PROFESSIONALS ARE SHRINKING VIOLETS WHEN IT COMES TO RETIREMENT PLANS: LAWYERS, ACCOUNTANTS NEGLECT NEED TO FUND BENEFITS FOR PARTNERS

In 1975, Arnold Ross met every Saturday for 13 weeks with a team of top partners from Weil Gotshal & Manges to create a new retirement plan for the growing law firm. The result: All partners are paying fees into a retirement buyout fund.

Why is this so remarkable? Because 23 years later, few New York firms of professionals have followed in Weil Gotshal’s footsteps. Instead, many are now sitting on ticking time bombs in the form of unfunded retirement promises made to aging and retired partners, which threaten to tear these companies apart.

“Unless professional services firms face this issue with a greater awareness, what is going to happen is a lot of firms will splinter,” says Mr. Ross, a senior partner with Hirschfeld Stern Moyer & Ross Inc. in New York, who is pushing firms to prefund their pension systems.

A wave of baby boomers will be retiring from such firms in the next decade, but their promised pensions all too often have not been funded. Younger partners, who are left to foot the bill from their own pockets, are now in many cases revolting against costly 11th-hour retirement demands, creating a potentially lethal mix. Retirement experts say that unfunded pension liabilities contributed to the closing of once-proud New York power broker law firm Shea & Gould, and have put merger pressure on other businesses.

low on totem pole

Unfortunately, legal and accounting firms cover new retirements predominantly by skimming off partners’ salaries only when the older partners retire, because they do not see partner buyout plans as a cost of doing business.

Experts say there are several ways to trim runaway retirement-buyout costs. These include capping the retirement benefit, tying it to just the first $500,000 a year in partner compensation, and linking the benefit to firm income and revenues, so that if they decline, the benefit will, too.

Many professional services firms excuse themselves altogether from retirement programs, leaving the onus on partners to prepare for their own financial futures. Some experts don’t think this is such a bad idea.

“My advice is, don’t enter into these things,” remarks Alan Johnson of New York-based Johnson Associates, referring to partner buyouts. “It’s like Social Security: It’s hard to unwind from them once you are in.”

As firms heed that advice, tax-qualified plans, such as 401(k) programs and individual retirement accounts, are proliferating.

However, that approach will benefit only younger partners, who have more time until they retire and who are often more willing to manage their own retirement funds. And plan adviser Mr. Ross, for one, worries that as partners spend more time planning their future, they will spend less time on their work.

aid to recruiting

In a world of heightened professional mobility, a funded retirement plan can be a big attraction.

“It is a great advantage and comfort to the partners — both to the younger ones who do not have to pay for older ones’ retirements in the future, and to the retiring partners to know that the money is there,” says Weil Gotshal senior partner Robert Lang, who, with Mr. Ross helped design his firm’s plan 23 years ago.

At the time, Weil Gotshal’s intent was to do the fiscally prudent thing, Mr. Lang says. But now the retirement fund also acts as a draw for new lawyers.

It can be difficult, however, to persuade younger partners that any part of their pay should fund someone else’s retirement. Many young professionals do not expect to remain with the same firm their whole career, so essentially buying out older partners’ sweat equity makes little sense to them. And Wall Street beckons with huge salaries.

This communication gap became a chasm at insurance broker Johnson & Higgins, which recently agreed to be sold. Current partners received huge bonuses from the sale, while the retired partners who had helped build the firm into a hot property were left with far less. Complaining that it was their firm, too, and that they had not been consulted, many of the retired partners are suing their younger former colleagues.

Crain News Service