Understanding the Impact of Mergers and Acquisitions on Employee’s Retirement Readiness

 If you turn on the television or open any major newspaper, you’re likely to find a story where one organization has just acquired another (or is knee deep in the process). According to a recent Dealogic report, total merger and acquisition activity volume to date in 2014 has totaled $1.65 trillion, which is at its highest level since 2007.

Much of the time, these acquisitions happen quietly with little attention in the media, while others, such as the recent mega-merger between American Airlines and US Airways, received a great deal of coverage (more importantly, what happens to my AAdvantage status?) . So why have these acquisitions occurred so frequently and why are they receiving this much attention?

Opportunity! Acquisitions can happen for any number of different reasons but many times an acquiring organization believes they may fill a gap by acquiring another organization which may lead to increased performance and improved earnings results. Other times, companies may merge to reduce costs where similar business lines exist and economies of scale can be generated.

There’s always a great amount of research and preparation that goes into preparing for an acquisition. While there are many issues that must be considered at a corporate level (financial, personnel), the impact of a merger on an organization can also create uncertainties for employees that are involved in the acquisition.

More specifically, few organizations consider upfront what impact the merger will have on their employee benefit programs, including retirement plans. An even fewer number of these employers consider what impact the acquisition will have on the overall retirement readiness of their employees.

Often times, when retirement plans are merged, there can be significant differences in benefit philosophies which lead to differences in benefits for those employees at retirement age, While one company may be attempting to replace 100% of eligible employee’s pre-retirement income, another may only be attempting to replace 50%.

As an organization that feels responsible for their employees retirement readiness, how should you address these differences and help ensure all employees are on track for a comfortable retirement? You can start by addressing the following-

  1. Determine what level of income your organization would like to replace for employees at retirement, taking into consideration the employee’s age, years of service and overall contributions to your company.
  2. Measure the retirement readiness of your employees at both a plan and individual level to determine where employees currently stand. There may be significant differences in the replacement ratios of your employees which need to be addressed.
  3. Finally, determine what changes may be necessary to help reach the retirement objectives you’ve set for your employees. If employees are falling short of these goals, there are many ways to help get employees back on track which may include slight plan design changes to encourage employees to save for their own retirement by rewarding them for increasing contributions to the plan.

Have you recently gone through an acquisition? If so, what changes have you implemented to make sure that all employees are well educated and prepared? What will you do differently next time?

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The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.
 
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