Retirement Plans

Underfunded retirement plans continue to plague CPA firms. They are a key reason that partners may be forced to sell the firm, and they create an uncomfortable financial barrier to younger staff who fear retirement responsibilities for more senior partners if they join the partnership.

Below are some considerations that CPA firm owners should look into now:

• How fast is the retiree population growing? The longer owners wait to address the issue, the larger this group becomes, which makes the problem worse.

• Are partners fully aware of existing obligations? The first step in addressing partner retirement issues: Forecast firm revenue, partner counts, and pension plan payouts for at least 10 years. Include a sensitivity analysis that breaks out expected levels as well as volatility and variations. Taking these actions ensures that partners are aware of worst-case scenarios and are willing to entertain all alternative solutions.

• Has the firm done all it can to avoid creating a "caste system"? Changing benefits for future owners while leaving them intact for everyone else may seem to be a good solution to the partner retirement problem—but it isn’t. The approach simply defers pain, and isn’t likely to be seen as fair, largely because it creates two groups: the haves and the have-nots. Instead, devise alternatives that allow for equitable compensation funded by sound financing with implied future revenue growth rates that are reasonable. If your firm’s current structure has already created multiple constituencies, any solution will have to define why each class of partners should cast an approving vote.

• Can payments be structured like debt, instead of equity? Post-retirement income formulas should resemble debt (fixed-dollar payments) like traditional defined benefit pension plans. The reason: The goal is to move away from equity-type arrangements in which retired partners retain units or shares. This change will break the link between partner contributions and new revenues enjoyed after those contributions were made.

One approach: Convert existing unit/share plans to an equivalent dollar-based formula to eliminate the revenue escalation from future payouts. Lock in the unit/dollar relationship on the last day of employment, just as a traditional pension plan does. Conversion doesn’t have to be uniform—in fact, it may help to set up somewhat more advantageous terms for those closest to retirement, since they will have less time to change their retirement planning and saving.

• Can the firm optimize tax qualified arrangements? Although dollar amounts available for tax shelters under qualified plans usually aren’t sufficient for adequate partner retirement income, the plans are a way to set aside funds, deliver a meaningful benefit level, and create desired tax deductions for partners. The required nondiscrimination tests often allow enough room to deliver significant partner benefits within tax qualified plans with only minimal additional benefits and cost to staff. Source: The Segal Company (212-251-5000)