Is Mandatory Retirement a Best Practice?

I’ll start with the punch line.  Yes, it is a best practice.

But only if your firm’s vision is to stay independent into the next generation by developing future leaders and retaining retirees’ clients.

If you are a small firm with partners who love what they do, have no hobbies to pursue in retirement, and basically want to die at their desks, then no, it may not be a best practice.  These partners are  saying: “This is my firm and no one tells me when to retire, especially based on my reaching some arbitrarily-decided age.”

The remainder of this post assumes that readers are the former, not the latter. For the most part, we address firms under $20M.

What is Mandatory Retirement?

It’s simply the age at which partner retirement is compulsory.  As of 2020, the vast majority of firms specify mandatory retirement age as 65-68.

But CPA firms have created their own unique definition of mandatory retirement. It’s the age specified in the partner agreement that partners must retire unless they wish to continue working in some capacity.  80-90% of partners in firms under $20M do not retire “cold turkey” and instead, wish to continue working, either full or part-time.

To make the above a best practice, the following provisions are usually specified by the firm:

• It is the firm’s decision, not the retirement-age partner, to allow a partner reaching mandatory retirement age to continue working.
• If partners continue working, they usually relinquish their equity and revert to a title of non-equity partner, of-counsel, director, principal, etc.
• They cease to have a vote and often no longer attend partner meetings.
• The firm, not the partner, decides all parameters of employment such as full time vs. part-time, which clients are worked on, the nature of the work performed, how much and when the person works and how the person will be compensated.
• Critically important: if retirement-age partners are allowed to continue working and control their clients, they are not eligible to begin receiving their buyouts because partners should only receive retirement benefits if they give the firm the proper notice of intent to retire and comply with the firm’s client transition requirements.
  

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CPA Firm Partner Retirement / Buyout Plans is a must-read for firms that either need to revise and update their existing plans or need to write a new agreement.  The book addresses ►what CPA firms are worth ►how partners earn their buyouts ►how to value a firm’s goodwill ►the acid test of a well-conceived retirement plan  ►6 methods of determining an individual partner’s buyout ►vesting ►notice and client transition requirements ►mandatory retirement ►non-compete and non-solicitation covenants ►how to prevent your plan from becoming a Ponzi scheme

How Many Firms Have Mandatory Retirement Policies?

The 2019 Rosenberg MAP Survey (based on 2018 data) shows the following:

• Over $20M – 94%
• $10-20M – 81%
• $5-10M – 69%
• $2-5M – 53%
• Under $2M – 25%

So, like so many practices, practices vary widely depending on firm size.

At least from a statistical perspective, mandatory retirement is clearly a best practice.  But a best practice is considered “best”  based on not only how many firms practice it, but the rationale for and benefits of the policy.

Why Have a Mandatory Retirement Policy?

Why is mandatory retirement an effective practice?  If a firm’s vision is to remain independent, grow, retain its best staff who are eventually promoted to partner, retain clients as their primary services providers retire, then mandatory retirement is critically important because it:

• Provides advancement opportunities for talented, ambitious staff.  Why would great staff stay if they never get to take over the clients of aging partners and their duties in the firm?
• Serves as a client retention practice by providing for an orderly transition to the next generation of ownership.  It protects the firm’s largest asset, it’s client base.
• Serves as a safety check for aging partners whose skills have eroded.  Both clients and staff don’t want to work with people who have lost it. These people also may put the firm at risk if they no longer have the intellectual capability to perform at a partner level.

Conclusion

Mandatory retirement is a best practice because it provides for the orderly transition of the firm to the next generation of ownership.  Failure to have a mandatory retirement policy doesn’t automatically mean the firm will never make it to the next generation.  It just makes it more difficult.  Remember this stunning statistic:  80% of first generation firms never make it to the 2^nd generation because they never created a succession plan, and failed to develop future leaders.