Regulatory Challenges Hindering Phased Retirement Programs

WASHINGTON ó Legislative and regulatory obstacles are preventing employers from offering programs that would allow workers to phase into retirement, a leading authority on phased retirement programs testified today at a hearing of the Special Senate Committee on Aging.

Valerie Paganelli, a senior retirement consultant at Watson Wyatt Worldwide, testified that, in preparation for the coming labor shortages, a growing number of employers would like to implement phased retirement programs to help them retain older, more experienced workers. However, Paganelli said certain federal rules and regulations make it difficult for employers to do so.

ìThe United States faces unprecedented retirement policy questions,î said Paganelli. ìIt is imperative that we allow for the flexible adoption of alternative forms of retirement programs.î

Paganelli asserts that the main reason for the limited availability of phased retirement programs is the variety of federal rules that generally preclude the use of qualified retirement plans, especially pension plans, to partially fund a phased retirement arrangement. For example, a significant barrier is the prohibition against pension distributions to actively working employees who have not attained normal retirement age. This requirement has resulted in a restriction against pension plans distributing benefits to participants prior to severance of employment or attainment of normal retirement age.

The IRS recently proposed guidance that would change this rule and permit certain phased retirement distributions. However, because the guidance would impose significant administrative burdens and limited flexibility, few employers have expressed interest in providing such a benefit to older workers. .

During her testimony, Paganelli offered several recommendations:

ïProvide for phased retirement distributions from qualified defined benefit plans. Currently, employers cannot permit distributions for active employees who have not reached normal retirement age but who want to reduce their work schedules and stay with their current employer. This has created a significant hurdle for phased retirement programs.

ïEndorse defined benefit plans. The plan design flexibility that is necessary to foster phased retirement has been a hallmark of defined benefit plans. Phased retirement benefits can be supplemented by the employer under a defined benefit plan in ways that simply are not possible in a defined contribution plan.

ïEstablish a framework for Americans to understand and practice the key components of successful retirement income planning (e.g., comparable to the food pyramid for encouraging healthy, balanced eating habits).

ïEncourage coordination among the Department of Labor, the Equal Employment Opportunity Commission and other appropriate governmental entities to help them shape and adapt to the changing landscape of retirement in the United States.

ìThe traditional three-legged stool of retirement income made up of Social Security, employer pension and personal savings is no longer the appropriate financial planning framework for future retirees,î said Paganelli. ìPhased retirement and the role of continued wages from active employment will become increasingly necessary as an added dimension to retirement financial planning.î

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