Make Sure 401k M&A is Done Right

401k, retirement, mergers, Millennium Trust Company
It’s a driving consideration.

Comcast is doing it. Wal-Mart is doing it. The volume of merger and acquisition (M&A) activity in the United States has increased this year, reaching record levels.

In May 2018 alone, 1,083 deals were announced, a 7.5 percent increase over the prior month.1

Companies with experience in M&A know that any merger or acquisition requires significant due diligence by the buyer. Forbes recently described it like this:

“Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and much more. This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the information it requires from public sources.”2

Analysis of qualified retirement plans should be an important part of M&A due diligence—and it’s not something to leave until the deal is almost done.

Although it’s not the norm, on occasion, the structure of a deal will be determined by the circumstances, liabilities, or obligations associated with the target company’s retirement plans.

As a result, it’s critical for executives at acquiring companies to thoroughly understand the legal and practical issues under ERISA and the Internal Revenue code.

Executives at the acquiring company must determine whether the target’s retirement plans have ERISA liability issues or IRS qualification issues. If the target’s plans have significant issues, then a decision must be made about whether to terminate the plan.

Some of our corporate clients, and some of the experts with whom we work, agree that plan termination prior to deal completion provides the buyer with options it might not have otherwise. However, a plan termination has an impact on participants’ retirement security.

It’s universally known that not every participant will make a smart decision about the retirement savings. And that could significantly affect their ability to retire and not run out of money.

In addition, if the terminated plan is a 401k plan, then depending on whether the seller or the buyer terminates the plan, its participants may or may not be eligible to participate in another defined contribution plan offered by the employer for 12 months from the date of the distribution from the terminated plan. This, too, may impede participants’ ability to save for retirement.3

The rules and regulations governing retirement plans can add layers of complexity to M&A decisions. However, it’s better to understand the issues up front than to discover them after a deal has been completed.

If your company may be an M&A target, and you’re concerned about the consequences plan termination could have on participants, make sure your plans are compliant. One of the most persistent issues for many plans is bad data. Cleaning up participant data—and maintaining clean data—can help simplify compliance.

One way to accomplish this is by adopting an automatic rollover provision that allows small accounts belonging to missing and non-responsive participants to be rolled over into automatic rollover IRAs. Rollovers can help eliminate issues related to notifications, missing participants and uncashed checks.

If plan termination is a condition of a deal, then Safe Harbor IRAs become even more important. The Department of Labor requires plan administrators to notify all participants about a pending plan termination and request distribution instructions.

If no response is received, the plan must search for the participants and, if they cannot be found, select “a distribution option for the benefits of missing participants.” The DOL’s preferred option is a rollover into a Safe Harbor IRA because the action is more likely to preserve the retirement savings of plan participants.

There is no limit on the size of an account that may be rolled into a Safe Harbor IRA when a plan is being terminated.

Before deciding how to manage an M&A target company’s retirement plans, buyers and sellers should work with ERISA counsel and complete thorough due diligence to identify potential risks and liabilities, as well as compliance issues and any other plan issues. Once due diligence has been completed, buyers and sellers can formulate a strategy.

Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.


  1. FactSet Mergers Staff, “U.S. M&A Deal Activity Increased in May”, com, Last modified July 5, 2018, https://insight.factset.com/u.s.-ma-deal-activity-increased-in-may?success=true
  2. Richard Harroch, “20 Key Due Diligence Activities in a Merger and Acquisition Transaction”, com, December 19, 2014, https://www.forbes.com/sites/allbusiness/2014/12/19/20-key-due-diligence-activities-in-a-merger-and-acquisition-transaction/#66bdb8ac4bfc
  3. Vanguard Commentary, “Employee Benefits Considerations in Corporate Mergers and Acquisitions”, com, December 2016, https://institutional.vanguard.com/iam/pdf/MAPPR.pdf?cbdForceDomain=false
Terry Dunne
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Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.

1 comment
  1. An easy way to ensure you have clean data in this type of situation is to implement a data matching and cleansing tool as part of your total plan. One example of any available option that has been used in this case is Data Ladder’s DataMatch Enterprise tool: http://bit.ly/2H7LO1s

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