Strategies for Retaining Late-Career Employees

By: Aaron Chochon and Brent Banister, CavMac

Due to the current labor market, many government employers are looking to provide older employees with incentives to work longer rather than retire. This article outlines several possible strategies to achieve this goal.

Public employers across the United States are facing workforce shortages, with many sectors struggling to attract and retain talent. This situation is exacerbated by an aging workforce and increased competition for skilled workers. To help tackle this challenge, there are several strategies available for defined benefit plans to encourage late-career employees to remain in the workforce.

A significant portion of public sector employees have reached, or are close to reaching, retirement eligibility. As these individuals leave the workforce, the loss of institutional knowledge and experience can create gaps that younger, less experienced employees may struggle to fill. Additionally, public employers are often constrained by budgetary limitations, making it difficult to offer competitive salaries and benefits that can attract new talent. Further, in response to the Great Recession, many public retirement plan sponsors created new, less costly benefit tiers for future hires to help improve their long-term funding trajectory. Although prudent at the time, some of these new tiers represented a significant reduction in benefits, complicating the recruitment of new talent.

As public employers seek innovative solutions to address workforce shortages, public retirement systems are exploring several strategies to incent late-career employees to extend their service.

The following are some approaches available for consideration:

Deferred Retirement Option Plan (DROP)

DROP programs allow eligible employees to “lock in” their accrued retirement benefits while continuing to work for a specified period – generally between three and five years. During this time, the participant’s monthly benefit is credited to an account (termed a “DROP account”) and typically accumulates with interest. Upon actual retirement from employment, members can receive their accumulated DROP accounts in a lump sum payment and start receiving their “locked-in” monthly retirement benefits.

This program encourages employees to extend their careers by offering a substantial lump sum benefit without reducing their accrued retirement benefit. DROPs can be designed a myriad of ways, with some designs specifically targeting employee retention. DROPs are utilized often when the retirement plan puts a cap on benefit service.

In-Service Distributions

In-service distributions allow eligible employees to access their retirement pension while also receiving a paycheck and retaining medical insurance coverage, provided they meet minimum age requirements set by the IRS. This option provides an incentive for older employees to work longer by offering a significant increase in total compensation. In addition, the increase in compensation and, therefore, the incentive is larger for career members who have accrued larger retirement benefits. The result allows public employers to retain valuable knowledge and skills.

Return-to-Work Program

Through Return-to-Work programs, retirees who underwent a bona fide retirement are welcomed back into positions covered by the retirement system, without pausing their retirement benefits. This can be particularly useful for addressing immediate staffing shortages. However, such programs can be restrictive in their design with respect to the number of hours the employee may work, the length of the bona fide retirement, and the typical requirement that there can be no pre-arrangement between the member and the employer to regain employment.

Partial Lump Sum Option

Another approach is to allow eligible members to receive a portion of their retirement benefits as a lump sum payout at retirement, contingent upon earning additional service beyond regular retirement eligibility. Their lifetime benefit would then be reduced to reflect the lump sum. The potential for a large payout is intended to incent employees to continue working until reaching the stricter (later) eligibility requirements.

Increasing Normal Retirement Age

While not an immediate solution, increasing the normal retirement age (usually only for new hires) can help to retain employees over the long-term, promoting a longer tenure for new members. This change, however, would likely not address short-term challenges and could potentially face backlash from current employees. It should thus be balanced with more immediate incentives designed to retain existing personnel.

Conclusion

In the face of broad demographic shifts, workforce shortages in the public sector is a difficult issue to address and requires strategic action. By implementing innovative retirement options, public retirement systems can incent late-career employees to remain in their roles longer and help alleviate the issue.

Public employers should remain proactive and responsive to both the challenges and opportunities presented by an evolving workforce. By prioritizing employee retention and investing in workforce strategies, public employers can help ensure that they continue to provide essential services effectively while addressing the needs of their personnel. The focus must be on creating policies that not only meet operational demands but also recognize and value the contributions of experienced employees throughout their careers.

About the authors: Aaron Chochon, ASA, EA, MAAA, FCA, Consulting Actuary, has developed a broad range of experience in public pensions, including pension valuations, assumption analysis, legislative analysis, projection modeling and consulting services.

Aaron has provided actuarial services to many retirement systems, such as Kansas PERS, Nebraska PERS, Iowa PERS, Missouri State Employees Retirement System (MOSERS), Oklahoma PPRS, South Dakota Retirement System, and numerous municipal clients.

Brent Banister, PhD, FSA, EA, MAAA, FCA, Chief Actuary, has public sector consulting experience since 1994 providing services to large public clients. He has worked extensively with cost-sharing multiple employer statewide and other large systems, including Indiana Public Retirement System, Iowa Public Employees Retirement System, Kansas Public Employees Retirement System, Los Angeles County Employees Retirement Association, Minnesota Teachers Retirement Association, Nebraska Public Employees Retirement System, and Oklahoma Public Employees Retirement System, in preparing the annual valuation, developing projection models, and conducting cost and experience studies. Over his career, Brent has performed a significant amount of review work for other consultants covering retirement and postemployment benefits on systems from municipalities through statewide systems all across the country.