How Retirement Benefit Plans Can Be Designed to Produce an Effective Workforce
By Patrick Ring
Retirement Section News, April 2024
The SOA Research Institute tasked the Workforce Science Institute to investigate how retirement benefit plans can affect a plan sponsor’s workforce and business results. The following is an interview with Rick Guzzo and Haig Nalbantian co-founders of the Workforce Science Institute who are the researchers on this project. The interview gives a helicopter view of the project as well as provides some “food for thought” on how retirement plans can be designed to produce an effective workforce.
Editor’s note: Rick Guzzo, co-founder and co-leader of the Workforce Science Institute, is a former professor of organizational psychology, is widely published and has lengthy experience consulting on the topics of work productivity and performance.
Haig Nalbantian, cofounder and co-leader of the Workforce Science Institute, is a labor/organizational economist and a widely published consultant to many leading organizations on the links between human capital management, workforce productivity and business performance.
Patrick Ring (PR): Tell us a little bit about your background and the types of retirement related projects you have had experience with.
Rick Guzzo (RG): I’m an organizational psychologist with two careers. The first was in academia, where I was a professor for nearly 20 years at New York University and the University of Maryland. I then jumped to Mercer, with Haig, to create a new research- and analytics-driven consulting service for workforce management. Now we have carried this forward to the Workforce Sciences Institute. Along the way, I’ve had the opportunity to engage in many retirement-related projects, such as identifying what factors most influence decisions to retire from a company, the fit of retirement plans in overall talent management strategies and helping modernize aspects of DB plans. The common theme in all projects is a focus on aligning retirement practices to the needs of the business.
Haig Nalbantian (HN): I’m a labor/organizational economist who has spent 30+ years working with employers to support the practice of evidence-based workforce management. I started my career teaching economics at New York University and serving as a research scientist in its C.V. Starr Center for Applied Economics. The value of applied economics and interdisciplinary research was driven home to me there and led me to Mercer where, with Rick, I helped build a new practice area focused on measuring and understanding the workforce and business impact of people practices. As part of this work, we’ve used advanced analytics to help clients understand how their retirement plans function as a component of total rewards to influence their ability to secure and motivate the workforce required to achieve their business goals.
PR: What is the Workforce Science Institute?
RG/HN: The Workforce Sciences Institute (WSI) exists to advance evidence-based, research-informed workforce management. Its goal is to further the development of workforce sciences, an emerging interdisciplinary field involving a highly empirical approach to the management of workforces in organizations. Originally, WSI was the outgrowth and research arm of the Workforce Strategy & Analytics Group that we helped launch at Mercer back in the mid-’90s. Its agenda is informed by many years of client work deploying advanced analytical methods to inform workforce strategies and help address workforce issues. In 2023, WSI was spun out of Mercer. We are working to establish it as an independent entity to support research and strengthen the application and practice of workforce sciences.
PR: Give us a brief description of the project and the deliverables.
RG/HN: The project will deliver new tools—a framework and metrics—for actuaries to use to better align retirement strategies and plan designs with business needs. The project began by reviewing recent relevant research, of which there is a lot, and formulating an initial framework that was reviewed with the SOA’s Project Oversight Group (POG). We are now in the process of refining the framework and specifying the key metrics, culminating in a user-friendly final report later this year.
PR: How will the project deliverables better help actuaries address the links between retirement and business results? How will the deliverables help them focus more effectively on improving business results?
RG/HN: “Framework” may sound abstract, but it refers to specific principles to steer by, key issues to consider, and questions to ask when assessing the unique strengths and weaknesses of an organization’s workforce in relation to business requirements. It also involves specification of key metrics to help answer those questions. Retirement practices shape the workforce, and the framework and metrics will provide the foundation for actionable advice for aligning retirement-related practices to best meet business needs. We think this fills a practice gap because strategies to manage retirements often get too little attention regarding how they work in sync with other talent management practices to serve business success.
PR: How much “bang for the buck” do you think defined benefit plans have in attracting and retaining workers?
RG/HN: Defined benefit (DB) plans can play a pivotal role in providing the incentives required to sustain an effective build-from-within talent strategy. On the front end, a DB plan can be an attractive part of an employment offer at a time when economic insecurity is growing. The retention aspect may be even more salient to employers and employees. Where homegrown talent generates premium value, employers need to find ways to induce employees to come, stay, and grow with the organization. Simply paying for tenure may not be efficient. An alternative approach relies on backloading pay and benefits to give employees the incentive to stay. A traditional DB pension, with its vesting schedule and payouts based on age and length of service, effectively back loads rewards. Just as importantly, a DB plan also provides incentives for employees to leave “on time.” With backloaded pay, employees are paid less than their value early in career and more than their value later in career. If there is no limit on employment at the back end of a career, such systems can become quickly non-economic. DB plans address this problem by reducing the financial value of continuing to work once retirement eligibility is achieved. Forfeiting a pension payout in any given year is an added cost to employees who have reached eligibility, one that grows with each additional year of service. This creates stronger incentives to retire, something vital in the absence of mandatory retirement.
DB plans are an important pillar of build-from-within talent strategies, providing the incentives that make such strategies sustainable. Too many employers fail to recognize this important reality, with serious cost and strategic repercussions for the business.
PR: Why is workforce planning and management important to business results?
RG/HN: Many business leaders refer to their organizations’ workforces as “assets,” but far fewer actually manage their workforces with the discipline and factual foundation they bring to the management of other business assets. This is a lost opportunity. A large body of research has established that the effectiveness of human capital management (HCM) is a major determinant of business performance, including shareholder value. In our own work with clients, we’ve often been able to quantify the workforce and business impact of people practices. The results are strong, consistent, and pervasive regardless of industry or the kind of workforce involved. The ability to secure the “right” workforce and manage it effectively is key to creating enduring competitive advantage for employers in the modern economy.
The increasing recognition of this reality is a reason that HCM has become an important component of the corporate evaluations being undertaken under the banner of environmental, social, and governance (ESG). For years, investors have had little to no information about a company’s workforce and people practices. That is changing fast as the economic value of effective HCM becomes clear and the data and tools that make it possible to generate and report such workforce intelligence are deployed by in-house workforce analytics functions.
PR: How have characteristics of the workforce changed over the last several years?
RG/HN: Everyone knows that the workforce is ageing. Less well known is how much of the growth of the US labor force is due to older workers. It is estimated that 93% of labor force growth in the past 25 years is attributable to people 50 years and older. Not only are there more of them in the workforce, also they are working later in life. This is true for all major demographic groups—gender, ethnicity, educational level—and the trend is projected to continue.[1] From the employers’ perspective, that’s a lot of experienced talent.
PR: Experienced workers are often paid more. Is their experience valuable to the business and why? Is all experience valuable?
RG/HN: The research literature distinguishes two types of human capital. General human capital is the knowledge, experience, skills, productive characteristics, and behaviors resident in employees and acquired through education and experience. Because it is transportable, it can be bought by other employers in the labor market at the going market price. It is often proxied by age. Firm-specific human capital is the special knowhow, experience, understandings, and networks that come from working in a specific organization, from knowing its work processes, technologies, customers, co-workers, and culture. It is attached to the “relationship” between employer and employee, not to the individual. As such it cannot be bought. It can only be built and grows with tenure, the common measure used to track it. Growth of each type of human capital is usually associated with higher pay.
Which type of human capital creates the most value varies across organizations, depending on their business strategies, operations, and the business environment in which they work. Our meta-analysis of results from multiple client projects where we and others in our group statistically modeled the workforce drivers of business performance in work units or groups found significant positive effects of employee tenure on financial and operational performance. While the effects varied across organizations, the overall impact was statistically significant and sizeable. Employee age showed no significant impact on performance. This “null" finding is nonetheless important as it contradicts the common stereotype of older workers being less productive.[2]
So, yes, experience matters. We find, empirically, that employee tenure is productive and more consistently drives value than age. And the effects can be larger than the compensation required to secure such tenure.
PR: Do you have anything else to share with the reader?
RG: We are really pleased with the collaboration we have with the SOA on this project. And the access it gives us to such great expertise is enormously beneficial.
HN: Pension plans have been viewed as blunt instruments, with little strategic influence from a talent perspective. The opportunity to work with the SOA to change this thinking and provide retirement actuaries with the tools to design pension benefits for strategic impact is exciting and potentially game changing.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Patrick Ring, ASA, was the volunteer chair of SOA Retirement Section Council’s Communications Team from June 2022 until February 2024. He can be reached at pringactuary@gmail.com.
Endnotes
[1] Johnson, R. W., Guzzo, R. A. & Pogrebivsky, I. (2023). Workforce trends and impact to retirement strategies. Society of Actuaries Annual Conference, October.
[2] Guzzo, R. A., H. R. Nalbantian and N. L. Anderson, (2022). Age, Experience and Business Performance: A Meta-Analysis of Work Unit-Level Effects. Work, Ageing and Retirement, 8, 202-223. The study can be downloaded for free on: https://academic.oup.com/workar/article/8/2/208/6574297?guestAccessKey=dc62f190-b8a7-4fe0-994c-b3476d22a72c