Pros and Cons of Sequenced Retirement

Coming to terms with retirement is difficult and, like most things, is even harder if you are a law firm partner. As soon as you begin to think about throttling things back a tad, your clients demand a quicker response time and your partners want you to bring in more business. At the same time, what seemed just a short time ago to be a distant respite is now looming over you and you may not even know what to do or if you can even afford to do it. Moreover, even if you do not want to retire, your partnership agreement may have a mandatory retirement provision that takes away your choice.

Typical Mandatory Retirement Provisions

Today most law firm partnership agreements contain a mandatory retirement provision, which sets an arbitrary date by which a partner must retire as a partner from the firm. Proponents of such a provision argue that it benefits a partnership by having a partner cease working and collecting compensation at a time when it is likely that the partner is less productive. Detractors of mandatory retirement claim this provision can prematurely end productive careers and harm partners who, as a result of their senior status, may not be as mobile as other partners.

Partners opposing mandatory retirement often take the position that while they are being forced out, the firm is unfairly benefiting by maintaining the client relationships that the partner spent years and even decades fostering.

Regardless of the pros and cons, mandatory retirement provisions appear to be here to stay. A simple typical provision is as follows: 'A partner must retire from the partnership on Jan.1 of the year after attaining age 65.'

Law partnerships, mindful of at least the perceived harshness of these provisions, have tried to ameliorate their effects in several ways. For example, a firm may continue to provide services such as an office and an assistant, usually on a part-time basis, and to invite the retired partner to attend certain partner functions.

Sequenced Retirement

A more complicated means of ameliorating the harsh effects of mandatory retirement is to include a retirement system by which retiring partners phase down over a period of years and transition business to the firm. The business purpose of this 'sequenced' retirement is to encourage the retiring partner to transition clients to a less senior lawyer with the goal of institutionalizing clients at the firm. The retiring partner is provided with post retirement incentives if the firm retains client business.

A typical sequenced retirement provision reads as follows:

a. Sequenced Retirement may be elected by a Partner by giving at least six months notice prior to the January 1st of the year in which the Partner attains age 65 and when such Sequenced Retirement is to commence. Sequenced Retirement shall be, at the election of such Partner, over either a two- or three-year period.

b. During such Sequenced Retirement Period such Partner ('Origination Partner') shall designate one or more Partners who shall receive follow-on origination credit for that Partner's Credit Clients ('Replacement Partner') and shall be primarily responsible for billing and supervising and/or performing the services in respect of the Credit Clients so allocated. During the Sequenced Retirement Period the Compensation Committee shall, in formulating their compensation recommendation for such Replacement Partner (in lieu of any other credit given such Replacement Partner for originating such clients) be presented with an amount of origination credit in their statistics supplied to such committee for such year equal to 16 2/3% of fees paid by those Credit Clients for the first year of the Sequenced Retirement Period of the Origination Partner, 30.5% during the second year of the Sequenced Retirement Period of the Origination Partner and, if applicable, 44% during the third year of the Sequenced Retirement Period of the Origination Partner.

c. During the Sequenced Retirement Period, such Sequenced Retirement Partner is expected to introduce to other members of the Partnership those clients with whom such Partner is most familiar, and to turn over to other members of the Partnership such legal work on behalf of his clients as may be feasible and appropriate.

d.The compensation of such Sequenced Retirement Partner shall be established by a formula as an amount equal to 15% of the total fees collected from Credit Clients during the first year, 12.5% during the second year and, if applicable, 10% during the third year.

Downside of Sequenced Plans

Despite their positive intent, such sequenced retirement provisions are troublesome for several reasons. First, they create an unfunded liability that the firm has to pay out of future earnings. Second, as a result of paying the retired partner a share of the client business, the compensation paid to active partners who work on those client matters is reduced to below market level. The active partner is in essence funding the payment to the retired partner from the accounts receivable of certain clients. The necessary result is to reduce the profitability of such matters, thereby requiring the firm to compensate the active partner less than they would otherwise receive. Third, such active partners may become so dissatisfied that they leave the firm with the clients in question. (They can then be compensated at their new firm on a nondiscounted basis.)

'Sequenced' retirement provisions can create two other problems. If gradual retirement payments become significant, they create tension along the firm's generational lines. This tension can provide a breeding ground for departures. In addition, the existence of such provisions sometimes makes lateral recruiting difficult, as it could reduce profits per partner calculations.

Conclusion

A law firm and its partners would be wise to review the partnership agreement to ensure that these and other retirement provisions comport with the partnership's current concepts for retiring.

This article was excerpted from a more comprehensive discussion of retirement topics in the author's 'Law Firm Partnership Law' column in
the New York Law Journal, an affiliate of A&FP.

Arthur J. Ciampi is the managing member of Ciampi LLC and co-author of the treatise Law Firm Partnership Agreements. He can be reached at [email protected] or by phone at 212-269-2453. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.

Coming to terms with retirement is difficult and, like most things, is even harder if you are a law firm partner. As soon as you begin to think about throttling things back a tad, your clients demand a quicker response time and your partners want you to bring in more business. At the same time, what seemed just a short time ago to be a distant respite is now looming over you and you may not even know what to do or if you can even afford to do it. Moreover, even if you do not want to retire, your partnership agreement may have a mandatory retirement provision that takes away your choice.

Typical Mandatory Retirement Provisions

Today most law firm partnership agreements contain a mandatory retirement provision, which sets an arbitrary date by which a partner must retire as a partner from the firm. Proponents of such a provision argue that it benefits a partnership by having a partner cease working and collecting compensation at a time when it is likely that the partner is less productive. Detractors of mandatory retirement claim this provision can prematurely end productive careers and harm partners who, as a result of their senior status, may not be as mobile as other partners.

Partners opposing mandatory retirement often take the position that while they are being forced out, the firm is unfairly benefiting by maintaining the client relationships that the partner spent years and even decades fostering.

Regardless of the pros and cons, mandatory retirement provisions appear to be here to stay. A simple typical provision is as follows: 'A partner must retire from the partnership on Jan.1 of the year after attaining age 65.'

Law partnerships, mindful of at least the perceived harshness of these provisions, have tried to ameliorate their effects in several ways. For example, a firm may continue to provide services such as an office and an assistant, usually on a part-time basis, and to invite the retired partner to attend certain partner functions.

Sequenced Retirement

A more complicated means of ameliorating the harsh effects of mandatory retirement is to include a retirement system by which retiring partners phase down over a period of years and transition business to the firm. The business purpose of this 'sequenced' retirement is to encourage the retiring partner to transition clients to a less senior lawyer with the goal of institutionalizing clients at the firm. The retiring partner is provided with post retirement incentives if the firm retains client business.

A typical sequenced retirement provision reads as follows:

a. Sequenced Retirement may be elected by a Partner by giving at least six months notice prior to the January 1st of the year in which the Partner attains age 65 and when such Sequenced Retirement is to commence. Sequenced Retirement shall be, at the election of such Partner, over either a two- or three-year period.

b. During such Sequenced Retirement Period such Partner ('Origination Partner') shall designate one or more Partners who shall receive follow-on origination credit for that Partner's Credit Clients ('Replacement Partner') and shall be primarily responsible for billing and supervising and/or performing the services in respect of the Credit Clients so allocated. During the Sequenced Retirement Period the Compensation Committee shall, in formulating their compensation recommendation for such Replacement Partner (in lieu of any other credit given such Replacement Partner for originating such clients) be presented with an amount of origination credit in their statistics supplied to such committee for such year equal to 16 2/3% of fees paid by those Credit Clients for the first year of the Sequenced Retirement Period of the Origination Partner, 30.5% during the second year of the Sequenced Retirement Period of the Origination Partner and, if applicable, 44% during the third year of the Sequenced Retirement Period of the Origination Partner.

c. During the Sequenced Retirement Period, such Sequenced Retirement Partner is expected to introduce to other members of the Partnership those clients with whom such Partner is most familiar, and to turn over to other members of the Partnership such legal work on behalf of his clients as may be feasible and appropriate.

d.The compensation of such Sequenced Retirement Partner shall be established by a formula as an amount equal to 15% of the total fees collected from Credit Clients during the first year, 12.5% during the second year and, if applicable, 10% during the third year.

Downside of Sequenced Plans

Despite their positive intent, such sequenced retirement provisions are troublesome for several reasons. First, they create an unfunded liability that the firm has to pay out of future earnings. Second, as a result of paying the retired partner a share of the client business, the compensation paid to active partners who work on those client matters is reduced to below market level. The active partner is in essence funding the payment to the retired partner from the accounts receivable of certain clients. The necessary result is to reduce the profitability of such matters, thereby requiring the firm to compensate the active partner less than they would otherwise receive. Third, such active partners may become so dissatisfied that they leave the firm with the clients in question. (They can then be compensated at their new firm on a nondiscounted basis.)

'Sequenced' retirement provisions can create two other problems. If gradual retirement payments become significant, they create tension along the firm's generational lines. This tension can provide a breeding ground for departures. In addition, the existence of such provisions sometimes makes lateral recruiting difficult, as it could reduce profits per partner calculations.

Conclusion

A law firm and its partners would be wise to review the partnership agreement to ensure that these and other retirement provisions comport with the partnership's current concepts for retiring.

This article was excerpted from a more comprehensive discussion of retirement topics in the author's 'Law Firm Partnership Law' column in
the New York Law Journal, an affiliate of A&FP.

Arthur J. Ciampi is the managing member of Ciampi LLC and co-author of the treatise Law Firm Partnership Agreements. He can be reached at [email protected] or by phone at 212-269-2453. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.