In a Corporate Merger, What Happens to Your 401k
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 401k plan may change. The reality is that there are few guarantees.
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.
If your employer is sold or merges with another there are three common outcomes concerning your 401k 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 401k Association and creator of the first 401k 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 401k 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 401k 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.
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 401k 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 401k-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.
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 401k 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 401k 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 401k 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 401k 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 401k 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 401k 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.
While most of your 401k 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.
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.
If you're waiting to vest, your vesting schedule may change due to the merger. You should contact your benefits department to find out what will happen in your situation.
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.