Despite Nearly Universal Retirement Coverage in Law Firms, Unfunded Obligations Still Post Threat
The Altman Weil Retirement and Withdrawal Survey for Private Law Firms, 2005 edition has just been released. The Survey, seventh in a series of retirement surveys conducted by Altman Weil, Inc. since 1981, finds that 96% of responding law firms have an active, IRS-approved retirement plan.
These funded retirement programs - where the availability of retirement assets is assured by setting aside current income as it is earned and before payment of personal income taxes - have become almost universal in law firms with 20 or more lawyers. Nine out of ten smaller firms also have such plans.
“This is a welcome trend,” notes Altman Weil principal James D. Cotterman. “Ensuring adequate funds for retirement is going to be a critical issue as the first wave of baby-boom lawyers begin retiring in just five short years.”
Most Popular Qualified Plans
Out of 12 plan types identified in the survey, four emerged as most popular. 47% of law firms surveyed provide combined 401(k) / profit sharing plans; 21% maintain 401(k) income reduction plans; 17% have Safe Harbor 401(k) plans; and 13% offer profit sharing plans. Firms with 100 or more lawyers overwhelmingly favor 401(k) income reduction plans and 401(k) / profit sharing combinations, while smaller firms offer a variety of retirement plan options.
Unfunded Plans
24% of law firms also report maintaining non-qualified plans limited to highly compensated and key management employees. These plans do not qualify for preferential tax treatment, but neither are they subject to the reporting and disclosure requirements of qualified plans.
The Survey found that only 35% of non-qualified plans are pre-funded, relying instead on the ability and willingness of future owners to pay benefits as they come due.
“Unfunded obligations like these represent a fundamental risk to the legal profession in an era of partner mobility, an aging lawyer population and a very competitive labor market,” says Mr. Cotterman.
“Law firms are grappling with the issue of past promises and their future economic consequences. But the bottom-line is that unfunded plans represent a clear competitive disadvantage in the marketplace. Firms seeking lateral hires or good merger partners will have a tough time if their fiscal house is not in order.”
Payment Caps and Vesting Requirements
Many unfunded plans are being modified with payment caps, reduced benefit formulas, longer vesting requirements and other strategies to limit or reduce the future economic burden on law firms.
60% of firms with non-qualified retirement plans cap total payments in a single year. Additionally, 85% of firms require a minimum period of service for participation. Over two thirds of firms report amending their deferred compensation plan since 1990, most commonly by lowering a pre-existing payment cap, lengthening the payout term or adding a cap for the first time.
Mandatory Retirement Age
Among firms with documented policies, 38% require mandatory retirement. As the size of the firm increases so does the likelihood of mandatory retirement. 57% of firms with 100 or more lawyers have such provisions, while only 13% of firms with 10 or fewer lawyers do.
Survey Methodology
The 2005 Retirement and Withdrawal Survey for Private Law Firms is based on data collected from 202 law firms in the fall of 2004. 26% of firms responding had 100 or more attorneys; 37% had 20-99 lawyers; and 38% had fewer than 20 lawyers.
The Survey is available from Altman Weil Publications for $325. Altman Weil Publications conducts and publishes numerous surveys of the legal profession including the Survey of Law Firm Economics, the Managing Partner and Executive Director Survey, and the Compensation Systems in Private Law Firms Survey. For additional information visit the Altman Weil website at www.altmanweil.com.
