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Merging one or more 401(k) plans into another 401(k) plan is common when companies restructure or are involved in an acquisition. Most employers decide to merge 401(k) plans because maintaining more than one 401(k) plan is costly and administratively burdensome. This article discusses many of the legal and administrative issues involved when 401(k) plans merge.
The timing of a merger of 401(k) plans is critical to the actual success of the merger. First, a clearly written advance notice of the actual transaction must be provided to the various service providers involved with each plan. This notice should inform the record keeper of the impact of the transaction on the plan. For example, the written notice to a record keeper may provide that the 401(k) plan will be terminating the record keeper's services and merging the plan into another 401(k) plan. Generally, a clearly drafted notice will prevent a record keeper from terminating the plan or from taking action that is inconsistent with the employer's intent.
A successful merger takes a minimum three months of planning. Investment decisions must be diligently documented and made. Also, retention or change of service providers must be adequately documented. In addition, if an employer determines that new service providers should manage the merged 401(k) plan, the employer should complete a diligent search of the available options in the marketplace. Given that new provider searches could take up to several months to complete, employers should act early, if possible.
The employer also should analyze the termination fees from certain annuity products and back-end loaded investments because there is a potential negative impact on participants and beneficiaries that could negatively impact the timing of a plan merger. Also, the employer should ensure that the legal issues involved if the sponsor pays participant market value adjustments and other related fees are analyzed prior to the merger and that plan loans are coordinated between the plans' service providers.
If the asset size of the merged plan increases substantially, new pricing and economies of scale should benefit plan participants. Participants should be informed of any cost and investment and operational changes due to the merger. These communications to participants are essential for the success of a merger. Plan fiduciaries have a duty to manage the plan's administrative costs. A merger may significantly change the price structure of the costs borne by participants and beneficiaries. Thus, knowledge of the service contracts and fund fees are essential in any merger of the 401(k) plans. Since timing is critical, planning for the merger and following procedures will lead to a successful plan merger.
Complete knowledge of each plan involved in a merger will help to make a 401(k) plan merger successful. Therefore, a thorough review of all the following documents should be accomplished several months before the merger: plan documents (adoption agreements, basic plan documents); amendments, trust, and/or custodial agreements; IRS …