Older Workers: Phased Retirement Programs, Although Uncommon, Provide Flexibility for Workers and Employers
Published: 2017-06-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the large baby boomer generation retires, the workforce will lose much of their knowledge and experience. Encouraging phased retirement, in which older workers reduce their work hours with their current employer to transition into retirement, has been cited by retirement experts as one way to mitigate this loss. GAO was asked to review the work patterns of older Americans and phased retirement programs.
In this report, GAO examines (1) recent trends in the labor force participation of older workers, (2) the extent to which employers have adopted phased retirement programs and what type of employers offer them, and (3) what challenges and benefits, if any, exist in designing and operating phased retirement programs.
GAO analyzed data from two nationally representative surveys, the Health and Retirement Study (2004-2014) and the Current Population Survey (2005-2016); reviewed relevant federal laws and regulations; conducted a literature review; and interviewed 16 experts on retirement and 9 employers who offer or considered offering phased retirement programs. While phased retirement programs exist in both the private sector and government, this report focuses on private sector programs.
section_title: What GAO Found
paragraphs: Participation of older workers in the labor market has increased in the last decade, according to GAO analysis. Further, most individuals ages 61 to 66 who were still working maintained a full-time work schedule. However, although about a quarter of workers in this age group had planned to reduce hours as they transitioned to retirement, fewer than 15 percent subsequently reported being partly retired or gradually retiring from their career jobs.
While no nationally representative data on the prevalence of phased retirement exist, GAO's review of studies and interviews with retirement experts indicate that formal phased retirement programs are relatively uncommon. Of those that are offered, they are more common among employers with larger or technical and professional workforces, such as education, consulting, and high-tech, according to studies GAO reviewed (see table). Nine of 16 experts GAO interviewed explained that industries with skilled workers or with labor shortages are motivated to offer phased retirement because their workers are hard to replace.
Formal phased retirement programs present design and operational challenges for employers, including compliance with provisions and laws related to discrimination, according to publications GAO reviewed and experts and employers GAO interviewed. For example, in one study GAO reviewed, 71 percent of large employers agreed that regulatory complexities and ambiguities involving federal tax and age discrimination laws impact their ability to offer phased retirement programs. Experts and employers said programs that target highly skilled workers, who are often highly paid, could violate rules that allow for favorable tax treatment that generally prohibit qualified pension plans from favoring highly compensated employees. Despite these challenges, most employers GAO interviewed who reported having phased retirement programs found them beneficial. For example, eight of the nine employers GAO interviewed said they were able to address various design and operational challenges and cited program benefits related to worker retention, knowledge transfer, transition into retirement, and workforce planning.
section_title: What GAO Recommends
paragraphs: GAO is not making recommendations in this report.

section_title: Letter
paragraphs: The retirement of the large baby boomer generation will lead to the  workforce losing much of its knowledge and experience. Further, as GAO  has previously reported, most households approaching retirement have  low retirement savings, generating concern about older Americans’  preparedness for retirement. These effects could be mitigated, to some  extent, if Americans were encouraged to continue to work at older ages.  According to retirement experts, one option available to accomplish this is  phased retirement. Phased retirement is when workers reduce their  working hours with their current employer in order to transition into  retirement.
GAO was asked to review the work patterns of older Americans and  examine phased retirement programs. In this report, we examine (1)  recent trends in the labor force participation of older workers, (2) the  extent to which employers have adopted phased retirement programs and  what type of employers offer them, and (3) what challenges and benefits,  if any, exist to the design and operation of phased retirement programs.
To describe the recent trends in labor force participation of older workers,  we analyzed nationally representative data from 2005 to 2016 in the  Current Population Survey (CPS) and the 2004-2014 Health and  Retirement Study (HRS), two datasets with information about the labor  force participation of older workers. We examined the reliability of these  data by reviewing documentation and conducting selected data checks  and found it sufficiently reliable for our purposes. To inform all sections of  this report, we reviewed relevant federal laws and regulations and  conducted a literature review that included academic studies and industry  surveys and reports as well as relevant articles. We also interviewed  agency officials and 16 experts, such as consultants, representatives of  industry and interest groups, and academics. We identified these experts  through our review of relevant literature and through expert referral.  Finally, we conducted semi-structured interviews with nine employers  who offer or considered offering phased retirement programs. We  selected these employers to represent a variety of employer types by  location, size, and industry. Although the information from these  interviews is not generalizable, the examples and perspectives provided  were useful in describing the issues related to phased retirement. While  there are phased retirement programs in both the private sector and  government, this report focuses on private sector programs.
We conducted this performance audit from April 2016 to June 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence we obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. For more information on  our objectives, scope, and methodology, see appendix I.
subsections: section_title: Background
paragraphs: Formal phased retirement is an employer-based program in which older  workers can reduce their working hours in order to transition into  retirement. Phased retirement may include partial drawdown of defined  contribution or defined benefit pension benefits and a knowledge-transfer  component. Depending on the employer, the program may include health  coverage for participants. In contrast to formal programs, informal  phased retirement arrangements are not part of a formal program but are  alternate methods to ease into retirement with the same employer, such  as an ad hoc agreement or retirement followed by a term as a contractor.
Employer goals for formal phased retirement programs vary, but may  include knowledge retention, skills transfer, workforce planning, and  retirement planning. Employers can use phased retirement as a human  resource tool not only to retain workers with essential skills or knowledge,  but also to provide an incentive for other workers to retire. Additionally,  workers may find phased retirement to be a positive way to ease into  retirement.
subsections: section_title: Sources of Retirement Income
paragraphs: Income in retirement can come from multiple sources, including but not  limited to: (1) Social Security, (2) payments from defined benefit (DB)  plans, and (3) retirement savings, such as savings in an individual  retirement account (IRA) or a defined contribution (DC) plan, such as a  401(k).
Social Security: Social Security retirement benefits partially replace  earnings lost due to retirement and provide a base of income upon which  to build. The initial monthly benefit amount depends on the worker’s  earnings history and the age at which he or she chooses to begin  receiving benefits, as well as other factors. Social Security pays  unreduced benefits at the full retirement age, which has gradually  increased from 65 (for 1937 and earlier birth cohorts) to 67 (for 1960 and  later birth cohorts). Workers can elect to receive retirement benefits as  early as age 62, but the benefit amount is reduced compared to benefits  at full retirement age. Workers who retire after their full retirement age  receive a benefit increase for each month they delay claiming retirement  benefits, up to age 70.
A worker may also choose to work and receive Social Security benefits.  However, depending on his or her earnings, those benefits may be  reduced until full retirement age, although any earnings in and after the  month a worker reaches full retirement age will not reduce retirement  benefits. Additionally, for workers who have income above a certain  threshold, their Social Security benefits may be taxed.
Social Security faces significant financial challenges, as we have  previously reported. According to the 2016 report from the Social  Security Board of Trustees, the Old-Age and Survivors Insurance trust  fund (from which Social Security retirement and survivors’ benefits are  paid) is projected to be able to pay full benefits until 2035. The report  warns that unless action is taken to avert depletion of the trust fund,  continuing revenue is projected to be sufficient to cover about 75 percent  of scheduled benefits at that time. This projection raises the possibility of  changes to Social Security benefits, taxation, or both before 2035.
Defined Benefit Plans: DB plans offer pension benefits in the form of an  annuity that provides a periodic payment for life, typically on a monthly  basis, and may offer a lump-sum distribution option. They are  employment-based and offer benefits determined by a formula that  includes factors specified by the plan, such as salary and years of  service. Specifics on how the calculation takes those factors into account  can affect the final benefit amount. For example, this amount may be  determined by the average of the worker’s last 5 years of wages, or the  average of the worker’s highest 5 years of wages. Workers may be able  to receive in-service distributions from their DB plan (i.e., draw a pension  benefit while they are still working), generally no earlier than age 62.
Over the past several decades, private sector employers have shifted  from providing a large share of retirement benefits through DB plans to  relying much more heavily on DC plans, according to Department of  Labor data. In 1975, there were about 103,346 DB plans and 207,748  DC plans. By 2014, the number of DB plans had shrunk by more than half  (to 44,869) while the number of DC plans had more than tripled (to  640,334).
Retirement Savings: Two primary types of retirement savings vehicles  are IRAs and employer-sponsored DC plans (such as 401(k) and 403(b)  plans). For both DC plans and IRAs, benefits accrue in the form of  account balances, which grow from contributions made by workers (and  sometimes by their employers) and investment returns. DC plans and  IRAs often place the primary responsibility on individuals to participate in,  contribute to, and manage their accounts throughout their working  careers and to manage their savings throughout retirement. Workers and  employers who contribute to retirement savings accounts generally  receive favorable federal tax treatment, such as tax deductions or  exclusions for contributions and tax-deferred or tax-free returns on  investment. A worker may start to withdraw, without a penalty, from  these types of retirement savings vehicles as early as age 59 ½, if the DC  plan or IRA allows it.
In prior work, we analyzed data from the 2013 Survey of Consumer  Finances and found that about half of households age 55 and older had  no retirement savings, such as in a 401(k) or an IRA. Moreover, we also  found that many older households without retirement savings had few  other resources, such as a DB plan or nonretirement savings, to draw on  in retirement. Social Security remains the largest component of  household income in retirement, making up an average of 52 percent of  household income for those ages 65 and older.
section_title: Federal Oversight of Laws and Regulations Related to Phased Retirement
paragraphs: The Internal Revenue Service (IRS) within the Department of the  Treasury (Treasury), the Department of Labor (DOL), and the Equal  Employment Opportunity Commission (EEOC), as part of their work, have  the primary responsibility for administering the laws and regulations that  affect employment programs for older workers such as phased  retirement.
The Employee Retirement Income Security Act of 1974 (ERISA) is the  primary federal law governing the sponsoring of pension plans in the  private sector. Under ERISA, both IRS and DOL have important  authorities and responsibilities.
IRS: IRS determines whether private sector pension plans qualify for  preferential tax treatment under the Internal Revenue Code. In  determining the qualification of a plan, IRS enforces Internal Revenue  Code nondiscrimination requirements, which prohibit a qualified pension  plan from discriminating in favor of highly compensated employees (in  comparison to lower paid, rank and file employees). These  nondiscrimination requirements would apply to qualified plans, including  those maintained by employers that offer phased retirement. Specifically,  qualified plans must show that they do not discriminate in two ways: 1) by  demonstrating they do not favor highly compensated employees in terms  of plan coverage, and 2) they are not providing disproportionate  contributions or benefits to those highly compensated employees.
DOL: Under ERISA, DOL is responsible for protecting the interests of  plan participants. DOL’s Employee Benefits Security Administration takes  primary responsibility for enforcing ERISA reporting and disclosure  requirements, such as informing participants and sponsors of their rights  and obligations under the plan. The Employee Benefits Security  Administration also enforces ERISA’s fiduciary requirements, i.e., the  standards of conduct for those who exercise discretionary authority or  manage a plan or have authority to dispose of its assets.
Under ERISA, the ERISA Advisory Council was established to advise the  Secretary of Labor with respect to carrying out his/her duties under the  act. The Council established a Working Group on Phased Retirement to,  among other things, examine issues facing employers who wish to create  phased retirement programs and the various legal and regulatory  obstacles to implementing phased retirement.
EEOC: As part of its responsibility, the EEOC enforces the Age  Discrimination in Employment Act of 1967 (ADEA) and Titles I and V of  the Americans with Disabilities Act of 1990 (ADA). The ADEA provides  protection for workers ages 40 and older from employment discrimination  because of age. The ADEA applies to all the terms, conditions, or  privileges of employment, including hiring, firing, promotion, lay-off,  compensation, benefits, job assignments, and training. The ADA  provides, among other things, for protections from employment  discrimination due to disability and reasonable accommodation for  qualified workers.
section_title: Population Aging and Economic Productivity
paragraphs: While not all researchers agree, it has been suggested by some that as  the population ages and the number of baby boomers leaving the labor  force increases, there could be a loss of economic productivity. This  potentially has important implications for future economic growth. In a  2016 study, researchers found that a 10 percent increase in the  percentage of the population age 60 and older decreases the growth rate  of gross domestic product (GDP) per capita by 5.5 percent. According to  this study, two-thirds of the reduction is due to slower growth in the labor  productivity of workers across the age distribution, while one-third arises  from slower labor force growth. The researchers say their results imply  that annual GDP growth will slow by 1.2 percentage points this decade.  The availability of phased retirement, by extending labor force  participation, has the potential to provide options that would be beneficial  both to the older workers and the overall economy.
section_title: More Older Workers Are Extending Their Labor Force Participation, and More Plan to Gradually Reduce Work Hours Than Actually Do
subsections: section_title: Older Workers’ Labor Force Participation Has Increased Overall in the Last Decade, Particularly for Those Over Age 65
paragraphs: In 2005, GAO reported that labor force participation rates of older workers  were projected to rise between 2005 and 2015 and this has indeed been  the case. This increase in labor force participation among older workers  occurred at the same time that the workforce participation of the U.S.  population overall declined by approximately 3 percentage points (see fig.  1). The Bureau of Labor Statistics (BLS) and GAO reports anticipated this  trend among older workers prior to the recession of 2007-2009, and the  negative effect of the recession on the income security of older workers  may have added an incentive for older workers to keep working.  Increases in labor force participation by women ages 55 to 64 and by  women and men age 65 and older were the primary contributors to the  overall increased labor force participation among older workers. Men  ages 55 to 64 kept their labor force participation relatively stable from  2005 to 2016.
BLS reports that it expects the labor force participation of those age 65  and older will continue to increase and that older workers will constitute a  larger part of the workforce overall by 2024 as the population in general  ages. However, BLS expects the overall labor force participation rate for  those 55 and older to decline as the baby boom generation moves from  pre-65 to the over 65 category. According to the BLS report, this is  primarily because the baby boomers make up a disproportionately large  share of the labor force and as they move into age groups with lower  participation rates, this will lower the average labor force participation  both overall and for the 55 and older population.
Overall, in 2016, about 40 percent of all individuals age 55 and over  participated in the labor force, and unemployment was lower than for the  population as a whole (monthly unemployment ranged from 3.3-3.9  percent for older workers in 2016, as compared to 4.7-5.0 percent for all  ages). According to GAO analysis of CPS data, most workers age 55  and over work full-time.
Analysis of CPS data suggests that older workers are more concentrated  in white-collar and service occupations. According to three of 16 experts  we interviewed, white-collar workers are likely to work longer, partly  because their jobs tend to be less physically demanding than blue-collar  jobs. Table 1 provides a summary of the percentage of older workers by  occupational sector.
section_title: Up to an Estimated 35 Percent of Older Workers Report They Can Reduce Work Hours, but Few Actually Do
paragraphs: In 2014, most older workers ages 61 to 66 worked full time, though many  reported that they could reduce their work hours. We analyzed Health  and Retirement Study (HRS) data from 2004-2014, focusing on a group  of people who were born from 1948 to 1953. In 2004, when this cohort,  known as the Early Baby Boomers, was 51 to 56 years old, an estimated  29 percent responded affirmatively when sked whether they could reduce  their hours. Ten years later, when this group was 61 to 66 years old, of  those Early Boomers still working, an estimated 35 percent said they  could reduce their hours (see fig. 2).
Between 24 and 29 percent of Early Baby Boomers plan to gradually  transition to retirement by reducing their hours, which is more than the  percentage who plan to stop working altogether (see fig. 3). Similarly,  GAO reported in 2015 that about 26 percent of workers ages 55-64  planned to work part time, while 18 percent planned to stop working  altogether.
For most years we analyzed, between 16 and 18 percent of the cohort  approaching retirement said they would be interested in reducing their  hours even if their pay was also reduced proportionally. This percentage  increased to 22 percent in 2014 as the cohort aged (see fig. 4). In all  years within this time period, more women than men in this age cohort  expressed willingness to accept lower pay for reduced work hours.
However, over the period we analyzed, data indicate that fewer Early  Baby Boomers actually retired gradually than said they would be  interested in reducing their hours. Based on our analysis of HRS, in 2014,  as the Early Baby Boomer cohort approached retirement, the number of  individuals who were partially retired was about 11 percent. This  number was lower in 2004—at about three percent—when the cohort was  younger. The percentage who were classified as partly retired in 2014 is  generally lower than the percentage which indicated some ability, plan, or  interest in reducing hours as they approach retirement (see fig. 5).
Other studies analyzing HRS data had findings similar to ours, namely  that relatively few workers gradually retire from their career jobs, and that  more of those workers who gradually retire have higher-paying jobs than  workers who do not gradually retire. Specifically, four studies we reviewed  also used HRS to examine the percentage of older workers who gradually  retire. The most recent of these studies estimated that only 11 percent of  men and 6 percent of women in the Early Baby Boomer cohort gradually  retired from their full-time career jobs. It also found that those workers are  more likely to have higher-paying jobs. For example, among the Early  Baby Boomer cohort, an estimated 7 percent of men who earned up to  $50 per hour gradually retired, compared to 19 percent of men who  earned over $50 per hour. (For a discussion of what retirement is, see  sidebar.)
While there may be unobserved barriers to a gradual reduction in hours,  there are concrete financial reasons why more workers may plan to retire  gradually than actually do. First, gradually retiring may have  consequences for employer-provided health and pension benefits and no  measures to address them. Our analysis of HRS data indicates that  among workers ages 61 to 66 in 2014 who said they could reduce their  work hours, about 33 percent said their health insurance benefits would  be reduced or eliminated and 23 percent said their eligibility for pension  benefits would be affected. Another factor that may affect individuals’  ability to gradually retire is Americans’ low savings leading into retirement  and a desire to maximize earnings prior to retiring fully. As we reported in  2015, most households approaching retirement have low savings.
Further, many workers retire sooner than they thought they would and  therefore may not be able to carry out their plan to reduce work hours  leading into retirement. Specifically, despite increases in older workers’  overall labor force participation, HRS respondents retired, on average,  sooner than they expected. In the HRS cohort approaching retirement  between 2004 and 2014, the average difference between planned  retirement year and actual retirement year was about 6 years. Nearly 70  percent of respondents who had a plan for when to retire ended up  retiring prior to their planned retirement year. About 17 percent of  respondents retired later than expected.
Depending on the year, up to one-half of cohort members retiring from  2004 to 2014 said they felt forced to retire; the percentage was higher for  those who retired in their 50s than in their 60s. That said, as the cohort  aged, more respondents said they wanted to retire when they did than  said they felt forced to retire. In our prior work we reported that individuals  approaching retirement tend to overestimate their ability to keep working  past retirement age and often have to retire for reasons they did not  anticipate, such as health problems, changes at their work place, or  caregiving responsibilities.
section_title: Formal Phased Retirement Programs Are Not Common, with Larger Employers and Those with Technical and Professional Workforces More Likely to Offer Them
subsections: section_title: Phased Retirement Programs Are Not as Common as Informal Arrangements, and the Number of Programs Remained Steady in Recent Years
paragraphs: While no nationally representative data on the prevalence of phased  retirement exist, one large study we reviewed and experts we interviewed  indicated that formal phased retirement programs are relatively  uncommon. The largest study we reviewed, a 2016 Society for Human  Resource Management (SHRM) survey, found that an estimated 5  percent of all employers in SHRM’s large membership base offer a formal  phased retirement program. Moreover, experts we spoke with confirmed  that formal phased retirement programs are not common. Of the 16  experts we interviewed, 14 said that such programs were either not  common or were rare.
The other two studies providing information on the prevalence of phased  retirement programs we reviewed also found that such programs were not  widely adopted by employers, though the studies did not specify whether  the programs were formal and looked only at employers with a certain  number of workers. Further, the findings from these two studies likely  overstate the prevalence of phased retirement among employers overall  because while a substantial proportion of U.S. firms have a small number  of workers, such small firms were underrepresented in these studies.
Formal vs. Informal Phased Retirement  In this report we discuss both formal phased  retirement programs and informal phased  retirement arrangements, similar concepts  that both involve easing into retirement while  remaining with the same employer.   For purposes of this report, formal phased  retirement is an employer-based program in  which older workers can reduce their working  hours in order to transition into retirement.  While studies we reviewed all used variations  on this definition, they all included programs  that employers offered to workers prior to full  retirement. For example, a 2016 Society for  Human Resource Management study most  closely described formal phased retirement as  we use the term, defining it as a formal  reduction in schedule and/or responsibilities  prior to full retirement. A study by the  Transamerica Center for Retirement Studies  the same year described phased retirement  as a work-related program to help workers  age 50 and older transition into retirement by  reducing hours and shifting from full time to  part time, and an earlier MetLife study  described such programs as part-time work  programs to help employees ease into  retirement.   In comparison, informal phased retirement  arrangements are situations in which a worker  remains with the same employer but eases  into retirement through an informal channel  rather than a program. For example, some  workers nearing retirement may be allowed to  have part-time status though there is no  formal policy (sometimes referred to as an ad  hoc arrangement). Alternately, an employee  may retire and then be rehired by the same  employer (known as retire/rehire).
Informal phased retirement arrangements are generally more common  than formal phased retirement programs, according to the two studies we  reviewed that examined this topic and 10 of the 16 experts we  interviewed. (See sidebar for more information about formal and  informal phased retirement.) According to SHRM’s 2016 study, 11  percent of employers in their membership base reported that they offered  informal phased retirement in 2016, which is about twice as many as  reported they offered formal phased retirement. Another study found that  a majority of employers with 20 or more workers could “work something  out” vis-a-vis phased retirement, although only one-third of these had a  formal written policy.
There is little indication that the prevalence of phased retirement has  changed much in recent years, according to the three studies we  reviewed on this topic. The SHRM study examined formal phased  retirement programs specifically, reporting that their prevalence has  remained relatively low among its members over the last decade. These  programs may be unlikely to increase, as SHRM reports less than one  percent of their members plan to begin offering such a program in the  next year. Two different studies examined a combination of formal and  informal phased retirement and found the prevalence unchanged in  recent years. One study looked at the time period between 2008 and  2014 and found no statistically significant difference over time in the  percentage of employers with 50 or more workers offering phased  retirement. One small study that included large domestic and  international employers found the proportion of employers offering  phased retirement relatively unchanged from 2010 to 2015.
section_title: Larger Employers and Those with Technical and Professional Workforces Are More Likely to Offer Phased Retirement Programs
paragraphs: More large employers offer phased retirement than small employers,  according to the three studies we reviewed that examined the number of  workers at employers offering phased retirement. The SHRM survey  found that its members with 2,500 to 9,999 workers are significantly more  likely to offer formal phased retirement programs than those with fewer  than 500 workers (an estimated 16 percent, compared to 5 percent for  employers with 100 to 499 workers and 4 percent for employers with 1 to  99 workers). Another study reported that a slightly larger percentage of  employers with 500 or more workers offer phased retirement programs  than employers with 10 to 99 workers (30 percent compared to 25  percent), though the difference was not statistically significant. One  further study found that phased retirement occurred more at employers  with 500 or more workers than at those with less than 500 workers (77  percent compared to 39 percent).
Employers in certain industries are more likely to offer phased retirement,  particularly those in industries with technical and professional workforces.  Consulting, education, and high-tech were among the industries most  likely to offer phased retirement, according to the three studies we  reviewed that included information on formal and informal phased  retirement by industry. According to SHRM’s survey of its members,  industries most likely to offer formal phased retirement include education,  government, utilities, consulting, and high-tech (see table 2). For  example, 12 percent of SHRM members in the education industry offer  formal phased retirement, and among the subgroup of higher education  members, 23 percent offer it. Industries least likely to offer formal phased  retirement include real estate/rental leasing and retail/wholesale trade.
The other two studies examining data on prevalence examined both  formal and informal phased retirement and found patterns similar to the  SHRM study. One older study of employers with more than 20 workers  found that establishments in the service sector, especially those in health,  education, and social services, are more likely to permit formal and  informal phased retirement. In contrast with the SHRM survey, this  study found that public administration and  transportation/communications/utilities industries were less likely to permit  formal and informal phased retirement. Lastly, one study based on a  small survey of large domestic and international employers found that  consulting, professional, scientific, and technical services organizations  were most likely to offer formal and informal phased retirement (41  percent) while manufacturing employers were least likely to offer it (24  percent). (See sidebar for information on phased retirement in the  federal government.)
Employers with professional and technical workforces may have more of  a reason to retain older workers via phased retirement precisely because  their workers tend to be highly skilled. Nine of the 16 experts we  interviewed explained that industries with skilled workers or with labor  shortages have motivation to offer formal phased retirement programs in  part because their workers are hard to replace. For example, one expert  we interviewed described a company with manufacturing staff who were  highly skilled in engineering or the complex manufacturing process. The  company saw a need to offer phased retirement to retain these staff, who  would be hard to replace.
Certain employers may also choose to offer phased retirement to their  most skilled or higher ranking employees rather than to others. For  example, one study found that among large employers offering phased  retirement, a smaller percentage offered phased retirement to hourly  workers than offered it to executives and salaried workers. Another  article we reviewed described how technological advances have  increased the demand for skilled labor and that phased retirement may be  better to manage skilled workers, managers and professionals than  clerical and blue-collar workers.
Some of the industries most likely to offer phased retirement already have  part-time opportunities for workers, which may have to do with how their  work is structured and the common practices in those industries. For  example, according to 2016 CPS data, an estimated 26 percent of  workers in education and health services work less than 35 hours per  week, compared to 11 percent in manufacturing. The nature of the job  likely also plays a role, as it may be logistically easier for a professor, for  example, to teach fewer courses than for an assembly-line worker to  reduce the hours on her shift. For instance, two of the publications we  reviewed explained that some employers feel phased retirement may not  be a good “fit” with their job structure. As one expert told us, some  industries have embraced flexible work arrangements while others have  not. Establishments more open to part-time work or flexible hours also  tended to be more open to phased retirement, according to the two  studies we reviewed that examined employer characteristics. One of  these studies also found that establishments that permitted informal or  formal phased retirement tended to have policies that were supportive of  part-time work, such as health insurance and paid vacations for part-time  workers.
There are other reasons that employers may not be interested in phased  retirement or retaining older workers, according to four of 11 publications  we reviewed that described potential obstacles to phased retirement. For  example, two articles cited bias or beliefs among some employers that  older workers are less productive or less valued than younger workers.  One of these and another article described how health care costs can be  expensive for older workers. One additional study reported that the  obstacle most commonly cited by large employers who do not offer  phased retirement is that there is no expressed interest from  employees. This may be especially true in workplaces with few older  workers.
section_title: Designing Phased Retirement Programs Can Be Challenging, According to Experts, Employers, and Publications, but Some Employers Report Benefits in Doing So
subsections: section_title: Key Cited Challenges to Designing a Phased Retirement Program Include Compliance with IRC Nondiscrimination Provisions and Employment-related Discrimination Laws
paragraphs: Employers face potential challenges in complying with various laws and  regulations when designing a phased retirement program, according to  experts and employers we interviewed and the publications we  reviewed. Of large employers, 71 percent agreed that “regulatory  complexities and ambiguities involving federal tax and age discrimination  laws impact their organization’s ability to offer a phased retirement  program,” according to a small MetLife study of employers with 1,000 or  more workers. One of the experts we interviewed described a general  sense of fear or uncertainty among employers about laws and regulations  and their possible application to phased retirement arrangements. Based  on employer and expert interviews and publications we reviewed, some  employers report facing challenges with Internal Revenue Code (IRC)  nondiscrimination provisions, employment-related discrimination laws, the  defined benefit pension formula, health care coverage, and in-service  distributions from pension and savings plans.
IRC nondiscrimination provisions: According to experts, publications,  and employers, IRC provisions regarding discrimination can be a  challenge when designing phased retirement programs. These provisions  generally prohibit a qualified plan from discriminating in favor of highly  compensated employees. Failure to comply may result in loss to the  employer of the tax benefits of providing an ERISA qualified plan. In  addition, workers in a plan that is no longer qualified may lose tax benefits  and certain protections. Over the past several decades, private sector  employers have shifted from providing a large share of retirement benefits  through DB plans to relying much more heavily on DC plans. The  nondiscrimination rules apply to both DB and DC plans. The MetLife  survey found that an estimated 51 percent of large employers agreed that  “the retirement plan nondiscrimination rules can be an obstacle to an  effective phased retirement program for their organization.” Of the 11  publications we reviewed, five reported the nondiscrimination provisions  in general were a challenge, as did seven of the 16 experts we  interviewed. However, of the eight employers we spoke with that had DC  plans and phased retirement programs, none identified the  nondiscrimination rules as a challenge to setting up a phased retirement  program in the context of their DC plan.
In contrast, one employer we interviewed had seriously considered a  phased retirement program but ultimately did not implement one in part  because the employer believed it could fail the nondiscrimination testing.  It believed the IRS regulations limited its ability to provide the phased  retirement program it wanted. The employer explained their view that if  they offered phased retirement and gave partial service credits to phasing  workers who were participating in the DB plan, and the credits were  included in the nondiscrimination testing, it could fail the test due in part to  their older workforce’s longer service and therefore higher salaries.
According to eight of the 16 experts we interviewed, some employers,  such as those providing specialized services, would prefer to choose only  those workers with specific, difficult to replace skills for phased  retirement, and often it is those workers who are highly paid. This  potential challenge was also noted by four of the 11 publications we  reviewed. For example, one of the experts said in his view if an employer  wanted to incentivize phased retirement by offering additional 401(k)  matching contributions, it would be discriminatory if it were offered only to  highly compensated employees—potentially those with the specific skills  the employer wanted to retain. Specifically, the IRC nondiscrimination  rules require that the group of employees who are eligible for phased  retirement not be constituted in a way that favors highly compensated  employees. This determination is made by comparing the extent to which  highly compensated employees are eligible for phased retirement with the  extent that other employees are eligible and takes into account the  business reason for the selection of the eligible group. One expert  observed that if a company does not have a business need to make all  workers eligible for phased retirement, it must have a business need for  selecting specific types of workers. He added that companies struggle to  decide and define who should be eligible for pension and other benefits  such as phased retirement.
Employment-related discrimination laws: According to experts and  employers we interviewed, designing phased retirement programs for  older workers also potentially brings employers face-to-face with age- and  disability-related legal challenges. Of the 16 experts we interviewed, 10  noted as a challenge the potential of a phased retirement program  violating ADEA and/or ADA protections against employment-related age  or disability discrimination. The ADEA was also discussed in three of the  11 publications we reviewed. One article explained that deciding to offer  phased retirement only to employees who have essential skills could  expose the employer to ADEA claims, especially if the program denied  enrollment to relatively old employees. Another expert pointed out that it  could be considered discriminatory if it targeted the phased retirement  program only to workers who were younger than age 62. Two employers  commented that it is easier to allow an ad hoc agreement for a worker  who wants to work fewer hours or to become a contractor than it is to  have a formal phased retirement program.
According to four of the employers we spoke with and six of the  publications we reviewed, the potential legal uncertainties and challenges  that surround both nondiscrimination provisions and employment-related  discrimination laws may discourage employers from establishing formal  phased retirement programs, even though they and their employees may  benefit from such programs. One expert we interviewed told us that  phased retirement is a grey area under the age discrimination laws.  Another told us there is a high level of concern about creating  discriminatory phased retirement programs.
Calculation of defined benefit pensions: The benefit formula of some  DB plans can be a potential challenge to designing a phased retirement  program, according to seven of the 11 publications we reviewed.  According to those publications, depending on how the formula is  designed, it could have a negative effect on working longer and be a  disincentive for workers to participate in their employer’s program. For  example, if the benefit formula calculation takes into account the last 5  consecutive years of wages, and the worker participates in a phased  retirement program that entails fewer work hours and lower wages, it  could have a permanent effect on the worker’s DB pension amount.
Seven out of 16 experts noted the potential challenge of determining how  the benefit for a DB plan is calculated. For example, one expert said a  major concern was that participating in phased retirement could reduce a  worker’s lifetime DB pension benefit if the benefit is based on the last 3 or  5 years of service. Another told us that if the employer made changes in  the DB plan to accommodate the phased retirement participants, the  employer would have to be very careful to do this in a nondiscriminatory  way. Of the nine employers we interviewed, two had DB plans. One of the  two commented that when they designed their phased retirement  program, the DB plan was the most difficult piece to figure out.
Health care coverage: The provision of health benefits to participants in  a phased retirement program can be a challenge, according to two of the  11 publications we reviewed. Employers may choose to offer group health  coverage to their workers who work less than full time. These employers  have to decide whether phasing workers will be covered. For active  workers over age 65, Medicare is generally the secondary payer. If an  employer provides health coverage to phasing workers, both older and  younger than age 65, the employer may have increased health care  costs. According to two articles we reviewed, some employers may see  this increased cost as a disincentive to implementing a phased retirement  program. These articles noted the potential cost of providing health  insurance for phasing workers.
However, health care coverage was provided for both full-time and  phasing workers by all eight of the employers we interviewed who offered  phased retirement. One pointed out that their health insurance subsidy is  a major benefit to employees, and as a component of the phased  retirement program, shows that the company respects and values its  workers. Three of the eight employers required that the phasing worker  complete a designated number of work hours per week or pay period to  qualify for these health benefits. One of the three had two levels of  coverage differentiated by age, hours worked, and tenure requirements.
In-service distributions: According to nine of the 16 experts we  interviewed and three of the 11 publications we reviewed, workers may  be unable to afford living on the reduced wage of phased retirement,  which may make the programs unattractive to such workers. To afford  living on the reduced wage of phased retirement, workers may need to  withdraw income from their retirement savings accounts or start receiving  DB benefits. However, in-service withdrawals are subject to age  requirements, and not all plans allow in-service withdrawals. DB plans  generally provide in-service distributions only to workers age 62 and  older.
One article pointed out that DC plan participants generally may not  receive, without penalty, distributions from a DC plan until they reach age  59 and ½. The article noted that because few workers can afford to  partially retire unless they receive retirement benefits, these provisions  effectively rule out phased retirement before age 59 ½ for DC plan  participants and age 62 for DB plan participants. Two of the experts we  interviewed said that age 62 was too old to make a difference in early  retirement decisions. One added this can be an issue in certain industries  where workers may want to retire before age 62.
This can be challenging for employers who may want to provide phased  retirement to workers in their 50’s. One article noted that employers with  DB plans may want to offer phased retirement to their younger workers,  preferably when they are eligible for early retirement under the plan  provisions. One expert said that phased retirement could be very helpful  for workers in physically demanding jobs, such as the service industry or  building trades, that tend to wear out workers’ bodies by their 50s.
section_title: Experts and Employers Interviewed Reported that Operating a Phased Retirement Program Requires On-going Compliance Activities and Attention to the Concerns of Managers
paragraphs: According to our interviews with experts and employers, operational  challenges with phased retirement programs fall into two general  categories: 1) on-going compliance activities with IRC nondiscrimination  provisions and employment-related discrimination laws; and 2)  administrative issues including the needs and concerns of managers.
IRC nondiscrimination provisions and employment-related  discrimination laws: According to five of the 11 publications we  reviewed and seven of the 16 experts we interviewed, compliance with  the nondiscrimination provisions can be an ongoing challenge.  Depending on a retirement plan’s eligibility criteria under a phased  retirement program, there may be complaints of employee discrimination.  For example, one employer we interviewed said they did not advertise  their program partly because it is not offered in every business unit. Both  an expert and an employer told us that the paperwork required to stay in  compliance with the nondiscrimination provisions can be burdensome and  is easy to get wrong. According to two of nine employers and 10 of 16  experts we interviewed, ongoing activities related to compliance with  ADEA- and ADA-related discrimination laws can also be a continuous  challenge.
Administrative and manager concerns: Seven of the nine employers  we interviewed told us that phased retirement programs present  administrative challenges. Six of them told us their managers were  concerned that they have to get the same amount of work completed with  fewer work hours from phased retirement participants. Administering the  payroll was also cited as an ongoing challenge by another employer, who  told us it can be difficult to track these workers’ time and to account for  merit increases and bonuses. Another employer said it is a challenge  both to arrange workers’ schedules and make sure clients’ needs are  met. One employer said it takes managers extra time to help with  knowledge transfer and adjustments due to changes in workers’  schedules.
Two employers told us their managers also were concerned about the  phased retirement program in the context of their organization’s financial  and personnel rules and processes because, ultimately, the program  could result in reduced budgets for the individual work units. One  employer explained that managers have to do their planning and  budgeting as if the phased retirement participants were working full time.  Another employer described a similar budget/staffing situation. This  employer told us that each division is funded by head count (number of  staff), so if the division has a phased retirement participant, the manager  will not necessarily have the budget to hire a full time replacement  because the head count remains the same.
section_title: Employers We Interviewed Who Had Overcome These Cited Challenges Reported Benefits from Phased Retirement Programs
subsections: section_title: Approaches to Overcome Cited Challenges
paragraphs: In light of these cited challenges, employers we spoke with who had  implemented phased retirement programs told us they were able to  address various design and operational challenges using different  approaches.
IRC nondiscrimination provisions and employment-related  discrimination law approaches: Of the nine employers we interviewed,  five reported that they overcame potential IRC nondiscrimination  challenges applicable to their retirement plans by allowing all of their  workers who met basic age and years of service requirements to  participate in the phased retirement program. For example, one  employer opened phased retirement to all U.S. employees age 60 and  older with 5 years of service at the company. Another opened the  program to all workers age 55 and older with 10 years tenure and at least  “achieved expectations” on their performance evaluations. Three  employers had no eligibility requirements at all. One employer  commented that their program’s open eligibility was in line with the  inclusive culture of the company.
The three employers with specialized or highly skilled workers said they  overcame the challenge by making their phased retirement program  available to those workers they identified as meeting a “business need.”  For example, one employer told us that eligibility for their phased  retirement program was up to management and management’s  perception of the business need to retain staff, and the ability to fill the  phasing worker’s position on a part-time basis. They said that some  positions require full-time staff, for example, customer service positions.  Another employer said they require the worker to submit an enrollment  form with the manager’s signature both at initial application and every  year of program participation thereafter. According to this employer, this  procedure ensures there is a business need for the worker to participate  in the program.
To allay employment-related discrimination concerns, employers reported  using different approaches. One employer told us managers have very  strict guidelines about what can and cannot be said in a discussion about  phased retirement. Specifically, a manager cannot offer advice or ask  leading or specific questions about age or retirement. Another employer,  who does not advertise their program, told us they wait for the “windows”  when workers bring it up or at performance reviews to discuss the  program. Similarly, another employer said that when an employee tells  human resources they are interested in retirement, human resources  asks if phased retirement is an option. One of the employers, who does  not have a written policy on phased retirement, told us the individual  worker and the company representative work together on phased  retirement to “make it work.”
How One Employer Met the Challenge of  Defined Benefit Plan Accruals  One employer we spoke with told us it  calculates the benefit amount for its defined  benefit (DB) plan using a consecutive 5-year  average of wages. Because workers in its  phased retirement program only work four  days per week and receive 80 percent of their  full-time pay, they would risk getting less than  the targeted replacement level of full-time  income if the reduced pay level were used in  their DB benefit calculations. To meet the  challenge of lower DB pension accruals  during the phased retirement period, the  employer told us they pay workers in the  program a full-time salary and allow them to  purchase one day of vacation per week for 20  percent of their salary. Thus, phasing workers  effectively receive 80 percent of their full-time  salary for working four days per week, and a  full-time equivalent salary is used for  purposes of the DB pension calculation.
Defined benefit plan approaches: One employer we spoke with said  they overcame the challenge of DB benefit formulas by making changes  to the calculation for phased retirement participants. Specifically, the  employer said they changed the way that benefits are accrued so there is  only a slight difference from the benefits a worker would have received if  they continued to work full-time (see sidebar). Another employer reported  avoiding any challenges to DB plans because the company had frozen its  DB plan prior to introducing phased retirement. Current trends show a  significant shift away from DB plans and toward DC plans, so there may  be less of a need in the future for approaches to overcome DB plan  challenges regarding phased retirement.
Administrative and manager concern approaches: Employers we  interviewed said they overcame the challenges of managers’ concerns  about working with a phased retirement program in ways that worked for  each individual organization. The human resources department at one  employer responded to the managers who objected to the phased  retirement program by promoting the program’s benefits. That employer  said, for example, that managers would be reminded that having an  experienced part-time person was better than having no one, which could  be the case if the phased retiree had stopped working altogether.  Additionally, managers were reminded that a part-time experienced  worker could help train a new person for the job.
Employers also reported making various program adjustments to help  with managers’ concerns. According to one employer, work needed to be  completed even if some workers reduced their hours, so they set up a  “flex team.” This group of workers is available to fill in as needed  throughout the company, and managers can tap it to fill shifts of phased  retirement participants. Another approach taken by one employer we  interviewed is that when a request for phased retirement is made, they  look at the current staff roster to see if there is a part-time worker who  might want to work more hours or go full time to fill the gap left by the  phased retiree. They noted that because of the nature of their work, they  can set up different combinations of hours and shifts.
section_title: Reported Benefits of Phased Retirement Programs
paragraphs: Employers we interviewed identified four primary, employer-focused  benefits of phased retirement: 1) the retention of knowledgeable, highly  skilled workers; 2) the transfer of knowledge to younger workers; 3) the  ability to transition older workers into retirement; and 4) the opportunity for  workforce planning.
Worker retention: Seven of the nine employers we interviewed  suggested that allowing knowledgeable, experienced workers to phase  into retirement often means they will stay longer with their employer. One  employer said they are very satisfied with the phased retirement program  because it helps retain highly educated, specialized workers. Another  commented that their workforce is very valuable and if these employees  were not participating in phased retirement they would be retired.
Knowledge transfer: Seven of the nine employers we interviewed said  that maintaining the company knowledge base is critical to employers.  One small employer told us their main challenge is the aging of the  workforce and succession. We were told by another employer that it is  expected a phasing worker will train and mentor his or her replacement,  thus maintaining the company knowledge base. Yet another employer  said that knowledge transfer is a large component of the phased  retirement program and it is expected that workers create a transfer plan.
Transition to retirement: Six of the nine employers we interviewed said  providing a gradual pathway to retirement allows both employer and  worker to adjust. The culture of the company, one employer said,  facilitates the phased retirement program. Another employer noted that  phased retirement eases the transition for workers afraid of losing their  sense of professional belonging as they transition out of paid work. In this  same vein, an employer said that their program provides an attractive off  ramp, and added that it is a way to reward a worker for their years of  service. Another commented that phased retirement is a positive way for  those at or near retirement age to transition softly into retirement—they  are participating, but at a reduced pace. Two companies conducted  surveys of phased retirement program participants and found that these  workers appreciated the ability to transition into retirement.
Workforce planning: Five of the nine employers we interviewed said  knowing when workers will retire allows employers to plan for the future.  Providing a phased retirement program, one employer told us, makes  them aware of workers’ retirement plans and thus able to plan for future  workforce needs. Another employer said that a major goal is to help the  company with workforce planning by encouraging workers to let the  company know about their retirement plans and to help transfer their  knowledge before they retire.
section_title: Agency Comments
paragraphs: We provided a draft of the report to the Departments of Labor and the  Treasury, the Equal Employment Opportunity Commission, the Internal  Revenue Service, the Office of Personnel Management, and the Social  Security Administration. The Departments of Labor and the Treasury, the  Equal Employment Opportunity Commission, the Internal Revenue  Service, and the Office of Personnel Management provided technical  comments, which we incorporated as appropriate. The Department of the  Treasury and the Internal Revenue Service reviewed this report solely for  technical accuracy. They noted that in conducting this review they made  no determination on whether the current phased retirement programs  described in this report (including in Appendix II) satisfy the requirements  of the Internal Revenue Code. The Social Security Administration did not  have comments.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Labor, the Secretary of the  Treasury, the Acting Chair of the Equal Employment Opportunity  Commission, the Commissioner of the Internal Revenue Service, the  Acting Director of the Office of Personnel Management, the Acting  Commissioner of Social Security, and other interested parties. This report  will be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines (1) the recent trends in the labor force participation  of older workers, (2) the extent to which employers have adopted phased  retirement programs and what type of employers offer them, and (3) what  challenges and benefits, if any, exist to the design and operation of  phased retirement programs.
To describe the recent trends in labor force participation of older workers,  we analyzed nationally representative data from the Current Population  Survey (CPS) and the Health and Retirement Study (HRS), two datasets  with information about the labor force participation of older workers.
We analyzed data from the 2005-2016 CPS Annual Social and Economic  (ASEC) Supplement, which included the most recent available data. For  example, we used CPS ASEC to estimate the labor force participation of  older men and women of different age groups, as well as the occupational  sector in which older workers work.
CPS is sponsored jointly by the U.S. Census Bureau and the U.S. Bureau  of Labor Statistics. ASEC is an annual supplement to the CPS that  includes information about family characteristics, household composition,  education attainment, previous year’s income, work experiences, and  other things. It is representative of the U.S. noninstitutionalized population  living in households. We chose CPS because it is the primary source of  labor force statistics for the population of the United States, and because  it has a large sample size (about 94,000 households in 2016).  Approximately 185,000 total individuals comprised the sample in 2016.  Moreover, it included questions relevant to our purposes, such as age,  labor force participation, and occupation.
We also analyzed data from the 2004-2014 HRS for the Early Baby  Boomer Cohort (born 1948-1953), which included the most recent  available data.  For example, we used HRS to estimate the percentage  of older workers that can reduce their work hours, that plan to reduce  their work hours as they transition to retirement, that would like to reduce  hours even if their pay is also reduced, and the percentage that are partly  retired. We also used HRS to analyze other information for this cohort,  such as the percentage that said their pension or health benefits would be  affected by reducing their hours and the percentage that retired sooner  than expected.
The University of Michigan’s HRS is a longitudinal panel study that  surveys a representative sample of approximately 20,000 Americans over  the age of 50 every 2 years, with new cohorts being added to the sample  every 6 years. We chose HRS because of its large sample size, focus on  older Americans, and because it included questions relevant to our  purposes. For example, it asks about workers’ plans for retirement and  work patterns. Moreover, the longitudinal panel structure allowed us to  examine changes over time, such as an individual’s plans at one period  compared to the outcomes in another period.
We examined the reliability of the CPS and HRS by reviewing  documentation and conducting selected data checks. For example, we  reviewed codebooks, technical documentation, and information about  survey weights for each dataset. We also conducted electronic testing to  check for missing data or errors. We found the data we used to be  sufficiently reliable for our purposes.
Nonetheless, as with all survey data, estimates from the CPS and HRS  are subject to some sampling error since the samples are one of a large  number of random samples that might have been drawn. Since each  possible sample could have provided different estimates, we express our  confidence in the precision of the sample results as 95 percent  confidence intervals. These intervals would contain the actual population  values for 95 percent of the samples that could have been drawn. In this  report, we report percentage or other numerical estimates along with their  95 percent confidence intervals. Unless otherwise noted, all percentage  estimates based on the CPS have 95 percent confidence intervals that  are within about +/- 2 percentage points or less, and all percentage  estimates based on the HRS have 95 percent confidence intervals that  are within +/- 3 percentage points.
The survey literature refers to both the CPS and HRS samples as  complex designs, a loosely-used term meant to denote the fact that the  sample incorporates special design features such as stratification,  clustering and differential selection probabilities (i.e., weighting) that  analysts must consider in computing sampling errors for sample  estimates of descriptive statistics and model parameters. For CPS, we  used weights provided by the U.S. Census Bureau. For HRS, we adapted  the Balanced Repeated Replication (BRR) method to develop and use  weights specific to the Early Baby Boomer cohort. The BRR method is  applicable to stratified sample designs with two half-sample units (i.e.,  primary sampling units) selected from each stratum. When full balancing  of the half-sample assignments is employed, BRR is the most  computationally efficient of the replicated variance estimation  techniques.
To inform all sections of this report, we reviewed relevant federal laws  and regulations and conducted a literature review regarding the  prevalence of phased retirement programs in the United States. The  literature review included scholarly journals, conference and working  papers, and trade news published between 2006 and 2016. The trade  news helped us also identify industry surveys and reports. We excluded  publications limited to a particular industry, those not based on a  reputable data source, and those whose authors are affiliated with a  partisan organization. From this search, we identified 20 publications (11  quantitative studies for which we reviewed the methodology and 9  qualitative articles that we used to describe the perspectives or  observations of the experts who authored them). All 11 studies described  the prevalence of phased retirement (4 described percentage of workers  who gradually retire, and 7 described the percentage and/or type of  employers who offer phased retirement). Eleven of the publications (2  quantitative and all 9 qualitative) described challenges to phased  retirement.
While we concluded that each of the publications we included was  appropriate for our purposes, they did have some limitations. For  example, the quantitative studies were based on surveys that had various  sample sizes, populations, and were from various years. Moreover, none  was nationally representative of all employers and there were varying  definitions of phased retirement, though each quantitative study described  phased retirement with the same employer. For our purposes, we  distinguished the studies that described formal phased retirement (an  employer-based program in which workers reduce their working hours in  order to transition into retirement) from those that described informal  phased retirement (such as an ad hoc agreement or situation in which a  worker retires and is rehired on a part-time basis, such as a contractor).  Nonetheless, these publications provide valuable information on the  prevalence of phased retirement and the challenges to such programs.
To understand the prevalence of phased retirement programs and any  issues designing and operating these programs, we spoke with agency  officials, including officials from the Department of Labor. For example,  we discussed the ERISA Advisory Council reports with officials from the  Department of Labor’s Employee Benefits Security Administration, the  Department of the Treasury, and the Internal Revenue Service.
We also interviewed 16 experts on the topic of phased retirement. We  identified these experts through our review of relevant literature and  through expert referral. The experts represent a variety of fields, such as  consulting, industry groups, interest groups, and academics, and we  evaluated these experts’ independence, for example, by confirming they  had no known source of bias and were not affiliated with a partisan  organization.
Lastly, we conducted semi-structured interviews with 9 employers that  offer or considered offering phased retirement programs (see appendix II  for more information). Six employers had formal phased retirement  programs, and 3 did not. Of the 3 without formal phased retirement  programs, 2 had phased retirement programs that were not written down  or formalized but that otherwise met our definition of a phased retirement  program, and 1 employer considered but did not implement phased  retirement. We identified these employers using publicly available  websites, relevant literature, and expert recommendations. We also  considered proximity to other employers and GAO offices. While the  information from these interviews is not generalizable, it provided rich  examples and perspectives on the issues related to phased retirement.
We selected these 9 employers to represent a variety of employer types  by location, size, industry, and retirement plan. We spoke with 4  employers in the Midwest, 4 employers in the West, and 1 employer in  the South. We spoke with 2 employers with fewer than 200 employees, 2  with 200 up to 2,500 employees, and 5 with over 2,500 employees. We  spoke with employers in various industries, including consulting, higher  education, finance, and health care. Five employers had only a defined  contribution plan, 3 had both a defined contribution and defined benefit  plan, and one had a deferred compensation plan.
section_title: Appendix II: Profiles of Phased Retirement Programs for Selected Employers
paragraphs: Formal phased retirement is an employer-based program in which older  workers can reduce their working hours in order to transition into  retirement. We conducted semi-structured interviews with 9 employers  that offered or considered offering phased retirement programs. Six  employers had formal phased retirement programs, and three did not. Of  the 3 without formal phased retirement programs, 2 had phased  retirement programs that were not written down or formalized but that  otherwise met our definition of a phased retirement program, and 1 had  considered but did not implement a phased retirement program. We  identified these employers using publicly available websites, relevant  literature, and expert recommendations. The employers represent a  variety of employer types by location, size, industry, and retirement plan.  Below are profiles of the 8 employers with whom we conducted interviews  who offered formal or informal phased retirement. The following  information reflects how each employer generally responded to the  questions we asked during the semi-structured interviews. We did not  independently verify the information each employer provided to us about  their phased retirement program.
Features of phased retirement:
Basics: In this formal phased retirement program, workers work  80 percent time and receive 80 percent of pay and 80 percent of  their bonus money, but the defined benefit (DB) pension formula is  based on full salary for up to five years because workers appear  full time on paper.
Cited benefits/advantages: Retention of workers and  development of future leaders and the ability of the employer to do  workforce planning. The employer has conducted surveys of  workers and managers, and feedback about the phased  retirement program is very positive.
Eligible workers: All employees in the United States who are at  least age 55 with 10 or more years of service, who have achieved  or exceeded performance expectations, and who have permission  from management are eligible.
Hours reduction allowed: 20 percent
Length of phased retirement: Workers can stay in the program  for any length of time as long as they are meeting program  standards and have their manager’s approval.
Knowledge transfer: Phasing workers agree to spend time  transferring knowledge, skills, and expertise. For each year the  worker participates, he or she creates a proposal that includes a  knowledge transfer plan with recommendations on how it will  ensure business continuity.
Effect on health care benefits: Participation in phased  retirement does not affect the cost of health insurance for the  worker or employer.
Effect on pension benefits:
DB plan: For phased retirement participants, DB benefits are  based on the worker’s full-time salary and reduced bonus. This  mitigates the effect of reduced pay on the worker’s benefit.  However, if the worker participates in the program for more  than five years, the pension will be affected.
DC plan: The defined contribution (DC) plan contribution is  based on a worker’s full-time salary and reduced bonus.
Features of phased retirement:
Basics: In this formal phased retirement program, workers and  managers develop a structured plan to transfer knowledge and  transition to retirement within two years.
Cited benefits/advantages: The primary benefit is knowledge  and skills retention. Additionally, it helps the company with  workforce planning by encouraging workers to inform the  company about their retirement plans and to help transfer their  knowledge before they retire. The employer has conducted  surveys of workers and managers, and feedback about the  phased retirement program is very positive.
Eligible workers: All workers who have reached age 60 and who  have been at the company for five or more years and who have  permission from their managers and human resources, are  eligible.
Hours reduction allowed: Participants must work at least 50  percent and no more than 80 percent. A participant may submit a  request to work less than 50 percent, though they lose eligibility  for health care benefits.
Length of phased retirement: Phasing can last from six months  up to two years.
Knowledge transfer: Knowledge transfer is a large component of  the program. The employer provides many tools and guidelines,  and it is expected that phasing workers create a transfer plan.
Effect on health care benefits: The employer provides a subsidy  so that the health insurance rates for phased retirement  participants are the same as if they were working full time.
Effect on pension benefits: There is no DB plan. The DC plan  contribution formula does not change with phased retirement, but  the amount of pay upon which the contribution is based changes  in proportion to the worker’s reduced salary.
Other: To deal with the challenge of completing work with phasing  workers working only part time, the company has a group of workers  who fill in as needed throughout the company. Members can be called  on to fill in for phasing workers.
Features of phased retirement:
Basics: In this formal phased retirement program, workers in units  that have implemented the program may participate.
Cited benefits/advantages: The benefits are primarily worker  retention and knowledge transfer, training, and mentoring of staff  that remain.
Eligible workers: Eligibility is up to management and  management’s perception of the business need to retain staff, and  of the ability to fill a position with a part-time worker. It can begin  at any age. Some work units have implemented the program,  while others have not.
Hours reduction allowed: Participants typically work 60 percent  of full time.
Length of phased retirement: (no response)
Knowledge transfer: There is an expectation that participants will  mentor or train staff, but there is no formal knowledge transfer  program.
Effect on health care benefits: If the worker is more than 60  percent time, the employer provides a subsidy so that the health  insurance rates for phased retirement participants are the same  as if they were working full time. However, employer-provided  health benefits end at age 65—the age at which workers become  eligible for Medicare.
Effect on pension benefits: There is no DB plan. The employer  provides a dollar-to-dollar match for the DC plan. Since it is not  based on a proportion of the worker’s salary, the match remains  unchanged regardless of participation in phased retirement.
Features of phased retirement:
Basics: In this formal phased retirement program, workers are  allowed flexibility within the program’s basic rules. Workers can  retire fully at any point during phased retirement.
Cited benefits/advantages: Phased retirement helps avoid a  retirement “cliff.” Instead, it is a ramp from 100 percent time to 0  percent time. Additionally, phased retirement allows the employer  to hire new workers at a lower cost.
Eligible workers: Must be at least age 55 and an eligible worker  for at least seven years.
Hours reduction allowed: The phasing worker and his or her  supervisor negotiate the workload.
Length of phased retirement: Phasing may last one to five  years.
Knowledge transfer: Knowledge transfer and mentoring is done  on a case-by-case basis.
Effect on health care benefits: The employer provides a subsidy  so that the health insurance rates for phased retirement  participants are the same as if they were working full time.
Effect on pension benefits: There is no DB plan. The DC plan  contribution formula does not change with phased retirement, but  the amount of pay upon which the contribution is based changes  in proportion to the worker’s reduced salary.
Features of phased retirement:
Basics: In this formal phased retirement program, a workers’ unit  must determine that participation can be accommodated given  staffing levels in that unit.
Cited benefits/advantages: Phased retirement helps the  employer retain specialized or knowledgeable workers and uses  these workers to bridge the gap between experienced and  inexperienced workers. It also helps with workforce planning.
Eligible workers: All who meet basic requirements of at least age  55, worked at least 10 years with the employer, have worked a  certain number of hours in one of the three prior calendar years  and per pay period are eligible to apply. Each request is approved  or rejected on a case-by-case basis. The supervisor and a human  resources representative discuss the request with the employee.  A primary consideration is whether phased retirement for this  worker can be accommodated given staffing levels in the worker’s  unit.
Hours reduction allowed: While there is no requirement, the  average phased retirement participant works 24 hours a week.
Length of phased retirement: There is no restriction on the  length of phasing.
Knowledge transfer: Phasing workers may be tapped to pass on  knowledge both formally and informally to younger workers.
Effect on health care benefits: Participants who have worked 10  years with the employer pay health insurance costs at the part- time worker rate. For those who have worked 20 years, the  employer provides a subsidy so that the health insurance rates for  phased retirement participants are the same as if they were  working full time.
Effect on pension benefits: There is no DB plan. For the DC  plan, the contribution formula does not change with phased  retirement, but the amount of pay upon which the contribution is  based changes in proportion to the worker’s reduced salary.
Features of phased retirement:
Basics: In this formal phased retirement program, workers must  transition into full retirement within three years.
Cited benefits/advantages: This program provides participants  the ability to adjust to full retirement by reducing their workloads  gradually, while they are still contributing to their units.
Eligible workers: Certain full-time workers who are at least age  57 and have completed at least 10 years of service are eligible.
Hours reduction allowed: Participants may work 75 percent or  50 percent time.
Length of phased retirement: Phased retirement can last no  longer than three years.
Knowledge transfer: There is no knowledge transfer  requirement.
Effect on health care benefits: Participation in phased  retirement does not affect the cost of health insurance for the  worker or employer.
Effect on pension benefits: Eligible workers have a choice  between coverage by a DB plan or a DC plan.
DB plan: Phased retirement affects the final years’  contributions to the DB plan because workers have a lower  salary while participating in phased retirement. However, this  does not necessarily have an effect on the amount of the DB  pension benefit at full retirement because the current  calculation is based on the worker’s highest years of earnings,  not the most recent.
DC plan: For the DC plan, the contribution formula does not  change with phased retirement, but the amount of pay upon  which the contribution is based changes in proportion to the  worker’s reduced salary.
Features of phased retirement:
Basics: This phased retirement program is not formalized but  otherwise meets our definition of a phased retirement program.  While there is no formal structure, the program can be set up in a  number of ways. A worker can switch out of duties that are on his  or her career track, to less stressful duties, or less complex duties;  or a worker could phase to part-time at their regular duties.
Cited benefits/advantages: The organization is able to retain  people who do highly specialized work. It helps with the transition  as a worker near retirement works with his or her replacement.
Eligible workers: All workers are eligible and phased retirement  can begin at any age.
Hours reduction allowed: There is no requirement.
Length of phased retirement: There is no limit to how long a  worker can phase.
Knowledge transfer: There is no official policy but the program  helps with the transition from one worker to the next as the  phasing retiree works with his or her replacement.
Effect on health care benefits: If a phasing retiree works at least  25 hours per week, it does not affect the cost of health insurance  for the worker or employer.
Effect on pension benefits: There is no DB plan. The DC plan  contribution formula does not change with phased retirement, but  the amount of pay upon which the contribution is based changes  in proportion to the worker’s reduced salary.
Features of phased retirement:
Basics: This phased retirement program is not formalized but  otherwise meets our definition of a phased retirement program. In  consultation with management, workers may develop a plan to  reduce their hours prior to full retirement and train their  replacement.
Cited benefits/advantages: The ability to offer phased retirement  helps the company attract and retain its highly skilled workforce.
Eligible workers: It is available to all employees. Employees can  begin phasing at any age.
Hours reduction allowed: While there is no requirement, the  most common reduction in hours is to 50 to 60 percent time.
Length of phased retirement: While there is no requirement,  workers generally phase for one to two years.
Knowledge transfer: It is expected that an employee will train  and mentor his or her replacement.
Effect on health care benefits: If the employee works 20 or more  hours per week, the employer provides a subsidy so that the  health insurance rates for phased retirement participants are the  same as if they were working full time.
Effect on pension benefits: There is no DB plan and no DC  plan. The employer funds a deferred compensation plan, and the  contribution formula does not change with phased retirement, but  the amount of pay upon which the contribution is based changes  in proportion to the worker’s reduced salary.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michael Collins (Assistant  Director), Laura Hoffrey (Analyst-in-Charge), Laurel Beedon, Samuel  Kelly-Quattrocchi, and Jessica Rider made key contributions to this  report. Also contributing to this report were Carol Bray, Lawrance Evans  Jr., Sarah Gilliland, Robert Goldenkoff, Kirsten Lauber, Sheila McCoy,  Erin McLaughlin, Mimi Nguyen, Jessica Orr, Dae Park, Rhiannon  Patterson, Oliver Richard, Matthew Saradjian, Joseph Silvestri, Adam  Wendel, and Daphne Williams.
section_title: Related GAO Products
paragraphs: 401(k) Plans: Effects of Eligibility and Vesting Policies on Workers’  Retirement Savings. GAO-17-69. Washington, D.C.: October 21, 2016.
Social Security’s Future: Answers to Key Questions. GAO-16-75SP.  Washington, D.C.: October 2015.
Retirement Security: Federal Action Could Help State Efforts to Expand  Private Sector Coverage. GAO-15-556. Washington, D.C.: September 10,  2015.  401(k) Plans: Clearer Regulations Could Help Plan Sponsors Choose  Investments for Participants. GAO-15-578. Washington, D.C.: August 25,  2015.
Retirement Security: Most Households Approaching Retirement Have  Low Savings. GAO-15-419. Washington, D.C.: May 12, 2015.
Retirement Security: Women Still Face Challenges. GAO-12-699.  Washington, D.C.: July 19, 2012.
Unemployed Older Workers: Many Experience Challenges Regaining  Employment and Face Reduced Retirement Security. GAO-12-445.  Washington, D.C.: April 25, 2012.
Income Security: Older Adults and the 2007-2009 Recession.   GAO-12-76. Washington, D.C.: October 17, 2011.
Highlights of a GAO Forum: Engaging and Retaining Older Workers.  GAO-07-438SP. Washington, D.C.: February 2007.
Retirement Decisions: Federal Policies Offer Mixed Signals about When  to Retire. GAO-07-753. Washington, DC: July 11, 2007.
Older Workers: Labor Can Help Employers and Employees Plan Better  for the Future. GAO-06-80. Washington, D.C.: December 5, 2005.
Older Workers: Demographic Trends Pose Challenges for Employers and  Workers. GAO-02-85. Washington, D.C.: November 16, 2001.