At a growing number of law firms, the Boomer generation is reaching the age when retirement among the ranks has partners leaving in increasing numbers. Recent writings, including Debra Cassens Weiss‘ As Baby Boomer partners retire, law firms face increasing costs and client issues, have noted the numerous and significant financial issues for law firms that are associated with partner retirement.
The increased incidence of partner retirement can be a financial hit on many levels. The monetary payout associated with the retirement benefits is one. While some firm’s retirement plans are fully funded, many plans require a “topping off” of a guaranteed benefit and others, not being funded at all, must be satisfied out of yearly profits. Second, when senior lawyers retire the impact can be negative due to the loss of their productivity not so readily replaced. Third, retirements generally require the return of capital to retiring partners. In a world in which partner capital contribution levels have grown, the capital to repay can be significant-certainly often greater than the capital being contributed by incoming partners.
Individually each one of these financial “hits” can be significant. When considered together (as they often occur), they not only can strap a firm but also can upset the financial bargain the younger non-retiring partners have come to expect. To respond to that predicament, firms are taking action to lessen the financial impact by reducing the overall financial benefit paid on retirement, extending the years for repayment of capital, extending the years of service necessary to vest in a retirement plan, and lowering the cap on annual retirement benefits paid by the firm in any given year. Because such modifications generally must be phased in over a number of years, however, the initial ameliorative effect can be modest.
Even a proactive financial solution to the increased retirements does not necessarily solve all problems. Other issues tied to cascading retirements can loom over a firm, including:
Modifications to the Plans Can Take Too Long to Assuage Younger Partners. Because most modifications to the bulging retirement obligations firms face are phased, the financial strain on the firm and potentially felt by the next generation is not avoided immediately. That can mean an inordinate portion of the firm’s positive financial performance (at least in the eyes of younger partners years away from retirement) is allocated to retirees. With a sense of security and loyalty among partners lower than ever before, opportunities for younger partners to go elsewhere may resonate.
Eagerness to Invest Capital at Firms is not a Given. As senior partners retire and start recovering their capital, younger partners are afforded the opportunity to invest capital in the firm. Sure, it often is the sin qua non of a nice compensation package, but what if highly productive attorneys eschew partnership in favor of a contractual arrangement that requires no capital contribution. It happens now and may happen more often in the future.
Longer Vesting Periods Will Create Other Issues. Engineering the retirement benefits with longer vesting periods and the like may work in a firm’s financial model, but it could create a caste system among generations of lawyers. Moreover, in a market that competes for high value laterals or transformative mergers, the handling of “years credit” towards retirement plan vesting can be thorny. Many law firms will find that the vesting issue for new additions can have destabilizing ramifications.
Demographics are Trending the Wrong Way. To the extent demographic trends make Social Security a bad bet, the demographic trends at law firms could be worse. The pyramid is dead and buried and signals a shrinking law firm workforce that will be expected to shoulder tomorrow’s retirement obligations. Today’s numbers, as reported by Julie Triedman in her The American Lawyer article Pensions Pose an Increased Threat for Some Firms, are not great. There is no reason to believe that they will improve in the years ahead.
Many of today’s law firms are taking sound steps to address the progression of partner retirements. They simply have to. But as helpful these steps are to the long-term bottom line, they also may contribute to or fail to address some long-term implications that won’t be felt for years. As you engage in retirement plan tweaking, are you addressing these long-term issues?