Benefit Plan M&A: M&A Impact on Benefit Plan Operations

So Denise, when it comes to M&A and the impact on plan operations, from a benefit plan audit standpoint what are the things that as a plan sponsor you need to be thinking about?
DF:So as a plan sponsor, we need to start thinking about before there is a M&A activity at the company, is what are you going to do with the plan? And it depends if it's a stock purchase or an asset purchase and deciding if it's going to be a termination or a merger. And all of those details really need to be thought about before any of the merging takes place, and it has to be a well thought out plan. So once a company decides if they're going to do a termination or a merger, how do they decide if they need to change service providers? What happens there?
Ch:That's a really good question because when there is a merger or acquisition, there's a lot of moving parts. Oftentimes, depending on the size of the company and the company being acquired, you need to really consider demographics. So you need to look at the existing record keeping situation, if there's the relationship with the TPA, and say to yourself, based off of how many assets and participants we're taking on here, does it make sense for us as the acquiring company to continue on with the record keeper and relationships that we have? Do we entertain the acquired companies record keeper, or do we look at other options?

So it's always important to know the demographics and understand what they look like so that you can begin to think about what service providers are going to be best for you and your employees going forward.
DF:And it sounds like it's a good time to reevaluate from a cost perspective as well.
Ch:Yep, absolutely. Again, as you have more participants and assets coming into your plan, if the plans are merging, that could be a great opportunity to go back to your record keeper, negotiate fees. It could also lead to pricing breaks or discounts on funds. So there's an opportunity here at a potentially lower cost of the plans, and that's something that's really within your fiduciary duty as well. So as the plan, you want to make sure that you're doing everything you can to put forth the best plan for your employees. And in doing so, making sure you have the most cost-effective plan, that can be an important part of it also. Not the most important part, but something worth considering for sure.
DF:What are some of the other considerations when you change a service provider?
Ch:So you definitely want to make sure from a fund mapping perspective that you have a strategy. So this goes, again, with the communications and working with a financial advisor or retirement applying committee to make sure that there's a strategy in place around the investments. Again, that could be taking a look to see if there's other lower cost solutions, different share classes that could be helpful. But it's also important if you're going to do a re-enroll into QDIA or to mapping, what the best options are. And so we recently helped a client through a recent M&A transaction where they decided to do a QDIA rollover, which is probably what we see about 95% of the time. It marks a solid point in time fiduciary event for the company, which helps protect them and also ensures that participants are in a proper age adjusted.

So how about, Denise, from your perspective, what is needed for the plan audit? What are all the things that a plan sponsor needs to get together in order to make sure that they're going to be ready for the next audit post M&A?
DF:Sure. We do ask for all the documents. We're very document oriented, we want to see it in writing. There's been way too many times where a client will say, "I merged." And I said, "Okay, did you really merge or did you terminate?" "Yeah, we terminated." "Okay, but you can't be both. It's either a merger or a termination." So it's really grabbing holds of the documents, the plan documents and all the amendments to see what really happens. Is it a termination, is it a merger? Because they are two separate and distinct items, as we already said.

So obtaining all the documents, the plan documents, the amendments, the M&A documents. And what we'll be doing is looking at both the plan level and the employee level of the assets in the accounts. So did the one service provider get transferred over to the other service provider in total? All the money? And then at the participant level, did that participant have their money transferred over to the new service provider in the same amount?
Ch:Right, did the balances add up? The so important point of all of this, when you're talking about the employee experience, did my money get transferred over properly, and is it there?
DF:Yeah. And as an auditor, it's all about completeness and accuracy here.
Ch:Yeah. So from your perspective, what are some of the main challenges or hiccups in getting these documents together? Or how can you be better prepared as a plan sponsor?
DF:I would suggest making sure you speak with your auditor, so that way they have an understanding of what's going on and share all those documents with them. There's been many of times where we're not included or included after the fact, and we see a lot of times plan sponsors like a clean cutoff. So they'll go for the December 31st year- end cutoff date, and that's the date that they want to merge the plan. And for one too many clients, what happens is that the one service provider will go ahead and liquidate the assets on the 31st, but then not transfer it over to that second service provider until January, the next business day.

So therefore, when we're looking at a certification of the assets, which we would need for an ERISA Section 103(a)(3)(c) audit, former limited scope audit. It's a tongue twister, that ERISA 103. So here we are as auditors, getting the certification with the asset listing and the service provider that liquidated is showing zero assets at the end of the year. And then you say, okay, well maybe it's at the other service provider at year-end. And they say, no, we didn't get it until January. So here we are sitting with two documents that say there's no plan assets, which we know that's not true. The money is somewhere, it's there.
Ch:It's there somewhere.
DF:Right, it can't be nowhere. So from an audit perspective, we go back to the service provider with the client and say, what happened? And most of the time they'll say, well, we liquidated on December 31st, the assets. So it comes off of the books of the plan, so to speak, and the certification report, however, it's sitting in our general assets waiting for that check wire to go to the new service provider. So we do have it.
Ch:It's there somewhere.
DF:It's there, but it's all about the audit documentation when we receive it, and as the certification shows zero, we know that that's not accurate. The money has to be somewhere. So it takes a lot of back and forth to get that ironed out. So that's definitely something, if you can avoid a 12/31 transfer, I would highly recommend it. And who really wants to be doing that on New Year's Eve anyway?
Ch:Yeah, not me, that's for sure.
DF:So what we would suggest for a cleaner cutoff, and maybe use the quarterly end dates, your 3/31, your 6/30, your 9/30, that makes it clearer and cleaner, and that way we know that the assets are still there somewhere.
Ch:Absolutely. No, I think that's important part to bring up, and especially on, I mean, from a record keeping perspective, that 1/1 date, that end of year date is super popular for whether it's plan transitions, M&A transactions, whatever it is. Not that we actively push clients to avoid that data if they're making a change, but just knowing that the capacity is probably going to be less for that record keeper somewhere else at a different time in the year is just typically going to be the case.
DF:Absolutely.

We appreciate you tuning into this episode. In our next and final episode, we'll switch gears and look at how M&A affects the benefit plan participants. We hope you'll join us for that segment.

^{Transcribed by Rev.com}