Playing Catch-Up
Whether any additional pension or 401(k) relief will be introduced by the next President remains to be seen. But the easing of certain regulations has allowed soon-to-be retirees to pad their savings. In 2001, for example, the Internal Revenue Service amended its rules to permit people 50 years and older to squirrel away more in their defined-contribution plans. For traditional safe-harbor 401(k) plans, participants can now save an additional $5,000. For simple 401(k)s, an extra $2,500 is permitted. "It's great because as you get closer to retirement you can contribute more on a tax-deferred basis," says Hess. "Our research indicates that 90 percent of employers now offer catch-up strategies."
The Boeing Co. is one. "We encourage employees age 50 or older to take advantage of catch-up contributions to accumulate more dollars on a tax-deferred basis," says Pam French, director of benefits and integration. Such plans, adds Alan Glickstein, senior retirement consultant at Watson Wyatt Worldwide, are especially helpful for "second-wage earners, where you can defer relatively large amounts of pay and take advantage of the tax benefit."
New regulations regarding automatic enrollment also help cushion savings. The IRS now permits employers to automatically enroll employees in defined-contribution plans, provided employees are notified in advance and permitted to opt out. Companies can even enroll existing employees in a target-date retirement account. "While it costs companies more to automatically enroll because their matching contributions go up," says Hess, "from an altruistic standpoint they're helping the workforce have the means to retire." Still, there are some indications that the savings rates of aggressive investors could be adversely affected, since the default rate may be less than their previous savings rate.
The Aerospace Corp., a Los Angeles–based defense contractor, has found another way to help retirees ease into retirement: phased-in retirement. "We allow our employees who retire to come back and work up to 999 hours a year, which we understand is allowable under ERISA and Department of Labor guidelines," says CFO Dale Wallis. "We draw upon their valuable skills; they conserve more of their retirement money and get paid to boot."
Phased-in retirement plans, however, are still in their infancy because of government regulations. For instance, an employee covered by a defined-benefits plan cannot participate. Nearly two-thirds of employers in a survey by the Employment Policy Foundation said they were stymied by regulations when offering such programs. But they are invaluable in certain industries. "If you're running a hospital and have a group of nurses all reaching retirement at the same time, it may not be in your best interest to have them all retire at once," says Glickstein. "[Under these programs,] you can give them a smaller workload and they can partially tap their retirement funds, preserving the remainder for full retirement."
Back to the Future
Aerospace did something even more radical: it reinstated its defined-benefits plan. "It's in our customers' best interests that our employees stay a long time, to give corporate memory to the government's space and missile programs," Wallis says. "We didn't want to lose workers to competitors offering a more secure retirement package."
The nonprofit unveiled a defined-contribution plan in 1993, the year it put its traditional pension in a soft freeze, meaning it was closed to new entrants but current employees could continue to accrue benefits. Employees hired before 1993 could rely on the usual bimonthly check; those hired after would accrue a lump sum upon retirement based on contributions made to their plan. "Many plan on living 20 more years after retiring," says Wallis. "But what if they live another 30 years? What do they do those last 10 years?"
The company answered those questions by partially thawing its pension plan for new employees. "New employees now get a 50/50 plan that is half defined-benefits and half defined-contribution," the CFO explains. "They get both the lump sum at retirement plus a pension check for the remainder of their lives."
The new plan also offers significant retention benefits. The government's Base Realignment and Closure Act almost caused the relocation to Colorado of Aerospace's primary customer, a U.S. Air Force base in Los Angeles. "The base represented more than half of our revenues, and we were across the street," Wallis notes. "Had it moved, they would have wanted Aerospace's people, our intellectual capital, to move with them. A defined-contribution plan doesn't give you the handcuffs to do that, whereas a defined-benefits plan provides far more incentive to pull up stakes."
Focus on the Fiduciary
Don't expect a rush of companies to follow Aerospace's lead. Instead, Vanguard's Brennan believes that demographic realities will prompt financial-services firms to develop new products at a "fast and furious" pace. With them, however, will come some fiduciary risk.
"Although plan sponsors have no obligation to deliver a certain amount of retirement income to participants, if they help employees plan their retirement-income streams, they should be careful not to run afoul of fiduciary duties under ERISA," says McDermott's Joseph Adams. "No good deed goes unpunished. Once companies begin to offer things like target-age funds, annuities, and [predictive] tools, there is an element of risk."
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