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Regulations Hinder Phased Retirement
WASHINGTON, D.C — Legislative and regulatory obstacles are preventing employers from offering programs that would allow workers to phase into retirement, according to Valerie Paganelli, a senior retirement consultant at Watson Wyatt Worldwide and a leading authority on phased retirement programs.
Paganelli recently testified before U.S. Special Senate Committee on Aging that federal regulations are making it difficult for employers to implement phased retirement programs to help retain older, more experienced workers.
According to Paganelli, the main reason for the rarity of phased retirement programs are federal rules that generally preclude the use of qualified retirement plans — especially pension plans — to partially fund a phased retirement arrangement.
One example 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.
- 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.”