Helping employees retire early Featured

7:00pm EDT December 26, 2007

CEOs face monumental challenges when navigating issues surrounding their aging work force. In order to avoid the predicted brain drain caused by retiring baby boomers, many CEOs are orchestrating knowledge transfers between retiring employees and less-experienced workers, while other executives face retention issues with younger employees, as middle-aged managers stay longer and limit opportunities for up-and-comers. The best solution for CEOs is to control when workers retire.

As it stands today, the baby boomers are in control of their retirement dates and many aged 55 to 65 are choosing to stay on the job longer because they just can’t afford to leave or are anticipating limited access to affordable medical insurance. The more employers step in to help solve some of the problems facing prospective early retirees, the more they’ll be able to control their exodus.

“There are many issues facing employees who might like to retire early,” says Jon Joss, senior retirement consultant with Watson Wyatt Worldwide, San Francisco. “Without 401(k) oversight, retirees are forced to manage their own asset portfolios and the volatility of the financial markets doesn’t portend enough income stability for prospective retirees. If CEOs want to get a handle on the issues and control the timing of employee retirements, they really need to provide more assistance to potential early retirees.”

Smart Business spoke with Joss about what CEOs can do to support early retirees and exercise better control over the egress of middle-aged workers.

How can employers provide more stable retirement income to early retirees?

In order to help employees retire early, employers should consider offering annuity options under their 401(k) or other defined contribution plans. Over the past few years, financial services firms have introduced insurance products to help fill the hole left by the winding down of traditional plans, where vested participants are promised a lifetime monthly benefit at retirement. The growth of 401(k) and other defined contribution plans place the investment management and draw down burden on employees as retirees receive a lump-sum benefit when they leave. Consider offering employees the choice of several annuity plans and the option to invest all or part of their defined contribution retirement assets into the program. Because employees will feel more secure receiving a guaranteed income and relieved from the burden of managing their investment portfolio, they may retire earlier.

Offering annuities as an option can also keep scarce knowledge workers on the job longer or assist with retaining younger workers who frequently say they want guaranteed retirement benefits. By leveraging their purchasing power, employers may be able to offer retirees better annuity programs than those they could purchase on their own. The Pension Protection Act has provided some good guidance around the selection and protection to employers for offering annuities, making employers feel more comfortable.

Should employers offer planning assistance to prospective retirees?

Employers can provide modeling tools that will help prospective retirees determine how much money they’ll need to retire and their projected income levels resulting from a variety of portfolio investment scenarios. Employers can also continue to make those tools and investment advisory services available to employees once they retire. This type of assistance provides reassurance to prospective retirees, because navigating the volatile investment markets can be treacherous enough.

How can employers help employees obtain medical coverage before they reach the age for Medicare eligibility?

There are several options that employers can consider to help prospective early retirees obtain affordable health coverage. Under one strategy, the employer can create a defined contribution type plan used to pay health care premiums for the employee based upon a length of service formula. For example, let’s say that an employee has 20 years of service, the employer can allocate $1,000 per service year, or $20,000, and place that money in a separate account, or leave it unfunded and use it to pay for medical premiums. Or the employer can place the funds in a Health Savings Account that the employee can use to meet deductibles and uninsured expenses. Another option is to make the company’s group health coverage available to early retirees.

By leveraging their group buying power, employers can offer retirees more affordable, guaranteed coverage with no eligibility requirements. Employers can decide if they want to contribute all or part of the premiums, and some of the cost could even be covered by the defined contribution plan allocation. There’s a great deal of flexibility available to employers in meeting this need.

What other health care assistance might early retirees need?

CEOs should consider maintaining the claims administration for early retirees and, if they decide to extend group health coverage, offer HMO or PPO options, which will help retirees manage their costs and achieve greater financial security. The more financially secure employees feel, the sooner they’ll retire.

JON JOSS is a senior retirement consultant with Watson Wyatt Worldwide, San Francisco. Reach him at (415) 733-4466 or