In a Corporate Merger or Sale, What Happens to Your 401(k)?
Corporate mergers are nerve-wracking because they introduce a lot of unknowns into your life. Immediate questions come to mind. How will it affect your position? Your salary? Will there be layoffs? After the initial shock, other questions arise. If your employer is sold, what will happen to your retirement plan? Many times, the details aren’t determined until months after the merger is complete.
Three Possible Outcomes
In the event of a merger there are three primary outcomes for your retirement plan:
- Your company plan is merged into the new company plan (most common)
- Both company plans will be maintained separately (second most common)
- Your plan may be terminated (least likely)
The most common scenario is for your current employer to merge their plan into your new corporate parent plan.
When this happens, you will be subject to all the rules and conditions of the new plan and your old plan options will disappear. Your existing 401(k) plan is moved into the new plan. The new plan will come with its own investment options and employer matching. The process takes time. Typically, there will be a period where you will be locked out of your existing plan while it is merged into the new plan.
A plan may choose to continue as if nothing has changed. The acquired company will continue to run their own plan. Employees of the acquired company continue to utilize their existing 401(k) plan and don’t partake in the acquirer’s plan.
In the event of a plan termination, there are two primary options.
- The most common scenario in a plan termination is that everything remains the same except that the plan doesn’t allow new contributions. You still can remain invested in the plan, take money out at retirement, and have it serviced in the way you’ve been accustomed to. It just doesn’t allow new money to flow into the plan.
- The second scenario in a plan termination is that the plan closes, doesn’t allow new contributions, and forces participants to distribute their assets into another plan or an individual retirement account (IRA).
In each scenario any employer money becomes fully vested. That means that you are fully entitled to the money the employer has put in regardless of the plan rules on how long you must work there.
What Happens to Your 401(k) if You Company is Sold and You Don’t Work There Anymore?
It is common to leave an employer and keep your retirement plan money at your old employer.
If you’ve left a company and they are acquired your options are similar to current employees with two exceptions:
Force Out Distributions
If your retirement account balance with your former employer is less than $5,000, they may have the option to force you out of the plan. When this happens, your savings are automatically placed into an IRA in your name.
If you are a terminated participant in the plan you have the option to move your money out of the plan regardless of what route they choose.
Most plans will allow you to move your 401(k) either to your new employer or to an individual retirement account (IRA) in your name.
IRAs offer you greater investment options, typically lower fees, and portability.
Learn more about the benefits of consolidating your investment accounts.
What Should I Review in My New 401(k) Plan?
Once the path is clear for your retirement plan, it is time to review your benefits and options.
Some of the options to review in your new plan include:
- When are you eligible to begin contributing?
- Is there a Roth 401(k) option?
- How much can you contribute? Does the employer restrict catch-up contributions?
- What investment options are available? Are there low-cost index funds? Can I diversify across all asset classes?
- Is there an employer contribution? Is it a match or profit sharing?
- Who pays the plan expenses? Does the employer? Do I pay it?
- Can I take a loan out of the new plan?
- When can I begin taking distributions? Does it allow in-service distributions?
- Is there employee education?
- What is the vesting schedule like?
- Is there employer stock I can invest in?
- Do I have online access to the account?
401(k) Rollover Specialists
Corporate mergers can cause anxiety
If your company is going through a transition, we are happy to provide you with an independent evaluation of your options. No cost or obligation.
If you’re interested in receiving advice in your best interest, please set up an appointment using the link below.
Brian Berkenhoff, CFA