For more than a few AmLaw 200 law firms, non-qualified retirement plans exist that are largely unfunded. Although “a good idea at the time” when established, the plans now can represent a significant burden. As James Cotterham wrote in his Retirement Basics for Law Firms a decade ago, the unfunded pension plans can be a problem. More recently, Jennifer Smith of the Wall Street Journal wrote in Next Pension Clash: Law Firms about the problem in stark dollars and cents. And in a development that may be an aberration yet demonstrative of the reason for concern, last year the PBGC took over the pension obligations of the law firm of Butzel Long after it concluded that unless relieved from the pension obligation’s burden, it would not be able to survive in today’s competitive legal environment. For many law firms, unfunded plans can impact the ability to compete.
The problem is not going away. Matt Greenslade’s Your Boomer Partners are Retiring. Is Your Firm Ready? provides a picture of the aging of the AmLaw 200 partner ranks. There are a whole host of succession issues presented by the graying of law firms, and while some firms have dodged the unfunded pension plan issue by having no such obligations, many are not so lucky. For one thing, the plans can be destabilizing. Partners nearing retirement are often protective of this benefit. Younger partners years away from retirement may wince at the existing or looming financial burden. And for managing partners trying to ward off the adverse effects of transition by pursuing mergers or lateral hiring, the overhang of a large unfunded pension plan can be a deal killer.
Finding a solution is not easy. The options, good and bad, generally are limited to four:
Try to Pre-Fund the Plan. Depending on the schedule of retirements facing the firm and the ability to model the obligations, funding the plan now instead of waiting for the retirements to hit is a possible solution. Unfortunately, tax issues and structural concerns that have made this a poor option in the past haven’t gone away. So although technically an option, it is not much of one.
Terminate the Plan. This can be the nuclear option. Depending on when the looming retirees vest in the plan, it is possible to terminate the plan as to a group of future retirees and negotiate with the vested partners and already retired partners for a settlement. Terminating a plan requires incredible will and political certainty. It pits culture and honor versus financial imperative. Like the adage about killing the king if deciding to shoot, this option needs to succeed if it is to be attempted.
Modify the Plan. A great thing about a non-qualified plan is that its flexibility allows modifying the plan to ameliorate past promises with the current realities. Options include phasing in modifications that impact partners that are a longer way from retirement age, substituting in some qualified plan options that allow a firm to pay as it goes, and buying out vested partners. Depending on the proposed restructure, a modification can garner the kind of political support that avoids pitting the old against the young.
Pay the Plan. Sometimes none of the foregoing options work or have sufficient support to implement. When this happens, the only option (other than closing) is to prepare for the obligations by strong financial planning and budgeting. A firm left in this position also needs to develop retention strategies for the partners that will see less compensation in the years ahead due to the need to financially support the retired and retiring partners. Finally, if strategic planning at the firm seeks to leave open the potential for merger, lateral hiring and bank financing for future operations or initiatives, it is essential that the retirement obligations be recognized.
Unfunded pension plans can present significant financial challenges. Seeking relief by termination or modification pits the young against the old-a volatile mixture. Yet resolving this tension may become a matter of survival. If your firm has an unfunded plan, is it taking steps to deal with this dilemma?