Before you start, make sure you’re data ready
Integrating retirement plans provides a unique chance to capitalize on the strengths—and address the weaknesses—of the underlying plans. In other words, to improve benefits for all employees involved.
As with all types of 401(k) problem-solving, consulting on merger-and-acquisition (M&A) situations begins with data. This involves collecting reliable data on the plans under discussion and the retirement readiness of the incoming and incumbent employees, and a lot more. Our framework assumes that you’ve sourced this data, whether it’s through the plan sponsors, the recordkeepers, or third parties.
1 What types of 401(k) plan design changes are mandated and allowed?
Before you move into analysis and solution building, it’s important to know what actions companies are required to take with their 401(k) plans because of their planned merger or acquisition. Here’s a brief review of the requirements under ERISA and the Internal Revenue Code (IRC).
||What it means
||ERISA and IRC requirements|
1 Operate the acquired plan on a stand-alone basis
2 Merge the acquired plan into the buyer’s existing plan
3 Freeze the acquired plan
1 Keep the plans separate
2 Merge the plans
3 Keep the plans separate for all or a portion of the transition period (i.e., end of the year after the year in which the transaction occurred) and subsequently merge them
There are many regulatory and legal issues to know about and address when merging retirement plans amid a merger or acquisition. This includes analyzing the plans and determining any protected benefits, identifying and correcting any operational and plan document failures, and providing any required notices and filings. It’s also important to have the plan fiduciaries confirm in writing that the plan(s) are qualified in operation and whether the plan(s) are under IRS or U.S. Department of Labor audit.
Given all the steps involved in a potential transition, we recommend starting the planning process at least 90 days before the targeted acquisition or merger closing date.
Beyond the legalities, due diligence is crucial for other reasons; for instance, in a stock purchase or merger, any deficiencies in the acquired plan can taint the acquirer’s plans once the assets are merged. This is generally overlooked when there’s a rush to close the deal, and merged plans must pass IRS coverage tests in the aggregate.
2 How does an M&A affect employees?
If retaining and rewarding employees, including highly compensated employees (HCEs), are key objectives, then it’s important that you and your client understand how the plan transition will affect employees from both of the organizations involved in the deal.
This calls for a wide-ranging analysis, covering:
- Employer contributions, auto-enrollment and auto-escalation, as well as other elements of plan design
- The type and quality of available investment options
- The availability of nonqualified deferred compensation, cash balance, and other adjunct plans
- Retirement readiness among HCEs and any planning services or testing strategies in place for dealing with IRS contribution limits
Even if a plan merger isn’t on the table, reviewing all this information gets you a wide-angle view of the retirement benefits and retirement readiness across your client’s entire employee population. This can fuel ongoing discussions about the goals, objectives, and long-term future of the retirement program after the M&A transaction—and whether the plans need to be harmonized or if an HCE-targeted strategy, such as a nonqualified plan, might be appropriate.
Communication about any enhancements and other changes to the retirement plan program following an M&A is critical to maintain and boost employee morale, loyalty, and overall productivity.
3 What larger objectives can the retirement plan transition help with?
A group of 1,000 executives with M&A experience was asked why some of their deals hadn’t delivered their intended outcomes. Gaps in execution and integration, failure to achieve cost synergies, and falling short of cultural alignment all rose to the top.
Top internal reasons why M&A transactions haven't delivered expected value
Each number indicates the percentage of surveyed CEOs selecting each response
Source: "The state of the deal: M&A trends 2020," Deloitte, 2020. A survey of 750 executives at U.S.-headquartered corporations and 250 at domestic-based private equity firms.
Our problem-solving framework allows you to look at the plans involved with a fresh perspective. Armed with this insight, you can help ensure that the plan committee’s current goals are being met. Equalizing retirement benefits for new and legacy employees, offering a program that retains top talent, or cutting administrative costs can help the organizations blend more successfully and improve the bottom line.
4 Do we have all the skills we need at the table?
The high volume of deals among companies and professional practices provides plenty of opportunity for retirement plan consultants, TPAs, and service providers who are conversant in retirement program problem-solving for M&A. But with so many moving parts, it’s certainly not a one-person show.
Part of your preparation for any M&A-related retirement plan project is to ensure all the appropriate skills are engaged in the project. This could include proactive, up-front meetings with an ERISA attorney conversant in M&A activity—a smart move given how specialized this knowledge is, even among lawyers.
More broadly, your project team can include ERISA consultants, compliance analysts, strategic communications consultants, and more.
To make a bigger impact on retirement programs, be a trusted solver of 401(k) problems
Being able to navigate your client’s retirement program through the complexities of a merger or acquisition can really help you demonstrate your value as a true partner and asset to the corporation’s C-suite. Adopting a set of reliable analytical frameworks—such as this M&A support framework—is an important step to becoming a trusted advisor and an in-demand 401(k) problem solver.
1 “Global M&A Industry Trends: 2022 Outlook,” PwC, January 2022.
This content is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.