Mergers and acquisitions are commonplace among businesses, regardless of their size or industry reputation. While these deals often present exciting opportunities for companies and their owners to fulfill strategic ambitions, they can also leave employees feeling uncertain, especially when it comes to their retirement plans.
If your company is involved in an M&A transaction, here are some key points to keep in mind:
Navigating Retirement Plans During M&A
Retirement plans often don’t get much attention during the M&A process, but they play a crucial role in negotiations. Typically, company leaders from both sides will meet to discuss their retirement plan offerings before finalizing any deal. They’ll consider factors like contribution limits, fees, investment choices, and vesting schedules.
In terms of employee benefits, federal laws provide substantial protection, no matter the company size. Take the Employee Retirement Income Security Act (ERISA), for instance. ERISA ensures that employee benefits, once vested, aren’t negatively impacted by an M&A transaction. Its main aim is to integrate plans effectively while preserving employees’ vested rights.
Anticipating Changes in Retirement Plans
Understandably, employees might worry about potential changes to their retirement plans during an M&A. However, they might actually find that new options suit them better than their current plans. Here’s how an M&A could impact defined-contribution plans like 401(k)s:
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New Investment Choices: Employees might gain access to a broader array of investment options that could boost their retirement prospects. However, this might mean getting used to new platforms or interfaces.
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Altered Contribution Limits and Matching Policies: The new plan might offer more generous contributions and employer matches, although sometimes the opposite could be true.
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Revamped Vesting Schedules: Changes could also affect when employees can fully access their benefits, potentially offering earlier access or imposing new restrictions.
- Transitioning to New Plans: If a company opts to replace existing plans completely, it’s crucial for employees to get up to speed with what the new plans entail, weighing their pros and cons.
Despite the decline in traditional pension plans, many employees still rely on them. During an M&A, pension funds can be significantly affected, so staying alert to potential changes is essential. Here’s what could happen to pensions:
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Continuation Under New Ownership: The best-case scenario for employees is if the new owner chooses to maintain the pension program with minimal changes.
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Freezing of Pensions: If the new company freezes existing pensions, current benefits are preserved, but new employees won’t have access.
- Termination of Pensions: Sometimes, employers may decide to terminate pension plans altogether, offering a lump-sum payout in return.
Reassurance on Existing Balances
Thanks to ERISA and other legal frameworks, employees are protected and cannot lose money that’s already been contributed. Companies can’t simply move or take away these funds, ensuring vested benefits are safeguarded.
However, there are a few long-term considerations:
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Market Performance and Individual Goals: Changing investment options or contribution patterns could affect your retirement savings projections. Keeping track of these changes is vital, especially if you have specific retirement milestones in sight.
- Life Stage Considerations: Those closer to retirement may feel more vulnerable to changes and should pay extra attention to how these shifts impact their future plans.
Always remember that, while existing balances are secure, unvested contributions or future benefits might not automatically transfer to a new plan. It’s important to thoroughly review all new retirement plan documents to fully understand their impact on your financial plans.
Employees also have rights under ERISA, such as receiving advance notice of any significant plan changes. Companies must supply proper training, documentation, and resources to assist all employees.
Adapting to changes from an M&A transaction can be tough, even for seasoned employees. It’s essential to make the most of available tools to safeguard your financial future, particularly as you near retirement. Stay informed, ask questions, and keep your financial goals in sight.
—By Rick Calabrese, Esq., CPA and co-founder of Commonwealth M&A.
