When a company goes through a merger or acquisition, the handling of employee 401(k) plans is an essential part of the transition, as it can impact both current and future retirement savings for employees. The outcome for a 401(k) plan depends on several factors, including the structure of the acquisition, the acquiring company’s policies, and decisions made by the companies involved. Here's a brief overview of what typically happens:
Asset Sale: In an asset sale, the buyer acquires specific assets of the seller, but not the company itself. The seller retains responsibility for the 401(k) plan. The plan can either be terminated, with participants rolling their balances into IRAs, or kept open for current employees. If the seller terminates a significant portion of its workforce, all affected participants become fully vested.
Stock Sale: In a stock sale, the buyer acquires the entire company, including its 401(k) plan. The buyer can choose to terminate the plan, merge it with their own, or keep it separate. If the plan is terminated, participants can roll their balances into IRAs or the buyer's plan. Merging the plans requires careful coordination to ensure a seamless transition.
Plan Merger: Combining the target company's 401(k) plan with the acquiring company's plan is often the most streamlined approach. This requires careful planning to align investment options, fees, and administrative processes.
Maintaining Separate Plans: In some cases, both companies may choose to maintain their separate plans for a period of time. This can simplify immediate administrative challenges but may create complexity in the long term.
Communication and Transparency of M&A-related impacts to the Retirement Plan
Effective communication is an important element in managing a 401(k) plan during a merger or acquisition. Plan sponsors should develop a clear communication strategy to explain any changes to employees and address their concerns. Providing timely, clear information helps reduce confusion, keeps employees engaged, and demonstrates that their retirement savings are a priority for the company.
Important topics to communicate about 401(k) plans include:
- Changes in Plan Structure: Whether the plans will be merged, terminated, or maintained separately.
- Impact on Contributions and Matching: Any changes to matching contributions or other plan features.
- Vesting and Rollovers: How vesting schedules may change and what options employees have for rolling over their assets.
- Investment Options: If the new plan offers different investment choices, educate employees on their options and the importance of reviewing their portfolios.
A Checklist for 401(k) Plan Sponsors for Handling M&A and the Retirement Plan
At some point in the future, you and your company may be involved in a potential merger or acquisition. Below is a high-level checklist for plan sponsors of 401(k) plans to consider when navigating a merger or acquisition. This will help ensure compliance and smooth integration while protecting plan participants and minimizing potential liabilities. In addition, your World Investment plan advisor team is here to support and assist you should the need arise.
DUE DILIGENCE AND ASSESSMENT
- Plan Review: Review the provisions of each 401(k) plan involved (if both the buyer and seller have one).
- Plan Compliance: Ensure that all plans have been operated in compliance with ERISA, IRS, and DOL regulations, with no outstanding compliance issues or penalties.
- Audit and Filings: Check the last few years’ audits and Form 5500 filings for accuracy and look for any audit issues or reporting inconsistencies.
- Vendor Agreements: Evaluate existing service provider agreements, including recordkeeping, advisory services, and other vendor contracts for termination or transition terms.
STRATEGY FOR 401(K) PLANS POST-MERGER
- Plan Consolidation vs. Retention: Decide whether to maintain separate plans, merge one plan into another, or terminate a plan. This decision often depends on:
- Plan size and cost.
- Administrative complexity.
- Alignment of benefits and plan provisions.
- Participant Communication: Develop a communication strategy for participants about any changes to their benefits or plan choices, timelines, and resources available.
PLAN COMPLIANCE AND DOCUMENTATION UPDATES
- Amendments and Restatements: If merging or making any major changes, amend the plan documents to reflect the new plan structure and provisions.
- Non-Discrimination Testing: Run non-discrimination tests to ensure the plan remains compliant, especially after the integration of a new employee population.
- Fiduciary Responsibilities: Review and update fiduciary appointments and responsibilities to ensure coverage for the merged or new entity.
- Plan Notices: Provide required notices, such as the Summary Plan Description (SPD) and Summary of Material Modifications (SMM) to participants if there are material changes.
PLAN ASSET AND LIABILITY TRANSFER
- Asset Transfers: If consolidating plans, arrange for the transfer of plan assets, ensuring it is done in a tax-efficient, compliant manner.
- Loans and Outstanding Obligations: Handle participant loans or other liabilities. They may need to be transferred, restructured, or paid off if a plan is terminated.
- Rollover Options: Offer participants clear guidance on their options for rolling over funds if a plan is terminated.
FIDUCIARY AND ADMINISTRATIVE OVERSIGHT
- Governance Structure: Update fiduciary oversight structure, governance policies, and responsibilities for the new entity.
- Plan Administrator and Committee Changes: Review and update plan administrator designations and investment or retirement committee members as needed.
- Review Investment Options: Assess the investment lineup to ensure it aligns with the new entity’s investment policies and participant demographics.
ENGAGE PROFESSIONAL HELP
- Legal Counsel: Work with ERISA or benefits counsel to ensure the transaction complies with all regulations and that the plan documents are accurately updated.
- Plan Advisor/Consultant: Engage with a retirement plan consultant to facilitate transitions, communication, and participant education.
- Auditor: Ensure auditors are prepared to handle the complexity of a combined or terminated plan if required.
ONGOING MONITORING AND COMMUNICATION
- Plan Transition Monitoring: Oversee the transition to make sure all asset transfers, participant communications, and vendor updates are completed smoothly.
- Follow-Up Audits or Reviews: Schedule a review post-integration to confirm compliance and assess any participant issues or outstanding items.
- Ongoing Participant Support: Provide participants with ongoing support to answer questions and guide them through any changes, including financial wellness resources if possible.