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What Should You Do With Your Old 401k?

Working for a company that’s just been acquired by another firm can cause great anxiety for a lot of reasons. If you’re in this situation, you might be concerned about any number of things from losing your office to losing your job.

Should you also be worried about losing your 401(k) plan? What might happen to it?

“Mergers happen all the time, but one often-neglected aspect of M&A activity is the retirement plan,” says Wendy Baker, Legal Counsel, Human Interest, headquartered in San Francisco. “There are essentially four options for dealing with the retirement plan of a company that’s being acquired:

  • The retirement plans of both companies can be merged
  • The plan at the acquired company can be terminated
  • The retirement plans of both companies can be maintained
  • The plan at the acquired company can be frozen—or, maintained without the option of further contributions”

Given all these options, it’s clear anything can happen. This means your benefits may be at risk. How much risk?

“Plan participants’ future benefits are not protected when their existing 401(k) plan merges into a 401(k) plan with lesser benefits,” says Holly Verdeyen, Defined Contribution Leader, Wealth at Mercer in Chicago. “Money earned and vested to date is protected and participants cannot lose what they have earned in the plan, but there’s no protection for future benefits. Very often there is a comparability analysis and the buyer will look at the sellers package and try to make employees whole for a period of time to avoid disadvantaging employees who have already been impacted in other ways by the merger, but this is not required.”

Much of what could happen depends on the exact nature of the transaction involving your company. Now, you might not know precisely the circumstances of the deal, but as soon as the deal becomes public, you can begin to assess your situation.

“If it is an acquisition, the acquirer typically maintains their plan while the recently purchased company has their plan merged; thus, forming one plan,” says Daniel Maupin, Financial Planner at Rather & Kittrell Capital Management in Knoxville, Tennessee. “Many times, the employees of smaller companies benefit from now having the leverage of many more employees when paying for company benefits including the potential for lower costs within the retirement plan. If it is a merger and there is not a parent company involved, the decision lies upon the plan sponsor which is often driven by a retirement plan committee. At this level, they determine what is best for the participants and the plan design as a whole.”

It’s not that simple though. Even if the acquisition is a purchase, there still may be variables you’ll need to consider. This will influence the choices the new owners have.

“The options available are partly determined by the type of sale—stock or asset,” says Baker. “In a stock sale, the buyer is acquiring ownership of the company from the seller. Ownership of the seller’s company includes everything that belongs to the company, including any active retirement plans. In an asset sale, the buyer is only purchasing certain assets of the seller, like client lists, physical and/or intellectual property, equipment and so on. The seller’s retirement plan does not pass automatically to the buyer.”

If you remain worried, you might be wondering if there’s an escape clause, a way to get your money out of the old plan before it gets put into the new plan. In general, your options here are limited.

“Under no circumstances can active employees roll their balance out of the plan unless the remaining plan allows in-service distributions and the participant has met the in-service requirements,” says Brian Heckert, Founder & Wealth Manager at FSM Wealth in Nashville, Illinois.

What is this “in-service distribution” Heckert refers to?

“Rolling your balances out of a retirement plan while you are still an employee is known as an in-service rollover,” says Jeff Coons, Chief Risk Officer and Director of Institutional Services, High Probability Advisors in Pittsford, New York. “Rules on in-service rollovers vary from plan to plan. Even though your plan’s in-service rollover rules are generally considered a protected benefit and should survive a merger if they are part of your plan pre-merger, it is important to check with your new employer post-merger before making the decision to roll out of your new plan.”

Although it appears you are powerless to do much, rest assured there are some things the acquiring company cannot take away from you. Heckert says, “A merger of two plans cannot violate the anti-cutback rule. The merger cannot reduce or eliminate protected benefits.”

What is the “anti-cutback rule” and how might it apply to you?

“The IRS has established anti-cutback rules that companies should pay close attention to when merging retirement plans,” says Coons. “As an example, a plan’s vesting rules for past employer contributions are a protected benefit that would need to be maintained at the time of the merger.”

When your company gets bought out or merges into another company, it’s natural for you to get anxious. It’s best to accept what you cannot change. After all, whatever happens, the retirement money that is yours remains yours, no matter what.

“Participants continuing on as employees don’t have much say,” says Stuart Robertson, CEO, ShareBuilder401k, Seattle. “In general, it depends on how the companies want this to occur and what’s enabled in the plan documents of the acquired company’s plan. In theory, greater assets under management and an increased number of employees using a 401(k) plan can help a company better manage costs and services. Some will indicate it’s easier to manage the transfer and closing of the previous plan by not enabling an IRA rollover option.”

Who knows? When it comes to your 401(k) plan, the grass might be greener on the other side.

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