How to Protect Your 401(k) When Your Firm Is Involved in a Merger
Corporate mergers and acquisitions don’t just affect our jobs--they can shake up our 401(k) plans too.
Just ask Darlene Haney.
For 29 years, the Simi Valley resident worked for Pacific Bell, first as a telephone operator and later as a communications technician. During much of her career, she purchased company stock through the company-sponsored savings plans. In fact, up until recently, virtually all of her 401(k) retirement plan was invested in shares of AirTouch--the wireless communications unit PacBell’s parent company spun off in 1994.
Granted, holding just one stock is a risky bet, especially in a retirement plan. But AirTouch turned out to be a stellar performer.
Then Texas-based SBC Communications stepped in and acquired PacBell in 1997. A little more than a year after the acquisition, SBC notified PacBell employees that their 401(k) plan would be merged into SBC’s Savings and Security Plan. Workers were told that there would be a two-month “blackout” period before the merger during which they could not shift assets out of AirTouch stock. If they didn’t move out of AirTouch stock before this period, their shares in AirTouch would be sold and automatically replaced with SBC common stock.
Haney stayed put. “She was told the SBC stock would be just as good as what she had,” says Renee Jacobs, one of her attorneys.
So far, it hasn’t been. Since Haney’s plan merged into SBC’s, SBC stock has lost 32% of its value. Meanwhile, AirTouch was acquired by another company, Britain-based Vodafone, and Vodafone AirTouch shares are up nearly 80% during that same period. Haney claims that her 401(k) plan would be worth about $180,000 more if not for the switch.
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Haney is now suing SBC, claiming among other things that SBC should have allowed plan participants to hang on longer to their AirTouch shares; that the company should have warned them that SBC stock would not perform like AirTouch’s; and that the company should have notified them much sooner about the plan switch, giving workers more time to decide what to do.
It’s unclear if Haney’s suit will be successful, largely because laws dictating what companies can and can’t do with 401(k) plans after a merger or acquisition are so unclear themselves. In fact, there are virtually no rules or guidelines indicating what rights consumers have in these situations.
“There probably isn’t a lot that anybody can really point to in black letter rules or laws or regulations or even case law,” says Alan Lebowitz, deputy assistant secretary for the Pension and Welfare Benefits Administration at the Labor Department. “There’s a great deal of murkiness about all of this.”
Which means 401(k) plan participants must be that much more vigilant in protecting their interests when their company is involved in a merger. (Last year, there were more than 8,800 announced mergers involving U.S. firms.)
Here are some basic things you should know:
* If your company is acquired, expect changes to your 401(k) plan. If one company buys another, there’s very little incentive for it to keep the acquired firm’s 401(k) up and running in addition to its own, says Debra Levine, assistant vice president for retirement plans at Pioneer Investment Management in Boston. After all, it’s more expensive to run two plans than one.
* If your 401(k) plan changes, expect a “blackout” period. When one plan is folded into another, some time is required for the new 401(k) plan administrator to make sure all the old plan’s paperwork and financial information is properly documented and transferred.
During this time, companies will freeze your account. Your 401(k) assets will still be invested, but you won’t be able to change your contribution rates or investment selections during this time.
So “the market could crash 50% and I can do nothing? Is this legal?” one reader recently asked in an e-mail. The answer, unfortunately, is yes.
To make matters worse . . .
* There is no law that specifically limits how long blackout periods can last. “To my knowledge, the issue of blackout periods has never appeared on the government radar screen either at IRS or [the Department of Labor],” says Fred Reish, managing partner at Los Angeles law firm Reish & Luftman.
“People always want to know what the rules are,” says Lebowitz of the Pension and Welfare Benefits Administration. “Here, there just aren’t any.”
Generally speaking, you should expect at least a four-to-eight-week blackout period, says Vernon Kozlen, executive vice president at City National Investments in Beverly Hills. “The shortest ones I’ve seen are about three to four weeks, but I’ve also seen three-month blackout periods too.”
What’s to stop a company from imposing a one-year blackout period? In theory, nothing.
Still, companies shield themselves from basic liability for plan performance by giving participants a large selection of sensible investments to choose from--and allowing them to switch in and out of different types investments every day or week. However, “during a blackout period, participants lose the right to direct their own investments,” Reish notes. “So employers take on greater responsibilities, if not liabilities, whether they know it or not,” he says.
Nonetheless, there’s very little consumers can do during a blackout, which makes it all the more important to examine your portfolio before it happens.
At the very least, plan participants should be absolutely sure that their investments are properly diversified before the blackout. This is no time to take big risks with your retirement savings, by loading up on company stock, for instance. By making sure that your investments are properly diversified in and among different types of mutual funds, you stand a much better chance of weathering a volatile market during a blackout.
* There is no law requiring companies to give advance notice that a blackout period is about to begin. Of course, most plans will. For one thing, it fosters ill will among the rank and file and bad publicity outside the firm to pull a switch on plan participants without giving them advance warning.
However, there are no laws that say companies must notify workers, say, 30 or 60 days before the blackout begins.
In Haney’s case, she says she received notification about two weeks before SBC’s blackout period began. “With the mail, [the warning] buried on page three of the bulletin in fairly fine print, [SBC] really didn’t give people any time to properly prepare,” contends Steve Haney, Darlene Haney’s son-in-law, who also represents her in the lawsuit.
SBC officials would not comment on the specifics of the suit, citing its ongoing nature.
Plan participants can protect themselves “by keeping their eyes open and being a pest to their employee benefits department,” Lebowitz says. Instead of waiting for the blackout period notice in the mail, call your benefits department and demand to know when the period will start. And start examining your 401(k) immediately.
* Demand to know what will happen to your specific 401(k) investments after the blackout period. Some firms will create an “opt-in” system, where they will inform you of new choices in your 401(k) and ask you to decide exactly how much of your money you want in each.
Other companies create an “opt-out” system. In these situations, the company may give plan participants stock and bond funds to choose from that are similar to those in their old plan. Then, they will “map” over your allocations from the old plan to the new one--unless you object. For instance, if you invested 15% of your money in a large-growth stock fund in your old plan, your new plan may allocate 15% of your money to its large-growth stock fund option.
It’s important to know how your 401(k) will be rolled over so your money doesn’t end up in an investment that you don’t want.
Notes Kozlen of City National Investments: “Individuals, especially in these situations, should take the appropriate time to be informed about their plan benefits and options. You have to take an active interest in your plan.”
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Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.
