No law firm collapse has left a more indelible mark on the legal profession than the spectacular failure of Dewey & LeBoeuf. While many remember the outsize guarantees and the drawing down of credit lines that helped bring about its demise, the firm was also pinned with another immense financial burden: a generous, underfunded pension plan.

For some firms in the Great Recession, reduced revenues combined with the overwhelming pressure from multimillion-dollar pension liabilities—a holdover from the days when pensions were simply a promise firms made to retiring partners—were too much to bear.

But with the Great Recession now a decade in the past and another recession brewing, has the industry learned from its mistakes?

Dewey's pension hearkened to the old days at law firms. Instead of a traditional 401(k), a government-backed fund to which a firm and its employees contribute annually, many Dewey attorneys were rewarded with a lavish pension that was paid out of a firm's yearly revenues.

Big Law has all but completely shifted away from the unfunded pensions that contributed to Dewey's downfall, opting for investment-based alternatives. These plans are just one more way Big Law is beginning to look more like the rest of corporate America—a good sign for law firm stability. But for retiring partners, there's a trade-off.

As law firms steer clear of inherently risky pensions, their partners are now the ones absorbing the brunt of the risk. And as the economy staggers in response to COVID-19, those partners are no longer as well-positioned to weather the storm as they might once have been.

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Risk Aversion

In much the same way as firms learned from Dewey to not draw heavily on credit and guarantees, most of Big Law has looked to remove risk from their pension plans.

The vast majority of the country's highest-grossing firms have switched to defined-benefit plans, in which attorneys are promised a set benefit when they retire, hence the defined benefit. The most popular defined-benefit structure, according to Citi, is the cash balance plan.

In cash balance plans, partners can make contributions each year to pension accounts. As opposed to a 401(k), in which pensioners can put away a maximum of either $19,500 or $26,000 annually, depending on age, cash balance plans allow partners to put away up to $200,000 a year, which is in turn poured into low-risk investments.

With this structure, law firms are more protected from deep cuts into revenues, and the retirement accounts are backed by the government and cannot be touched in the event of a recession-induced collapse. But these plans aren't bulletproof: Firms whose investments turn south will be required to make up the shortfall in order for the benefits to be fully funded.

"The decline in the stock market will reduce the net assets of your fund available for paying those benefits. If you don't have a statutory minimum, you have to put in," Ralph Baxter, the former long-time CEO of Orrick, Herrington & Sutcliffe, says.

Some firms, like Haynes and Boone, have addressed this risk by opting to define the benefit retirees receive as whatever is in a partner's cash balance account, instead of a set sum, thus avoiding almost all risk.

Among the Am Law 50, 46 firms maintain defined-benefit plans, with most of them being cash balance plans, according to publicly available data collected by Citi Private Bank's Law Firm Group. Among the Am Law 100, there are 138 defined-benefit plans—many firms operate more than one. Interestingly enough, there are only 66 such plans among Am Law Second Hundred firms.

Many firms have even begun phasing out their defined-benefits program in favor of defined-contribution plans, in which attorneys contribute to retirement, often with a match from the firm. Unlike defined-benefit plans, these setups aren't backed by the firm and shift almost all the risk away from the employer and onto the employee.

By redistributing the risk, firms are in a much better position now than they were in 2008 or even 2016, when 23% of partners reported having unfunded pension plans, according to Major, Lindsey & Africa's 2016 Partner Compensation Survey.

"Law firms are on the whole much healthier today. They are better off financially to deal with these unprecedented times," says Les Corwin, managing partner of Eisner's New York office, who represented Dewey in its aborted negotiations to merge with West Coast contemporary Orrick.

However, what's good for the law firm is not necessarily good for its partners.

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Partners' Problems

While firms may be better off—and in a stronger position to minimize layoffs and shortfalls and stave off collapse—the change to the industry's pension approach has left many partners facing smaller pensions and more risk. And with the U.S. stock market dropping more than 30% in response to the spread of the coronavirus, that risk has come home to roost.

While not beholden to the fortunes of a law firm, these investment-based pension plans rise and fall with the markets. As COVID-19 continues to wreak havoc on the economy, these plans are changing the retirement calculus of some attorneys. Any decrease in future earnings or retirement can take a toll on Big Law partners, who often live in high-tax states such as California and New York, and have long enjoyed a high standard of living.

For ex-Dewey partner Gregory Owens, a combination of creditor claims, alimony and state and federal income taxes proved insurmountable, even when he landed at White & Case after the firm's collapse. As the New York Times reported in 2014, he ended up filing for Chapter 7 bankruptcy.

"You go to Manhattan. You've got a city tax [and] a state tax, so a guy making a million a year could be paying tens of thousands in taxes a year," says Paul Sundin, a CPA who frequently advises law firms on pensions at Emparion.

An attorney who retires this year in a down market will, until the market recovers, have to live off of the reduced value of their pension plan. Some might find it more advantageous to keep working, West Coast legal recruiter Larry Watanabe says. This calculus brings on a new urgency when taking into account the handful of Big Law firms that still have mandatory retirement policies, he adds.

"The market's down 30%," Watanabe says. "People on the cusp of retirement, they're not going to have a choice. They're going to have to work."

Of the 35 lateral partner prospects Watanabe was working with in early spring, half a dozen were seeking a move to avoid mandatory retirement policies and create a longer runway for their careers, hoping the economy will recover.

"That number is going to increase when they look to their accounts," he says.

And as COVID-19 and the policy responses it demands—business closures and social distancing—continue to turn the stock market into a roller coaster, firms may look for ways to save money by targeting retirement benefits.

In March, for example, Pennsylvania-based Am Law 200 firm Marshall Dennehey Warner Coleman & Goggin decided to halt its 4% 401(k) match for the rest of the year in an effort to save on revenue and avoid layoffs. Some 80% of the firm's 1,200-plus employees participate in the program.

"We're trying to offset these losses and live up to our family values and keep them together. This was a measure we could take as an alternative to layoffs and pay cuts," president and CEO Mark Thompson says of the decision.

But Keith Wetmore, a recruiter at Major, Lindsey & Africa and former head of Morrison & Foerster, isn't so sure of the effect pensions have on behaviors. For many attorneys, the desire to keep working at the peak of their production, as well as the cumulative cost of housing and (for some) divorce, drives them to continue working.

"I have not witnessed a lot of people who are saying, 'If only I had another million in the bank I wouldn't keep going,'" he says. "Second and third marriages are one of the biggest factors."

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Relying on a Rebound

Dewey's pension obligation amounted to nearly $80 million by the time the firm filed for bankruptcy.

"Do the math," Corwin says. "You're talking about people who were receiving hundreds of thousands of dollars when they retire. What they didn't count on was the Great Recession."

Not only did the multimillion-dollar liabilities reportedly sink a merger with Orrick, but the obligation became another drag on the firm as it battled through the economic downturn. While the Pension Benefit Guaranty Corp. did end up taking over pensions for more than 1,700 employees, the resulting payments made for a serious haircut to retirement accounts.

"The real tragedy of these law firm dissolutions are those people," Corwin says. "The people who gave the firm its blue-chip clients and built its reputation, thought they had a nice pension to live off of in Florida and ended up with next to nothing."

While the contours of this latest downturn may be different from the 2008 recession, many of the demographic problems are still present. Law firm partnerships are by and large composed of baby boomers. The generation is responsible for about 25% of law firm matters, according to Altman Weil consultant Eric Seeger. A 2016 ALM analysis found that nearly half of the Am Law 200 partnership was over age 52.

It is true that these qualified plans now en vogue with law firms are often not as lavish as the unfunded plans of the past, nor are they risk-free. But many would prefer to wait for the market to rebound than risk losing their job and their retirement plan along with it, if their firm were to buckle under the pressure of its obligations—as so many did at Dewey.