f employers are going to use retirement benefits to provide incentives to employees to defer retirement, defined benefit plans offer a better mechanism than defined contribution plans. Even without modifying the design, a defined benefit plan generally has a built-in incentive for working longer.

    "In a defined benefit plan, the later part of your career is when the most significant increase in your benefits occurs, particularly defined benefit plans that base pensions over the final average earnings of the last five years of employment,” F. Pierce Noble, Dallas-based worldwide partner of Mercer LLC, said in an interview.

    "By delaying retirement—if you are in a final-pay pension plan—you can impact the benefit you will receive. If you work another year, the retirement income will go up."

    With most defined contribution plans, working longer is no special incentive for employees, he said, because with few exceptions, the employer match stays the same.

    "If you continue to work, you don’t have to draw down on your defined contribution plan, so you preserve the balance for future times.”

    On the employer side, the actuarial calculations and funding issues of a defined benefit plan could be affected by employees deferring retirement.So far, however, neither Mr. Noble nor Joel Rich, retirement practice leader at Sibson Consulting in New York, has seen anything beyond anecdotal evidence that employees are staying longer. As a result, Mr. Rich said, “I don’t think there has been an impact on plan design.” Sibson is a human resources consulting division of Segal Co., New York.

    From an actuarial standpoint, the extent employees defer retirement would lead to gains or losses in the plan.

    "If a lot of employees don’t retire in plans that have early retirement supplements, there would be gains to the plan,” Mr. Rich said.

    Would changes in retirement timing change a defined benefit plan’s asset allocation?

    "It could in theory," Mr. Rich said. "Say you have a defined benefit plan with a lump-sum [payout] option. If you expect a bunch of employees to take advantage of the lump sum, the company might invest [plan assets] in something less subject to market fluctuations,” or vice versa.

    In general, qualified [defined benefit] plans could have provisions to encourage or discourage early retirement, Mr. Rich said.

    The plans are not set up to offer incentives for deferring retirement beyond normal retirement age, he noted.

—Crain's Benefits Outlook Online,  November 2008

Barry B. Burr is a reporter for Pensions & Investments.  To comment, e-mail editors@workforce.com.