Avoiding 401(k) Surprises in Mergers & Acquisitions

When companies expand by acquiring other businesses, they need to consider a myriad of factors. The valuation, deal structure, regulatory issues, post-merger goals and personnel integration are high-level issues requiring substantial attention. It may be easy to overlook some of the less pressing considerations, like what to do with the employee 401(k) plan. However, for employees responsible for dealing with the retirement plan after the acquisition closes, it’s a big deal.  

Asset purchase vs. stock purchase

The structure of a company acquisition directly affects who is responsible for the 401(k) plan after the deal closes. In the case of an asset purchase, the acquiring company chooses specific assets it will purchase, leaving other pieces of the selling company behind. In this case, managing the 401(k) plan typically remains with the seller. For a stock purchase, the acquiring company takes over everything, including the retirement plan and its liabilities.

Upon obtaining another company’s retirement plan as part of a stock purchase, the acquiring company needs to decide whether to maintain the plan as a separate, secondary plan or roll plan participants into the company’s existing retirement plan. Most often, especially when the acquiring company is the larger of the two entities, the purchased company’s plan participants transition to the purchaser’s 401(k) plan and the prior plan is terminated.

Plan liabilities

Retirement plan compliance is highly specialized, and most M&A teams lack the expertise to manage it without help.  Retaining an experienced ERISA attorney to review the plan documents and evaluate the overall state of the plan, including its liabilities and other red flags for risk, is often necessary.

Who is responsible?

When proceeding with an acquired retirement plan termination, understanding who is responsible for various aspects of winding down the plan depends on the plan contract. The financial companies that offer 401(k) plan management services, such as Fidelity,  Voya and dozens of similar firms, each have unique agreements that also may vary depending on the size of an individual plan. Responsibilities may fall on the fiduciary company that owns the plan, the financial services company that manages the plan or another plan vendor. Reviewing contract language to understand each party’s roles and responsibilities during a plan termination is essential to smoothly deconverting a plan and avoiding unanticipated additional charges for services not covered in the contract.

Navigating the complexities of retirement plan issues that accompany M&A activity is challenging. A qualified attorney can offer necessary legal advice, and MarketSphere Retirement Reunification Services can help work through the many risks caused by missing and deceased plan participants. Contact our Retirement Reunification Services team for more information.

Don’t miss our upcoming webinar, Beyond the Deal: Uncovering M&A Risks in Unclaimed Property and Retirement Plans, which explores the hidden risks and overlooked liabilities tied to unclaimed property and retirement plans—two areas that can have significant post-transaction consequences if not properly addressed. Click here to register!