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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.

Have You Outgrown Your PEO?

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As a retirement plan advisor for small businesses, navigating the landscape of Professional Employer Organizations (PEO) can be both challenging and rewarding. While PEOs offer invaluable services for startups and growing businesses, there comes a time when your business might outgrow its PEO. Recognizing this milestone is crucial for your company’s evolution and can significantly impact your bottom line and employee benefits strategy.

Why Leave a PEO?

Perhaps, your journey with a PEO may have started because of the immediate benefits in HR management, employee benefits, payroll, and compliance support. PEOs offer the advantage of securing workers’ compensation insurance at lower costs and allowing small and mid-sized businesses to offer competitive benefits packages. However, as your business matures, pain points arise which might lead you to reconsider this relationship:

  • Cost Considerations: It can be difficult to assess the fees that you actually pay to a PEO for their services. Often times, the administrative cost paid to the PEO is significantly higher than the bundled cost to provide services. Comparing the cost to “rebuild” your PEO independently, you can often times find significant cost savings.
  • Desire for Control: As businesses expand, the need for customized HR and benefits solutions becomes apparent. Especially in competitive industries where competing for candidates is extremely difficult. PEO’s often times can’t keep up with benefits offered in the marketplace.
  • Vendor Selection: Partnering with a PEO means your choices for health benefits, workers’ compensation, and other services are often limited to the PEO’s selections. This results in poor vendor alignment and cost/benefit tradeoffs that limit choice and competitiveness.

Timing and Considerations for Exiting a PEO

Deciding to exit a PEO relationship requires careful planning and consideration of several key factors:

  • Tax Consequences: Exiting mid-year can potentially have tax implications, such as double-taxation on FICA and FUTA due to nontransferable employee wage bases.
  • Replacing Services: You will need to find alternatives for payroll, HR, compliance, and benefits administration. This might include hiring internal staff and partnering with new vendors.
  • Insurance and Benefits: Transitioning out of a PEO means securing your own workers’ compensation, health insurance, 401k and other benefits.
  • Timing is critical to make sure that all of your services are ready to go when you exit the PEO. Even one missing link can make an exit impossible and keep you in your contract for another year.

Assembling the Right Team

The good news is that experts can solve for all of these problems. Successfully transitioning away from a PEO requires assembling a team of experts to ensure a smooth changeover and continued compliance:

  • Payroll/HRIS Provider: An essential member of your transition team, a payroll/HRIS provider will ensure that your payroll and human resource information systems are seamlessly migrated and set up to support your company’s operations without interruption. The right provider will offer solutions that are scalable and customizable to your growing business needs, facilitating payroll processing, benefits administration, and compliance with labor laws.
  • Benefits Broker: An experienced broker can help you navigate the complexities of health insurance and other benefits to find the best fit for your company and employees.
  • Insurance Agents: For workers’ compensation and liability insurance, specialized agents can offer competitive options outside the PEO model.
  • Financial Advisor: A financial advisor can provide guidance on the tax implications of exiting a PEO and assist in restructuring your benefits and retirement plans to maintain or improve financial health.
  • HR Consultant: To fill the HR gap left by the PEO, an HR consultant can help establish internal HR functions tailored to your company’s specific needs.

Conclusion

Transitioning away from a PEO is a significant decision that impacts every aspect of your business, from financial planning to employee satisfaction. By carefully assessing the timing, preparing for the change, and assembling the right team of experts, you can ensure that this transition supports your company’s growth and long-term success. By embracing this change you can create a wealth of opportunity to create a custom benefits, HR and compliance strategy to help you compete for talent and add to your bottom line. 

For more information on how we’ve helped others in the past, click the link below. 

Why Benchmark your 401k

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What is 401(k) benchmarking and why should you do it?

Simply stated, 401k benchmarking is the process of reviewing and evaluating your company retirement plan. It involves taking a look at what you are offering your employees today and deciding if it’s appropriate or needs some updating. There are four main areas to focus on when assessing your retirement plan: 

  1. Plan Design
  2. Service Providers
  3. Funds
  4. Fees

Each aspect of your plan requires a slightly different set of questions and documented responses. To go into detail about each section, we will break this into a two-part series, beginning with Plan Design and Service Providers; but don’t worry, we will discuss Funds and Fees in a separate article. Below we are going to share some best practice questions to help you get started on your benchmarking analysis.

Plan design

When you think about it, plan design is your plan’s framework; it is like the chassis of the vehicle.  Do you think all car frames are the same? Probably not. They vary depending on the type of the vehicle (pickup truck, SUV, cargo van, 18-wheeler, or sports car). The same is true for your retirement plan, the frame (or plan design) must be able to support your end goal. When it comes to 401(k) plan design, some important considerations include:

  • Who is eligible to join the plan?
    • Age?
    • Length of employment?
    • Are employees automatically enrolled?
  • What type of accounts can employees use for savings?
    • Pre-tax
    • Roth
  • Is there a company contribution to employees?
    • Which employees?
    • How is the company sharing the money?
      • Required?
      • Not required?
      • Encouraged, based on employee savings?
    • If an employee leaves, what happens to their account?
      • What is the vesting schedule?
      • If their account is under a $1,000, does the employee receive an automatic distribution?
      • If their account is between $1 – 5k, is it automatically rolled into an IRA?
      • If the account is over $5k, what procedures are in place to keep track of the former employee?
    • What about the required Form 5500 tests?
      • Did we pass?
        • Great! But, could we be more efficient?
      • Did we fail?
        • Next time, how can we avoid corrective distributions?
      • How can use the 401(k) plan be used to reward, retain, and recruit top employee talent?

Once the plan design is aligned to meet the needs of the company and provide a competitive offering to employees, the chassis is set.  But don’t worry, no matter what your plan design framework is like today, it can always be updated – it just may take some professional retooling.

Service providers

Staying with the car analogy, your recordkeeper is like the make or name brand of the car.  Is it a Honda, BMW, Lexus, Toyota, Ford, Audi, Chevy, Porsche, or another vehicle brand?  We are saying it’s the brand because most of the time when an employer is asked, “where is your plan?” they respond with the name of the recordkeeper.  For example, “where is your plan?” “It’s at John Hancock.”  “It’s at Voya.”  “It’s at Fidelity” just to name a few recordkeeper examples.

Just as car manufacturers produce different models of vehicles, the same is true of recordkeepers.  Just because two employers have two retirement plans with John Hancock does not mean that they are the same.  Instead, they could have different platforms, investments, costs, service models, advisors, plan design and more.  The same recordkeeper name does not mean the same plan.  Which is why, it is important for employers to ask questions and find out more information about what is available.

Questions to ask:

  • What products and platforms do you offer?
  • Are there price breaks or concessions based on our plan size?
  • What services are we paying for? Could you provide a list?
  • Have you made any technological enhancements to your service?
    • Uploading contribution files
    • Seamless payroll integration
    • Online account access
    • Cybersecurity, encryption, and fraud prevention
  • What other interesting advancements has your firm made that we should be aware of?

This is not a complete list of questions to ask your recordkeeper; however, it is a start.  The important thing to remember is that if you don’t like the responses – just like shopping for a new car – you can always walk down to the next lot and see what else is available.

Overall, the goal of an employer-sponsored retirement vehicle is to get your employees into a suitable car with appropriate features that give them the gas and ability to drive towards a successful retirement destination.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

Would You Work for Free?

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Would You Work for Free?

Recently, I was on a call with a new prospect, a CPA, discussing his 401k plan.  During our call, we got to the subject of the fees he is currently paying for his 401k plan.

After some back and forth, Mr. CPA told me that he was not paying anything for his 401k plan. When I mentioned, that he may not have a direct bill but the fees are lumped in with the investments, which is typical in older plans, he got angry and ended the call saying: “We’ve been down this road before and we pay NOTHING for our 401k plan.”

This call got me flustered, and I was genuinely upset after hanging up, or rather, getting hung up on!

Given how much attention the 401k industry has paid to fees since Fee Disclosure was introduced in 2012, I thought that we had moved past fees.  I thought employers had at least been given enough information to know that they are paying someone something for their 401k plan.

If a CPA could fall for this sales pitch, Houston, we still have a problem.

So, this begs the question, would you work for free?

I think the obvious answer to that is, No! No one would work for free, nor should they. There are a lot of moving parts to a 401k and the thought that a company would take custody of your money, keep track of your individual employee’s accounts, create a website and mail statements for free doesn’t make sense.

The point is, there are at least 3 different entities that are being paid for from your 401k Plan. They are: The Recordkeeper, The Investment Management Company, and The Advisor.  In some arrangements you will also have a Third-Party Administrator who can get paid from the plan.

I can assure you that none of these parties work for free.  If you don’t receive a bill directly from any of these parties, that means that they are receiving fee’s directly from your plan assets.  This is a process called revenue sharing, and it is the way that plans historically paid for their 401k’s.

A Primer on Revenue Sharing

 Today, most plans are paid for by the revenue from funds in an ERISA bucket or Plan Expense Account or by moving to a more transparent process we call “zero-revenue” which strips out the fee payments from the investments and bills either the company or participants directly for plan related services.  Either way, fees that come from plan assets, need to be accounted for.

All fees aren't bad

Fee’s aren’t inherently bad, but high fees are. Sometimes, you do get what you pay for and there are no rules that say you need to pay the lowest fees possible, but as a sponsor of a 401k or 403b plan, it is your fiduciary duty to understand who is receiving fees from your plan and to ensure that those fees are reasonable for the services that they are providing.

All of these fees can be found on your Fee Disclosure statement that you can get from your provider.  I encourage you to take some time to look at those statements and work with someone who can make sense of the fees and whether you are paying a reasonable amount for services. 

If it sounds too good to be true it may be

The phrase “Too good to be true” should come to mind anytime someone says that they are giving you anything for free.  As a rule of thumb, if someone says that your 401k plan is “Free” they probably don’t want you to take a closer look. 

Keep in touch

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Info@401kImpact.com

Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC and Retirement Impact, LLC are separate and unaffiliated

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