Upon retirement, a full equity partner in a CPA firm typically earns a deferred compensation benefit, together with a return of cash capital contributions. In many firms, an equity partner also earns 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. Firms should be cautious about deciding whether to offer this additional payout.
After employee compensation and rent, partner deferred compensation and retirement benefit plans usually are the third largest expense on a firm’s income statement. It is no secret that COVID-19 will probably hurt revenues and bottom lines at many firms. Firms of all sizes are working hard to reconfigure their staff loads and to renegotiate their space requirements. We haven’t heard much, however, about what they are doing regarding their obligations for deferred compensation retirement plans. So my firm recently reached out to over 350 managing partners at leading small, midsized and larger CPA firms and asked, “Are you thinking about changing your partner retirement benefits post COVID-19?” Thirty managing partners at leading firms across the United States responded to our survey. Their input provides a glimpse into the current thinking regarding partner retirement benefits post COVID-19.
The key takeaway is that, with current profits likely to take a short-term hit, several respondents are contemplating changes to annual net profit caps, early retirement provisions, and mandatory retirement ages. In addition, and of particular interest, the survey found that 10 percent of respondents at leading small and midsized firms with annual revenues less than $40 million have deferred at least 25 percent of their most recent payout of retired partner benefits. None of the respondents at the larger firms, however, have taken this action.
Presented below are other key takeaways of the survey (it’s important to note they may differ with a larger number of respondents):
- Over 73 percent of respondents indicated that a partner’s retirement benefits are at least two and a half times their highest average compensation. With a likelihood that short-term current partner compensation is going to be less than that before COVID-19, only 3 percent of respondents are contemplating reducing that multiple by 10 percent.
- Almost 43 percent of respondents have an annual net profit cap of more than 10 percent on aggregate retirement benefits. While only 5 percent of all respondents are thinking about increasing their cap by at least 10 percent, 20 percent of the firms with more than $40 million in annual revenue are thinking about increasing their cap by at least 10 percent.
- More than 96 percent of respondents indicated that their firms 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 respondents indicated that partners can retire 10 years before the mandatory retirement age.
- 11 percent are thinking about changing early retirement from 10 years to 13 years.
- Almost 54 percent of respondents indicated that their retirement plan had cliff vesting, but only 40 percent of the larger firms contain cliff vesting.
- 73 percent of respondents indicated they have a minimum number of partner years to qualify for a retirement benefit.
- Just over 91 percent of respondents were not thinking about extending the service period by at least one or two years, while almost 97 percent are not going to extend the pro-rate period by at least two or three years.
- About 13 percent of respondents indicated that that there is a retirement benefit cap for individual partners. Only 5 percent indicate they are thinking about reducing the cap.
- Accrued capital, in addition to being a partner deferred compensation retirement benefit, is paid-out by about 77 percent of all respondents.
Over the last 10 or 15 years, partner retirement plans slowly became more and more attractive to full equity partners at many of the leading firms across the United States. This was occurring as partner profits were slowly improving for the active partners. While none of us knows where the accounting profession will land two or three years from now, it is probable that improved profits will be hard to come by. All leading firms need to take a hard look at their partner retirement plan post COVID-19 and, if necessary, change it to reflect the current environment we are now operating in — our new normal.
