When companies engage in mergers and acquisitions (M&A), the focus is often on operational integration, financial restructuring, and human resources. However, one area that deserves particular attention is the impact on 401k plans. As a plan sponsor, understanding how to navigate the complexities of retirement benefits during an M&A is necessary to ensure compliance, safeguarding employee assets, and maintaining a positive employee experience.
Here’s what plan sponsors need to consider and prepare for when overseeing 401(k) plans during mergers or acquisitions.
1. Due Diligence: Assessing Existing 401k Plans
Before any merger or acquisition, conducting thorough due diligence on both the acquiring and target companies’ 401k plans is essential. This helps you understand the similarities, differences, and potential legal and administrative challenges that may arise from consolidating or maintaining two separate plans.
Key Steps:
- Review Plan Documents: Analyze plan documents, including Summary Plan Descriptions (SPDs), vesting schedules, and eligibility criteria.
- Evaluate Fiduciary Responsibilities: Identify who holds fiduciary responsibility for each plan, as this could shift post-merger.
- Check for Compliance Issues: Ensure both plans comply with ERISA, IRS regulations, and Department of Labor requirements. Non-compliance could lead to costly penalties or legal issues.
By fully understanding the structures of both plans, you can avoid surprises during the integration process.
2. Deciding on the Fate of the 401k Plans
There are generally three options for handling 401k plans post-merger:
- Plan Merger: This involves combining the target company’s 401(k) plan into the acquiring company’s plan. This is often the most streamlined approach, but it requires careful coordination to ensure that the transition is seamless.
- Plan Termination: In some cases, the target company’s 401(k) plan is terminated, and employees are required to roll over their funds into the acquiring company’s plan or into individual retirement accounts (IRAs).
- Maintaining Separate Plans: While less common, some companies may choose to maintain both plans separately for a period of time. This can simplify immediate administrative challenges but may create complexity in the long term.
Each of these options comes with its own legal, financial, and administrative implications. Plan sponsors should collaborate with legal counsel and Watkins Ross retirement plan advisors to determine the best approach.
3. 401k Plans Compliance Considerations
The regulatory environment surrounding retirement plans is stringent, and M&A activity can bring new compliance risks. Plan sponsors should be aware of the following:
- ERISA Requirements: Any changes to the 401(k) plan post-merger must comply with the Employee Retirement Income Security Act (ERISA). This includes following fiduciary standards, maintaining fairness to participants, and avoiding conflicts of interest.
- IRS Rules: Ensure that the plan(s) continue to meet IRS requirements for qualified retirement plans. This includes adherence to contribution limits, nondiscrimination rules, and tax-deferred status.
- Vesting Schedules: Pay close attention to vesting schedules in the target company’s 401(k) plan. During a merger, employees may be fully vested in employer contributions, or the acquiring company may choose to honor the existing vesting schedule. Ensure any changes comply with plan documents and regulations.
- Plan Testing and Nondiscrimination: After merging plans, you’ll need to conduct nondiscrimination testing to ensure that highly compensated employees do not disproportionately benefit from the plan. Failure to pass this test can lead to significant penalties and required plan corrections.
4. Communication with Employees
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.
Important Topics to Communicate about 401k Plans:
- 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.
Providing timely, clear information helps reduce confusion, keeps employees engaged, and demonstrates that their retirement savings are a priority for the company.
5. Handling Investment Options
If the acquiring company decides to merge the 401k plans, there may be differences in investment options. For plan sponsors, the integration process will likely include reviewing both plans’ investment lineups to decide which funds to retain or replace.
Plan sponsors should work closely with their Watkins Ross investment advisors to make sure the investment transition is handled smoothly and transparently.
6. Understanding Potential Cost Implications
Merging 401(k) plans can be costly. Administrative, legal, and consulting fees can add up quickly, particularly if the process involves terminating a plan and rolling over assets.
Additionally, plan sponsors may need to invest in new recordkeeping systems or amend plan documents to accommodate changes.
Cost Factors Include:
- Plan document restatements
- Investment manager fees
- Legal and compliance costs
- Employee education and communication efforts
A thorough cost-benefit analysis should be performed early in the planning process to evaluate how much the merger will cost versus maintaining separate plans or terminating one.
7. Fiduciary Responsibilities Post-Merger
Once the merger or acquisition is complete, the fiduciary responsibilities associated with the 401(k) plan do not disappear. In fact, they may increase, as the new plan will now serve a larger pool of participants. Plan sponsors must continue to uphold their duties to act in the best interest of the participants, which includes monitoring plan fees, reviewing investment options, and ensuring compliance.
Final Thoughts
For plan sponsors, mergers and acquisitions bring significant challenges, especially when it comes to managing 401k plans. By conducting thorough due diligence, ensuring compliance, and maintaining clear communication with employees, sponsors can help ease the transition and protect the long-term retirement goals of their workforce.
As you navigate the complexities of M&A transactions, partnering with the experienced legal and financial advisors at Watkins Ross is crucial to ensure that both the company and its employees are set up for success in the post-merger environment.
It is important to communicate any potential M&A changes to your legal, investment and administration (TPA) team ahead of any such changes before paperwork is signed. This will ensure all parties can assist with these changes and guide you through the process for a smooth transition and avoid any complications.
