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Perils Of Unfunded Obligations: 4 Key Questions
Editor's Introduction
As summarized by A&FP Board member Bill Brennan of Altman Weil, Inc. an “unfunded retirement program” is essentially a promise to pay partners a retirement benefit in the future from the firm's future profits. About 24% of law firms have an unfunded retirement plan (down from 57% in 1990), according to the 2005 Retirement and Withdrawal Survey for Private Law Firms, prepared by Altman Weil, Inc. In about 15 years over 30,000 lawyers will be retiring each year. To the extent these partners must be paid retirement benefits from the then-current profits of their respective law firms, those firms unprepared for this potentially huge financial liability will be at risk, and some may not survive.
Former A&FP Board member Jim Cotterman, also of Altman Weil, has done some new writing about retirement plans recently [see "Related Resources"]. Jim also suggested the four questions around which this virtual-roundtable discussion was organized:
- What are the challenges of traditional unfunded programs?
- What remedies exist to mitigate the challenges?
- Can a traditional unfunded program still work? If yes, what parameters create a “safe harbor”?
- What effect will the approaching retirement of the baby boomer generation have on unfunded plans?
Problems with unfunded retirement plans are currently big news in the general business world, so law firms struggling with their plans are certainly not in totally unique straits. Law firms do have some distinctive concerns, however. For example, many firms are organized under difficult-to-change partnership agreements, many have experienced soaring growth in baseline compensation, and many are finding it hard to adjust to the increasing frequency of mid-career lateral transfers.
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