Merging More Than Just Companies: Your Guide to Seamless Retirement Plan Integration

When companies merge, much attention is often given to combining operations, technology, and corporate cultures. However, one of the most complex—and crucial—tasks that often gets overlooked is how to integrate retirement plans. Getting this step right can ensure that employees stay confident in their benefits and the process runs smoothly. Below, we dive into the steps necessary to effectively merge retirement plans, ensuring a seamless transition that benefits both the company and its employees.

The Retirement Plan Reconnaissance Mission: Your First Step

Before diving into any plan integration, it’s important to start with a thorough review of both companies’ retirement plans. This step is essential for identifying potential issues and finding ways to align the plans effectively. A well-executed reconnaissance mission ensures you understand each plan’s features and how they can be combined.

Understand the employees’ current benefits: Identify the full scope of employee benefits under each plan, such as matching contributions or loan provisions, to prevent any unintended losses.

Review each company’s plan documents: This includes evaluating provisions, contribution structures, vesting schedules, and any potential regulatory concerns.

Check for plan compatibility: Look for any gaps or discrepancies in eligibility requirements, investment options, or contribution limits that may cause issues.

Compliance Check-Up: Avoiding IRS Scrutiny

Merging retirement plans requires a careful eye on compliance. If each plan isn’t in full regulatory alignment, it can result in serious consequences, including IRS penalties. This first step is crucial to ensure that you won’t run into any surprises further down the line.

Conduct a compliance review: Ensure that each plan meets the IRS and Department of Labor regulations. Check that filings are current (e.g., Form 5500) and that the plans have passed all necessary compliance tests.
Verify plan reporting requirements: Make sure that all necessary reports are filed on time, and no previous audits or violations have been overlooked.
Document any necessary corrections: If there are compliance gaps, address them immediately, as merging non-compliant plans can lead to costly legal repercussions.

Plan Compatibility: Are the Plans Ready for Partnership?

When merging two retirement plans, the next step is to ensure that both are compatible with one another. This involves reviewing the key elements of each plan and identifying areas where adjustments might be necessary.

Compare contribution structures: One plan may have higher employer contributions than the other, or one may offer different matching percentages. Decide whether to standardize these or adjust accordingly.
Align vesting schedules: If one plan has a faster vesting schedule, you’ll need to consider how to handle that for employees who may be impacted.
Evaluate plan features: Look at the investment options available in each plan—standardizing options or allowing employees more choices can make the merged plan more attractive.

Due Diligence: Uncovering Potential Surprises

Performing thorough due diligence helps uncover any potential surprises, ensuring that there are no hidden challenges that could complicate the integration process later.

Assess administrative processes: Review how each plan is administratively managed. Are there redundancies? Are there inefficiencies that could be streamlined during the merger?
Examine investment performance: Review the historical performance of the investment options in each plan. Ensure that the options chosen for the new plan are both cost-effective and provide strong returns.
Identify any outstanding liabilities or loans: Track the status of any plan loans or other financial obligations to ensure they’re properly addressed in the transition.

Communicating Changes: Building Trust with Employees

Retirement plan mergers often bring uncertainty for employees. Clear, timely communication can help mitigate concerns and ensure that employees feel confident about their future benefits.

Provide clear, timely notifications: Inform employees early about the planned changes, including how the integration will impact them.
Hold informational sessions: Offering group and one-on-one sessions will allow employees to ask questions and get clarity on how the merger affects their benefits.
Highlight the positives: If the merger enhances benefits (e.g., more investment options or lower fees), be sure to communicate those advantages clearly to employees.

Aligning Vesting Schedules

A common point of confusion during a merger is differing vesting schedules. To avoid issues, companies must decide how to align these schedules.

Consider accelerated vesting: If one company has a faster vesting schedule, you may want to consider accelerating vesting for the merged group to ensure fairness and simplicity.
Evaluate the impact on employees: If some employees are negatively impacted by the change in vesting, consider offering other incentives, such as bonuses or additional contributions.

Making Benefit Accrual Decisions

For defined benefit plans, merging can also mean deciding whether to freeze or continue benefit accruals.

Freeze accruals: If necessary, freezing accruals in one plan is an option, but it can lead to dissatisfaction if not communicated properly.
Continue accruals: Continuing benefits for all employees can be a more transparent approach, ensuring that everyone’s retirement savings keep growing.

Exploring Feature Enhancements

A retirement plan merger also presents an opportunity to enhance the features and benefits of the new combined plan.

Expand investment options: By offering a wider range of investment choices, employees can have more control over their retirement savings.
Improve loan provisions: Consider adjusting loan terms to make it easier for employees to access their funds if needed, but be sure not to create unintended financial strain.
Introduce new distribution options: These could provide employees with more flexibility in how they access their retirement savings, particularly for those nearing retirement age.

The Plan Integration Path: Deciding on Your Approach

There are a few strategic paths you can take when integrating retirement plans. Each option offers distinct advantages and challenges, depending on your organization’s goals.

Full Integration

Full integration involves combining both plans into one cohesive structure, merging all employees into the new plan.

Preserve all protected benefits: Ensure employees’ accrued benefits are preserved while integrating all participants into the same plan.
Streamline investment options: Standardize investment options, where possible, to ensure all employees have access to the same opportunities.

Freezing One Plan

Freezing one of the plans can help maintain certain benefits for employees, but it also requires careful administration.

Halt contributions: One plan can be frozen for future contributions while maintaining existing balances.
Communicate freeze clearly: Be transparent about why the freeze is necessary and how it will affect employees moving forward.

Plan Termination

Terminating one of the plans entirely is an option, but it requires a thorough understanding of the implications.

Fully vest employees: Any frozen or terminated plan will need to fully vest employees to ensure no one loses their benefits.
Manage distribution of balances: Employees will need clear guidance on how to manage their balances, whether through rollovers or direct distributions.

Keeping Employees Informed: Communication is Essential

Employee buy-in is crucial during this process. To keep employees informed and secure, make sure the communication is clear and consistent.

Offer clear instructions: Provide employees with all the necessary information on how the merger will affect their individual accounts.
Provide one-on-one guidance: For those who need more assistance, offer personalized consultations to help them navigate the transition.

Fiduciary Duty: Your Key Responsibilities

As the fiduciary overseeing the retirement plan merger, it’s your responsibility to act in the best interests of your employees. This includes making decisions that ensure the plans remain compliant and cost-efficient while prioritizing employees’ financial well-being.

Review all decisions thoroughly: Carefully evaluate each step to ensure that it aligns with your fiduciary responsibilities.
Document everything: Keep detailed records of all decisions and actions taken during the merger process, as this will be important for legal and regulatory purposes.

Resources for a Smooth Transition

If you’re unsure about any aspect of the process, don’t hesitate to consult experts or regulatory bodies for guidance.

Consult the IRS and DOL: Use resources from the IRS and Department of Labor to guide compliance decisions.
Seek legal advice: Consult with ERISA attorneys to ensure your decisions align with federal regulations.

Wrapping Up: Making the Retirement Plan Merger a Success

Merging retirement plans doesn’t have to be overwhelming. By carefully reviewing, communicating, and strategically integrating the plans, you can create a cohesive, efficient retirement program that benefits everyone involved. With the right planning and execution, this process can enhance your organization’s benefits offering and improve employee satisfaction.

Need help navigating your retirement plan merger? Connect with a specialist today.