If your employer has been acquired by another company, you may be wondering what will happen to your 401(k) plan. Depending on the type of sale and the decisions made by the buyer and the seller, you may have different options for your retirement savings. Here are some common scenarios and what they mean for you.
Scenario 1: The buyer merges the seller’s plan with its own plan
In this case, the buyer assumes sponsorship of the seller’s 401(k) plan and combines it with its own plan. This means that you will become a participant in the buyer’s plan and your account balance will be transferred to the new plan. You will be subject to the rules, fees, investment options, and services of the new plan. You may also have to meet certain eligibility requirements, such as a waiting period or a minimum number of hours worked, before you can contribute to the new plan.
The advantages of this option are that you can keep your money in a tax-deferred account, avoid potential penalties and taxes for early withdrawal, and continue to benefit from employer matching contributions (if offered by the new plan). The disadvantages are that you may lose some features or benefits of your old plan, such as lower fees, better investment choices, or more flexibility. You may also have to deal with administrative hassles, such as filling out new forms, updating your beneficiary information, or changing your contribution rate.
Scenario 2: The buyer terminates the seller’s plan
In this case, the buyer decides to end the seller’s 401(k) plan and distribute the assets to the participants. This means that you will receive a lump-sum payment of your account balance, either as a direct rollover to another retirement account or as a check payable to you. You will no longer be a participant in the seller’s plan and you will have to find another way to save for retirement.
The advantages of this option are that you can have more control over your money and choose where to invest it, such as in an IRA, a new employer’s plan, or a taxable account. You can also avoid potential fees, risks, or changes associated with the new plan. The disadvantages are that you may have to pay taxes and penalties if you do not roll over your money to another tax-deferred account within 60 days. You may also lose the opportunity to receive employer matching contributions (if offered by the new plan) or to benefit from the power of compound interest.
Scenario 3: The buyer maintains the seller’s plan
In this case, the buyer decides to keep the seller’s 401(k) plan as a separate entity and does not merge it with its own plan. This means that you will remain a participant in the seller’s plan and your account balance will stay in the same plan. You will be subject to the rules, fees, investment options, and services of the old plan. You may or may not be able to make new contributions to the old plan, depending on the terms of the sale and the buyer’s policy.
The advantages of this option are that you can preserve the features and benefits of your old plan, such as lower fees, better investment choices, or more flexibility. You can also avoid potential taxes and penalties for early withdrawal. The disadvantages are that you may have to deal with two different plans, one from your old employer and one from your new employer, which can be confusing and inconvenient. You may also miss out on employer matching contributions (if offered by the new plan) or on better investment opportunities in the new plan.
Scenario 4: The buyer freezes the seller’s plan
In this case, the buyer decides to stop accepting new contributions to the seller’s 401(k) plan but does not terminate it or merge it with its own plan. This means that you will remain a participant in the seller’s plan and your account balance will stay in the same plan, but you will not be able to make any more contributions to the old plan. You will be subject to the rules, fees, investment options, and services of the old plan. You may or may not be able to participate in the new plan, depending on the terms of the sale and the buyer’s policy.
The advantages of this option are similar to scenario 3, except that you will not be able to increase your savings in the old plan. The disadvantages are also similar to scenario 3, except that you may have less money to invest in the new plan.
How to Choose the Best Option for You
The best option for you depends on your personal situation, preferences, and goals. Here are some factors to consider when making your decision:
- The type of sale and the options available to you
- The fees, expenses, and performance of the old and new plans
- The investment options and diversification of the old and new plans
- The services, features, and flexibility of the old and new plans
- The tax implications and penalties of each option
- The employer matching contributions (if any) of the old and new plans
- Your current and future income and tax bracket
- Your retirement age and expected withdrawal rate
- Your risk tolerance and investment horizon
- Your other sources of retirement income and savings
To help you compare the different options, you can use the following table as a guide:
| Option | Pros | Cons |
|---|---|---|
| Merge | Keep money in tax-deferred account, avoid penalties and taxes, continue employer match | Lose features or benefits of old plan, deal with administrative hassles, accept new plan rules and fees |
| Terminate | Have more control over money, choose where to invest, avoid fees, risks, or changes of new plan | Pay taxes and penalties if not rollover, lose employer match, lose compound interest |
| Maintain | Preserve features and benefits of old plan, avoid taxes and penalties, keep money in tax-deferred account | Deal with two different plans, miss out on employer match or better investment opportunities in new plan |
| Freeze | Preserve features and benefits of old plan, avoid taxes and penalties, keep money in tax-deferred account | Stop making new contributions to old plan, deal with two different plans, miss out on employer match or better investment opportunities in new plan |
Example: Alice’s Story
Alice works for Company A, which has been acquired by Company B. She has a 401(k) plan with Company A, with a balance of $50,000. She earns $60,000 a year and contributes 10% of her salary to the plan, with a 50% employer match. She plans to retire at age 65 and expects to withdraw 4% of her balance each year. She is 40 years old and has a moderate risk tolerance.
Company B offers Alice four options for her 401(k) plan: merge, terminate, maintain, or freeze. She decides to compare the different options using the table above and the following assumptions:
- The old plan has an annual fee of 0.5% and an average annual return of 7%
- The new plan has an annual fee of 1% and an average annual return of 8%
- The IRA has an annual fee of 0.25% and an average annual return of 7.5%
- The taxable account has an annual fee of 0.1% and an average annual return of 6.5%
- The tax rate for rollover is 20% and the penalty is 10%
- The tax rate for withdrawal is 15%
- The inflation rate is 2%
Here are the results of her analysis:
| Option | Balance at age 65 | Annual income at age 65 | Total income after 25 years |
|---|---|---|---|
| Merge | $472,892 | $18,916 | $473,898 |
| Terminate | $458,400 | $18,336 | $458,400 |
| Maintain | $445,850 | $17,834 | $445,850 |
| Freeze | $431,303 | $17,252 | $431,303 |
Based on these numbers, Alice decides to merge her old plan with the new plan, as it gives her the highest balance and income in retirement. She also likes the fact that she can keep her money in a tax-deferred account, avoid penalties and taxes, and continue to receive employer matching contributions. She is willing to accept the higher fees, the different rules, and the administrative hassles of the new plan, as she believes that the higher returns and the simplicity of having one plan outweigh the disadvantages.
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