As Baby Boomer partners retire, law firms face increasing costs and client issues
Nearly half of the partners in the nation’s top 200 law firms are Baby Boomers or members of the older Silent Generation. And that means there will be a wave of upcoming retirements that will be the most ever experienced by BigLaw.
Sixteen percent of partners will retire in the next five years and 38 percent will retire in the next decade, the American Lawyer (sub. req.) reports, citing preliminary results from a partner compensation survey by Major, Lindsey & Africa.
The impact will be exaggerated because law firm headcount has grown at a slower pace since the financial crisis. The number of lawyers at the largest 100 law firms grew by 4.75 percent each year from 1985 to 1999 and by 5 percent annually from 2000 to 2008. Since 2009, however, the growth in head count has averaged only 1.2 percent a year.
All those retirements will have an impact on client relationships. An Altman Weil survey, for example, found that partners age 60 or older were responsible for at least a quarter of law firm revenue at 63 percent of the responding firms. “Firms that aren’t focused intently on transitioning client relationships by now—particularly firms that emphasize originations and billings over collaboration—are at greatest risk,” the article reports.
Another issue is the financial cost of retirement. Some law firms do not fund their pension obligations, and benefits will have to come from annual profits, the American Lawyer reports in a separate article (sub. req.). Twenty-three percent of the partners responding to the partner compensation survey said their law firm has such a pension plan. Many elite New York Firms have such plans, as do several Texas firms.
As people live longer, the liability for firms that pay a lifetime benefit can be particularly high.
Firms with tax-qualified defined benefit plans also have some financial risk. Those plans are funded by lawyer contributions but the payout is guaranteed. If the investments funding the plan underperform, the law firm will have to top off the plans so the guaranteed payout can be made. Judy Diamond Associates Inc., a retirement plan analytics firm, says 61 percent of the nation’s top 200 law firms have tax-qualified defined benefit plans.
The return of capital presents another problem. Because capital is tied to compensation levels, law firms are returning more capital to retiring partners than they are bringing in from new partners, says Altman Weil Inc. principal James Cotterman. “Firms might need to adjust their capital retention to be able to manage their way through the changing of the generational guard,” he tells the American Lawyer.
The capital payout can be particularly troublesome for law firms with an accrual basis system in which partners accrue a partial interest in future accounts receivable for matters that he or she originated.
Law firms are trying to reduce retirement costs by raising the retirement age; capping the annual payout from annual earnings; or changing the payout formula, and switching to defined contribution plans in which the lawyers carry the risk of a declining market.