Early Retirement Incentive Plans (ERIPs) for Employee & Workers

Early Retirement Incentive Plans extend the benefits offered to workers or give additional financial inducements that motivate employees to retire prior to the age or time they otherwise would retire. Early retirement incentive plans first appeared on the employee benefit landscape in the late 1970s and early 1980s. The nation was struggling with “stagflation,” and many firms sought to reduce their labor costs without resorting to layoffs. At the same time, the long-term trend toward earlier retirements was proceeding unabated. Many workers expressed a desire to enjoy the “leisure” that could be secured through the early retirement provisions of many companies’ defined benefit plans. Early Retirement Incentive Plans offered enhancements to these benefits, allowing employees to retire earlier than they had planned. They proved popular among salaried and hourly workers alike and were smiled on by unions. No wonder, then, that a study of Fortune 100 firms in 1989 found that eight out of ten had offered such programs (BNA 1989).

When first offered, firms could not reliably predict how many or which workers would accept them. Especially when Early Retirement Incentive Plans were generous, and their eligibility criteria quite broad, firms lost many workers they would have wished to retain. Sometimes they found they had to hire back these new retirees as consultants or independent contractors. For example, a survey of 232 private and public employers by Mercer Human Resource Consulting found that 35% hired back retirees as consultants or independent contractors, and 37% brought back retirees as temporary or part-time employees. In the past two decades, however, firms have become much more sophisticated in targeting offers to avoid such outcomes.

During the past several years, the popularity and advantages of Early Retirement Incentive Plans has been on the wane. Several factors are involved in their diminished use. First, the ranks of potential retirees have been thinned by two decades of offering such programs. In addition, many employers have faced the need for substantial reductions in their workforce or the need for cutting particular jobs in response to a merger—goals that were unlikely to be achieved with Early Retirement Incentive Plans alone.

Moreover, while earlier programs had been able to call on the ample funds available in defined benefit pension plans, newer retirement plans were likely to take the form of defined contribution plans, which are not readily useful in creating Early Retirement Incentive Plans. Indeed, many firms making layoffs today are in the service industry, where workers may not be covered by any retirement plan. And with declining stock values, many defined benefit plans are finding that they now must add funds to property pension funds in order to cover their obligations for current and future retirees. Companies must annually report the actual—not just the estimated—value of their pension funds. Under federal law, if a firm’s loss exceeds 10% of the greater of a pension’s liability or the fair market value of assets, it must by law begin making contributions to the plan (Kerchoff 2002).

Finally, rapidly rising health care costs and the legal issues raised in interpretations of Employee Retirement Income Security Act (ERISA) or the Older Workers Benefit Protection Act (OWBPA) legislation served to dampen the enthusiasm of firms regarding Early Retirement Incentive Plans. Although retiree health benefits—at least helping to bridge a worker until (s)he was eligible for Medicare or retirement medical care“>retirement medical care —were a standard part of earlier ERIP packages, firms now find the costs of such benefits prohibitive. Without a guarantee of protection from rising health care costs, potential how to retire early for retirees find Early Retirement Incentive Plans much less attractive.

Despite these influences, Early Retirement Incentive Plans continue to exist. In fact, they have been widely adopted within higher education and are being offered by states and local communities to achieve downsizing objectives. A 2001 article by the Chronicle of Higher Education reported that since 1994 “nearly half of all colleges have offered financial incentives to encourage faculty members to retire early” (Fogg 2001). Before describing the most recent set of Early Retirement Incentive Plans offered by corporations, academic institutions, or government, a review of the basic characteristics of such programs is in order.

First, participation in Early Retirement Incentive Plans is voluntary. Firms are careful to target an entire class of employees, or a particular location; this protects them from charges of age discrimination in employment. Second, these programs are short term. They are often called “open window plans” because offers are made and must be accepted during a limited time period, typically one to two months, though the range may run from one day to one year. Finally, these plans provide one-time cash and/or pension plan adjustments. Some also provide continuation of other benefits (e.g., health and life insurance) for a specified period. The range of benefits offered is described below, but, as already noted, firms have gained a good deal of experience in the design of Early Retirement Incentive Plans and are able to be more selective in setting eligibility requirements. They also have become less generous in the benefits packages being offered.

While firms and employee benefit consultants agree that, to be most effective, an offer should occur only once, many firms do offer such plans periodically—some nearly every year. A Hewitt Associates 1992 survey of nearly 700 companies, for example, found that one-fifth had offered two programs since 1988; 7% had offered three, and 3% had offered four or more (Hewitt Associates 1992). A 1999 report by Watson Wyatt found that 31% of firms had offered more than one window plan. Unfortunately, workers exposed to frequent Early Retirement Incentive Plans come to believe that they will be able to postpone retirement and still receive an offer “when the right time comes.” Indeed, in 1998, 81% of retirements from employers with pension plans took place prior to retirees’ sixty-fifth birthdays (Employee Benefit Plan Review 1999).