Retirement Options A Primer

Here’s a look at a few of the many retirement options offered in today’s workplace.

Concerns:

• Today’s worker is more mobile and less likely to stay at one job until he or she meets the enhanced benefits eligibility threshold. As a result, the employee can be left with little or no benefit.

• The cost of ongoing actuarial calculations and compliance with rules and regulations can be hard on small and medium-sized companies that lack the economies of scale of their larger brethren.

Defined contribution plan: Anindividual retirement account that allows an employee tocontribute a percentage of pay up to a certain amount tax-deferred. Someemployers offer a percentage match up to a maximum amount and based oneligibility requirements such as a vesting.

Concerns:

• The risks of saving for an individual’s retirement are shifted from employer to employee, which many employees may not be able to handle.

• Employees are not fiscally prepared. These lump-sum retirement distributions require a new level of employee education about investment and money management, says Craig Copeland, senior research associate with Employment Benefit Research Institute.

Cash balance plan/Pension equityplan: Similar hybrid defined benefit plans that pay a specified amount ontermination or retirement based on a predetermined formula, but look likedefined contribution plans because they appear to accumulate assets annually inhypothetical accounts.

Concerns:

• These can be controversial, because they can leave long-term employees in the lurch with reduced benefits if they are not phased in to preserve older employees’ benefits.

• Employees are not fiscally prepared.

Stock options/Equity: Employeesreceive stock or a share of a company with the potential for long-term growth.This is especially popular at high-tech companies, says John Scott, director ofretirement policy for the Washington, D.C.-based Benefits Council, formerly theAmerican Association of Private Pension and Welfare Plans.

Concerns:

• Much of a person’s retirement savings could be in one asset, the value of which may go up or down.

Phased retirement: Any flexibleapproach that allows employees to reduce work hours and/or job responsibilitiesto ease into full retirement. How popular is it? In a 1999 Watson Wyatt surveyof almost 600 medium-sized companies, 16 percent offered phased retirement, withanother 25 percent looking at it in the next few years. “However, as manyas 50 percent of workers over age 55 are working in retirement, suggesting thatmany workers are creating their own phased retirement by leaving their currentjob and working a reduced schedule at another organization,” adds ValerieA. Paganelli, a Seattle-based consulting actuary with Watson Wyatt.

Concerns:

• IRS rules prohibit distribution of benefits from defined benefit plans to employees who are still on the payroll prior to normal retirement age.

• 401(k) plans are prohibited from making in-service distributions prior to age 59 1/2.

• Incomes for employees may be inadequate.

• Corporate culture and succession planning often don’t support the strategic idea.

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