Providing Retirement Benefits for Professionals

By Bruce Knox
President, Executive Benefits Practice
Retirement Capital Group, Inc.

The Challenges

Highly compensated professionals in legal, accounting and medical practices, similar to highly compensated executives in public corporations, are affected by the limitations imposed on tax qualified retirement plans.

Many professional firms have adopted non-qualified retirement plans and have chosen to either informally fund the liabilities created by these plans or pay benefits from current cash flow as they become due.

Although informally funded non-qualified plans provide a small measure of security for the participants, in that funds are being set aside and ear-marked to fund retirement benefits, they are still subject to the claims of the creditors of the Firm under bankruptcy or in the event of an adverse legal judgment against the Firm.

Additionally, for plans paying benefits out of current cash flow there are generational issues that arise. Younger partners feel they are paying a disproportionately larger percentage of their income in comparison to older partners at a time when their incomes can less afford the diversion of cash from the expenses of day-to-day living. Of course, the older partners feel that this system is perfectly equitable as they were required to do the same when they were younger.

Recruiting and retention of highly qualified professionals can often be dependent upon the retirement benefits offered and the method utilized to fund those benefits. Professionals have turned down attractive offers due to the magnitude of the recruiting Firm’s unfunded retirement liability and others have left a Firm, because their retirement benefit was not secure, to join another Firm that provided a more secure benefit.

Alan M. Berry, a senior partner at Katten Muchin Zavis Rosenman in Chicago, credits the Firm’s ability to attract and retain high quality attorneys and to grow by merger and acquisition to the comfort that attorneys and Firms get from the opportunity to participate in a partner retirement plan that is 100% funded.

"We at KMZ Rosenman are fortunate to have begun funding our partner retirement plan over 20 years ago. Because we can offer this security to our partners, we have very low turnover and have been successful attracting new partners that have high visibility in geographic and practice areas where we have focused our growth efforts."

Mergers and acquisitions in the accounting field have been affected by unfunded retirement liabilities. Mergers are not new to the accounting industry - once known as the Big Eight, the consolidation wave which began in 1984 has shrunk the industry to the Big Four. Frank A. Rossi, formerly Managing Partner/Chief Operating Office of Arthur Andersen & Co. and a member of the firm's Board of Partners and Executive Committee, is among those who feel that unfunded partner liabilities have influenced the shape of the accounting industry as we know it today.

"By their very nature, mega-mergers are very difficult to do because each of the Firms has a very special culture. For example, in 1989 a proposed combination of Arthur Andersen with another Big Eight accounting firm was not completed because of incompatibility problems. One of the major issues was the concern of Andersen about the significant cost of the unfunded partner retirement benefit liabilities (both present and future) of a combined firm."

The IDEAL Plan Solution

Retirement Capital Group's Professional Firm Executive Benefits Practice has designed The Individually Directed Equity and Life (IDEAL) Plan to provide a secure funding method for new non-qualified retirement plans as well as for existing plans that are unfunded (paying benefits from current cash flow) or informally funded. The IDEAL Plan:

Puts control in the hands of the individual participant and permits them to tailor a retirement plan to their personal pre and post retirement cash flow requirements;
Enables a participant to invest in funds that match their risk tolerance level; investment options range from very conservative to very aggressive; and
Replaces the defined benefit method of funding retirement benefits with a defined contribution method designed to target a defined benefit.

In summary, the IDEAL Plan delivers a secure retirement benefit to professionals for a fraction of the cost of qualified plans while providing significant flexibility in compensation package design to meet the personal needs of the key people driving the success of the firm.