Survey finds most law firms have IRS-approved retirement plans

Daily Record (Rochester, NY), May 31, 2005 by Staff

According to Altman Weil's Retirement and Withdrawal Survey for Private Law Firms, since 1981, 96 percent 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 10 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. Forty-seven percent of law firms surveyed provide combined 401(k)/profit sharing plans; 21 percent maintain 401(k) income reduction plans; 17 percent have Safe Harbor 401(k) plans; and 13 percent 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

A total of 24 percent 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 percent 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, Cotterman said. 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.

A total of 60 percent of firms with non-qualified retirement plans cap total payments in a single year. Additionally, 85 percent 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 percent require mandatory retirement. As the size of the firm increases so does the likelihood of mandatory retirement. In addition, 57 percent of firms with 100 or more lawyers have such provisions, while only 13 percent of firms with 10 or fewer lawyers do.

The survey, seventh in a series of retirement surveys conducted by Altman Weil, Inc., is available for purchase. For additional information visit the Altman Weil website at www.altmanweil.com.