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In a Corporate Merger, What Happens to Your 401(k)
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By Clifton Linton
Senior Writer, mPower |
If your employer is sold, what will happen to your
retirement plan?
Corporate mergers and acquisitions can be nerve-wracking.
It seems like there are always a lot of closed-door meetings you're not invited to, where
the big decisions are being made. This lack of knowledge feeds anxiety as workers fret
about layoffs or, even if they retain their jobs, how benefits including the 401(k) plan
may change. The reality is that there are few guarantees, other than that your vesting
schedule is protected.
Sometimes the merging of company retirement savings plans
occurs in the open; most of the time, the details are hashed out among the new company
officers in private. Here's a look at what sometimes happens behind these closed doors.
Three Outcomes
If your employer is sold or merges with another there are
three common outcomes concerning your 401(k) plan:
- Your plan may be terminated
- Your plan may continue
- Your plan may be merged with the plan of the new corporate
entity.
Plan terminations come in two forms. In the first,
the plan is shut down and all the assets are distributed to participants. In the second,
the plan continues but new contributions are not permitted, nor are your assets
distributed. Participants are allowed to change their investments and withdraw funds at
retirement. In both cases, all participants become fully vested.
It's rare for employers to actually shut a plan and
distribute all the assets, said Ted Benna, president of the 401(k) Association and creator
of the first 401(k) plan. The reason is that some employers don't want to tempt their
employees with a distribution. Many times when employees receive a distribution they spend
the money rather than rolling it over to a new employer's plan or into an IRA. Then they
need to start building a new retirement nest egg.
If your plan is terminated but the assets are not
distributed, it is pretty much business as usual. You will likely see the same investments
and plan features. You just can't contribute any more to this plan. You should be allowed
to contribute to your employer's new plan. And, when you leave your employer you would be
able to take the money according to the rules of your plan.
If your plan continues to operate and you are
allowed to continue making contributions, it will remain your 401(k) plan. In that case,
you can continue making contributions and will see the same plan features.
If your plan is merged, then all bets are off. You
may see features and investments retained from your old plan or not.
Merging Plans
Merging 401(k) plans is an intricate process that has
become faster and easier with the help of computers. But, it still takes time.
It could take your benefits department at least several
months to decide on the features and whether to stick with a current plan provider or to
change to a new one.
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| "It is more common in
large-company mergers for the 401(k) issues not to be nailed down in the purchase
agreement." |
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| Ted Benna, president of the 401(k)
Association and the creator of the first 401(k) plan. |
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Then the assets from your old plan need to move to the new
one. While this is done, you will be "locked out" of your plan for a period of
time. During this time your old recordkeeper runs a final tally on your account, your
shares are sold, and the money is moved to the new recordkeeper. You may have to select
new investments when you can again access the plan. Sometimes, your money is automatically
invested in the nearest matching fund in the new plan. This process "used to be 10
weeks -- now it is usually between two and four weeks," said Trisha Brambley,
president of Resources for Retirement Plans Inc., a 401(k) plan consultant.
During the lockout time, you typically aren't allowed to
take a loan or withdrawal or pick new investments. However, your contributions continue.
If you have an outstanding loan, that is typically allowed to continue, if your new plan
permits loans. If not, then you might have to pay the loan back. Your benefits department
can provide more details about loans.
Employers are usually good about keeping employees informed
about what is going on during a plan merger.
As a one-time employee of a software company in the 1990s,
Jennifer Wells, 32, has seen her fair share of corporate mergers. In the last one, which
also resulted in a 401(k)-plan merger, the management "was really good about
informing us ... that it would have the effect of freezing the accounts temporarily,"
she said.
Indeed, most employers explain the steps to their workers.
This isn't specifically required by the Employee Retirement Income Security Act (ERISA).
Yet, the Department of Labor recommends that employers act prudently in designing and
implementing blackout periods, which would include notification. Congress is currently
considering legislation that would require notification.
Common Concerns
Your employer will likely be sold or buy another company if
you stay with it for more than a few years. In today's business climate mergers are
"not a matter of if, but when," said Donald K. Jones, national
marketing manager for the group retirement series with Nationwide Financial in Columbus,
Ohio.
Some common concerns employees raise when their company
merges are:
- who makes the decisions about my plan;
- will my benefits be better, worse or the same;
- what protections do I have; and
- how long will it take to find out the answers to these
questions?
The disposition of the 401(k) plan is not usually a
priority item when two businesses consolidate. Commonly, this isn't addressed until after
the deal is done. "It is more common in large-company mergers for the 401(k) issues
not to be nailed down in the purchase agreement," Benna said.
Benefits and human resources representatives from each firm
often design the new plan. "A lot of this is negotiable," said Gary Wood,
president of Concorde Financial Corp., a 401(k) consulting firm based in Dallas.
When Brambley is asked to help create a new plan, she said
she and the team she is working with "lay out all the plan provisions and the
cost" from both legacy plans and compare them. Often they try to keep the best
features from each plan in a new plan. But, if cost is a consideration, that may not
happen, she added.
Benna often encourages owners who are selling a business to
make sure all of their former employees are fully vested in the plan before the sale is
complete. This way, any employees who lose their jobs because of the merger will at least
receive the employer contributions to the 401(k) as well as their own.
"I say to the business owner, 'you incurred the cost
of making the contributions; there is nothing to be gained by seeing the employees get
whacked and lose the ability to fully vest,'" Benna said.
This vesting can be accomplished by terminating the plan,
which automatically vests all employees, or amending it at the last minute to fully vest
participants.
Better or Worse
Don't expect your new 401(k) plan to be better; rather,
hope to be pleasantly surprised if it is. Your new employer is not required to continue
existing plan provisions or benefits, and some companies take advantage of this to reduce
benefits. However, many companies realize that this could have a negative effect on
employee morale.
"Almost in every case, when a company acquires or
merges, the morale of employees is so important that the last thing they want to do is
disturb benefits," Jones said.
When Texaco and Chevron merged in October 2001, the new
401(k) plan that resulted had many changes from the legacy plans. A company spokesman said
some of these changes include:
- increasing the number of investment offerings from 11 to 36;
- allowing employees to immediately sell company stock given
as a matching contribution instead of waiting until age 55; and
- making the company matching contribution a flat percentage
of salary, rather than basing it on corporate earnings.
Guaranteed Vesting
While most of your 401(k) plan's provisions are not
protected by law, "there are certain benefits that can't be reduced. For example, if
an employee is vested in an account they can't lose that," Jones said.
Indeed, your vesting schedule can only stay the same or
improve.
Suppose your employer offers a one-year cliff-vesting
schedule, meaning that all employer contributions become yours after a year on the job.
Further suppose you have been at this job for 18 months, so all your employer
contributions are fully vested. If a firm that has a three-year cliff-vesting schedule
buys your company, your vested contributions can't be taken away.
Take a slightly different scenario. Suppose you have been
on the job less than one year when the merger occurs. The contributions to your plan from
your former employer will still vest at your 12-month anniversary.
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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premier online community resource for 401(k) participants
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