GuidePost - Vol. 4, Issue 5 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

July 2008
Taking retirement one phase at a time

Retirement can be a rather traumatic event. For decades you’re a regular part of the workforce. Then one day you get a lot of paperwork, and hopefully a nice party. The next morning you wake up retired. But what if it didn’t have to be this way?

For many people, it’s not. And according to a recent article in Talent Management, potential changes in the rules governing retirement plans could make it easier for Americans to soften the blow of retirement, financially and otherwise.

The story begins with a fairly conventional assessment of the retirement savings situation: according to the results of a recent Hewitt study, only one in five workers will have sufficient funds to meet their financial needs in retirement. In addition to the usual concerns about looming financial disaster, and a recommendation that employers provide customized, targeted “tools, information, and guidance,” the study raises some interesting workforce management issues.

As Hewitt’s Alison Borland points out, if some of the most experienced employees find they need to remain in the workforce for financial reasons, it could have the beneficial effect of easing the talent shortage faced by their employers. Companies could also have an easier time managing the transfer of skills and knowledge from their most senior employees. On the other hand, “a disengaged workforce that is dying to leave” is not exactly the ideal profile for high-performance organizations.

Unphased, for now
Now, here’s where things start to get weird. If employers are to help people manage the transition to retirement, rather than just help them save for it, Hewitt suggests phased retirement as a promising solution. This strategy allows older workers to shift to a part-time schedule, collect a reduced salary, and gain some access to their retirement benefits. If the idea of tapping your 401(k) at 50 or 55 makes you nervous, you’re not alone: as the Talent Management piece dryly puts it, “the concept is challenging from a regulatory perspective.”

The idea has actually been around for a decade or more. According to a Workforce article, organizations such as the University of North Carolina system were among the first to implement phased retirement. In a highly knowledge-intensive environment with inherently flexible work schedules and duties, allowing senior faculty to pass the torch slowly makes a lot of sense (especially when new hires proverbially work twice as hard for half the money). Because more than half of UNC’s staff is over age 55, the system had another advantage: everyone involved had already reached retirement age, so IRS rules weren’t an issue.

Private-sector companies have not been as keen on the idea. Partly this is because knowledge transfer is rarely a corporate strategic priority. Mainly it is due to decades-old rules intended to discourage retirees from working. Because IRS regulations prohibit employees from receiving partial retirement payments before retirement age, and many plan rules don’t allow full payments to those who remain employed after retirement age, the typical solution is an ad-hoc one: quit, take the payments, and go to work part-time somewhere else. In fact, an AARP survey found that as many as 80% of Baby Boomers plan to do just that.

Retirement dreams, real-life nightmares
A tenured college professor starting retirement payouts while easing into a reduced class schedule sounds like a pretty comfortable pipe dream. For those with less secure finances, working well into “retirement” just to make ends meet might be more like a nightmare. But this is exactly what four fifths of Americans may be facing when their retirement savings comes up short.

Which begs the question of what changes, if any, should be made to the regulations to accommodate phased retirement. Yes, flexibility and choice are good, to a point. Yes, we are in the midst of a generation-long shift toward greater individual responsibility for healthcare and financial security. But when most people’s retirement savings is already inadequate, it’s not hard to imagine the risk involved in letting them tap their savings well before retirement really begins.

Aggregate anxieties
We’d all like to think that people are smarter than that. Individually, perhaps we are. But in the aggregate it’s hard to have confidence that phased retirees will have enough money left when they can’t work anymore. Consider hardship withdrawals and plan loans as related behavioral examples. Despite stiff penalties, steep interest requirements, stern lectures, and the nagging sense of robbing Peter to pay Paul, these troubling options remain popular.

In the business of investment advice we deal in probabilities, not absolutes. (“You have at least a 50% chance of reaching an income of $X…”) In theory, giving well-informed, well-funded participants the option to blur the lines between work and retirement is a great idea. Better still, it legitimizes the solutions many people and organizations have already improvised. In practice, however, the probability of misuse, however well-intentioned, is just too great. To paraphrase Clemenceau, perhaps retirement is just too important to be left to the retirees.

~~ Sherrie