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Retiring Minds Want to Know

How institutions are making voluntary retirement programs work
University Business, July/August 2012
Administrators, faculty, and staff at Ohio U could opt to begin their "twilight years" early.
Administrators, faculty, and staff at Ohio U could opt to begin their "twilight years" early.

It’s an increasingly common move by campus officials during challenging economic times: voluntary retirement. Offering these incentives to faculty and staff provides a ready means of reducing personnel costs while not being seen as severe and traumatic as layoffs, salary reductions, and furloughs tend to be.

Although the details of such plans vary from one college to the next, they all rest on the potential for shrinking the workforce during times of static or declining budgets.

Even where employees will be replaced, costs may be lowered by using part-timers or hiring less experienced full-time personnel. New employees may also come with less expensive benefit packages than those negotiated in earlier eras.

“The most common reason an institution would promote early retirement would be to meet budget cuts,” says John Cothern, senior vice president at Middle Tennessee State University, which carried out a voluntary incentive program in 2009-2010. “This could be from either reduced state funding in the case of public institutions, or reduction in enrollment that translates to reduced funds.”

Accelerating the retirement of existing staff also opens opportunities for bringing in new talent. “Colleges and universities want to be able to attract and retain the best and the brightest at their institution, and to do that, they need to be able to regularly hire new professors and promote from within,” says Edward Moslander, senior managing director of institutional sales and service at TIAA-CREF. “An ongoing replenishment of faculty enables academic institutions to bring new ideas and the latest thinking in research to their programs.”

What do employees think of voluntary retirement offers? Just how much do they benefit institutions? And what should officials consider in making the offer? Read on to see how some institutions have managed their programs.

Desire to Retire

At Ohio University, a plan implemented during the past academic year has allowed employees to retire at an earlier date than originally planned or to retire with a larger benefit. In addition to faculty, administrators and classified employees were also eligible to participate. Age limitations varied according to employment category, but typically included those with five years of service at age 60, 25 years at age 55, or 30 years at age 50.

Those who took the university’s offer received combinations of a cash bonus, service credit, and payout of vacation and sick leave. Depending on the classification, employees could choose from a number of options; a $50,000 cash bonus on separation was offered to employees who waived participation.

Results have exceeded expectations, according to university leaders. They had established a participation goal of 15 percent, but 25 percent of eligible faculty and staff have enrolled to date.

Voluntary retirement ‘has freed up capital for departments to reorganize, and we believe we have seriously limited any need for mandatory layoffs, which was one of the main reasons for offering the program.’ —Greg Fialko, Ohio University

“The program has freed up capital for departments to reorganize, and we believe we have seriously limited any need for mandatory layoffs, which was one of the main reasons for offering the program,” says Greg Fialko, senior human resource director. The move wound up costing the institution an estimated $15 million up front, but at least $10 million will reportedly be saved annually because of the plan.

Some colleges have achieved positive results with incentive programs that do not include provisions for early retirement, but still offer similar features. Under these plans, faculty and staff must meet normal eligibility requirements for retirement. But in encouraging personnel to retire earlier than they might otherwise—say at 60 or 65 instead of 65 or 70—institutions may gain the same types of advantages as plans based specifically on early retirement.

Last year, the Dallas County Community College District developed such an initiative in response to state budget cuts. Announced in March, the plan offered eligible employees 80 percent of their annual base pay if they retired by August 31. A second group received 50 percent of their annual base salary if they retired by January 31, 2012. The incentive was available to employees who were already retirement eligible by being at least 65 years old with a minimum of 10 years of service, or by meeting the “rule of 80.”     

The district benefited in two ways, explains Edward DesPlas, executive vice chancellor for business affairs. Along with the differential between the higher pay of retiring employees and the lower pay of employees hired to replace them, another plus was the opportunity to reorganize around the holes created by retirements.

The University of Utah's Early Retirement Incentive Program, first  offered in 2007, allows employees age 60 or older to receive cash  incentives until they reach the full retirement age for Social Security.“In several instances, we were able to take administrative and support staff positions off of our organizational chart,” he says. “The program gave us budgetary and organizational elbow room.” The plan cost about $11.8 million in incentives paid to participants. Annual savings are estimated at $6.1 million for the first year and $5.5 million each year thereafter, with full cost recovery in approximately two years.

A similar plan has been successful at Penn State, where employees were offered a lump-sum payment of a percentage of their salary. Faculty and staff were eligible if they were actively employed on a specified date and were either age 60 with 15 years of consecutive regular full-time service, or had at least 25 years of consecutive regular full-time service regardless of age.

hree separate colleges over the past year offered the plan, and 63 percent of those who were eligible opted for voluntary retirement, according to Robin Oswald, director of the employee benefits division of the university’s office of human resources. In some cases, participants were given a choice of three retirement dates.

“The choice of retirement dates helped stagger the ultimate reduction in faculty and staff,” Oswald says.

Not a Panacea

Even when voluntary retirement plans bring needed savings, some results can be less desirable.

“There are many ancillary issues that arise from losing faculty and staff in that manner,” says Cothern of Middle Tennessee State. He points to challenges such as reduced services, possible elimination of academic and non-academic programs, and increased reliance on part-time faculty and staff. Other possibilities include increased workloads for remaining personnel, departmental reorganizations and the need to establish new revenue sources.

He adds that meticulous planning and preparations are a necessity, and that officials must be clear, open and honest as to why a decision to reduce the workforce was made. “There must be employee buy-in or many problems can arise, including poor morale for remaining employees,” Cothern says.

Moslander of TIAA-CREF notes that while opening doors for new talent, retirement initiatives may also have the opposite effect when it comes to outstanding senior personnel. Losing a star researcher or a highly productive staff member, for example, may not be in the organization’s best interest.

At the same time, in some organizations there is less of a critical mass from which to draw.

“For already thinly staffed organizations or individual departments where full replacement of vacated positions will be required, an early retirement option may not provide an optimal return,” says Ohio U’s Fialko.

Smooth Transitions

To head off problems and make transitions as smooth as possible—for individuals as well as institutions—good communication is a must.

“Communication is crucial,” Moslander says. “The decision to retire early isn’t something that employees should take lightly. It is incumbent upon administrators to openly communicate that an early retirement plan is available, and it is also important that employees know that the appropriate discussion sessions are available as well as a chance to meet with a financial advisor.”Four-acre Emeriti Park, honoring former Ohio University faculty and staff, is one way this institution shows retirees they won't be forgotten. The entranceway is named for Vice President for Finance and Treasurer Emeritus William Kennard (middle), who retired in 1997 after 31 years of service.

Along with the opportunity for discussion, detailed information should be provided in written form and widely distributed via email or web postings. In fact, the more facts made available to all concerned, the better.

Develop FAQs for easy reference, and hold meetings to explain the plan and any additional benefits that may be involved in the retirement,” Oswald advises. “And be available if a participant has any questions.”

In the process, undue haste should be avoided. “Potential participants need as much time as possible to consider the incentive offer, to determine their financial health, and to consider post retirement options,” DesPlas says. “Individuals and organizations need time to adjust to the prospect of this change.”

The importance of studying all of the options should also be emphasized to employees. “Caution potential retirees to make sure their health benefits are lined up, that they understand the income tax impact of the incentive pay and its distribution, and that they understand how social security and any other pension plans will interact with each other,” DesPlas says.

Another measure that may head off problems is seeking expert advice before establishing guidelines, according to Fialko.

“I recommend seeking outside consulting, including [on] legal and tax compliance issues, when designing a program,” he says. “A retirement provider should be able to assist, as well.”

The degree to which such help is needed all depends on how much internal expertise a college or university has, DesPlas says.
“Usually the CFO, the chief people officer, and the college legal counsel can handle this,” he says. “Externally, a good place to seek assistance would be from peers who have done this before, or from a CPA or attorney that specializes in labor and payroll law.”

And while financial considerations are the impetus for any retirement incentive program, experts advise taking care not to overlook the human dimension.

‘Much of what [retiring] faculty members want is not costly to provide. They want to know how they can stay connected.’’ –Claire Van Ummersen, American Council on Education

“A majority of faculty want an ongoing relationship with the campus from which they are retiring,” says Claire Van Ummersen, a senior advisor in the division of leadership and lifelong learning with the American Council on Education, adding that officials must find clear, transparent ways of communicating what’s available to faculty.

She points out this may be more a matter of taking the time to package services for retirees rather than adding expensive programs or services.

“Much of what faculty members want is not costly to provide,” says Van Ummersen. “They want to know how they can stay connected.”    

She says that providing answers to a few basic questions can help bring faculty on board with retirement incentive plans:

  • Is there a place on campus where they can continue research or writing?
  • Can they have access to libraries and electronic databases? 
  • Might they remain on the same email lists?

Addressing such matters can make the experience more positive for faculty and, in turn, foster a greater level of acceptance for any voluntary retirement plan.

These questions also highlight how some of the costs of retirement incentive programs are not quantifiable, but still merit consideration. 

The vacuum left by departing personnel is one important issue to consider. “Campus leaders should not make the mistake of overlooking the loss of knowledge and expertise associated with early retirements,” says John Weis, vice president for human resource services at Dickinson College (Pa.). “Those retiring have made significant contributions and have well-established personal relationships throughout the campus." 

To minimize negative impact, careful succession planning is advisable. “Be sure the departments and the institution have a strong line of succession, especially for unique and hard-to-fill jobs,” says DesPlas. “Don't be caught not knowing where you will go to recruit replacement talent.”

Employees may well have their own financial concerns about  retiring early, as well.

While retirement incentive packages can be advantageous to institutions, that’s often not the case for individuals, according to James Lange, a Pittsburgh CPA and attorney whose clients include 500 college professors. He says retirement incentive packages are often not advantageous to individuals.

“Many tenured professors are taking early retirement buyouts for a fraction of what they would make if they continued working,” he says. “They all talk about locking in the health benefit often offered and perhaps a six-month kicker, but together they don't come close to what they would make if they continued working for even a couple of years, let alone indefinitely like many probably would.”

Lang says participating in an incentive program makes most sense when it dovetails with existing personal plans. “If a professor is happy doing what he is doing, I think it is an enormous financial and professional mistake to take one of these packages,” he notes. “If a professor is financially secure and was looking to retire anyway, then it is free money.”

From the institutional viewpoint, financial challenges that lead to retirement incentive plans can also act as a catalyst for positive change.

“It may be a cliché to say ‘never let a crisis go to waste,’ but these cases may provide opportunities for an institution to take advantage of,” Cothern says. “Many institutions know that changes need to be made for one reason or another, but just have not done it with operations seemingly doing OK when really that is not the case. Too, institution leadership may not want to fight the battles that come with this type of action. So now is the time to act, but do so responsibly.”