Pros and Cons of Sequenced Retirement

by | Sep 17, 2015 | Retirement

Dealing with retirement is never easy, especially for partners in law firms.  Even if a partner doesn’t want to retire, often the firm’s partnership agreement includes a mandatory retirement provision that does not   give   partners   a choice.

Typical Mandatory Retirement Provisions

Most  law firm partnership agreements include mandatory retirement provisions that establish an arbitrary date by which a partner must retire. Some argue that this benefits a partnership by having a partner stop working and collecting compensation when they become less productive. Conversely, this provision can prematurely put an end to productive careers and harm partners who, because of their senior status, are not as mobile.

Partners who oppose mandatory retirement often claim that while they are being forced to leave, firms are unfairly benefiting by maintaining client relationships the retiree fostered for years.

Regardless of these differing opinions, mandatory retirement provisions aren’t going away any time soon. A typical provision reads like this: “A partner must retire from the partnership on January 1 of the year after attaining age 65.”

Law partnerships have tried to improve the provision’s effects in numerous ways. These include continuing to provide an office and an assistant, generally on a part-time basis, and inviting the retiree to attend select functions for partners.

Sequenced Retirement

Another way of improving the harsh effects of mandatory retirement is by including a retirement system in which retiring partners phase out over several years while transitioning business to the firm. The “business” purpose of the “sequenced retirement” is to encourage retirees to transition their clients to an attorney with less seniority with the goal of institutionalizing clients at the firm. The retiree also is given post retirement incentives if the client’s business is retained.

A typical sequenced retirement provision reads this way:

  1. Sequenced Retirement may be elected by a Partner by giving at least six-months’ notice prior to January 1 of the year in which the Partner attains age 65 and when such Sequenced Retirement is to commence. At the election of such Partner, Sequenced Retirement shall be over either a two- or three-year period.
  2. During such Sequenced (“Origination Partner”) shall designate one or more Partners who shall receive origination credit for  that Partner’s  Credit Clients (“Replacement Partner”) and shall be primarily responsible for billing and supervising and/or performing  the  services in respect of the Credit Clients so allocated. During the Sequenced Retirement Period, the  Compensation Committee in formulating their compensation recommendations for such Replacement Partner (in lieu of any other credit given such Replacement Partner for originating such clients) shall be presented with an amount of origination credit in their statistics supplied to such committee for such year equal to 16 2/3% of fees paid by those Credit Clients for the first year of the Sequenced Retirement Period of the Origination Partner, 30.5% during the second year of the Sequenced Retirement Period of the Origination Partner and, if applicable, 44% during the third year of the Sequenced Retirement Period of the Origination Partner.
  3. During the Sequenced Retirement Period, such Sequenced Retirement Partner is expected to introduce to other members of the Partnership those clients with whom such Partner is most familiar and to turn over to other members of the Partnership such legal work on behalf of his clients as may be feasible and appropriate.
  4. The compensation of such Sequenced Retirement Partner shall be established by a formula as an amount equal to 15% of the total fees collected from Credit Clients during the first year, 12.5% during the second year and, if applicable, 10% during the third year.

Downside of Sequenced Plans

Sequenced retirement provisions can be bothersome for a few reasons.

  • An unfunded liability is created that the firm must pay out from future earnings.
  • Paying the retiree a share of the client business may result in the compensation paid to active partners working on those client matters being reduced to below market value. This means the active partner is funding payment to the retiree from certain clients’ accounts receivable. The profitability of these matters, therefore, must be lowered, which requires the firm to compensate the active partner less than they would receive otherwise.
  • Active partners may become so dissatisfied that they exit the firm and take the clients in question with them.

There are other problems created by “sequenced” retirement provisions. If gradual retirement payments become substantial, tension is created along the firm’s generational lines, which may foster departures.  These retirement provisions also may hamper lateral recruiting because of reduced profits per partner.

We work with professional service firms in creating compensation and succession plans. For more information, contact one of our professionals today.