Unfunded retirement program changes
November 5th, 2010 by Jim Cotterman
Unfunded retirement provisions will continue to change from the universally applied look-back programs typical two decades ago. Factors that undoubtedly influence such changes are:
1. Qualified retirement programs: The tax advantages and asset protection offered by such plans is superb. It has been about two decades since the US tax laws for such programs changed and allowed significant retirement asset accumulation for partners. Thus, anyone who was in their early 40s then benefited greatly from the advantages of compounded growth over time. These partners should, if diligent and careful, have accumulated substantial retirement accounts. Older partners needed to rely more on the unfunded programs because they had less time to benefit from their use.
2. Changing law firm structure/market: Unfunded programs are essentially pay-as-you-go schemes that work well when they are first put into place. However, as they mature and the underlying demographics change, they tend to turn upside down — the contributions made exceed the benefits received. The US Social Security system is a reasonably good proxy and the analysis of it (Understanding Social Security Reform) published by the AICPA demonstrates this characteristic. Unfortunately for many law firms this demographically led change in the Social Security system is directly applicable to the likely demographic changes in the legal profession. The economic rationale that supported such programs is broken — the programs are maturing and the underlying leverage and growth in firm size and profits are unlikely to support their continuation in all but a few firms.
3. Lawyer mobility: Lawyers who have key relationships and can influence where clients will place significant legal work are attractive in the market. Accordingly, firms will seek to acquire, by one means or another, such individuals. The use of self-funded programs where a lawyer can benefit from the success of transitioning relationships within a firm will open a new era in the strategic use of non-qualified retirement programs as part of the recruitment/retention arsenal of growth oriented firms.
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