With interest rates low, mergers and acquisition activity is brisk even for smaller and middle market companies. Sometimes overlooked in the mergers and acquisitions process are the retirement plans of the acquired company as well as how it affects the acquiring company. Daniel Bryant, CEO of Sheridan Road with numerous offices primarily in the Midwest helping plan sponsors, discusses how companies should be looking at retirement plans during this process.
When mergers and acquisitions get going, time is of the essence and oftentimes due diligence on the retirement plans is either forgotten or given short shrift. But the latent liability within a 401k, DB and especially executive compensation plans can cause trouble down the road. So while there are serious time constraints, review of retirement plans is essential which means the advisory firm hired needs to not only be experienced in retirement planning but must have an established M&A due diligence process.
The liabilities may include lingering fiduciary issues that the acquired company has overlooked or even simple compliance problems that may result in fines or penalties. The rash of 401k lawsuits which has migrated down market is another concern. Issues with unfunded DB plans are obvious but the extent of the problems can affect the purchase price as can overfunded plans.
There are also opportunities, Bryant explains. Often times, his group is able to find ways to save money when reviewing the plan’s 401k record keeping and fees as well as investments as industry pricing continues to drop. Bryan also notes that his group has found ways to find substantial savings in the executive compensation programs which can significantly affect cash flow after the transaction.
M&A activities are also an excellent time for the consolidated company to look at all their retirement plans to first, make sure that the plans and the vendors make sense for the new entity. In addition, it’s important to review the new buying power of the larger 401k plan that may result in significantly reduced fees because the plan is eligible for lower share classes or can move to less costly collective trusts or managed accounts. In fact, not conducting a major review of all retirement plans after an acquisition may give rise to liability if a plan sponsor has not taken prudent steps to determine if lower priced share classes are available.
