How to Prepare for M&A Retirement Plan Transition

The white paper released by Diversified titled, “Mergers and Acquisitions: Key Considerations for Retirement Plan Conversion,” examines the special considerations of retirement plan conversion due to merger and acquisitions (M&A) activity and offers best practices for achieving a transition.

According to the paper, which is written by Laura Gaynor, vice president, Diversified, it is important for any organization undergoing an M&A to ensure that any action taken does not compromise the qualified status of any existing or newly created retirement plan.

Often when firms merge they do not consider the implications of employee benefits until the transaction is well under way or possibly even finalized. Because of this, there are sometimes unanticipated costs or administrative complexities that could have been avoided with advance planning. 

Starting the Process 

The issues and impact on a retirement plan involved in an M&A can be very complex. Gaynor writes, “For any organization acquiring or merging with another, a good first step is to engage its legal advisers, plan advisers and plan provider early in the process to determine how best to accomplish the overall objectives. These resources should be able to offer valuable insights, recommend alternatives and help avoid pitfalls.”  

Before a merger or acquisition takes place, it is also important for the plan sponsor to consider the retirement plans and the benefits provided by those plans, as options may be limited after the transaction is completed.

Plan sponsors should also conduct a compliance review on existing plans of both the acquirer and acquired. “The review will allow for comparison of the plan designs, provisions, objectives, investments, administration, communication, education and contribution amounts. It will also identify potential obstacles to compliance before a course of action is decided upon,” stated Gaynor.

She says it is likely there are three scenarios will take place when acquiring an organization:

1. The acquiring organization has a retirement plan in place while the acquired firm does not;
2. Both the acquiring and acquired organizations have retirement plans in place, and the acquiring entity is obliged to take sponsorship of the acquired entity’s plan; or
3. Both the acquiring and acquired organizations have retirement plans in place, and the acquiring entity is not required to take ownership of the existing plan.  

Plan Conversion Assessment  

If a plan sponsor does decide to merge plans during an M&A, a plan conversion will be required. In order to have a successful transition, a plan sponsor should reevaluate features and benefits of an existing plan.

Gaynor recommends also taking the following steps as part of a plan assessment:

•  Locate and review plan documents and amendments.

•  Determine if revisions to the plan documents are warranted.

•  Review service agreements and contracts to identify discontinuation periods, contract terms or surrender penalties that may apply.

•  Examine service agreements for notifications that must be communicated in writing to any providers that may be eliminated from the plan; determine deadlines for delivering these notices.

•  Collect current 5500 forms and results of nondiscrimination tests, if applicable, to offer to prospective plan providers in order to familiarize them with the status of the plan’s testing and financials.

Investment Menu 

Prior to moving forward with a plan conversion, Gaynor also suggests plan sponsors review the investment options offered to their participants. She writes that plan sponsors should evaluate the following questions in regards to a plan’s investment needs:

•  Is the investment lineup sufficient for all plan participants?

•  What share classes are used in the plans?

•  Will any investors impose a withdrawal charge if transferred?

•  Are participants getting enough guidance and advice to make informed decisions? 

Communication Strategies  

Plan participants will be impacted by a plan conversion. It is important to explain to all participants the reasons for the conversion, changes and detailing their benefits.

Gaynor recommends the following steps to develop a participant communication strategy:

•  Make an assessment of the new total workforce to determine best ways to reach them.

•  Ensure that communications don’t occur during periods of the year that represent peak production times for various employees groups.

•  Avoid communicating plan changes during holiday periods.

•  Evaluate whether it will be more effective to send important information to employees’ homes or to their work locations.

•  Assess whether it will be more effective to hold employer-sponsored group meetings, use e-mail or create bulletin boards to promote interest and enthusiasm around changes in the retirement plan.

•  Determine whether it will be effective to engage key employee segments, such as department managers, to serve as advocates for explaining the plan changes to their staff.

To request a full copy of this white paper, e-mail RetirementResearchCouncil@divinvest.com.