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Mind your 401(k) in M&A
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October 26, 2000: 8:33 a.m. ET
When your company is bought out, your options are likely to change
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - Another day, another merger. Except this time it's your company in the headlines. How you do your job may or may not be affected. But your benefits very well may, particularly your 401(k). And it pays to keep abreast of the changes.
Otherwise, you may find yourself paying unexpected fees, investing in funds you don't want, wondering what happened to your company stock or being prevented from taking a withdrawal or loan when you planned to.
Bigger plans may mean more choice
There's no one formula for how 401(k)s are handled in a merger. But more and more, merging companies are merging their 401(k)s into one, said Mary Ann Arlt, a vice president and consulting attorney for ASA, an employee benefits consulting firm. And often that means one plan is absorbed into another.
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 WHAT TO EXPECT WHEN YOUR PLAN IS MERGED
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There will be a "quiet" period when you cannot make withdrawals or loans.
Investment options may be "mapped" into the new plan.
You may have to re-enroll in the new plan.
You may have to sell company stock from your old plan.
Plan loans often can be transferred to the new plan.
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That's not necessarily a bad deal for employees. When plans merge, the asset base grows significantly, giving the combined company more bargaining power with plan providers to offer greater investment choice at lower cost.
And rest assured, no matter what the provisions of the new plan, all of the money you contributed to your old 401(k), all of the employer matches that have vested in your account and the earnings that have accrued, cannot be taken from you, said David Wray, president of the 401(k)/Profit Sharing Council of America.
But certain decisions made by the investment committee and company management will affect your money.
Mapping new terrain
For instance, when your account is transferred from one plan to another, your investment choices are "mapped," meaning if you are invested in an aggressive growth fund and a mid-cap value fund, the investment committee will designate which funds under the new plan most closely match your old choices.
"It's a fiduciary decision," Arlt said.
Sometimes, those mapping decisions may not be exact. "We've had situations where it's not a direct match," said Tom Rossi, a defined-contribution-plan consultant with human resources research firm Watson Wyatt Worldwide.
In some cases you may be given the option to review this mapping before the transfer and decide if you would rather put your money into other funds in the plan at the time of rollover. If you do nothing, your money will automatically be put into the funds the investment committee selects.
"That's why you have to stay on top of these things," Arlt said.
Of course, once ensconced in the new plan, you may make further investment changes as you see fit.
One choice you are not likely to have is the option of rolling over money from your old 401(k) into an IRA. That usually requires "separation of service" through death, retirement or the securing of a new job. Just because your company or division is being merged does not necessarily constitute separation of service.
Mind the gap
Keep in mind, no merger takes place overnight. That means that even after your company and its new bedfellow join forces, your old plan may still be in effect for up to two years, although one year is more common, Rossi said.
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QUESTIONS TO ASK ABOUT YOUR 401(K) IN A MERGER
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Can I choose my investments in the new plan before my money is transferred?
Am I eligible to participate in the new plan?
What is the new matching formula?
What is the plan's vesting schedule?
Will my old plan be terminated and if so, when?
What will happen to any outstanding loans from the old plan?
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While you may still contribute to your old account during this interim period, be sure to check when the plan will be terminated officially and know whether the funds you wish to invest in before that time impose any early withdrawal fees, Arlt said.
In other words, if you know your money will be transferred into the new plan in 60 days and the fund you want to invest in imposes a penalty for withdrawals made within the first 90 days, you would do better to forego the investment in that particular fund.
"They don't waive the fees," Arlt said.
You should also be aware of the "quiet" or "blackout" period during which the plan transfer takes place. Your money probably won't be out of the market for more than 48 hours at most, but you may not be able to withdraw from or make loans on that pool of money for a period of up to six to eight weeks, Arlt said.
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MARK DOWN THE "QUIET PERIOD" ON YOUR CALENDAR
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Money from your old 401(k) probably won't be out of the market for more than 48 hours at most when it is being transferred to the new plan, but you may not be able to withdraw from or make loans on that money for a period of up to six to eight weeks.
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That doesn't necessarily mean you can't put money into the new plan during that time or carry out withdrawal or loan activities on that new pool of money. But that will depend on whether you need to re-enroll and whether you will be subject to different eligibility and vesting schedules under the new plan.
New plan, new rules
Often, if you are eligible to participate in the 401(k) at your old company, you will be entitled to do so at the newly merged employer. But you may need to sign up again for the privilege before you begin contributing under the new plan.
In some cases, however, you may need to sit on the sidelines for awhile until you become eligible again because prior service is not recognized under the new plan.
Or, while you may be eligible, the vesting period – the time you must work at a company before you're allowed to walk away with employer matches – may be longer. This new vesting schedule would only apply to matches going forward under the new plan, not to those that have already vested under your old plan.
Keep in mind, too, the matching formula itself also might be altered, for better or worse.
Whether the changes compare favorably to your old plan or not, "There's not much you can do," Arlt said, except know what your options are and make your plans accordingly.
Of loans and stock
That advice also applies to any outstanding loans you may have in your old 401(k).
Normally when a plan terminates, all outstanding loans become due immediately. But often, Rossi said, where there is a trust-to-trust transfer, there is a loan-transfer provision as well, meaning if you continue to work at the merged company, you can keep paying off the loan under the new plan.
Things get more complicated when a division of a company is bought out and the old plan continues to exist but the division employees either must shift their participation to the new plan or choose which plan they want. In that case, if you have an outstanding loan, ask your benefits department what options you have.
If you own any stock from the company of the acquired division, you may be forced to sell it, since the acquiring company may not wish to have that investment in its plan.
Sometimes the stock is sold around the time of the plan-asset transfer and rolled into your new account as cash, Rossi said. But in some instances the new employer will let you hold onto the stock for a certain period, say 18 months, during which time you get to decide when to sell. If you don't do so within that "sunset" period, it will be sold for you, Arlt said.
Take some comfort in trends
You may not be a fan of your company's merger or its potential near-term consequences – the corporate culture wars, power plays and confusion about who's doing what for whom.
But there may be at least one silver lining. Unless you work for a large company that sells your division to a smaller firm with a less generous retirement plan, the competitive marketplace is on your side when it comes to large 401(k)s.
"All companies are having trouble keeping employees," Arlt said, noting that 401(k)s are one good retention tool in the war for talent. So the trend overall is toward shorter eligibility and vesting periods, greater investment choice and more attractive matching formulas. The bigger the company, usually, the more bargaining power for better benefits.
But it's hard to take full advantage of your benefits, especially when they're in transition, if you don't know what the new rules and requirements are.
"Employers should be providing timely communication on these things," Arlt said. "Be sure to read them."
If they don't, Wray said, "You should be persistent in asking questions until you're fully satisfied you understand what's happening." 
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