7 issues in partner retirement planning

plus 6 steps for transitioning clients.

by august j. aquila

the biggest danger facing the future of accounting firms today is not the economy. it is the lack of planning for partner retirement.

more on great partnerships: solving underperforming or dysfunctional partners | underperformers come in many shapes and sizes | 6 focuses for managing partners | 10 steps to transitioning to a new mp | what managing partners should be doing | 11 things all partners must do | why partners need written goals | fighting restraining forces
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you would think that this would be one of the most important strategic issues for firms, but unfortunately it is not.

without proper retirement/succession planning, the firm is left directionless. it is not only planning for the succession of the managing partner that is essential. planning for the retirement of other key partners and non-partners in the organization is important as well.

planning for retirement becomes even more critical when the retiring partner is a founder or a key rainmaker of the firm. often, these individuals do not want to leave the firm and remain working at the firm longer than necessary.

over the past 12 months, i have been speaking with firm leaders about leadership in general and succession planning. although there isn’t just one way to structure a successful retirement plan, there are basic elements that need to be incorporated. and while you may have some of the following items included in your partnership agreement, it is important to have a clearly articulated retirement policy in place. this policy will prevent confusion or negative feelings at retirement time

what’s in your retirement plan?

retirement age

the most important issue to determine is the actual retirement age. a few firms require partners to step down from the partnership at age 60. others, especially the smaller and mid-size firms, have a mandatory retirement age of 65 or 66. the specific age is not as important as actually having an age designated in the agreement. setting the age can be a sensitive issue in smaller firms because the owner may feel that the younger partners are forcing him or her out. this issue is so important that it cannot be ignored.

retirement from the partnership does not mean retirement from the firm. the retired partner gives up his or her ownership interest. then, depending on the firm’s preference, the partner can take one of several different roles, from senior partner to business development team leader to mentor.

many larger firms have adopted an early retirement age in order to make room for younger accountants to move up through the ranks. also, while some partners are vibrant at age 60 or 65, others may have lost a lot of their desire to continue to grow the practice. it should be up to the firm – and not the individual partner – to make any exceptions to the general retirement guidelines.

finally, when you have a specific age for retirement, you are better able to plan for client transition.

retirement notice

it used to be common for a retiring partner to give a 6- or 12-month notice. today, i am seeing more agreements requesting a one- to two-year notice and prohibiting a partner from retiring during the first four months of the year.

for several years, firms have been creating retirement calendars. this is a simple spreadsheet that shows the estimated retirement date and retirement benefit for each partner in the firm. firms usually update and discuss the retirement calendar as a part of their annual retreats. this helps the firm plan for client transitions as well as project retirement expenses. most firms have a cap on the amount they can pay out each year to retired partners and having a retirement calendar can highlight future cash flow problems.

retirement and deferred compensation agreements

if you are going to ask retiring partners to transfer their client base or cut back on hours, make sure you are not asking them to do something that will eventually hurt their retirement payments. for example, a partner’s deferred compensation is based on the average of the last three years of compensation before retirement. during this time – if you ask the partner to transition clients – it will reduce his or her compensation because the compensation plan rewards for a partner’s book of business. in most cases, the partner will not transfer clients during this period. in order to avoid such conflicts, you may need to lock in the retirement amount a few years before the transition period so the partner will transfer the client base in a timely manner.

early retirement

i don’t know if i am correct, but i discourage smaller firms from allowing partners to retire too early. i believe it can be detrimental to a firm to lose the intellectual capital, the relationships and the referral sources that a partner brings.

in addition, early retirement can impose a financial burden on the firm. if a partner is fully vested in retirement benefits after 10 or 15 years of service, that partner might be able to retire at 50 or 55. to avoid this problem, either defer the payment of retirement benefits until age 60 or have early retirement trigger a “clawback” that drastically reduces the retirement benefits.

client transition

partner retirement and client transition should go hand in hand. hence, partners who fail to transition all or part of their client base should have some portion of their retirement benefits reduced or held back. client transition is rarely a fast process; it can take two or three years if the process is effective and done correctly. in addition, the transition process becomes more complicated with larger clients when actual client involvement in the process becomes critical. (see the end of this post for more on the activities the firm needs to undertake during client transition.)

compensating retired partners

often, retired partners will continue to do work for the firm. again, it should be up to the firm to determine what the work will be and how the partner will be compensated. there are three ways to do this:

1. for billable work, the partner is paid a percentage of the work he or she performs based on the cash collected. this amount is usually 30 percent to 40 percent.
2. if the partner is doing non-billable work, he or she is usually paid a fixed amount per hour.
3. for business development, the partner may be paid a percentage of the fees the firm earns for the year.

partner retirement, calculations and benefits

many firms are moving from deferred compensation benefits that are based on equity to a multiple of compensation (i.e., somewhere between two and four times). as smaller firms have grown over the last 20 or 30 years, partners with a large equity position have tended to have an exorbitant retirement benefit. for example, your cpa firm started 25 years ago and partner y holds 25 percent equity. the firm is now $10,000,000 and partner y is expecting $2,500,000 paid over five years. the firm has never reviewed its agreement. although the firm has good profits (i.e., 34 percent or $3,400,000), it is now forced to pay out almost 15 percent of its profits to one partner for the next five years. if the firm based its retirement benefit on a multiple of compensation (i.e., three times) and partner y’s average compensation was $650,000 per year, the firm would have a liability of $1,950,000. the key is to review the retirement formula to make sure the firm can afford it.

in addition to the deferred compensation benefits, firms will pay out the partner’s accrual basis capital account over a five-year period. while deferred compensation payments should not carry an interest faction, the capital account payments do.

other retirement benefits may include a continuation of health care benefits, an office with administrative support or even a small monthly payment after the deferred compensation payment has been made.

final thoughts

don’t be like the ostrich that sticks its head in the sand hoping that the problem will go away. i can assure you that developing a retirement policy will be an emotional event in the firm. each partner – based on age and personal financial position – will wonder, “how is this going to affect me?” however, if you are sincerely interested in planning for the firm’s future, this is one area that cannot be ignored. by doing it now, you will enhance the value of the firm and the likelihood that it will remain strong and independent.

retiring partners can be great ambassadors for the firm. treat them right. some day you will become one too.

client transition steps

it is recommended that clients be transitioned over a two- or three-year period to ensure that there is adequate time to made adjustments to the transition plan. the following six steps should be taken when transitioning clients from one relationship owner to another:

1. identify key clients. you don’t have to worry about every client, but it is important to take care of your most important clients. when you identify key clients, consider the following factors:

• audit or tax client
• annual fees
• services provided
• realization and profitability of the engagement
• client reputation in the marketplace
• importance of client to your niche area
• history of client services and service peculiarities about the client

2. identify key client advisors. care must be taken when transitioning a client to a new service provider. the ideal situation would be to transition the client to another partner or manager who already has familiarity with the client. having more than one person in the firm serving as a relationship manager is a foundational strategy for effective client transition. when you identify key client advisors, consider the following factors:

• the individual’s knowledge of the client and/or the industry/niche
• the chemistry and personality of the new advisor with the client
• the existing workload of the new advisor
• the willingness and enthusiasm of the new advisors to take on the client
• a key client account should never be pushed to another service provider

3. upfront communication. involve the client in the transition process. first, inform the client that you will be retiring in the next two or three years. second, make sure that the client continues to receive the same level of service. third, have a discussion with the client about the potential person who will take over the account. fourth, introduce the client to the individual so the client can become comfortable with the new service provider while you are still with the firm.
4. one-on-one meetings. key client accounts deserve and require a face-to-face meeting. this is an important time to let the client know your retirement plans and get the client’s input into the transition plan.
5. maintain fees. during the first year of transition, maintain current fees or raise them slightly. it is important that you do not provide the client with opportunities to look elsewhere.
6. first-year follow-up meeting. have a follow-up meeting with the client after six months or one year. this provides the client with an opportunity to voice any dissatisfaction with the service or service provider.

posted on may 17, 2017