401(k) plans — What happens with a merger or acquisition?

Ronald Phelps,

With a merger or acquisition, what happens to a corporate 401(k) or qualified retirement plan?

The first step would be to answer: how is the merger or acquisition structured? Once a corporate retirement specialist understands the acquisition structure of a stock or asset purchase, then they can help you and/or your clients understand and evaluate what options are available. 

401(k) plans — maintain, terminate, or amend after a merger

As a case study, here are some of the questions to address:

  • Did you and/or your attorney address the retirement plan(s) in the purchasing agreement?  If not, there are several points to consider:
    • Does the buyer wish to maintain the plan? If so, typically the buyer has numerous options; specifically, the buyer can maintain the plan as is and consolidate the purchased company plan into it, or vice-versa, merge the purchasing company into the acquired plan. There are notification requirements for employees and options given for conversion/rollover of assets into the new corporate plan or distribution options for those plan assets
    • Does the buyer wish to terminate the plan(s) and start a new plan? If so, typically a formal RFP process is completed by a corporate retirement specialist to walk the company through the entire evaluation process, from platform selection to individual investments suited to the buyer’s needs.
    • Does the buyer wish to amend the plan to better conform to the new combined entity? If so, typically a corporate retirement specialist can amend an investment policy statement (IPS) to reflect the wishes of the buyer, and aid with implementation to the employees as an aggregate.
  • Let’s imagine, for an instant, that the buyer doesn’t address these areas prior to the purchase of the business. The buyer completes the purchase and decides after the sale to terminate the retirement plan(s). It is possible that costs could be incurred for both the buyer and the seller. Moreover, depending on how the purchase is structured, either or both parties may have responsibility to pay for the termination of the plan, mostly after the fact.
  • Last, but likely as important as the purchase itself, is to address the benefit or detriment to employees of one or both firms. Employees should be able to review conversion/rollover of assets to a new plan; taxable events for low balance distributions (those under $5,000) allowable under IRS rules; conversion of plan assets to IRAs in the event of terminations or downsizings, and any tertiary needs due to plan design, such as Roth 401(k)s, auto-enrollment, auto-escalation of deferrals, and enhancements or detachments to company plan match dollars.

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401(k) plan mergers — vendors, plan design, IPS, discretion, education, and fiduciary services

After addressing your initial questions, here are some additional items to consider:

  • Vendor selection — Using your mission statement’s guidelines, a corporate retirement specialist can assist in hiring a company that provides a specific 401(k) plan, or qualified plan, including managing assets, recordkeeping, plan education, and plan administration.
  • Plan design — 401(k) plan design, simply put, is unlocking hidden opportunities in the tax code to increase contributions and save on taxes. This is specific to each business and is completely able to be tailored.
  • Investment policy statement — The purpose of an investment policy statement (IPS) is to assist the investment committee in effectively supervising, monitoring, and evaluating the management of the retirement plan.
  • Discretion and monitoring of investment options — The monitoring process considers the performance of the investment options, but also the fees charged, the information and disclosures made available, and any changes that have occurred with the investment fund (such as a change in fund manager).
  • Participant communication and education — 401(k) investment education can be categorized as follows: (1) plan menu disclosures, (2) investment concepts, and (3) allocation decision support. Plan menu disclosures summarize information and related disclosures regarding the plans menu of investment options. Investment concepts include education on general financial and investment concepts. Finally, allocation decision support provides a suggested decision making process to help participant make a sound investment.
  • Fiduciary oversight — Will your corporate retirement specialist sign on as a 3(21) or 3(38) co-fiduciary?

Ronald L. Phelps is senior vice president, wealth advisor, portfolio management director, and senior investment management consultant for The Phelps Group at Morgan Stanley Wealth Management in Madison.

The Phelps Group at Morgan Stanley is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Madison, WI. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

Morgan Stanley Smith Barney LLC, member SIPC.

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