Nothing sets companies’ gears in motion quite like a merger or acquisition. Firms engaged in M&A must align myriad moving parts, from operational issues to regulatory red tape. The demands of this process may push defined contribution plans to the back burner. “In some M&A deals, the DC plan transition is an afterthought,” says Nate Miles, head of U.S. investment strategy at State Street Global Advisors. “It shouldn’t be. Plan sponsors can use these transitions as opportunities to build a better plan.”

SSGA suggests the following guidelines to make the most of these opportunities to reimagine your DC plan.

Step 1: Establish goals.

Start by asking the most important question: What are your key goals for the transition? The goals will vary from plan to plan, and will dictate changes to the plan. For example, a sponsor that wants to increase participation or move participants to more age-appropriate investments might take the opportunity to conduct a re-enrollment, while another that wants to boost savings rates might restructure the employer match.

Nate Miles, head of U.S. investment strategy, State Street Global Advisors
Nate Miles, head of U.S. investment strategy, State Street Global Advisors

The process of reviewing existing plans with an eye toward building a new and improved plan presents a huge opportunity for plan sponsors, says Miles. “This is a chance to effect change,” he says. “It’s a perfect time to look at what you’ve already got and also to look ahead to see what you want to accomplish.”

Fred Greene, chairman of the retirement and insurance committee of the United Airlines master executive council of the Air Line Pilots Association International, helped guide the DC plan transition during the 2010 merger between United Airlines and Continental Airlines. He says the opportunity to transform the companies’ existing plans into one improved plan was too good to pass up. “We wanted to look at how we’d structure the plan if we were starting from scratch,” he says.

Start by considering the design of the legacy plans, including participation rates, auto-enrollment, contribution rates and matching formulas and asset allocation.

Participation rates
Compare the existing plans’ participation rates to average rates for similar-sized plans or industry benchmarks. If there are gaps between plans, try to identify the reasons. For example, one company may offer a defined benefit plan that skews DC participation rates. Consider what you can do to improve your new plan’s participation rates.

Auto-enrollment
If one plan doesn’t use auto-enrollment, plan sponsors may want to consider re-enrollment for some or all employees. A re-enrollment can boost participation rates by moving more employees into a plan, and also can be structured to funnel participants into age-appropriate investments. Consider a scenario where fund styles offered in existing plans may not be offered in the new plan. In that case, plan sponsors can receive safe harbor protection by remapping participants in those funds into target date funds most suitable for their ages.

Contribution rates and matching formulas
Building a new plan offers an opportunity to boost participants’ overall savings rates, whether by stretching the matching formula or ramping up default deferral rates. Jill Ayuso, director of benefits for North America for Technicolor, and her team have overhauled the company’s DC plan in recent months following a handful of acquisitions. One key move: increasing the company match to be more competitive. “One of our acquisitions in the technology sector helped us realize we needed to increase our company match to be better positioned to compete for talent with companies like Apple and Google,” she says.

Asset allocation
Does one plan have an outsized chunk of assets — and participants — locked in a stable value fund? “If so, the plan sponsor may want to consider remapping those participants into the plan’s default fund,” says Miles. Once the plan’s design elements have been reviewed, look closely at the investment options, from the top tier of offerings down to the underlying asset classes and single investment mandates. “Attaining as much detail as possible at this stage regarding the overall conversion, the components and the re-enrollment process is key,” says Jeff Yusah, head of the DC transition management team at State Street Global Markets. “You really need to understand what the plans are trying to do, and how they’re doing that.”

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“It’s a perfect time to look at what you’ve already got and also to look ahead to see what you want to accomplish.”

For instance, one goal should be to understand how the merger of multiple plans’ assets may cause an asset class shift as the plans become one, says Yusah, who regularly helps guide companies and plan sponsors through these transitions. The transition management team oversees the planning and coordination of investment portfolio restructuring for plan sponsors and other clients, bringing dedicated resources and a specialized platform to bear on this sensitive process.

Yusah first learns the projected balance in each of the asset class options in the new plan and compares those results with the legacy plans. “For example, I want to know whether the new plan will be heavier or lighter in fixed income than the legacy plans,” he says. “I want to go through every asset class and ask questions like, what’s the retention level? What’s the difference in active risk between the legacy and target fixed income portfolios? This process will help create a plan to effectively transition the assets.”

Greene and his colleagues decided to shake up their plan’s investment structure. They added a new tier of passive investments to shield participants from the cost of buying passive investments through a brokerage window, and created a new target-date fund that had a more balanced mix of assets than the TDFs in the legacy plans.

SSGA’s Nate Miles says a DC plan transition also can help plan sponsors lock in cost savings: “If your plan is growing in size, you may benefit from economies of scale that will lower pricing,” he says. “For example, you might choose to move all of your index assets to one manager, which may give you more consistency and a better pricing structure.”

Step 2: Designate a point person.

With a challenge as complicated as steering a DC plan through a merger, a good project manager is worth his or her weight in gold. “These transitions can be complicated, and it’s important to have a point person paying attention to each and every detail,” says Barbara Sims, HR M&A manager at Tasman Consulting, which specializes in human resources transitions during mergers and acquisitions.

Who should that person be? In an acquisition, this responsibility typically falls to the acquiring company. In a merger, the decision is likely to be more complicated; it may not be clear whether the companies should work through this process together, or whether one will take the lead. Regardless of which company’s employee takes on this responsibility, he or she will need fluency in several disciplines, from benefits and communications to investment design and regulatory matters.

[Image: Bloomberg]
[Image: Bloomberg]

That person also should be a top-notch communicator and project manager, says Technicolor’s Jill Ayuso. For instance, one of her team members followed up with others who were not invited to important meetings. That way, the individuals were up to speed before the next group conversation, which made meetings more efficient. “Our process was made easier because everyone communicated really well,” she says.

Of course, not every company can free up a key staffer to manage the transition. If internal resources aren’t available, consider hiring an outside consultant or transition manager.

Outside consultants specialize in helping companies and plan sponsors — both large and small — manage the transition of their DC plans during a merger or acquisition.

Transition managers’ at large financial institutions can use their companies’ contacts and resources to work on behalf of their clients.

A third party may be the best solution in a merger of equals, because the consultant or outside transition manager can offer a unique and unbiased perspective on the DC transition process.

Step 3: Create a timeline.

The amount of time until the merger or acquisition closes will help inform the scope of the DC plan transition. For instance, a compressed time frame may mean plan sponsors need to create a multistep strategy that refreshes the plan in stages over time.

Greene says the plan overhaul at United didn’t start until more than two years after the merger was finalized, when a new collective bargaining agreement was hammered into place to merge the pilots from both airlines. “Once the CBA was finalized, we kicked off the process of combining the plans,” he says.

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“One of the mistakes we see plan sponsors making in these situations is waiting until the last minute to communicate with participants.”

Work backward from the date the M&A deal closes to map out the milestones that need to be reached. Creating this timeline early in the process often will help plan sponsors and other stakeholders see what parts of the transition process might take the most time.

For example, recordkeepers may need several months to set up funds on the new plan’s platform, and a change in investment managers may require notifying legacy managers well in advance so they’ll have time to liquidate and transfer assets.

Step 4: Communicate with participants.

Employees of each company may have to handle a lot of change during a merger or acquisition. A well-planned DC communications strategy can help minimize participants’ worries and inform their expectations about their plan’s future. “One of the mistakes we see plan sponsors making in these situations is waiting until the last minute to communicate with participants,” says Megan Yost, head of DC participant engagement at SSGA.

Yost offers the following advice for communicating effectively with participants about the transition:

  • Don’t wait. There’s no time like the present to start reaching out to participants to inform them of changes. Communicating early can help reduce participant anxiety about the potential changes to the plan, and can send employees a strong signal from management about the benefits offered by the new combined company.
  • Mix your media. One communication platform — say, email — may not be enough to get participants’ attention. Try reaching them in several ways, including emails, direct mail and messages through the corporate intranet.
  • Keep it positive. “There’s a real opportunity not only to communicate how the plan is changing, but also to explain the value of the benefit you’re providing,” says Yost.
  • Make it easy. If communications ask participants to take action, make it easy for them to do so. For instance, a plan sponsor might include email links that take readers directly to a customized signup page for the new plan, or offer in-person meetings where participants can sign all necessary documents at once. “Whatever action you’re asking them to take, make it as easy as possible and they’ll be more likely to follow through,” says Yost.

The dawn of a new plan

The DC transition process can be complex, with a seemingly endless checklist of details to tackle. We recommend that plan sponsors not take the path of least resistance. A merger or acquisition is the start of a new era for the combined companies. How you manage the benefits for employees can help set the tone for the culture in the new firm. Make the most of this occasion by charting a new course for the company’s DC plan — and make sure all of the plan’s participants are starting out on the right foot.

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