Process

Key Questions CFOs Should Ask Before Acquiring a Company

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A Fiduciary Advisor's Perspective:

When businesses look to acquire another company, one area that often gets overlooked during the due diligence process is the target company’s retirement plans. However, from a fiduciary standpoint, failing to properly assess this area could expose your company to significant liabilities.

As a fiduciary advisor, one of our core responsibilities is to help businesses navigate this complex area of mergers and acquisitions (M&A). Whether the transaction is an asset sale or a stock sale, understanding the status and structure of the acquired company’s retirement plan is crucial. Below, we’ll explore the key questions CFOs should be asking, why these questions are so important, and how to make informed decisions before the deal closes.

1. Is the Acquired Company’s Current Plan Compliant with ERISA Regulations?

This is arguably the most important question a CFO should ask. The Employee Retirement Income Security Act (ERISA) establishes strict requirements for the administration of Corporate Retirement Plans. A target company’s failure to comply could result in significant penalties and even lawsuits.

As a fiduciary advisor, we would conduct a thorough compliance review of the acquired company’s plan, looking at:

  • Plan documents
  • Past audits
  • Regulatory filings
  • Any history of penalties or compliance issues

Discovering compliance issues post-transaction can lead to costly fixes, audits, or penalties. Identifying these risks early helps the acquiring company decide whether to terminate the plan, keep it separate, or merge it with their existing plan.

2. What is the Plan’s Design and Structure?

Every retirement plan is structured differently, so it’s essential to understand the acquired company’s plan design. How do their vesting schedules, matching contributions, and loan provisions compare to your current plan? More importantly, do these features align with your company’s overall benefits philosophy?

Understanding the acquired company’s plan design can help avoid future complications. For example, if their plan offers benefits that are significantly more generous than your current plan, employees could feel upset about losing those benefits if the plans are merged. Conversely, if their plan is less generous, there could be participation issues down the road.

Questions around plan design should also touch on:

  • Participation rates
  • Any unique plan provisions
  • Contribution levels from both employees and the employer

As advisors, we would look for any areas where the plan may be out of sync with your current plan or industry best practices.

3. What are the Funding Status and Investment Options?

Next, you’ll want to ask about the financial health of the acquired company’s retirement plan. Is it adequately funded, and are there any unfunded liabilities? Underfunded plans could leave the acquiring company with the burden of making up the shortfall, especially in stock sale situations where liabilities are inherited.

Another critical area is investment options. Does the target company offer a diverse, low-cost portfolio of investment choices? Are any of their funds underperforming or high cost? Merging your plan with one that offers inferior investment options could increase fiduciary risk.

As part of our role, we conduct an investment review to ensure that the plan’s options are appropriate and meet fiduciary standards. If the acquired plan’s investment lineup doesn’t pass our scrutiny, we’ll recommend steps for improvement or transitioning the plan into your current investment platform.

4. What Service Providers and Fees are Involved?

Retirement plan fees have become a significant area of scrutiny in recent years, with lawsuits and regulatory actions targeting high fees. Understanding who the acquired company uses for recordkeeping, advisory services, and custodial work—and how much they’re charging—is essential.

If the service providers are charging excessive fees, this could be a red flag. At the very least, these fees should be benchmarked against industry averages to ensure they are reasonable. Transitioning service providers can often come with penalties or disruption, so understanding those costs early can help you decide the best course of action.

As fiduciary advisors, we can assist in benchmarking fees and identifying areas where cost-saving measures can be applied without sacrificing the quality of service.

5. What Type of Transaction is It—Asset Sale or Stock Sale?

The type of sale—whether it’s an asset sale or a stock sale—will determine what happens to the acquired company’s retirement plan. In an asset sale, the buyer typically doesn’t assume responsibility for the seller’s plan. This often leads to the plan being terminated, and employees having the option to roll their assets into the buyer’s plan or an IRA.

In a stock sale, the buyer assumes both the assets and liabilities of the seller’s plan. This means the buyer could inherit any compliance issues, fiduciary breaches, or underfunded liabilities. In these cases, merging the plans or maintaining them separately becomes a crucial decision.

We work closely with CFOs to assess the risks of each scenario. If the transaction is an asset sale, we’ll guide you through the plan termination process, ensuring compliance and assisting with participant communications. In stock sale scenarios, we provide recommendations on whether to merge the plans or keep them separate, based on an in-depth risk assessment.

6. How Will Merging or Terminating the Plans Impact Employees?

The last key question is about the impact on employees. The acquired company’s employees may be accustomed to certain plan benefits that don’t align with your current retirement plan. Merging or terminating plans can create confusion or dissatisfaction among employees if not handled properly.

It’s essential to communicate clearly with employees about any changes to their existing plan. We help CFOs develop communication strategies that explain the benefits of any changes and ensure a smooth transition for all parties involved.

Conclusion

Acquiring another company involves more than just assessing their financials and operations. The company’s retirement plan represents a significant area of fiduciary risk if not carefully examined. By asking the right questions—and working with a knowledgeable fiduciary advisor—you can reduce liability, ensure compliance, and make decisions that benefit both your company and its employees.

If you’re in the process of acquiring a company and need help evaluating their retirement plan, reach out to us. We’ll help you conduct thorough due diligence and make informed decisions that align with your fiduciary responsibilities.

2024 Trends in Retirement Plans

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As we step into 2024, the world of retirement planning continues to evolve. It’s a great time to look ahead and understand what will guide us in improving retirement outcomes for our clients and their participants. This year, we expect to see a mix of familiar trends from the Secure Act 2.0 and new focuses on personalization and financial wellness. Also, we’re keeping an eye on how the economy will influence our strategies, especially with the upcoming election and the Federal Reserve’s actions against inflation. Here are the major themes we are working on this year:

1. Secure Act Updates

Changes continue to be implemented with the passage of the Secure Act 2.0. Some changes were delayed such as the Roth Catch-up requirement which will take place after 2025, however, there are some mandatory and optional that we are focusing on.

Long Time Part Time Employees.

Employers will now be required to allow long-time part time employees to defer into their 401k if they have worked at least 500 hours of service in each of three consecutive 12 month periods and have attained age 21. That requirement is reduced to two consecutive 12 month periods for plan years after 2025. Additionally, for plan years after December 31, 2024, 403b’s will be required to adopt these new provisions.

Matching contributions on student loan payments

Starting this year, Retirement Plans may treat certain student loan payments as plan contributions for the purpose of match contributions. This provision may mean that employees who make qualified payments on student loans can receive a match even if they were not able to contribute to their plan.

Emergency savings accounts linked to retirement plans

Starting in 2024 the Secure Act 2.0 allows for plan participants to make pre-tax payments to a linked emergency savings account up to $2500 and withdraw up to $1000 without penalty. Providing access to participants to emergency savings when they need it and still save for retirement could help alleviate the anxiety of saving in a retirement plan for lower income workers.

The Secure Act has many other provisions being implemented in 2024 as well. It is important that you discuss with your Administrator to ensure compliance.

2. Personalization

A key area of improvement in the defined contribution space is the increase in levels of personalization at the participant level. By using key demographic information already known by the plan and information received directly from plan participants, 401k and 403b providers can create personalized saving and investment plans for employees at scale. Our approach to personalization is to utilize a tiered approach depending on the level of engagement from plan participants.

Plan-level personalized reporting and engagement

Often times participants are disengaged or recordkeepers don’t have the necessary technological solutions for detailed personalized planning. When that happens, we are finding innovative ways to use readily available plan demographic data to create personalized reports. This strategy enables us to identify participants who need help, so we can proactively reach out to them.

Increased use of Managed Accounts for engaged participants

When participants are engaged and the recordkeeper has appropriate and cost-effective technology solutions, managed accounts can provide an advanced level of personalization for retirement savers. Managed accounts allow professional third-party management of a participants retirement account based on demographic data and input from engaged participants.

When utilizing managed accounts in a retirement plan it is essential to monitor the program to ensure that participants who are paying extra for the service receive additional value through personalization.

3. Focus on Financial Wellness

Technology improvements and engagement

In 2024, there’s a heightened focus on financial wellness within 401(k) and 403(b) plans. Technological solutions are playing a key role, offering sophisticated tools that provide a comprehensive view of an individual’s financial health, including retirement readiness. More providers are entering the market increasing engagement and reducing costs. These new tools are increasing engagement and helping participants create healthier relationships with their money.

Retirement Income hits the mainstream

There is a growing momentum for in-plan retirement income strategies. Plans are increasingly incorporating features that help participants transition their savings into a stable income stream for retirement, addressing concerns about outliving their resources. This shift underscores the evolving role of 401(k) plans from mere savings vehicles to comprehensive retirement planning tools.

As the retirement income market evolves, platforms and investment managers are creating innovative retirement income products at lower costs to benefit more participants.

4. Economic Disruption

The 401(k) landscape in 2024 is also navigating through economic disruptions. The influence of the Federal Presidential election is sure to be contentious and could potentially mean social and economic disruptions through the 2024 election season. 

Furthermore, the Federal Reserve’s efforts to achieve a ‘soft landing’ amidst economic uncertainty are crucial. The Fed’s monetary policies, aimed at stabilizing inflation while avoiding a recession, play a significant role in shaping the investment landscape. Participants and plan sponsors must stay vigilant, adapting their strategies to these evolving economic conditions to safeguard retirement assets.

Conclusion

The 401(k) and 403(b) landscape in 2024 presents both challenges and opportunities. Staying informed and adaptable is key to navigating this dynamic environment. Whether you’re a plan sponsor or a participant, understanding these trends is vital for making strategic decisions that secure a comfortable retirement.

3 Essential Traits to Look for in Your 401k Plan Advisor

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Navigating the labyrinth of corporate retirement plan regulations isn’t for the faint of heart, and that’s precisely where a knowledgeable 401k plan advisor comes into play. As HR managers and corporate executives, entrusting your company’s retirement plan to the right person is a responsibility you can’t afford to take lightly. But how do you distinguish a top-tier advisor from an average one? Look for these three crucial traits: fiduciary responsibility, robust governance, and absolute transparency.

The Importance of Fiduciary Responsibility in Your 401k Plan Advisor

One of the most essential characteristics of a proficient 401k plan advisor is their commitment to fiduciary duty. As a fiduciary, an advisor has the legal and ethical obligation to act in your Plan’s best interests. This critical responsibility goes beyond providing sound financial advice – it means putting the participant’s needs above everything else, even their own personal interests.


The best advisors prioritize their fiduciary duty, continually proving their worth through actions, not just words. Remember, a fiduciary duty isn’t something to be taken lightly – it’s a vital factor that protects your employees’ hard-earned retirement savings from potential mishandling.

Why Robust Governance is Critical for your plan.

Next, strong governance structures are crucial for the efficient management of your company’s 401k plan. Advisors with an effective governance strategy will work closely with you to design a plan that aligns with your organization’s vision and values. A robust governance structure ensures that your retirement plan is managed in a manner that minimizes risks, maintains compliance with regulations, and delivers the desired outcomes for your employees.


An excellent advisor will guide you through the creation and implementation of effective policies and procedures. They’ll also play an active role in educating your staff about the plan, fostering an environment where retirement planning is a shared and understood responsibility.

Transparency: The Foundation of Trust in a 401k Plan Advisor Relationship

Transparency is the cornerstone of any successful advisor-client relationship. A transparent advisor will ensure that you’re never left in the dark about any aspect of your 401k or 403b plan. This includes providing clear information about investment strategies, fee structures, and potential conflicts of interest.


Transparency breeds trust, and trust is essential when dealing with something as critical as your employees’ future. An advisor who places a premium on transparency demonstrates their dedication to avoiding conflicts of interest and nurturing a transparent relationship with your organization.

Taking the Next Steps

Choosing an appropriate 401k plan advisor is a decision that carries far-reaching implications for your company and its employees. That’s why it’s crucial to pick an advisor with fiduciary responsibility, robust governance, and unwavering transparency.


Now that you’re aware of what to look for, the next step is a review of your current plan. Whether you’re on the hunt for a new advisor or just want to ensure your current one is up to par, we’re here to help. Reach out today to schedule a review of your plan with us. Together, we can ensure that your employees’ retirement futures are in the right hands.

Top 401k Trends in 2023

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As 2023 continues to unfold, shifts in the 401k landscape are redefining how we plan for retirement. Today, we delve into the top 4 trends that are shaping fiduciary governance for 401k Trends in 2023: Retirement Income Solutions, SECURE Act 2.0 updates, Fallout from the Supreme Court ruling in Hughes v. Northwestern, and the rising importance of data privacy.

1. Retirement Income Solutions:

Guaranteed income solutions are gaining traction as participants seek the comfort of predictable payouts in their golden years. Employers are increasingly integrating these solutions into their 401k plans, leveraging innovative annuity products and bond ladders. The trend recognizes that a secure retirement isn’t just about accumulating wealth; it’s about ensuring that wealth translates into a stable income. However, with the rise of such solutions, plan fiduciaries must consider the added complexity and work to ensure these options are in the best interest of the participants.

2. Secure Act 2.0 Updates:

 The Secure Act 2.0 was signed into law in December 2022 and includes several updates that plan sponsors should be aware of. One of the most significant updates is the increase in the age for required minimum distributions (RMDs) from 72 to 73 starting on January 1, 2023, and then further to 75 starting on January 1, 2033. It is important to note that recordkeepers must make changs to their systems to accommodate these new regulations.

3. Active Funds: Are They Worth the Premium?

Despite the trend towards low-cost passive funds, active funds maintain a substantial presence in 401k plans. These funds, characterized by hands-on management and potentially higher returns, often come with higher fees. As fiduciaries, it’s essential to scrutinize these options thoroughly. Are the potential returns justifying the cost? Regularly benchmarking fund performance and fees is crucial to ensure participants are receiving value for the fees they are paying.  It is also important to note that all investments must be appropriate for the plan’s participants, as determined by the recent Northwestern Supreme Court case. 

4. Data Sharing and Participant Privacy:

As digital transformations permeate the financial sector, participant data privacy is paramount. Increased data sharing between plan administrators, payroll providers, and third-party service providers can enhance the participant experience. But it also necessitates robust safeguards to protect sensitive information. Fiduciaries must ensure data privacy policies are in place and enforced. In 2023, striking a balance between personalized services and data security is a challenge that every plan sponsor needs to meet.

In conclusion, 2023 is proving to be a dynamic year for 401k plans. These 401k trends in 2023 underscore the need for fiduciaries to stay informed and adaptable, continually working to ensure plans meet the evolving needs of their participants while protecting their interests. Staying ahead of these developments is key to providing a retirement plan that is not just compliant, but also helps provide better outcomes for your employees. 

Fiduciary Governance for CFO’s

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Fiduciary governance plays a crucial role in ensuring that 401k plans comply with the Employee Retirement Income Security Act (ERISA) regulations. By establishing strong fiduciary governance, CFOs can mitigate the risk of potential liabilities and safeguard the interests of their employees.

ERISA requires that plan fiduciaries, including CFOs, act solely in the best interests of plan participants and beneficiaries. Failure to fulfill this obligation can result in serious consequences, including potential lawsuits, regulatory penalties, and reputational damage. Therefore, it is essential for CFOs to understand how fiduciary governance can help them fulfill their fiduciary duties and avoid potential liability under ERISA.

Fiduciary governance involves establishing and implementing a set of procedures and processes that enable plan fiduciaries to manage their responsibilities effectively. This includes defining the roles and responsibilities of plan fiduciaries, establishing investment policies and procedures, monitoring plan performance, and conducting regular fiduciary training and education. By implementing a robust fiduciary governance framework, CFOs can ensure that they are fulfilling their fiduciary obligations and reducing their liability under ERISA.

  1. Minimizing Conflicts of Interest: A strong fiduciary governance framework includes policies and procedures that help minimize conflicts of interest. This includes establishing clear guidelines for selecting and monitoring plan investments and service providers. By doing so, CFOs can reduce the risk of potential conflicts of interest and ensure that their decisions are made solely in the best interests of plan participants and beneficiaries.
  2. Ensuring Investment Diversification: ERISA requires that plan fiduciaries ensure that plan investments are diversified to minimize the risk of large losses. Fiduciary governance can help ensure that the plan’s investment portfolio is well-diversified and aligned with the plan’s investment objectives. This can help protect plan participants and beneficiaries from undue investment risk, reducing the risk of potential liability for plan fiduciaries.
  3. Conducting Regular Plan Reviews: Fiduciary governance requires that plan fiduciaries conduct regular reviews of plan investments, fees, and service providers. By conducting regular reviews, CFOs can identify and address potential issues before they become major problems, reducing the risk of potential liability for plan fiduciaries.
  4. Documenting Fiduciary Decisions: A robust fiduciary governance framework includes documenting all fiduciary decisions made by plan fiduciaries. This documentation serves as evidence that the plan fiduciaries acted prudently and in the best interests of plan participants and beneficiaries. In the event of a lawsuit or regulatory audit, this documentation can help reduce the risk of potential liability for plan fiduciaries.

In conclusion, fiduciary governance is a key aspect of managing a 401k plan, and it can significantly reduce liability under ERISA for CFOs. As a CFO, it is your responsibility to ensure that your 401k plan is managed with the highest standards of fiduciary governance. By implementing a robust fiduciary governance framework, you can fulfill your fiduciary obligations, protect the interests of plan participants and beneficiaries, and mitigate the risk of potential liability. So, take action today and establish a strong fiduciary governance framework for your 401k plan to safeguard your company’s reputation and protect your employees’ financial futures.

401k Trends for 2022

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As we head into the fall and prepare for the 2022 plan year, here is a list of our 4 top retirement plan trends that we are implementing with our clients.

1. Inflation

Over the past several months, we have seen an increase in inflation in many sectors of the economy. While the Federal Reserve has said that the inflation we are experiencing now is temporary, there is no hiding the fact that we are near a 40 year low in interest rates.

Bonds are typically held in a portfolio with the goal to reduce volatility and provide a baseline income level in a proper asset allocation strategy. However, bond prices move in an adverse relationship to their yield. As a result, bond prices go down as yields rise, resulting in potential losses in an investor’s portfolio.

Not all Bonds have the same sensitivity to rising rates

There are many reasons why bond yields may rise, but not all bond prices will react the same to a rise in interest rates. Some bonds, such as inflation-indexed bonds, will increase their coupon rate as inflation rises, reducing pressure on the bond’s price to go down. Traditional bonds typically used in retirement plans tend to be more sensitive to rising rates, such as intermediate corporate bonds.

What you can do to help your participants

We have been adding in additional exposure to our lineups that include less traditional bond funds for some time. Funds such as inflation-protected and multi-sector bond funds may offer your participants flexibility to adapt to rising rates.

2. Taking Control of Plan Data

This year there have been several high-profile data breaches in the news. As more and more of your plan data gets placed online, Plan sponsors need to be aware of their exposure to potential data breach liability through internal systems and vendors.

In February of this year, the Government Accountability Office (GAO) recommended that the DOL formally state whether it is a fiduciary’s responsibility to mitigate cybersecurity risks in DC plans and establish minimum expectations for addressing cybersecurity risks in DC plans.

For its part, the DOL Addressed the second part of the request by releasing three pieces of guidance relating to best practices concerning: Hiring a Service Provider, Cybersecurity, and Online Security tips.

Plan Sponsors in their role as fiduciaries should begin to adopt cybersecurity best practices in anticipation of the DOL guidance that may make a failure to secure participant data a fiduciary breach.

Participant data may be a liability even if it is not "stolen"

We have seen a rising number of court filings and lawsuits alleging that service providers that utilize plan and participant data to sell other products are doing so in breach of fiduciary duty. In most cases, including the high-profile NYU case, the plaintiffs typically claim that recordkeepers were using their access to participant demographic data to sell lucrative financial instruments without compensating the plan for that use. To date, we have not seen any of these allegations be successful. However, not all the lawsuits in question have worked their way through the appeals process.

Plan Sponsors would be wise to take heed and start asking better questions of their service providers and their use of participant data to sell ancillary products to their participants.

3. Personalized Education and Advice

When used correctly by the plan, Participant data can be a valuable tool to identify and communicate with plan participants actions and advice independent of the services available from their recordkeeper.

Plans of all sizes utilize participant data to identify underperforming demographic cohorts to customize advice at scale in their retirement plans. Some of the programs we are seeing plan data participant data include:

  • Financial Wellness Programs
  • Financial Coaching
  • Managed Accounts/Personalized recommendations
  • Plan Health Reports

As discussed earlier, it is vital to have a formal plan whenever sharing participant data and ensuring that the data is used in the best interest of plan participants. However, as software and third-party services become more sophisticated and available, it may make sense to use participant data beyond the off-the-shelf services provided by some recordkeepers.

4. Missing and Low Balance Participants

Missing participants continues to be a topic of emphasis for IRS, DOL, and EBSA regulators. The primary duty of any fiduciary is to provide benefits to plan participants when due. Integral to that responsibility is for plan sponsors to know whom they owe benefits to and how to reach them for communicating vital Plan information.

Before 2014 the IRS had a program that you could use to forward mail to missing participants. However, since that program has terminated, there is no easy solution to finding missing participants. The DOL has issued guidance in January providing best practices for Plan Fiduciaries, including:

  • Maintaining accurate census information for the plan’s participant population
  • Implementing effective communication strategies
  • Missing participant searches
  • Documenting procedures and actions

Examples of participant searches include:

  • Checking related Plan and employer records
  • Checking with designated Plan beneficiaries
  • Using free online searches
  • Using a commercial locator service
  • USPS certified mail features
  • Death and social security searches
  • Reaching out to colleagues who worked with the person in the past.

Use force-out provision to remove low balance participants annually

One way to reduce your burden on locating missing participants is to regularly force out terminated participants with low balances while you are still in contact with them. Most plan documents have a provision that allows them to force out low-balance participants through a systematic process if their balance is below $5,000.

Most recordkeepers can automatically force out low-balance participants regularly through an automatic IRA provider and are more than happy to do that. However, we have found that few plans that come to us are taking advantage of this service. If your provider does offer this service, sign up or consider using one of the third-party providers who can provide that service free of charge.

If your provider doesn’t have a solid process for finding missing participants or forcing out low-balance participants, there are several third-party providers that we have worked with who can do a great job.

Remember to keep good documentation when forcing low-balance participants out of the plan. Often, the participant can easily miss the required notices alerting them to the forced-out distribution. As a result, the participant may be unaware that the plan transferred their account. Your responsibility is to keep a copy of any communications sent in their employee file or other safe location that can easily be referenced years into the future.

Conclusion

If you’d like to talk about any of these trends for your plan, please call us today.

 

This information is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information, plan sponsor will be in compliance with ERISA regulations. 

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