When M&A Occurs, Don’t Forget a Retirement Plan Review

By Richard Rausser

In recent years, the banking industry has had its share of mergers and acquisitions. In fact, in 2017, there were 247 bank M&A transactions representing a total value of $154.6 billion. And through April of this year, the numbers are on par with last year’s numbers, as 75 bank M&A transactions totaling $137.2 billion have been announced. And as many industry experts have predicted, a more benign regulatory environment, rising interest rates, and economic growth spurred by corporate tax reform may combine to further accelerate bank M&A deals in 2018 and beyond.

If your bank is contemplating acquiring another organization, part of the process will be integrating two retirement plans. It may not seem like the most pressing strategic priority, but getting it right is critical to employees who are relying on it—and whom management is relying on to make the newly combined bank successful. Understanding the nature of the M&A transaction and comparing the respective retirement plans are important first steps.

Start by analyzing the structure of the transaction. Understanding whether the M&A transaction is a stock sale or an asset sale can help in determining next steps and identifying any issues involved that need to be front of mind as you progress through the transaction.

Deal basics

If the transaction is a stock sale, the acquirer purchases another bank in its entirety. The acquiring employer becomes the employer and, therefore, the sponsor of the seller’s qualified retirement plan. If both the acquiring and selling employers have 401(k) plans at the time of the transaction, the successor plan rules prevent the acquirer from terminating the 401(k) plan of the purchased company once the sale is complete. An acquiring employer may decide during the planning stages that the two 401(k) plans will be merged. Once the stock sale transaction is complete, the new owner can then merge the two plans together.

If the acquiring employer does not want to keep the selling employer’s 401(k) plan, the purchase agreement needs to include a requirement that the seller terminate its plan before the business transaction occurs. If the resolution to terminate the seller’s plan is passed by the board and takes effect prior to the transaction, the seller is responsible for distributing all plan assets.

When a stock sale takes place, the acquired employees typically continue working for the acquiring company. Therefore, the acquired employees do not incur a severance from employment and there is no distributable event. The years of service the employees have with the seller will count toward eligibility and vesting credit under the acquiring employer’s plan.

If the transaction is an asset sale, the acquiring bank purchases only the assets or, for example, divisions of the seller. With respect to retirement plans, the seller will continues to exist and maintains its own qualified plan while employees of the purchased divisions or bank move to the acquirer. Participants who become employees of the acquirer are generally treated as having severed service with the seller and are permitted to take a distribution from the seller’s retirement plan. However, the entities may agree to transfer the retirement assets of the relocated participants from the seller’s plan to the acquiring employer’s plan via a spinoff of participants, assets and liabilities. This would not be considered a distributable event as the acquiring employer would be seen as maintaining the seller’s plan.

Evaluating and comparing

Once you understand the nature of the transaction and the potential issues involved, the next step is to review both organizations’ retirement plans. Creating a detailed comparison will enable you to identify differences that may need to be addressed as you move forward. It is also a perfect time to do a competitive analysis of the plans compared with industry best practices.

Key considerations include:

  • Does the surviving plan meet your bank’s benefit objectives and comply with all regulatory requirements?
  • Are plan investment options and performance consistent with your investment policy statement?
  • Is plan pricing in line with industry standards and your bank’s expectations?
  • Do you have the information needed to identify liabilities and estimate future contribution and expense requirements?
  • Does the acquired plan contain any protected benefits, such as early retirement provisions and distribution options?

M&A can also present an opportunity to update and refine a retirement plan, ensuring that it is competitive in terms of investment options, pricing, participant engagement and other features. A potential deal can transform a bank’s strategic outlook and it can be an opportunity to make improve the bank’s human capital outlook, too.

Richard W. Rausser, CPC, QPA, QKA, is senior vice president of client services at Pentegra Retirement Services, which ABA endorses for retirement plan services.