Magazine article Personnel

Preretirement Planning and the Bottom Line

Magazine article Personnel

Preretirement Planning and the Bottom Line

Article excerpt

To help fight the rising cost of retiree benefits, employers have found a surprising new weapon: preretirement planning. Here's how it works.

With companies bracing for the new FASB and IRS regulations, employers may have to diminish their contributions to both retiree health plans and pension benefits.

"The new FASB regs are so severe that many HR execs are reexamining their commitment," says Marvin Greene, vice president of TFP&C, a benefits consulting firm. Adds attorney Kenneth Sacks, a partner in the New York-based firm of Gibney, Anthony & Flaherty, "The trend is for companies to cut back on, or terminate, their defined benefit plans."

Clearly, this cost-saving move will shift the financial burden onto retirees. To soften the blow, some companies are teaching employees how to prepare for retirement on their own. "They want to make sure that employees will have the resources to shoulder the extra load," explains Greene.

Enter preretirement planning, a catchall term for programs offered by employers to educate and assist employees with retirement investment options. Make no mistake: Such programs are far from new to the corporate world. They traditionally have been used to motivate and lessen the stress of older workers.

In the 90s, however, many of the programs are geared to help companies shore the gap left by cutbacks in traditional retirement programs. In the process, preretirement planning programs are being marketed to employees as young as 30. The idea is that, even with full-blown retirement benefits, if you've waited until you're 50 years old to plan for retirement, you've waited too long. When retirement benefits are slashed, the situation is that much more critical.

Early retirement

While preretirement has always been used as a tool in downsizing, many firms have increased their reliance on it. Explained George Barbee, a vice president at Price Waterhouse: " One reason that preretirement planning is on the rise comes from the mid-'80s, when downsizing became a reality. When older employees were offered buyouts, they simply weren't prepared to make a decision in 60 days that would affect the rest of their lives. They needed more education. News of this quickly got back to the boardroom."

As a result, many corporations that are trimming staff rely on preretirement planning programs to help sell early retirement as an option. Chevron, for example, provides workshops specifically geared to employees who have been offered an early out. Last year, more than 5,000 employees participated in these specially designed workshops. "What companies really want is an orderly flow of people retiring, to allow the succession of younger workers into the management ranks," says Barbee.

The evidence that such programs can save money is incontrovertible. Barbee works the numbers out this way: "If you take 100 employees, and each employee costs the company $50,000 per year, including salary and benefits, their total compensation amounts to $5 million annually A preretirement program for 100 people at $500 a piece comes to $50,000. Now assuming that some of these people are not needed, if just one of these people retires, the preretirement program has paid for itself." Obviously, any additional retirees save the company even more money.

On the rise

Whatever a company's ultimate motivation, preretirement planning programs are on the rise. According to a 1989 survey by Buck Consultants, 38 percent of 386 responding companies offered an ongoing preretirement program. An additional 18 percent indicated they were planning to start a program within the next two years.

Employees seem to understand the need for such measures. "Employees know that companies are stretched because of competition, and that fewer dollars will go into retirement;' says Greene. He contends that combining preretirement planning with the saving of company dollars reinforces camaraderie between employees and management. …

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