Company buyout effects on 401k plans

[Guest DDDlump]

Company A buys out Company B, both companies have 401k plans, but the decision is made that Company B assets will not be rolled into Company A plan, nor is Company B plan terminated to allow participants to roll into IRAs, but rather it is "frozen" participants can only take distribution at normal retirement age or if terminated from new company A.

What possible reasons could this decision have been made?

[mbozek]

How about the obvious-- Co B plan may have a material defect that affects its qualified status-- It is a common practice to quarantine the plan of an acquired corporation because it prevents the acquiror's plan from being tainted. Due dilligence in acquisiton usually reveals such defects. Company A will wait until defect in B's plan is fixed by VCR or some other procedure before transferring assets to A's plan.

[david rigby]

mbozek is right on point.

In addition, Company A might be concerned about some defect in Plan B that is unknown. In that case, A is merely acting prudently until that question can be resolved.

[RCK]

I agree with mbozek's answer but not some of the reasoning behind it. Our experience in acquisitions has been that the due diligence process only turns up the most flagrant problems. In order to determine that a plan is truly clean, it is necessary to do a compliance audit or something similar. And that can't be done until after the deal is signed.

This is what requires the quarantine approach (although we have taken to calling it "aging" the acquired plans).

RCK

[JanetM]

Sounds like what my company did - except we did not freeze the acquired DC plans.

My company (A) bought another company (B) that had 3 DC and 4 DB plans. We intend on merging 2 of the DC plans into the A Plan.

Upon the completion of due diligence we decided to wait on merging the plan until the audit window closed. This was decided because the company (B) and the record keeper were unable to produce ALL the documention requested during due diligence.

It was simply a matter of playing it safe with the A Plan. Once the time has passed and we are confident there are no ghosts to haunt (taint) us- we will merge the plans.

[pjkoehler]

DDDLump: If the transaction was an asset acquistion, Company A's objective may have been to insulate itself from Company B's liabilities other than those it expressly assumed to accomplish its business purposes. Company A may not see that a plan merger effects its limited business purposes.

Even if this was a stock deal and Company B represented and warranted to Company A that it's plan had no qualification defects, the assets of Company B's Plan may include nonpublicly traded or other exotic assets (limited partnership interests, real property, etc), the transfer of which is declined by the Trustee of Company A's due to limitations on its record-keeping systems and valuation issues. If, in order to complete the plan merger, these assets would have to be involuntarily liquidated at a time that would cause the participant accounts to incur realized loses, Company A may be concerned about its exposure to fiduciary liability.

Even if there are no exotic assets, Company A may have decided to avoid plan merger in the post-Eron era out of an abundance of caution.

[mbozek]

PJ : Having odd or illiquid assets in a plan should not affect the merger of the plans since the merged plan can continue with the odd assets remaining with the same custodian or trustee as the previous plan since a qualified plan can have more than one trust. The assets would not have to be liquidated on account of the merger because the assets become assets of the merged plan. For operational purposes the participants will participate in one plan. The custodian/trustee will continue to value the odd/illiquid assets as assets in the participants accounts of the merged plan.

[pjkoehler]

mjb: just for the sake of argument, let's assume that Company A's plan and trust agreement have language that permits Company A to merge the two plans and appoint the trustee of Company B's plan as co-trustee of the merged plan with respect to the former assets of Company B's plan, i.e. that Company A's plan is not a Master or Prototype arrangement and or other highly standardized plan document tied to one or another form of funding vehicle or investment media, which would almost certainly preclude such language for administrative reasons. (DDLump could check the plan and trust documents and chime in here for a little reality check?) Let me ask you a question: On what system would the valuation of plan accounts be performed? The system operated by the co-trustee responsible for the assets of former plan A wont handle this otherwise it wouldn't have objected to the transfer in the first place, right? So that leaves the co-trustee of the former plan B. Ok, now how do we consolidate the accounting information for oh say: (1) participant benefit statements, (2) 5500 form preparation, (3) plan loan calculations. etc., etc. I'm sure you get the picture. It will have to be done manually. Now, I don't think I'm going too far out on a limb here to say that even if you get over the hurdle of limiting plan language, that that sort of manual consolidation of financial information most definitely "affects the merger of the plans" to the extent that Company A could reasonably conclude it makes more sense to adopt the arrangement described in the first message of this thread.

[Guest DDDlump]

I do not have either plan documents yet, I will be getting a copy of the SPD shortly. I have gotten involved in researching this as the employees from original company B are very unhappy that their assets are frozen. It is managed as a pooled account by an investment firm and the performance has been extremely poor. They have been unable to make any investment changes. Company A will only advice employees that this is how it has to be done!

[pjkoehler]

DDDLump: The SPD probably wont tell us about the limitations on the appointment of co-trustees and the segregation of assets. However, we can make an educated guess if you can find out if Company A's plan is a master or prototype plan, i.e. the sort of standardized plan document sold in tandem with a turn-key record-keeping system by an insurance company, brokerage firm, bank or other financial institution.

Other thoughts: you indicate that the assets of Company B are held in a pooled investment arrangement, which I assume means that the assets are NOT participant-directed; rather, the trustee determines the net investment earnings as reported by the investment manager and ratably allocates them probably in a ratio of beginning period account balances. Such an arrangement may further deter Company A from engaging in a straightforward plan merger if, for example, Company A's plan is an ERISA 404c Plan (i.e. participant-directed) and the financial position of Company B's trust reflects significant unrealized losses. Company A could reasonably conclude it would not be prudent currently to liquidate the assets of Company B's plan for the purpose of merging them into the participant-directed arrangement of Company A's plan.

Also, although the fiduciaries of Company B's Plan remain exposed for under ERISA's fiduciary standards (most notably, under the prudent expert rule, but also the documents, exclusive purpose and diversification rules), and while a merger may make good employee-relations sense, the employees of Company B should understand that they have no right to have their Plan B accounts merged into Plan A.