Phased Retirement Plans

[Guest Steven N]

Do the proposed phased retirement program regulations under Notice 2002-43, that provide for prorata distributions at normal retirement from a defined benefit plan or money purchase plan, supercede the provisions of a Deferred Option Retirement Program (DROP) that provide the accrual of the of the monthly retiremnet benefit and usually paid out in a lump sum benefit after the end of the DROP period (usually 1-5 years)? In addition, the proposed regualtions provide for the employee to maintain a dual status (i.e., partially retired and partially in service). This appears to conflict with a DROP where employees are still actively performing full time service for the employer. Finally, would the benefits payable under the phased retirement program be considerd an eligible rollover distribution?

[SoCalActuary]

The issue of phased retirement is one of retiree liquidity, i.e., money for living expenses.

Under our current rules, db plans pay the full benefit or nothing. If you work more than 60 hours per month, you get nothing, even though it reduces your monthly income. Phased retirement would allow a fraction of the benefit while working. This would be better public policy for people who wish to slow down without quitting completely.

The benefits would presumably be provided to those who want the regular income, otherwise they would not apply for them. Therefore, it does not make sense to see these distributions as eligible rollover amounts, since they are annuity type payments.

DROP makes sense when you want to continue full time work without being forced to forfeit the benefits not paid. To me, this is an alternative to the partial retirement benefits of the Notice 2002-43. However, it does have one thing in common, that the participant should not be forced to forfeit the lost payments. My idea is that the normal plan benefit is partly paid and partly held in trust, with the unpaid amount separated into a DC type account or alternatively used to give an actuarial equivalent increase in the later annuity benefit.

Some employers will find this problematic, since it does not help with their underfunded pension plans if the benefit is never forfeited.