Like fine wines, some older employees get better with age. With that in mind, some employers are launching phased retirement programs to try to retain valuable older workers.

"As the labor market continues to shrink, employers need to entice older employees to partially retire," said Tonya Manning, chief actuary for Aon Consulting's retirement practice in Winston-Salem, N.C. "Phased retirement is the way to do that."

Indeed, the arrangements—in which an employee moves to a part-time schedule or, after retiring, is rehired part-time or as a consultant—are often described as win-win situations. The arrangements may enable employers to retain highly skilled employees who might otherwise retire, and allow employees to ease into full retirement.

"Employers would like to keep experienced workers on the job," said Christine Faris, senior manager at Smart Business Advisory and Consulting in Devon, Pa. "Older workers often serve as mentors."

One employer pleased with results of its phased retirement program is Stanley Consultants Inc. of Muscatine, Iowa. Of 1,500 employees worldwide, about 1%, or 15 employees, at any one time take advantage of its phased retirement program, which is tied to the engineering company's profit-sharing plan.

Both hourly and salaried employees can participate in the program. Employees that go on a reduced hourly rate have their benefits prorated; for hourly employees, the percentage of their phased retirement benefits equals the percentage of hours worked. Salaried employees' phased retirements are calculated individually. Part-time workers also can start receiving half of their profit-sharing retirement benefit, and new accruals are halved.

Stanley Consultants also offers a 401(k) plan in which employees on phased retirement can still contribute up to 4% of pay while Stanley matches half of enrollees' contributions up to 2%.

Phased retirement "is just a win-win for employees and the company," said Alan Rhea, Stanley's acting human resources director.

Mr. Rhea said Stanley Consulting's workforce is aging and new engineers entering the workforce are not keeping pace.

The U.S. Bureau of Labor Statistics reported in 2006 that the median age for architecture and engineering jobs was nearly 47.

Phased retirement has definitely helped in terms of retaining clients who have worked long-term with certain Stanley employees, and allowed new engineers to learn the ropes from their more experienced colleagues. "We just don't want to lose (older workers). They just bring so much knowledge to the company," Mr. Rhea said.

Some employers use informal phased retirement plans like Stanley Consultants'. Many employers call it informal because, until recently, pension law for traditional defined benefit plans had no language defining phased retirement.

The reason employers haven't instituted formal plans is that federal pension law was an obstacle. Specifically, employees younger than a pension plan's normal retirement age, which typically is 65, were not allowed to receive partial distributions from their employer's defined benefit plans while still working.

But Congress, in passing a comprehensive pension plan funding reform measure last year, opened the door wider to phased retirement programs. As part of the Pension Protection Act, federal legislators rewrote pension law to permit employees age 62 and older to begin receiving distributions from their defined benefit plans while continuing to work.

The new law is "a step in the right direction" Smart Business' Ms. Faris said.

Prior to last year's law, some employers used creative ways to go around federal restrictions and set up phased retirement programs.

For example, employees would establish a break in service by leaving the company for a set amount of time, and then return to work in a part-time or in a consulting capacity. Some observers noted that employers that did this with their workers risked losing these people to competitors.

Still, the revamped law "doesn't require" employers to offer phased retirement programs, said Bob Walter, a principal and benefit consultant at Buck Consultants L.L.C. in Secaucus, N.J. "How much the employee is going to get remains open."

With Congress removing at least one obstacle—the inability of employees nearing normal retirement age to start collecting part of their annuity from their defined benefit plans while still working, albeit on a reduced work schedule—more employers are examining phased retirement programs.

Shortly after the PPA was passed, Hewitt Associates Inc. asked 146 employers what their focus would be in 2007 for their retirement plans in light of the new law and other regulatory changes. Nearly half said they would evaluate phased retirement alternatives.

The survey results suggest phased retirement programs are a "pretty hot issue out there," said Bob Leone, a Hewitt actuary in Minneapolis.

Mercy Health System in Janesville, Wis., already has an informal program in place, but Kathy Harris, Mercy's vp of human resources, said the new provision was being reviewed by plan administrators. "This is right in line with our Work-to-Retire Program, so you will probably see us adopt it," Ms. Harris said.

For those employers considering phased retirement plans, guidance is still needed from the U.S. Treasury Department, observers said.

Rules have yet to be set

In 2004, the Treasury Department issued proposed regulations, which would have allowed employees to work fewer hours while receiving a partial pension benefit. Those regulations were never adopted because many observers complained that the rules were too complicated and confining.

As recently as May, the Treasury Department finalized the rule defining normal retirement age to a safe harbor of 62, but this has little bearing on how to administer phased retirement plans, observers agreed.

Employers would like to have flexibility in how phased retirement works, observers said. In the 2004 proposed rules, employees would have needed to be at least age 59‡, reduced working hours by at least 20% and accepted an annuity and not a lump-sum payment.

Smart Business' Ms. Faris said many employers would want to work with employees individually to determine the appropriate reduction in working hours. Employers would also like to decide which jobs would be too essential to allow the employee in that position phased retirement benefits.

Other observers noted that employees might want to take advantage of phased retirement before they reach age 62.

"There are a number of issues that need to be resolved," Ms. Faris said.

Currently, the Treasury Department is working on rules and has asked for plan sponsor comments. Specifically, it asked whether an in-service distribution should be limited to the benefit that an employee would have received had he or she reached normal retirement age.

Also, the department is asking whether subsidized benefits should be treated as an early retirement benefit even though the employee hasn't left work, or if they should be treated as part of the participant's accrued benefit.