Sunday, October 8, 2006
Posted by Jeff Lipshaw
Hum the boomer anthem We Didn't Start the Fire as you contemplate this.
Law firms with the foresight to force partners to save for retirement by instituting defined benefit pension plans thirty or forty years ago are now feeling the same pinch as companies generally in trying to keep pension assets growing to meet obligations that are growing even faster. The problem with pure defined contribution plans (i.e. 401(k)s and the like) is that saving depends on the employee - matching plans can create incentives (bring the horse to water), but they can't make young or middling lawyers save (one presumes they drink!).
A couple years ago, a federal district court in the Southern District of Illinois shocked the pension world with an opinion noteworthy for its complete ignorance of the concept of time value of money and the allocation of risk and return in ruling that what has become known as a "cash balance" pension plan violated ERISA. The essence of the cash balance plan is to promise a rate of growth on the contributions, not a particular level of benefit. In an eminently sensible opinion, Judge Easterbrook concluded that the time value of money did not constitute age discrimination under ERISA (by providing a different level of benefit the longer an employee was in the plan), and reversed the decision (See Cooper v IBM Personal Pension Plan.) While this restores balance to the pension universe (get it?), the political and demographic impetus behind the case continues to raise its head.
What makes the plan a defined benefit plan is the fixed obligation to pay, say, five percent a year growth. The company still takes the risk that its investments will not accrue even at that rate, but it is more manageable than chasing the equity markets. But the impact is that younger workers will not have as rich a pension payout as their older boomer siblings and cousins.
That generational impact is now being felt in law firms, particularly those with defined benefit plans, where older partners are retiring nicely, thank you, very young partners have no expectation of similar benefits and quail at the thought of supporting all the younger boomers, and the younger boomers are now in the squeeze, facing a shorter period before the golden years to accrue value, and not getting the old defined benefits.
UPDATE: Paul Secunda over at Workplace Prof Blog (who actually knows whereof he speaks!) has intelligent commentary on this subject.