Benefits Business

Reshaped retirement plans

Benefits brokers and employers need to address the root causes
and effects of the graying workforce

By Len Strazewski

A retirement home in sunny Florida or California. Time to travel and visit the kids—and grandchildren. Volunteering in the community and taking care of your health concerns. When the economy was booming—or at least stable—that’s what retirement allowed for well-prepared employees.

For employers, retirement provides an orderly transition of the workforce as older workers with declining productivity and increasing health care costs are steadily succeeded by younger, healthier workers who have had the opportunity to work beside the experienced seniors for a limited period.

But as the economy continues to struggle, that traditional order is being upset—with consequences for employers, employee benefit experts say. And as a result, employers may want to revisit their retirement benefit strategy and adjust their employee benefit plans.

In addition, agents and brokers that provide retirement benefits services may want to prepare a few new solutions as their clients rethink how they want to smooth the retirement transition for their employees—and eventually themselves.

According to a recent study conducted by the Employee Benefit Research Institute (EBRI) in Washington, D.C., older American workers aged 55 or older are staying in the labor force longer as they attempt to deal with investment losses in their retirement plans and home values as well as increasing health care costs.

For the group that EBRI defines as “near elderly,” employees aged 55 to 64, the increase in labor force participation is being driven almost completely by women; male participation is about the same or declining slightly. However, among workers 65 or older, their continued work is increasing for both males and females.

U.S. Census data confirms that the pattern is not completely new. The labor force participation for workers over 55 has been increasing steadily since 1993 and reached nearly 40% in 2008 as the recession peaked.

However, EBRI notes, since then, workers have begun facing more responsibility for paying their retirement expenses as private-sector employees rely more completely on defined contribution retirement plans that are financed in part with their own contributions and that are subject to investment market fluctuations. Also, retiree medical programs have become increasingly scarce or less lucrative, placing greater cost burdens on the prospective retirees.

The study indicates, however, that the pattern is not all economic. Employees with higher levels of education are more likely to work longer; and while many of the pre-elderly and elderly continue to work because they can’t afford to retire, many are also working longer because they find their jobs meaningful and are able to continue past traditional retirement age.

While many employers may welcome the retention of their most experienced employees on the job, this pattern can be disruptive and expensive to those employers, notes Jack Abraham, principal and national benefits practice leader at PriceWaterhouseCoopers in Chicago.

The changes can affect human resource recruiting practices, training and, of course, health care costs as the workforce grays, he explains.

“Employers that expected hundreds of retirements as of January 1 this year are, in some cases, seeing only a handful of retirees. This has a real impact on employer costs as the older workers continue at or near the top of their wage scales and begin to drive higher health care costs. In general, an older workforce tilts toward the more expensive employees.”

In general, older workers have earned more vacation benefits, sick time and personal leave, creating a higher cost of accommodation for employers. The pattern can also limit the effectiveness of workforce reduction plans and buyouts, Abraham notes.

Since federal law prohibits age discrimination, employers may target older workers in their strategy, but the benefits must be offered to all age groups. As a result, employers risk losing the younger employees they want to retain and still pay the higher severance and COBRA costs for the older workers they do incent to retire.

What can employers do to rebalance their workforce and return to an orderly retirement transition? They should look to the original source of the problem and consider redesigning their retirement benefits plan for all employees—or divide their program into multiple benefit plans that target workers who may need more support to meet traditional retirement goals, Abraham says.

For most continuing elderly workers, the core of the problem is their damaged retirement assets, he explains. With the slow disappearance of defined benefit pension plans and their replacement with more volatile defined contribution such as self-managed 401(k) plans, many workers failed to accumulate secure retirement assets.

“There are many employees age 55 or older sitting on 401(k) plans with balances of $30,000 to $50,000, insufficient to fund a retirement, even with Social Security benefits,” he says. “And availability of health care remains a strong incentive to continue to work. Employees not eligible for Medicare could face huge personal health care expenses until they’re eligible—and more than they expect afterwards.”

Restructuring the defined contribution plans may be a good first step. Employers could consider placing a portion of their contributions in a more stable guaranteed low-expense annuity investment, which would create a floor of retirement assets that would not be subject to market fluctuations.

This should be accompanied by better retirement education that directs younger employees to focus more on their long-term needs and savings patterns.

Abraham also advises employers to reconsider their positions regarding defined benefit plans for all or some of their employees. Traditional pension plans may still be too expensive and prone to create long-term unfunded liabilities for employers, but more modern plan designs with modest benefits may solve some of the problems.

Abraham says employers might consider hybrid retirement plans that provide a defined cash balance that is guaranteed by pension plan-style funding or a defined benefit/defined contribution plan combination that secures a portion of retirement assets with an employer guarantee.

Employers could also offer a modest defined benefit plan to lower-paid employees instead of a defined contribution plan to help secure a retirement that could never be appropriately funded with defined contributions based on a percentage of wages and volatile market returns—but combined with Social Security may be a sufficient base of assets.

Phased retirement might also be an option for some employees who begin collecting on retirement benefits early while continuing to work part time. However, Abraham notes that phased retirement demands a stable base of assets upon which the retiree can draw to supplement the part-time income.

Agents and brokers may also want to revisit with their clients the retirement planning value of other benefits, including Health Savings Accounts that could be used to help fund retiree medical expenses in the future, supplemental retirement and deferred compensation plans for executives, individual supplemental annuities and long term care insurance that can be purchased through worksite market programs.

The author
Len Strazewski has been covering employee benefits issues for more than 30 years and is employee benefits columnist at Human Resource Executive magazine. He has an M.S. in Industrial Relations from Loyola University in Chicago.