firms target annual net profit caps, early retirement provisions, and mandatory retirement ages.
by domenick esposito
with profits likely to take a short-term hit, retired partners at many cpa firms are facing cuts to their payouts, according to our straw poll of 30 leading firms.
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with covid-19 hurting revenues and bottom lines, firms of all sizes are reconfiguring their staff loads and renegotiating their space requirements.
but we haven’t heard much about what firms are doing about their obligations for deferred compensation partner retirement plans. until now.
so we asked managing partners at leading cpa firms of all sizes, “are you thinking about changing your partner retirement benefits post covid-19?”
their answers provide a glimpse into the current thinking about post-covid partner retirement benefits across the united states.
we collected data from 30 managing partners, representing small firms, with less than $12 million in annual revenues; midsized firms, with up to about $40 million; and larger firms, with more than $40 million.
the firms are seriously contemplating changes to annual net profit caps, early retirement provisions, and mandatory retirement ages.
we’ve found, for instance, that one in 10 small and midsized firms have already “deferred” at least 25% of benefit pay-outs for retired partner benefits. none of the largest firms, however, have yet taken this action.
partner deferred compensation for retirement benefit plans is usually the third-largest expense on a firm’s income statement, following employee compensation and rent. upon retirement, full equity partners typically earn a deferred compensation retirement benefit, plush a return of cash capital contributions. in many firms, equity partners also earn a share of a firm’s accrued capital.
when added to the retirement benefit, an additional distribution of a firm’s accrual capital can be crippling to firms. when offering this additional pay-out, firms do so with caution.
other key takeaways:
- over 73 percent of firms report partner retirement benefits are at least 2.5 times their highest average compensation. with a likelihood that short-term current partner compensation is going to be less than that pre-covid, only 3 percent of respondents are contemplating reducing that multiple by 10 percent.
- almost 43 percent have annual net profit caps of more than 10 percent on aggregate retirement benefits. while only a few small and midsized firms are thinking about increasing their caps, 20 percent of the largest firms are thinking about increasing their caps by at least 10 percent.
- among the 96 percent of firms that have a mandatory retirement age of 65 or more, almost 7 percent of small and midsized firms are thinking about reducing mandatory retirement to 62 or 63.
- about 69 percent of all respondents indicate that partners can retire ten years before the mandatory retirement age. but 11 percent are thinking about changing early retirement from 10 years to 13 years.
- some 54 percent of small and midsized firms offer retirement plans with “cliff vesting,” but only 40 percent of the largest firms have “cliff vesting.” (“cliff vesting” grants full benefits at a specified date, rather than vesting gradually over time.)
- about 73% of all firms have a minimum number of partner years to qualify for a retirement benefit. but more than 91 percent are not thinking about extending the service period by at least one or two years. and almost 97 percent are not going to extend the pro-rate period by at least two or three years.
- with 13 percent of firms with retirement benefit caps for individual partners, 5 percent are thinking about reducing the cap.
- about 77 percent of firms pay out accrued capital, plus partner deferred compensation retirement benefits