In today’s legal market, law firms are seeing unprecedented profitability, and their partners are reaping the financial rewards. However, many attorneys may not be taking full advantage of the financial tools available to them through their firm. I sat down with Reed Nothwang, CFP®, Vice President and Wealth Advisor at Compound Planning, to unpack the complexities of law firm-sponsored savings plans. From tax diversification to deferred compensation pitfalls, this conversation offers actionable advice for attorneys looking to enhance their financial well-being.
Are You Getting the Most Out of Your Firm-Sponsored Plans?
Q1: What do most, if not all partners have access to?
The plans available will depend on each individual firm. Many firms nowadays, carry very similar savings plans, but may have little differences to them. First off, everyone will have access to some sort of 401k. Typically the Partners 401k is treated separate from the rest of the staff 401k. Partners will be able to make their discretionary contribution to either pre-tax or Roth ($23,500 for 2025). They should also be making a contribution that is coded as an ”employer match.” However, since the partner is an owner of the firm, it comes out of his/her regular draw. This is often a non-elective contribution, meaning you cannot opt out of making it, so plan accordingly. For 2025, that contribution should be $46,500 to get to the ERISA maximum of $70,000. If you happen to be over the age of 50, you can add an additional $7,500 contribution on top of that as well.
Q2: What other plans may be available?
Law firms will typically offer some sort of cash balance plan. 15 years ago, it would have been a defined benefit pension plan, not too different than what is offered to a teacher, firefighter or police officer. Private firms have largely moved away from this practice, and will offer a defined contribution cash balance plan. Depending on the firm, you’ll have the ability to choose your contribution, or it will be decided for you. For instance, at Orrick, Herrington & Sutcliffe, the cash balance plan is determined by your age and compensation. A brand new partner may contribute $13,000, while a 60 year old partner may contribute about $100,000. Alternatively, if you work for Baker Botts, you will decide your contribution to the cash balance plan during your first year as a partner, but you will not be able to alter your selection for as long as you are a partner with the firm.
Another plan that is typically offered is Deferred Compensation. Deferred Compensation is a hot button topic amongst law partners right now. I know some people who swear by it, and have deferred millions of dollars of their income into the plan. I know others who won’t even have the conversation about its benefits. Some benefits are that you can defer taxes towards retirement years, and you can save much more than in a 401k or cash balance plan. The drawbacks are that it’s an unsecured liability of the firm, and that it could cause someone to end up with too much pre-tax income. Ask anyone who worked at Heller Erhman in 2008, and they’ll tell you to avoid that plan at all costs.
Lastly, your firm may offer some sort of specialty type plan that isn’t designed for retirement. I’ve seen firms with a large tech client base offer venture capital funds, allowing all partners within the firm access to venture capital investments. There may be different insurance options that can be used to build cash value, or Health Savings Accounts to begin saving money towards medical costs in retirement.
Q3: What are some of the common pitfalls that partners fall into?
There’s a few things that I’ll see partners fall into quite a bit. The first is a major lack of tax diversification. As a partner, there’s a good chance you are in one of the top marginal tax brackets, and you may be paying state tax in multiple places. The temptation is to max out those pre-tax savings as much as possible. However, I encourage clients of mine to make sure they are not neglecting Roth contributions, or after-tax investments as well. While a good chunk of the savings options are automatically pre-tax, I encourage clients to mix in Roth contributions through the discretionary 401k contribution. You’ll pay tax now on that money now, but the tax-free distributions in retirement will allow so much flexibility. Along with that, start building up a taxable brokerage account. That account won’t come with many tax advantages like retirement accounts do, but gains are taxed at capital gain rates, instead of ordinary income. Again, it’s just a nice way to diversify how you are taxed down the road.
The other big pitfall I see often is leaving your investment in the default option. I can’t tell you how many 401ks I’ve seen where the partner is still in the default option. These default options are good enough for everyone, but not ideal for anyone. Most of the time, the 401k offers plenty of other options that can be used to personalize one’s investments to their actual goals at hand.
Q4: What recommendations would you give to a new partner at a firm?
I’d say it’s important to sit down with someone within the firm who understands these plans thoroughly. There will typically be some general information available, or an old webinar from years ago, but nothing can replace sitting down 1:1 and asking all of your questions. Get the summary documents for each plan and send them to your financial planner or accountant to make sure they understand each plan as well.
Then, go to talk with an existing partner at the firm. Ask them about how they’ve used each of the plans over the years. If you can talk to multiple people, then talk to multiple people. Hear different perspectives from those who have gone before you at the firm. You aren’t reinventing the wheel, but they may have advice that they wish they could have told themselves years prior.
Q5: What if my firm doesn’t offer some of these things?
I’ve seen a lot of small to mid-sized law firms fall short on savings plans. I’ve run into firms that just have a standard 401k in place, and they don’t realize how much they are missing out on from a savings perspective. Recommend that your firm speaks to someone like myself, who has worked with a handful of other firms. Most of the time, a mid-sized firm doesn’t have a great TPA (Third Party Administrator), and the TPA doesn’t know how to separate the partners 401k from the rest of the staff without causing top-heavy issues.
The firm may have opted against other plans due to cost. While there’s a cost to setting some of these things up, having better savings plans available is going to attract and retain quality talent for your firm. Especially when competing against larger law firms for talent, you’ll want to be able to offer a more competitive package to them.
About Reed Nothwang, VP and Wealth Advisor at Compound Planning
Reed Nothwang is an experienced wealth advisor with over 9 years in the wealth management space. At Compound Planning, he advises a select group of law partners, providing customized advice that simplifies and enhances their financial lives. Reed specializes in structuring financial plans for attorneys to address inconsistent income, high cash compensation, and risk mitigation.
Contact Information: reed.nothwang@compoundplanning.com or (415) 941-6889
About Shari Davidson and On Balance Search Consultants
Shari Davidson, President of On Balance Search Consultants, advises law firms on strategic growth, talent acquisition, and lateral transitions. With a focus on partner placements and law firm M&A, Shari brings unique insight into the business of law and the future of firm leadership.
Contact us at (516) 731-3400.
