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Design benefits with the right incentives for ‘on time’ retirement
Organizations can face unintended consequences when retirement-eligible employees remain in place either because they have not saved enough through their workplace savings plan to retire, or because their total rewards packages contain outsized incentives to stay put.
“If 4 percent of your population is retirement eligible and half of those people choose to delay retirement, the effect could be that 10 percent of your employees experience promotion blockage,” said Arthur L Noonan, a senior partner and actuary at Mercer. “This means 1,000 employees would experience promotion delays in a 10,000 employee firm.”
Noonan spoke at the Employee Benefit Research Institute’s winter policy forum, held recently in Washington, D.C.
Decisions about benefits design typically are made around financial metrics such as the cost for employers. That could be short-sighted, said Noonan, because “at the end of the day, it is labor productivity that drives true labor costs.”
When people don’t advance through the ranks because older workers are staying put, they become frustrated. And despite many predictions of Baby Boomers (born between 1946 and 1964) retiring at high rates and draining talent and expertise from their organizations, in many cases they seem locked down, as if proclaiming, “We won’t go.”
The resulting low “velocity” of talent movement can have negative consequences—especially for businesses whose strategy calls for attracting and promoting new talent. In these instance, “a business that provides incentives for retirement-eligible employees to leave would outperform one whose incentives are disconnected from tenure,” said Noonan.
To be sure, there can be negative consequences when employees do retire in large numbers. The well-known downsides of having an older working population include greater labor costs (due to higher compensation and increased health and disability claims). But on the plus side, older workers may be more productive than less-experienced new hires. How the positives and negatives weigh against each other will differ from company to company and from industry to industry. As a result, the optimal workforce management and total rewards strategies will differ among organizations.
Often, access to company-sponsored medical coverage is the top factor influencing the choice of whether to retire. Other key influencers include whether an employee’s 401(k) contains adequate savings or not, which is effected by retirement plan design factors such as the size of employer contributions, the incentives for employee contributions
built into the match formula, and the availability of retirement savings advice and education.
Other issues influencing retirement include time since an employee’s last promotion and the size of his or her annual raise (if high, then notching another year has a bigger payoff).
“Identifying the factors that influence retirement decisions is essential for designing the right incentives for ‘on time’ retirement,” Noonan said. HR professionals should find the answers three key questions, he advised:
• What is the true cost of delayed/early retirement for the organization?
• What is the value of tenure to the business?
• Is the value of tenure to employees properly aligned with its value to the business?
Next, use that information, coupled with data on actual retirement choices, to resolve a third question:
• What is the optimal design of inducement for “on-time” exits from the workforce?
Measure the root causes of turnover, or lack thereof, Noonan recommended, and then change the outcomes based on the organization’s talent management and total rewards design.
Along similar lines, a new report from the nonprofit Transamerica Center for Retirement Studies (TCRS),
Baby Boomer Workers are Revolutionizing Retirement: Are They and Their Employers Ready?, examines the retirement vision among Baby Boomer workers and the level of involvement among employers to facilitate their transitioning into retirement.
Boomers “are forging a new model of retirement that is a radical departure from that of previous generations,” said Catherine Collinson, president of TCRS. “In doing so, they are overturning long-standing assumptions about working until age 65, calling for dramatic changes in current employment practices, and proving that retirement and working are not mutually exclusive.”
The survey showed that:
• 65 percent of Baby Boomer workers plan to work past age 65 or do not plan to retire. Slightly more than half (52 percent) plan to continue working after they retire.
• 62 percent of the boomers who plan to work in retirement and/or past age 65 indicate that their main reason is income or health benefits.
• 34 percent plan to work for enjoyment, including 18 percent who want to stay involved and 16 percent who enjoy what they do.
“For most Baby Boomers, retirement is no longer a point in time at which one immediately stops working,” said Collinson. “It is now a phased transition which may involve shifting from full-time to part-time work, taking on a position which is more satisfying and/or less demanding, or pursuing an encore career. Few Baby Boomers expect to immediately stop working when they retire. This vision of a flexible, phased transition to retirement cannot be accomplished without employers having programs and employment practices in place to facilitate it.”
The survey found a deep disconnect between boomers’ expectations and employers’ retirement realities:
• Only 48 percent of employers have practices in place to enable shifting from full-time to part-time and even fewer (37 percent) allow taking on new positions that are less stressful or demanding.
• This disconnect is amplified by even fewer boomers believing that their employers have such practices in place: Only 21 percent believe their employer will enable them to shift from full-time to part-time and only 12 percent say their employer will enable them to take positions which are less stressful or demanding.
The survey also found that many employers feel that older workers have higher health care costs (57 percent), but only 28 percent cite higher disability costs. In terms of productivity, only 4 percent of employers believe that older workers are less productive than their younger counterparts.
“Employers have a tremendous opportunity to engage pre-retirees in succession planning, training, and mentoring which can be beneficial from an overall workforce management perspective for both the employer and employees involved,” said Collinson. “However, our research found that only 35 percent of employers are tapping into this opportunity.”
Employers can also do much more to help their employees financially prepare for retirement while maximizing the value and effectiveness of their retirement benefits. Five ways employers can help Baby Boomers and future generations successfully prepare and transition into retirement, as noted in the survey report, include:
1. Facilitate a flexible and phased transition into retirement. Employers can do much more to accommodate older workers who want to transition into retirement—and by doing so, they can help optimize their own workforce management efforts, improve succession and continuity planning, provide employees with valuable training and mentoring, and enable pre-retirees greater flexibility to retire on their own terms.
2. Assess effectiveness of retirement plan’s education offerings. Among employers that offer a defined contribution 401(k) or similar plan, most provide retirement-planning educational offerings through their retirement plan providers. These resources range from online tools and calculators to professional investment advice and even informational seminars, meetings, webinars and workshops. However, these tools are not found to be as useful as plan sponsors may expect. For example, only 60 percent of boomers find the online tools and calculators to be helpful.
3. Offer assistance for workers’ financial transition to retirement. Pre-retirees face a myriad of complex financial decisions regarding when and how they financially transition into retirement. The majority of plan sponsors provide planning materials and information about distribution options; however, fewer than half offer financial counseling, pre-retirement seminars or an annuity as a payout option as part of their plan. Plan sponsors can also assist by extending plan eligibility for part-time workers so boomers who are shifting from full-time to part-time have the opportunity to continue saving.
4. Provide education about Social Security and Medicare benefits. A strong knowledge of government benefits is especially important for pre-retirees. But only 17 percent of Baby Boomers know “a great deal” about their Social Security benefits and only 13 percent about their Medicare benefits. Employers can help by
offering information about these government benefits. Just 27 percent of employers currently provide information about Social Security and 29 percent about Medicare.
5. Promote the Saver’s Credit and catch-up contributions. Employers can encourage their employees to save for retirement by promoting two meaningful tax incentives:
the Saver’s Credit, a tax credit for low- to moderate-income workers who save for retirement in a qualified retirement plan or IRA; and
catch-up contributions, which allow workers age 50 and older to contribute to a qualified plan an additional amount over and above the annual plan limit. Only 23 percent of boomers are aware of the Saver’s Credit and only 64 percent are aware of catch-up contributions.
A new study by Bankers Life Center for a Secure Retirement finds that among middle-income Baby Boomers:
• 62 percent express some doubts that they will have enough money to live comfortably throughout retirement.
• 83 percent have not received any specialized training or education on topics related to retirement financial security.
• More than half (54 percent) report investable assets of less than $100,000, with one-third (34 percent) reporting less than $25,000.
• 59 percent do not receive professional financial guidance of any kind.
The Middle-Income Boomer Retirement Gap: Savings, Education and Advice—is based on a survey conducted in July 2014 among 1,000 Americans between the ages 50 and 68 who have an annual household income between $25,000 and $100,000.
Among middle-income Boomers—those born between 1946 and 1964 (currently age 50 to 68) and with annual household income between $25,000 and $100,000 per year—those who are not yet retired generally see themselves working longer and retiring after age 65:
• Just 19 percent of non-retired Boomers expect to retire at age 65—and many more working middle-income Boomers now expect to retire after age 65 (43 percent).
• While one-third feel very or extremely confident about their retirement savings, two-thirds express some doubts, with a quarter being not too confident or not at all confident.
Justified or not, a half-million dollars appears to be the threshold for middle-income Boomers to be more confident than not in having enough money for a comfortable retirement. However, more than half (54 percent) report investable assets of less than $100,000, with one-third (34 percent) reporting less than $25,000.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter
Related External Articles:
Why Employers Will Help Workers Retire,
MarketWatch, December 2014
Why Phased Retirement May Become the Hottest Boomer Benefit,
Money, November 2014
Related SHRM Articles:
Working in Retirement Is the New Norm,
SHRM Online Benefits, June 2014
Generations View Different Retirement Paths,
SHRM Online Benefits, May 2014
401(k) Match Thresholds and Default Rates Affect Savings,
SHRM Online Benefits, May 2013
Make It Easier to Say Goodbye,
HR Magazine, October 2012
Message to Employees: Saving 1% More Will Boost Retirement Income,
SHRM Online Benefits, August 2013
HR's role in Preparing Workers for Retirement, SHRM Workplace Visions report, August 2013
Social Security Statements Now Online,
SHRM Online Benefits, May 2012
Retiring Boomers Prompt Increase in Phased Retirement,
SHRM Online Benefits, August 2008
Related SHRM Video:
Benefits for Phased Retirement
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