A Cash Crisis
Robert P. Cummins says he intends to practice until he croaks (his word). So when he learned several years ago that a former law firm was withholding expected retirement benefits, this was not disastrous news.
But the Chicago lawyer feels for others who do intend to retire—until they learn they can’t afford to do so. “If what they were relying on doesn’t happen,” he says, “then that can be a pretty traumatic setback.”
As some seasoned attorneys have recently discovered, seemingly lucrative retirement plans can be anything but.
Within little more than a year, for instance, partners at the once-mighty Silicon Valley powerhouse Brobeck, Phleger & Harrison, as well as those at Chicago’s Altheimer & Gray, known for its sophisticated transactional work, had the same experience. After the firms suddenly dissolved, they found themselves without promised retirement payments.
Cummins is an example of another phenomenon: a lawyer denied retirement payments after he or she voluntarily departs a viable firm.
Commonly, as in Cummins’ case, the reason for the denial is a noncompetition clause in the former firm’s part-nership agreement. It is allegedly triggered when the departing lawyer goes to work at another local law firm or takes clients with him to the new partnership. A number of lawsuits have been brought over such situations, including one by Cummins, and settled on undisclosed terms.
Even when a firm is on solid financial footing, paying out agreed benefits to retiring lawyers can be a big problem, says William F. Brennan. He is a legal consultant in the Newtown Square, Pa., office of Altman Weil Inc.
“A lot of firms have not planned adequately for the retirement of their partners,” he says, using the term generically to include attorney shareholders in law firms set up as corporations.
Often, this lack of planning becomes apparent only when partners are on the verge of retirement—and a lot of baby boomers are nearing retirement age.
A number of firms have unfunded retirement plans whose benefits will be paid out of current firm income. If there isn’t a solid core of more junior partners with good books of business at that point, the remaining partners may jump ship, or threaten to dissolve the firm unless retiring partners accept reduced benefits. “I have seen it be the cause of split-ups in certain instances,” Brennan says.
TAKE NOTHING FOR GRANTED
Experts advise lawyers to keep a wary eye on promised benefits. When offered a partnership, they should review the partnership-agreement benefits provisions before accepting, Cummins says.
Among the most financially sound retirement savings vehicles are “defined contribution” plans, such as 401(k). That’s because these plans have already been funded, except perhaps for the most recent employer contributions, says Barbara B. Creed. A San Francisco lawyer, she specializes in employee benefits matters.
By contrast, “defined benefit” plans, such as pensions paying retired partners a percentage of former earnings, often aren’t fully funded. Plus, the value of funds set aside to pay promised benefits will fluctuate with the underlying assets (such as stock), while the benefit obligations remain fixed or increase, Creed explains. A federal agency guarantees such pension plans “but only to a certain dollar amount,” she notes, so partners aren’t fully protected.
Brobeck had both defined contribution and defined benefit retirement plans, and partners likely will suffer undetermined losses in both, Creed says.
If a firm can’t pay its bills, “The partners, if they have an unfunded partner retirement plan, would be among the last to get paid,” Brennan says. “Their claims against the firm probably would be subject to prior liens and prior claims. Banks and other lenders would get paid first.”
And the bottom line could be even worse. Particularly if a firm isn’t organized in a limited liability structure, partners may have to help pay its bills from personal assets. In a worst case scenario, partners “not only don’t have a retirement plan, but it may be that they face some significant potential liability,” Cummins says.