What In The World Is Going On With Lawyer Retirement Planning?

Retirement is a distant and unnoticed object of concern for young lawyers. After the toil of law school, the terror of the bar exam and the career-defining decisions of job searching, a young lawyer cannot be blamed for feeling immortal. With a seemingly endless stream of years ahead to ply his or her skills in the world of the law, slay a few dragons and make his or her fortune, retirement planning is not on the “to do” list.

For those of us with years of practice behind us, it is shocking how quickly the stream of time has passed. We of middle years think more of home and family, less of dragons, and wonder about the adequacy of our retirement planning.

This article reflects the results of a survey of law firms around the nation that reveals a variety of approaches to retirement planning and funding. Interviews focused on the structure and the funding of retirement plans. While the results of this survey are anecdotal, certain conclusions and recommendations emerged from the effort:

1. Almost every lawyer said that he or she wished they had given more serious thought and planning to retirement goals early in their careers.

2. Almost all commented they wished they could instill Conclusion 1 in the minds of young lawyers today.

3. The adequacy of retirement planning is relative to current lifestyle and expected retirement lifestyle.

4. Most interview subjects believe they are playing “catch up” in retirement planning.

5. New rules and plan options are available to significantly increase retirement savings.

6. Professional assistance is essential to effective retirement planning.

7. Many lawyers would not save for retirement if not “forced” to do so by their firms.

Lawyer Retirement is a Hot Topic

With the leading edge of the population of baby-boomers born between 1946 and 1964 now in their mid-to-late-50s, approaching retirement age, retirement is of interest to a greater number of lawyers than ever.

The three hottest topics in lawyer retirement planning today are:

1. Maximizing dollars currently contributed to retirement;

2. Getting firms out of the business of providing unfunded obligations to pay for partners' retirements; and

3. The effect of the baby-boom bubble.

What are Lawyers and Law Firms Doing About Retirement Planning?

Among the responses to this survey were several along the lines of one successful trial lawyer, a veteran of two multi-lawyer firms, who said: “We didn't have any agreement in our old firm, and we don't have one in this one. I intend to practice until I drop.” It is evident that lawyers in smaller firms tend to eat what they kill and defer retirement planning to another day. But after initial jokes, the ones who are not prepared for retirement expressed regrets about not doing so. It cannot be over emphasized that the universal admonition and lament among virtually every single lawyer interviewed was that retirement planning should start at the very beginning of a legal career.

As one lawyer said (paraphrasing here), there are some lawyers, no matter how little they make, who always seem to be able to save; and there are other lawyers, no matter how much they make, who cannot seem to save anything. He related observing how many lawyers in his firm save a healthy bonus and how many use the bonus to buy a new car. This senior partner in a large firm expressed agreement with the “The Millionaire Next Door” principle (The Millionaire Next Door by Stanley and Danko) that the key to wealth is current lifestyle. The point of the book is that wealth accumulation (read: retirement planning) is facilitated by current lifestyle management.

But other small firm practitioners had great confidence in their retirement planning. Here are some stories from around the nation, from firms small and large and very large. In spite of the bad experiences of some, overall the story is encouraging.

[Note: References to "qualified plans" in this article means plans qualified for deferred taxation of benefits under various federal laws. The intricacies of these alternatives are beyond the scope of this article.]

Retirement Planning in Smaller Firms

A partner in a 10-lawyer Texas firm said his firm has a couple of very senior partners, and is bottom heavy with junior partners and associates. The seniors initially controlled all the business and still hold a lot of power in that regard. The partnership agreement contains retirement payment obligations for the two senior partners. The “remaining” partners early on secured significant whole life insurance policies on the senior partners to help “annuitize” the retirement obligations, help cash them out on the front end or, should the partner die, to use the death benefit to fund “buy-sell” obligations and keep the rest.

When asked if the liquidation value of the firm was less than the potential deferred obligation (the opportunity being for the juniors to “liquidate” the firm then open their own shop, at a lesser cost than paying the retirement obligations), the attorney dismissed the possibility due to the seniors' client relationships (at least at present) and the negative image that would result in their smaller community.

Besides the usually unfunded nature of such retirement obligations, this points to the single major pitfall of senior attorneys in smaller firms relying on their former firms to fund their retirements. The liquidation value of a small service-based business like a law firm (leaving aside the intricacies of such issues as contingent feed cases in progress) is probably significantly less than the cost of paying the retirement obligations of former partners.

The next example is a 25-lawyer firm with only two partners. As to the partners' retirement, while they know they control the significant business of the firm now, they also realize that will not always be the case. Therefore, they retained professional advice and determined their retirement income goals. Using a non-qualified plan, they are presently funding their own retirement out of firm profits via an investment fund managed by a broker. As is not uncommon in many smaller firms in smaller towns and cities, the principals own the building where the law firm resides and expect this investment to supplement their retirement.

The firm in the past did experiment with implementing qualified plans to benefit associates and staff but soon abandoned the idea. The partner said they did not feel they got any goodwill or appreciation from the staff or younger attorneys for the firm's contributions. He said younger lawyers are focused too much on getting disposable income and simply did not regard the firm's contributions to a retirement plan as “real” compensation. He was one of many who expressed serious concern over younger lawyers' not focusing on retirement saving.

A 50-lawyer Midwestern firm with offices in more than one state said it originally had a “very modest” income continuation plan for the firm's founders but that the unfunded plan has been phased out, with only one retired partner still receiving payments.

After abandoning the unfunded retirement income continuation plan more than 20 years ago, the firm transitioned into using a qualified Profit Sharing Plan and now uses a 401(k) Plan exclusively, with the firm providing a “matching” contribution for attorneys' (including associates) and staff members' contributions (up to 4% of salary) and with a menu of investment alternatives inside the plan.

Said one of the firm's managing partners: “Other than the 401(k), it is not the firm's policy to give anyone the idea that the firm will be his or her retirement vehicle. Partners are expected to supplement the 401(k) [with their own savings and investments] and take care of their own retirement planning.”

As to capital accounts on retirement, this firm, a Professional Corporation, requires “partners” to buy in at a stated price per share, with the number of shares purchased increasing over time. At retirement, this capital is simply returned within 12 months without interest and without regard to issues of firm valuation or the value of its assets.

Retirement Planning in Large Firms

The four largest law firms surveyed fell into two camps, each camp having very similar approaches to retirement. One camp still employs unfunded retirement obligations. The other camp does not.

The First Camp: No Unfunded Retirement Obligations

In the first camp, one well established (over 100 year old) New England firm with several hundred lawyers maintains a combined 401(k) Plan and KEOGH (HR 10) Plan which it funds to the maximum amount. The firm (an LLP) does not return any capital to partners upon retirement. Associates are not included in the qualified plans.

Up until the early 1980s, the firm had a retirement plan calling for the payment to retiring partners of 50% of their salary for life. As compensation began to rise in the '80's, the firm phased this plan out and currently provides no retirement benefits other than what is available via the firm's qualified plans.

The second firm in the first camp, a national firm that has been in existence for more than 50 years, has in place what appears to be the prevailing retirement system among firms that have kept their retirement planning current with the latest qualified plan opportunities: a combination 401(k) Plan and Profit Sharing Plan designed to maximize the amount of contributions that can be made each year. Said a managing partner: “The firm requires partners to contribute the maximum by funding the Profit Sharing Plan out of profits,” a form of forced savings because “despite every practical and tax reason to put away savings for retirement, some partners are unmotivated or undisciplined to fund their retirement by sustained voluntary contributions; thus, we mandate that if you are going to be a partner here, you must have retirement savings.” Participation in the 401(k) Plan is voluntary.

Both plans are for partners and staff. The firm also maintains a separate 401(k) Plan for associates and “non-equity” partners (called “income partners” at this firm) who are employees of the firm.

In 2006, the firm plans to change its retirement policies to include income (non-equity) partners in the Profit Sharing Plan as well as the 401(k) Plan.

The firm has no mandatory retirement policy. “As long as a partner remains productive and competent to practice, we allow him or her to remain at the firm,” a managing partner said.

As to when retirement takes place, a partner said the firm's partnership agreement provides authority for the executive committee to force the retirement or withdrawal of a partner. Upon retirement, a partner is also paid his capital account, either in a lump sum or over a period of three years, as the firm decides on a case-by-case basis.

Part Two, coming next month, examines firms that use unfunded retirement obligations, and the current trends in partner retirement planning.

Retirement is a distant and unnoticed object of concern for young lawyers. After the toil of law school, the terror of the bar exam and the career-defining decisions of job searching, a young lawyer cannot be blamed for feeling immortal. With a seemingly endless stream of years ahead to ply his or her skills in the world of the law, slay a few dragons and make his or her fortune, retirement planning is not on the “to do” list.

For those of us with years of practice behind us, it is shocking how quickly the stream of time has passed. We of middle years think more of home and family, less of dragons, and wonder about the adequacy of our retirement planning.

This article reflects the results of a survey of law firms around the nation that reveals a variety of approaches to retirement planning and funding. Interviews focused on the structure and the funding of retirement plans. While the results of this survey are anecdotal, certain conclusions and recommendations emerged from the effort:

1. Almost every lawyer said that he or she wished they had given more serious thought and planning to retirement goals early in their careers.

2. Almost all commented they wished they could instill Conclusion 1 in the minds of young lawyers today.

3. The adequacy of retirement planning is relative to current lifestyle and expected retirement lifestyle.

4. Most interview subjects believe they are playing “catch up” in retirement planning.

5. New rules and plan options are available to significantly increase retirement savings.

6. Professional assistance is essential to effective retirement planning.

7. Many lawyers would not save for retirement if not “forced” to do so by their firms.

Lawyer Retirement is a Hot Topic

With the leading edge of the population of baby-boomers born between 1946 and 1964 now in their mid-to-late-50s, approaching retirement age, retirement is of interest to a greater number of lawyers than ever.

The three hottest topics in lawyer retirement planning today are:

1. Maximizing dollars currently contributed to retirement;

2. Getting firms out of the business of providing unfunded obligations to pay for partners' retirements; and

3. The effect of the baby-boom bubble.

What are Lawyers and Law Firms Doing About Retirement Planning?

Among the responses to this survey were several along the lines of one successful trial lawyer, a veteran of two multi-lawyer firms, who said: “We didn't have any agreement in our old firm, and we don't have one in this one. I intend to practice until I drop.” It is evident that lawyers in smaller firms tend to eat what they kill and defer retirement planning to another day. But after initial jokes, the ones who are not prepared for retirement expressed regrets about not doing so. It cannot be over emphasized that the universal admonition and lament among virtually every single lawyer interviewed was that retirement planning should start at the very beginning of a legal career.

As one lawyer said (paraphrasing here), there are some lawyers, no matter how little they make, who always seem to be able to save; and there are other lawyers, no matter how much they make, who cannot seem to save anything. He related observing how many lawyers in his firm save a healthy bonus and how many use the bonus to buy a new car. This senior partner in a large firm expressed agreement with the “The Millionaire Next Door” principle (The Millionaire Next Door by Stanley and Danko) that the key to wealth is current lifestyle. The point of the book is that wealth accumulation (read: retirement planning) is facilitated by current lifestyle management.

But other small firm practitioners had great confidence in their retirement planning. Here are some stories from around the nation, from firms small and large and very large. In spite of the bad experiences of some, overall the story is encouraging.

[Note: References to "qualified plans" in this article means plans qualified for deferred taxation of benefits under various federal laws. The intricacies of these alternatives are beyond the scope of this article.]

Retirement Planning in Smaller Firms

A partner in a 10-lawyer Texas firm said his firm has a couple of very senior partners, and is bottom heavy with junior partners and associates. The seniors initially controlled all the business and still hold a lot of power in that regard. The partnership agreement contains retirement payment obligations for the two senior partners. The “remaining” partners early on secured significant whole life insurance policies on the senior partners to help “annuitize” the retirement obligations, help cash them out on the front end or, should the partner die, to use the death benefit to fund “buy-sell” obligations and keep the rest.

When asked if the liquidation value of the firm was less than the potential deferred obligation (the opportunity being for the juniors to “liquidate” the firm then open their own shop, at a lesser cost than paying the retirement obligations), the attorney dismissed the possibility due to the seniors' client relationships (at least at present) and the negative image that would result in their smaller community.

Besides the usually unfunded nature of such retirement obligations, this points to the single major pitfall of senior attorneys in smaller firms relying on their former firms to fund their retirements. The liquidation value of a small service-based business like a law firm (leaving aside the intricacies of such issues as contingent feed cases in progress) is probably significantly less than the cost of paying the retirement obligations of former partners.

The next example is a 25-lawyer firm with only two partners. As to the partners' retirement, while they know they control the significant business of the firm now, they also realize that will not always be the case. Therefore, they retained professional advice and determined their retirement income goals. Using a non-qualified plan, they are presently funding their own retirement out of firm profits via an investment fund managed by a broker. As is not uncommon in many smaller firms in smaller towns and cities, the principals own the building where the law firm resides and expect this investment to supplement their retirement.

The firm in the past did experiment with implementing qualified plans to benefit associates and staff but soon abandoned the idea. The partner said they did not feel they got any goodwill or appreciation from the staff or younger attorneys for the firm's contributions. He said younger lawyers are focused too much on getting disposable income and simply did not regard the firm's contributions to a retirement plan as “real” compensation. He was one of many who expressed serious concern over younger lawyers' not focusing on retirement saving.

A 50-lawyer Midwestern firm with offices in more than one state said it originally had a “very modest” income continuation plan for the firm's founders but that the unfunded plan has been phased out, with only one retired partner still receiving payments.

After abandoning the unfunded retirement income continuation plan more than 20 years ago, the firm transitioned into using a qualified Profit Sharing Plan and now uses a 401(k) Plan exclusively, with the firm providing a “matching” contribution for attorneys' (including associates) and staff members' contributions (up to 4% of salary) and with a menu of investment alternatives inside the plan.

Said one of the firm's managing partners: “Other than the 401(k), it is not the firm's policy to give anyone the idea that the firm will be his or her retirement vehicle. Partners are expected to supplement the 401(k) [with their own savings and investments] and take care of their own retirement planning.”

As to capital accounts on retirement, this firm, a Professional Corporation, requires “partners” to buy in at a stated price per share, with the number of shares purchased increasing over time. At retirement, this capital is simply returned within 12 months without interest and without regard to issues of firm valuation or the value of its assets.

Retirement Planning in Large Firms

The four largest law firms surveyed fell into two camps, each camp having very similar approaches to retirement. One camp still employs unfunded retirement obligations. The other camp does not.

The First Camp: No Unfunded Retirement Obligations

In the first camp, one well established (over 100 year old) New England firm with several hundred lawyers maintains a combined 401(k) Plan and KEOGH (HR 10) Plan which it funds to the maximum amount. The firm (an LLP) does not return any capital to partners upon retirement. Associates are not included in the qualified plans.

Up until the early 1980s, the firm had a retirement plan calling for the payment to retiring partners of 50% of their salary for life. As compensation began to rise in the '80's, the firm phased this plan out and currently provides no retirement benefits other than what is available via the firm's qualified plans.

The second firm in the first camp, a national firm that has been in existence for more than 50 years, has in place what appears to be the prevailing retirement system among firms that have kept their retirement planning current with the latest qualified plan opportunities: a combination 401(k) Plan and Profit Sharing Plan designed to maximize the amount of contributions that can be made each year. Said a managing partner: “The firm requires partners to contribute the maximum by funding the Profit Sharing Plan out of profits,” a form of forced savings because “despite every practical and tax reason to put away savings for retirement, some partners are unmotivated or undisciplined to fund their retirement by sustained voluntary contributions; thus, we mandate that if you are going to be a partner here, you must have retirement savings.” Participation in the 401(k) Plan is voluntary.

Both plans are for partners and staff. The firm also maintains a separate 401(k) Plan for associates and “non-equity” partners (called “income partners” at this firm) who are employees of the firm.

In 2006, the firm plans to change its retirement policies to include income (non-equity) partners in the Profit Sharing Plan as well as the 401(k) Plan.

The firm has no mandatory retirement policy. “As long as a partner remains productive and competent to practice, we allow him or her to remain at the firm,” a managing partner said.

As to when retirement takes place, a partner said the firm's partnership agreement provides authority for the executive committee to force the retirement or withdrawal of a partner. Upon retirement, a partner is also paid his capital account, either in a lump sum or over a period of three years, as the firm decides on a case-by-case basis.

Part Two, coming next month, examines firms that use unfunded retirement obligations, and the current trends in partner retirement planning.