REGULATORY Challenges Hindering Phased Retirement Programs; Watson ...

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.

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

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:

    -- Provide 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.
    -- Endorse 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.
    -- Establish 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).
    -- Encourage 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.

"The 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," said Paganelli. "Phased retirement and the role of continued wages from active employment will become increasingly necessary as an added dimension to retirement financial planning."

About Watson Wyatt

Watson Wyatt Worldwide is one of the world's leading human capital consulting firms, providing services in the areas of employee benefits, human capital strategies and related technology solutions. The firm is a global alliance between U.S.-based Watson Wyatt & Company, a publicly traded company (NYSE: WW - News), and U.K.-based Watson Wyatt LLP, a privately held, limited- liability partnership. Together the companies operate as Watson Wyatt Worldwide, with more than 5,900 associates in 88 offices in 30 countries. Corporate offices are in Washington, D.C., and Reigate, England.