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Three Partner Retirement Issues

Retirement of partners poses three major questions in law firms today:
 
1. Should the firm have mandatory retirement?
 
2. What retirement benefit, if any, should the firm provide, and more important, will the benefit be funded?
 
3. How does the firm retina as much of the retiring partner’s “know how” as possible?
 
Mandatory Retirement
 
Many firms have a policy of mandatory retirement.  The reason that many other firms do not have  a policy is that they do not address the issue until one of their partners reaches retirement age.  This is the wrong time to deal with the matter.  Once a firm is faced with a specific situation, the decision becomes an emotional one rather than a business one.  The best time to deal with retirement is when all partners are still fairly young.  No firm that intends to institutionalize its being can do so without a stated retirement policy.
 
The advantage of a mandatory retirement policy is that the firm, rather than the individual, is in control of the matter.  While many partners who reach retirement age (usually sixty-five to seventy-two years of age) remain eminently qualified to practice, many do not.  A written policy allows the firm to protect itself by easing out partners who simply no longer should or want to be in practice.
 
To provide for an orderly retirement process for seniors, many firms provide for a transitional period before retirement (e.g., three to five years) in which the partner phases out of firm management and transitions clients to others in the firm.  During that time, the compensation of the retiring partner is reduced to reflect his or her changing role in the firm.
 
Many retired partners want to continue to be involved in the firm after their retirement.  An of counsel relationship permits this.  Each year the retired partner and the firm could negotiate a plan of contribution outlining how the retired partner plans to spend that year and how he or she will be paid for that contribution.  The retired partner can continue to transition client relationships, market the firm, serve as a teacher or consultant to young lawyers, and essentially spread the firm’s goodwill in the business and legal communities.
 
Retirement Benefits
 
Many law firms in the United States have partnership agreements that commit the firm to paying substantial retirement benefits to retiring partners.  That is, retiring partners are paid out of the firm’s future earnings.
 
A huge disadvantage to this approach is that the firm must remain economically viable for the retiring partners to receive their benefits.  Often the economic burden to the firm is so great that remaining partners are unwilling to continue to make payments.  In fact, war stories abound (and some litigation) about law firms that dissolved because of large unfunded benefits due to departed partners.
 
There are a limited number of options.  The partners could agree that they will “take home” less and thereby contribute to some type of retirement plan.  This type of “funded” approach is known as the “pay as you go method.”  Essentially, all partners contribute to their own retirement benefit.  Some lawyers object to this method because they feel that the firm should provide a benefit.  The fallacy to this argument is that the firm as it currently exists may not be around to provide the benefit, and then the retired partner will be left with no benefit.
 
The other option for a firm that does not fund retirement benefits is to have the partners agree that each individual partner will be responsible for his or her own retirement planning.  The biggest disadvantage to this method is that often the individuals do not provide for their retirement, so when the time comes they cannot “afford” to retire and must continue to work, even if their legal skills and judgment have deteriorated.  This presents a problem for the remaining partners, who must either force the senior out of the firm or face possible malpractice problems.
 
In any event, the best advise to any firm, particularly to one just being formed, is to avoid unfunded benefits of any kind at all costs.
 
Retaining a Senior’s Know-How

Too many firms have realized after the fact that when senior has retired from the firm, the firm has suffered more than expected because they did not plan for the senior’s retirement.  Senior partners are a major firm asset, often in more than one way:
 
1. They serve as firm leaders, often as the “glue” that binds a firm together.  This leadership can be a major firm strength and when it is no longer available, can have devastating results for the firm.  In this situation, a transition period allows the senior to “pass the mantle” to a partner who, with the right support, can gain the respect he or she will need to bring the firm forward.
 
2. They control major clients by virtue of their relationships with those clients that have evolved over many years.  A transition period, with a well-designed plan for each major client of that partner, may help the firm keep clients they might otherwise lose.  The plan would include the designation of the partner who will become the client manager; with a plan of action for how the designated partner will be phased in as the client manager.  Part of the plan might include a way of introducing more than one lawyer to the client to enhance the relationship.
 
3. They have stature in the business and legal community.  This is a more difficult role to transition and one that usually takes years, but, through a series of introductions in the right places, a senior can help ease the way for firm lawyers that follow his or her.
 
Regardless of what choices a law firm may make in the face of the issues discussed here, it is essential to the institution’s preservation that each issue be confronted and dealt with “up front” so that an issue’s irresolution shall not sow the seeds for later discontent and the possible destruction of the fragile fabric of the firm.

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This page contains a single entry from the blog posted on May 11, 2009 4:34 PM.

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