- Attorneys can’t live (or work) forever. Firms need to help older lawyers plan for succession and retirement.
We sometimes see stories about lawyers who still go into the office at 90, 95, or 103, and they are always written in a “isn’t he something” tone. In fact, lawyers generally seem to work longer than the general public (for which the average retirement age is about 62).
There are a number of reasons why lawyers practice beyond what others would consider a normal retirement age. I recently spoke at a webinar where we conducted a poll to ask why lawyers waited to retire. Answers included “having so much fun I don’t want to stop,” fear of missing out on new developments in the law and practice, made no plans for retirement/have no outside interests, and several others. About half of the respondents replied “other,” and I suspect many of those others were continuing to work for financial reasons: they simply had not saved enough to retire in the way they wanted. Consequently, they remained at their law firms and continued to practice. (I’m going to explore this issue in the context of law firm practice. The situations for sole practitioners and lawyers in the corporate world are very different, and retirement usually involves other types of planning.)
There is good news and bad news in this result. Older lawyers can continue to give the benefit of their experience, knowledge, and contacts to younger lawyers. But younger lawyers can be blocked from advancement in law firms because of the continuing presence of older lawyers, and sometimes decide to leave for that reason. Lawyers have many sound reasons to continue working, but those reasons should accrue to the benefit of both the lawyers and the firms for which they work. Financial necessity is not a positive reason for law firms to want older lawyers to continue in their practices, nor is it a positive reason for lawyers continuing to practice. Put another way, it is good business practice for law firms to plan the retirement and continuing work of older lawyers, over a period of years, but it is not good planning to have lawyers remain because they can’t afford to retire.
An entirely unscientific survey of older lawyers at seminars where I spoke suggests that many of them have not engaged in effective financial planning, and this includes saving enough in retirement plans to permit retirement when it is appropriate for other reasons. Law firms need to provide assistance with financial matters before retirement and take a more active and organized role in the succession planning process. This is a far better business model than the processes that are currently observed, which are generally either rigid rules about when lawyers must retire or, more commonly, ad hoc arrangements that promote uncertainty and retard rather than promote retirement planning. Law firms wisely spend considerable resources on training and promoting younger lawyers. Good business practice for older lawyers would involve a program of succession planning beginning at, for example, age 60, if not earlier. The program should include the following:
A significant part of the planning for retirement will involve retirement plans, particularly plans that qualify under Section 401 of the Internal Revenue Code, so-called qualified retirement plans. Effective use of the saving opportunities presented by qualified plans can be the largest component of financial assets in retirement. Retirement plans, qualified and otherwise, come in many varieties and have evolved over time.
In an earlier era, law firms typically did not provide benefits to retired partners through separate plans. More commonly, partnership agreements provided for payments after retirement, often by a formula that took into account fees produced over a period of time and length of service. For example, payments might be based on an average of fees produced in the last three years before retirement. It is easy to see the problems implicit in such a program:
It was not funded, so the payments had to come out of current earnings, setting up a clash with the younger generation.
The formula for these payments was generally not very nuanced, so a decline or rise in fees earned in the last few years could have a significant impact on retirement payments, making it difficult to plan for post-retirement financial needs.
Focusing only on fees earned, which was often the standard (but not the only one) did not take into account other contributions made by partners, and could result in widely varying results among partners with similar financial needs.
There were other reasons for the prevalence of unfunded, informal retirement payments from law firms. Until 1962, self-employed people were unable to save for retirement through qualified retirement plans. And when such contributions were finally permitted, the contribution limits were set much lower than for common-law employees. In addition, self-employed people were not covered by Social Security until the early 1950s. Unfunded, less formal retirement payments were one of the few ways to provide for partners’ retirements. Because of the uncertain nature of these arrangements, many lawyers simply continued to practice until they were physically or mentally unable to do so.
Unfunded retirement programs have not disappeared, but those that remain continue to demonstrate their shortcomings, especially the tension between younger partners and those closer to retirement. And even firms that have moved on to other types of plans might continue to have obligations under the former type. My own firm had such a plan, and 30+ years after switching to a tax-qualified plan, it is still paying a handful of retired partners under the prior arrangement. This is not to say that an unfunded arrangement should never be used. There might be individual lawyers whose contributions to the firm’s well-being are so substantial that they should receive some kind of supplemental payment. But this should not be the principal source of retirement payments. And obviously, it sets up tension as to who should qualify for such additional payments.
Once lawyers could participate in tax-qualified plans, a more efficient, secure, and probably fairer system of retirement payments was possible. Some firms opted for defined benefit pension plans, in which a benefit determined under a formula was provided, to be funded pursuant to statutory requirements. Such plans have many variations, as do hybrid types such as cash balance plans. The problem that prevents many firms from using them is that they often create a liability on the firm’s balance sheet that can be quite large. Some law firms use these types of plans as an add-on to the main type of retirement plan, often for the particular benefit of higher earners.
The most common type of retirement plan used by law firms today is the defined contribution plan—money is contributed based on a formula, invested, and an account is available at retirement. Among defined contribution plans, the most common type is the 401(k) plan, so-called because of the Internal Revenue Code Section permitting it. Contribution levels to the plan are elected by plan participants up to statutory limits. That includes zero, and some lawyers contribute nothing for a variety of reasons. But even if contributions are made at the maximum level, and invested carefully, they might still fall short of the amount needed to fund retirement. For this reason, many firms have added provisions to 401(k) plans that require mandatory contributions by partners. The value of such contributions is that they force partners to save (often over their objections), helping to prepare them for the succession of their practices. In this way, the retirement plan becomes a more assured source of retirement assets and a stronger component of the succession planning process.
Retirement plans are often adopted as another benefit for partners and employees of law firms, without considering how they fit into the process of succession planning for lawyers. In many law firms, the process of succession planning remains a haphazard, ad hoc one. A better method of planning, for both the lawyers and law firms, is to use retirement plans as an active component in planning for succession to younger lawyers and to combine them with financial and non-financial guidance to help make the process both businesslike and successful for all parties.