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When John Fletcher's company was bought by
a larger firm, he worried about the money in his 401(k) plan.
His biggest concern was that he would have
to put his six-figure balance into his new company's plan, which offered less desirable
investment options. "It wasn't the best of funds," he said.
Fortunately, Fletcher's company closed out
its 401(k) plan just before the acquisition was finalized. The timing of that move gave
Fletcher, 54, and his coworkers the chance to roll their money into IRAs and invest in a
wider choice of funds.
In today's fluid business environment,
mergers and acquisitions seem to be occurring at an ever-more-rapid rate. But workers
often have little or no say about what happens to their retirement benefits when their
employer is acquired. Understanding the process can help reduce surprises.
Nothing's Guaranteed
Except Vesting
The scene is a familiar one, flashbulbs pop
as two grinning CEOs shake hands after announcing a recently completed merger. What's not
familiar is the gritty grunt work that comes with trying to combine the two companies'
benefits packages. It's a job that can be fraught with pitfalls because each 401(k) plan
is unique. The employer designs the plan. And it's likely some employee will be upset
about losing a prized benefit.
When two companies merge, the disposition
of retirement plans is often an afterthought.
"The retirement plan is always the
last thing people look at," Fletcher said. "A lot of times it's looked at after
the merger takes place."
By that time, employees may not have much
flexibility with their retirement money.
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"Only the past is protected
by federal law. In general, if you have $10,000 in an account, you will still have
that."
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Stuart Lewis
employment attorney with Silverstein and Mullens, a division of Buchanan Ingersoll PC |
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"The participant has no options. It's
up to the company's legal staff," said Linda Kravchick, director of operations with
Ceridian Retirement Plan Services, a retirement-plan record-keeping firm.
To make mergers even messier to understand,
the law provides few guarantees for employees. So, if your company was bought and you had
a generous plan, don't expect that to continue, says Stuart Lewis, an employment attorney
with the law firm of Silverstein and Mullens, a division of Buchanan Ingersoll PC.
"The future isn't protected. Only the
past is protected by federal law," he said. "In general, if you have $10,000 in
an account, you will still have that."
Say your 401(k) plan offered the following
benefits: 10 investment choices, a 100% match on the first 6% of salary and a guarantee
that employer contributions vest in two years. Which of those three does the law require
to be carried over for existing employees?
Answer: the vesting.
"A company can change anything about
the plan. The only thing they can't change is the vesting (for current employees),"
Kravchick said.
A First Person
Account
Fletcher's experience is instructive
because he was not only a plan participant, but, as company president, also a key
decision-maker. In April 1998, Cleveland, Ohio-based Century Business Systems bought
Fletcher's company, National Retirement Planning. Fletcher is now a retirement expert with
Century.
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"The retirement plan is
always the last thing people look at. A lot of times it's looked at after the merger takes
place."
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John Fletcher
Former president of National Retirement Planning |
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When the National-Century merger was
discussed, one of the first things Fletcher did was look at the new company's retirement
plan. The investments were a big concern. National had selected top-notch funds for its
plan, while the Century funds didn't look as good. Fletcher didn't want his investment
growth to suffer, and his employees had similar concerns.
Three Possible Outcomes
Given the fact that each 401(k) plan is
unique, there's no one-size-fits-all way for employers to deal with the plans of companies
they acquire. "There are so many small technicalities involved. There are 100
different variables," Kravchick said.
Still, there are three broad paths
employers are likely to choose from, says Laura Stern, director of institutional
investments with TwentyTwenty Advisors Inc., a 401(k) consulting management firm.
- Your plan is terminated.
This is the most common choice among employers,
Lewis says.
In this case, the plan is closed. All the
employee contributions, vested employer matches and profits are returned. Employees may
choose to roll the money into a rollover IRA or cash out. If the new corporate parent's
plan allows it, they may be allowed to roll their money into that 401(k) plan.
One point: if a company wants to terminate
a plan, it needs to be done before the acquisition is complete, Fletcher says. "If
you do that, (employees) have free rein with … the money," he said.
The law says that if an employer terminates
a plan after acquisition, it must wait 12 months before opening a new 401(k) plan.
That's why Fletcher decided to terminate
National Retirement Planning's 401(k) plan prior to the Century Business Services
acquisition. When the plan was closed, Fletcher gave the other 11 employees in the company
the chance to roll their money into an IRA. All of them took that option, he said.
It can take anywhere from a few weeks to
seven months to close a plan, Fletcher says. During that time, you won't be able to make
contributions to the plan, but your account should continue to earn interest.
- Your plan is retained.
In other words, the new employer decides to let the
old plan continue to operate. This option is used less frequently and "tends to
happen when there are different benefits approaches," Stern said.
Say one employer allowed post-tax
contributions to the 401(k) plan and the other didn't. Combining the two might cause the
final combined plan to lose its IRS qualification if any of the post-tax contributions
were improperly made to the first plan. Instead of closing the plan, the employer may
decide to retain it.
In this situation, the employer may decide
not to permit new employees to enroll in the old plan. They would be directed to the plan
of the new parent company.
- The two plans are merged (the acquired plan
is rolled into the new company's plan).
In this situation, the retirement money isn't distributed to the
employees. It's automatically rolled into the new merged plan and the participants have no
other alternative, says Ted Benna, the creator of the first 401(k) plan.
Combining two plans can take anywhere from
a week to several months, and the plan is frozen during that time. Your money continues to
earn interest, but you can't make contributions or withdrawals. This tends to be the least
popular option because of the complexity of combining the detailed rules and benefits of
two plans, said Stern.
What You Can Do
If your plan is terminated, you should
expect to receive a check for the amount of your contributions, employer contributions and
any investment profits. Note: all employer contributions become fully vested when a plan
is terminated regardless of your years of service.
At this time, you have two choices. First,
you may decide to roll the money into an IRA and continue to invest it. You may want to
open an IRA ahead of time and arrange to have a trustee-to-trustee transfer and avoid the
worries of paying withholding tax.
Fletcher did this when National's plan was
closed.
Alternately, you could cash out. About 65%
of workers do this when their plan is terminated. However, this option comes with a heavy
penalty. If you're under the age of 59ý, you will have to pay an early-withdrawal penalty
as well as any appropriate tax on your profits and original contributions. While having
the money might be nice, you should make sure you have adequate retirement savings.
Regardless of what happens to your
employer, your greatest resource is the plan administrator. This person should be able to
tell you if you may take a distribution or can roll into the new employer's plan,
Kravchick says.
If your employer offers a new 401(k) plan,
you might want to see if you could roll your money into it.
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