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.
