broadly addressing the current trend in the healthcare industry, Ms. Paulk opened her remarks by noting that current demand for hospital workers exceeds supply. While supply is growing, it is simply unable to keep pace. National supply and demand projections indicate a huge future deficit for registered nurses. Historically, registered nurses and pharmacists drop out of the workforce sharply around age 50. Such professionals tend to leave the profession completely by age 65.

There has been a great deal of research conducted to determine strategies that can be implemented in healthcare organizations to improve retention of maturing workers who are approaching retirement. The research used focus groups with recently retired healthcare workers and those who are nearing retirement. A broad geographic cross-section of the country was used to find participants for the focus groups.

Key findings of the research were as follows: Retirement is viewed as an evolutionary process from full-time, then to part-time, and eventually to complete retirement. Many of the participants expressed similar attitudes and opinions. In addition, participants face similar issues and concerns. Many workers believe they will remain in the workforce for the unforeseen future. Many hope to work for as long as possible because they enjoy working; others must continue for financial reasons or because they need health insurance coverage for themselves and their families.

Barriers to continuing work were long shifts, few part-time opportunities, physical limitations, growing physical demands, perceived lack of respect, and pension commencement restrictions.

For John Hopkins Health System (JHHS), the reality is that in order to collect benefits and continue part-time work, an employee must leave and go work for a competitor. JHHS allows retirees to return to work, but limits their hours to 499 per year, because at 500 and above employees cannot draw their benefits at the full amounts. The 499 hour limit is usually too low in terms of a benefits threshold because most employers require 20 hours per week.

One way to level the playing field between defined contribution and defined benefit plans is by allowing active employees to commence their DB benefits after age 59.5 (not on a full basis but on some reduced basis) as the plan provisions define, and to continue to earn additional pension benefits while actively employed. Upon actual retirement, additional accruals would be added to the benefits that have already commenced.

Fixing the defined benefit rules that discourage in-service distributions will give employers the flexibility and simplicity that is needed. In addition, this will provide a level playing field in retirement benefit programs—enhancing employers’ ability to retain employees and culture. Notably, care must be taken to avoid complexity that will discourage employers from addressing and improving phased retirement. Complex rules and guidelines from the DOL would paralyze employers, and employees will effectively be pushed out the door, which is the opposite of what needs to happen in the coming future.

Testimony of Chai Feldblum, Georgetown Law/ Workplace Flexibility 2010

Professor Chai R. Feldblum is the Co-Director of Workplace Flexibility 2010 and a Professor of Law at Georgetown University Law Center, where she also directs its Federal Legislation Clinic.

Professor Feldblum stated that a goal of Workplace Flexibility 2010 is to make workplace flexibility a standard of the American workplace. As the lead policy component of the Alfred P. Sloan Foundation’s National Initiative on Workplace Flexibility, Workplace Flexibility 2010 seeks to achieve workplace flexibility with the combination of voluntary employer efforts and thoughtful public policy. Workplace flexibility would include three (3) categories:

1. flexible work arrangements;
2. time off; and
3. job exit, maintenance and re-entry.

Professor Feldblum believes that because there are significant legal and regulatory barriers to implementing a phased retirement program, she sees the need for the Secretary of Labor to address issues surrounding phased retirement as a matter of “national policy.” On that basis, the Department of Labor could act as a “catalyst” for other agencies to address the issue. To Professor Feldblum, many of the tax and notice issues presented are intertwined with policy decisions that must be addressed on the basis of meeting employer workplace needs in order to ensure adequate retirement security for American workers. While Professor Feldblum believes that Congress may have to establish a “coherent policy” in this instance, the Department of Labor particularly provides a critical source of information of what may advance the welfare of workers, and in that capacity, it could interact with Treasury, the IRS, and many other agencies.

Professor Feldblum offered an analysis of legal issues that face phased retirement programs, as well as the challenges in those programs that include age of eligibility, distribution issues, and ERISA disclosure and fiduciary issues, and employer discretion in seeking to establish these programs. There are also issues regarding health care coverage. Professor Feldblum also points to other studies that should be continued in this area.

Professor Feldblum would support the proposed legal definition offered by the Council in its 2000 Report of the Working Group on Phased Retirement which is:

“…phased retirement means a gradual change in a person’s work arrangements as a transition to full retirement. This may involve a change of employers (including self-employment), a change of career or a reduction in the number of hours worked. As the focus is on how and on what terms people continue working after they are eligible for retirement benefits, the re-employment of retirees, whether or not it is anticipated when they first retired, is also sometimes included in discussions of phased retirement.”

Testimony of Norman Stein, Pension Rights Center

Mr. Stein opened his remarks by commenting on the timeliness of a discussion about phased retirement, especially considering the fact that most baby-boomers are on the verge of retirement. Although phased retirement can provide value to both the employer and employee in many situations, developing a regulatory regime to accommodate phased retirement programs requires a complex balancing of competing retirement and workplace issues that, if not carefully calibrated, can have unfortunate policy consequences and devastating real-life consequences for some Americans.

One approach to facilitate phased retirement is to revise certain laws with an eye toward more pliant regulatory flexibility. People who argue for this approach sometimes tell a story along these lines:

An employer has a retirement plan with a subsidized early retirement benefit. Some highly valued employees who wish to continue working but also wish to begin receiving their retirement benefits cannot do so and stay with their current employer (unless they are at least age 62). The employee can, however, take an identical job with the employer’s competitor across the street and begin receiving his benefits. Thus, even though the employee would like to stay with the employer, and even though the employer wants to retain the employee, the current rules—which prohibit in-service distributions from a pension plan unless the employee has attained age 62—make this impossible.

At first blush, this might seem a compelling argument for loosely constrained regulatory limits on an employer’s ability to shape a phased retirement program. But on reflection, there are some problems with both the story and the proposed answer to the problem the story presents. First, the story is not a phased retirement situation at all. Rather, the story is one in which the employee and employer agree that the employee should be able to draw his salary for full-time work and also draw his retirement benefits. One response to this might be: So what? The story still seems to present a pretty compelling case for allowing the employer to permit benefit distributions to active employees. And what is the harm?

Nevertheless, because it is difficult to fashion a rule allowing flexibility in this situation, but not permitting employers to work mischief in other situations, there is a potential for harm. For example, if employers enjoy barely restrained flexibility of the sort needed to address the problem raised by the story, employers could also amend plans in situations where employees who do not have subsidized retirement benefits are able to begin drawing down their retirement benefits while still working. The consequence for such employees will be lower benefits when they do eventually retire. This would be true even if the employee were actually phasing down to part-time employment. Pliant rules may also result in employers using phased retirement programs to encourage older workers to move to part-time status when the employees would prefer to work full-time. This might also mean loss of certain benefits (most prominently health benefits) that the employer reserves for full-time employees.

Suggested principles for, and concerns about, a new regulatory regime for phased retirement include the following:

1. A tax-subsidized retirement system should primarily be concerned with supporting people in their retirement (whether actual or phased retirement);
2. Phased retirement programs should require a genuine reduction in work hours commensurate with reduced retirement benefits during the period of phased retirement. Benefits should not be payable to full-time employees, except perhaps those who have attained full Social Security Retirement age.
3. An employee should continue to accrue additional retirement benefits during the period of phased retirement.
4. In a plan based on a final-pay variable, participant compensation during part-time work should be annualized so that accrued benefit earned during full-time work does not decline in value because of reduced compensation;
5. An employee who enters a phased retirement period should continue to be treated as a full-time employee for purposes of eligibility for health and other benefits.
6. Safeguards should be developed to insure that phased retirement programs are not used to push older workers out of the full-time job market.
7. Safeguards should be developed to ensure that phased retirement programs do not discriminate in favor of highly compensated employees or a subgroup of highly compensated employees. Under current non-discrimination regulations, it is possible to design a phased-retirement program that would be available only to a small number of highly compensated employees.
8. Employees who elect phased retirement should receive detailed disclosure comparing the value of their phased retirement benefits and the benefits to which they would be entitled (i) if they retired immediately, and (ii) if they continued to work full-time. The disclosure should also be made to spouses of employees.
9. Employers should not be able to pay phased retirement benefits in a lump sum. In addition, we might consider allowing employers who have reconsidered the desirability of subsidizing early retirement benefits to add to the plan’s normal retirement benefit a subsidy for those employees who continue working past early retirement age. This would encourage employees in such plans to continue work, which might well be in the interest of both the employer and the employee.

Footnotes

1. Central Laborers' Pension Fund v. Heinz, 541 U.S. 739 (2004).