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The number of law firms that have an active, IRS-approved qualified retirement plan has increased dramatically in recent years, according to the Altman Weil 2002 Retirement and Withdrawal Survey for Private Law Firms. The 98 percent of the 197 responding firms that have such plans represent a 13 percent increase from the last time the survey was conducted, in 1998, according to Altman Weil. James Cotterman, the Altman Weil principal who conducted the survey, said firms have responded to a heightened need for qualified plans because more attorneys are retiring earlier. Cotterman also said that because the recent wave of retirees includes the baby-boom generation, there are more people than ever leaving the profession. “Many associates organize their careers and financial situations around leaving at an average age of 60 rather than 62,” Cotterman said. “Firms are trying to accommodate those persons, since the group has become a sizable number.” After accumulating wealth during their lengthy spans within the profession, older associates have been leaving the job earlier to venture outside the box of practicing law. According to Cotterman, firms have adjusted accordingly by expanding the list of options and benefits within their retirement plans. Cotterman also attributed the surge in retirement options to the lack of viability of unqualified plans within the law firm environs. He said that the majority of these plans are unfunded as well, because the tax cost of funding such a plan is too high for many of these firms to bear. Qualified plans impart mutual benefits upon both the employer and its beneficiaries, which explains their growing prevalence among law firms. “These plans [qualified] are a lot less risky,” Cotterman said. “If a firm with a nonqualified plan goes belly up, the employees have just lost all their benefits.” In addition, qualified plans are made up of tax-deferred investments that are secured in a separate trust. Therefore, the demise of the firm is not accompanied by a lapse in benefits as well, Cotterman said. The survey displays trends toward the qualified-plan structure, a majority of which lay within the realm of defined contribution plans. Qualified plans are split into two groups: defined benefit and defined contribution plans. Defined benefit plans offer specific retirement benefits based on age, years of service and past earnings. Within this option, the employee is required to annually set aside a specified amount of his income toward the plan. On the other hand, employees under defined contribution plans set aside a varying portion of their income at their own discretion each year and, upon retirement, reap a specific amount of monetary contribution irrespective of the cost of particular retirement benefits. According to Cotterman, defined benefit plans place risk within the hands of the employer, while defined contribution plans shift the risk to employees. Since the benefits retired employees receive under contribution plans depend on the purchasing power of the monetary contributions received from the plan, the employee must also bear the risks of inflation. Cotterman said the defined benefit plan offers a lot to the older employee who started at the firm much later in his career. By contrast, the 20-year-old who sets aside plenty of savings for a long period would opt for the latter. While the defined benefit plan may seem like the ideal solution to the majority of retirees, portability is a common concern. An annual monetary contribution, within defined contribution plans, can be easily carried over to a job with a new firm, unlike the transport of the more unwieldy benefits of defined benefit plans. The transport of retirement savings is imperative in today’s legal climate, where the average lawyer is constantly on the move in switching firms. Administrative costs also run significantly higher within the more complex defined benefit plans. In concordance with these difficulties, recent surveys find that law firms generally opt for either defined contribution plans or hybrids of the two. The four most popular plans emerging from the Altman Weil survey were types of defined contribution plans. Of the responding law firms, 49 percent provide combined 401(k)/profit-sharing plans, 25 percent maintain 401(k) plans, 13 percent have money purchase pension plans, and 11 percent offer profit-sharing plans. “They [defined contribution plans] are more flexible and give the employee more choice over retirement options,” Cotterman said. The most popular 401(k) plans allow participants to set aside a certain portion of their income toward the plan, which is then matched by the employer. Often an employer tacks a profit-sharing agreement onto the 401(k) plan it offers. The profit-sharing aspect allows employers the flexibility to offer annual contributions that vary according to their own profitability during the year. Within the realm of profit sharing, there are many variations upon which payments can be weighted according to age, pay or other criteria. Wolf, Block, Schorr and Solis-Cohen’s chief financial officer, Paul Levy, said that a similar 401(k) and profit-sharing combo, which was instituted several years ago to replace the more costly unfunded plans, is a favorite among partners at Wolf Block. Dependent upon rank, contributions vary from 5 percent to 14 percent of annual income. Money purchase plans are other types of contribution plans that include one hybrid feature — fixed annual payments. Like its counterparts, the plan does not guarantee specific benefits, offering instead a way of setting aside money toward an unspecified amount of retirement benefit purchases. Often firms enact payment caps as a “protection mechanism” for the firm, ensuring that “all beneficiaries share in the red when the cap is hit,” Cotterman said. If the organization suffers from financial stress during a particular year, it can defer part or all of its annual contribution to another year. While this fluctuating contribution structure appears to be a detriment to employees who rely on guaranteed yearly contributions, Cotterman stressed its long-term benefits. “As the baby-boom generation is moving toward retirement, quite a few people have come to benefit under the plan,” he said. “If the organization can’t afford to pay a certain year, rather than cancel the plan, they just pay it later. That protects the beneficiaries, ensuring that the plan stays in place.” The six-digit salaries of more highly compensated players within the legal profession warrant plans that allow them to defer larger amounts than the tightly capped qualified plans. According to federal tax laws effective in 2002, the maximum compensation that can be taken into account toward determining contribution and benefits is $200,000 in 2002, up from $170,000. While unappealing to the majority of employees, unqualified plans look a lot more inviting to the highly compensated partner. The laxity in federal regulation is often cited as a flaw to the average employee, but this translates into the collapse of the upper bound on salary portions that can be set aside for retirement. Levy said that Wolf Block had previously offered unfunded pension plans to its partners, but due to expensive internal costs, as is common with these types of plans, they were dropped several years ago. “It gets complicated, and the reasons for it weren’t compelling enough,” he said. “It was getting expensive.” New tax laws have significantly altered pension laws, which include relaxation of this upper bound. Cotterman said that as the general population ages and incomes upon retirement increase, the law has accommodated. But, he added, the prospects of these new laws depend upon firm budgets. “It’s always nice to say the law allows you to put more money aside,” Cotterman said. “Firms will probably only make use of this additional funding to the extent that they can afford to.” Cotterman remained ambivalent as to whether these kinds of changes in legislation would translate into more retirement benefits. New tax laws have accommodated the higher peak in salaries upon retirement. In 2002, the most that a person under a 401(k) can contribute from his paycheck is $11,000. This limit will grow by a thousand dollars each year until it hits $15,000 in 2006. The amount that can be taken into consideration toward determining contributions has also been upped to $200,000 and will continue to further increase to adjust for inflation in $5,000 increments. In addition, starting in 2002, the limit on total contributions will be the minimum of $40,000 or 100 percent of compensation, up from the minimum of $35,000 or 25 percent. Within the venue of defined benefit plans, the list of 2002 changes will include an increase in the maximum allowable pension benefit received by retirees to $160,000 from the previous $140,000. Many employees underestimate the power of “compounded earnings and time” toward a fruitful retirement. Cotterman stressed that while legislation has done its part to keep up, employees must face the realization that “the longer you wait to start saving, the more costly it becomes.” The 2002 Retirement and Withdrawal Survey for Private Law Firms is based on data collected from 197 law firms in the fall of 2001. Of the responding firms, 22 percent had 100 or more attorneys, 40 percent had 20 to 99 lawyers, and 38 percent had fewer than 20 lawyers.

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