How do Private Equity Buyouts Affect Employee Pension Plans? (2024)

FAQs

How do Private Equity Buyouts Affect Employee Pension Plans? ›

Using data from the Form 5500 filings, I analyze the impact of private equity (PE) buyouts on the defined benefit (DB) plans of target firms. I find that following a buyout, DB plans are more likely to be frozen or terminated, and defined contribution (DC) plans are not likely to provide sufficient substitutes.

In the event of a merger there are three primary outcomes for your retirement plan: Your company plan is merged into the new company plan (most common) Both company plans will be maintained separately (second most common) Your plan may be terminated (least likely)

Key Takeaways: Private equity acquisitions can lead to significant changes in the workplace for employees. Immediate effects may include leadership and management changes, along with potential job security concerns. Long-term implications can involve cultural shifts and alterations in compensation and benefits.

Once a company is acquired by a private equity firm, several immediate changes are typically implemented to drive transformation and set the stage for future growth. These changes encompass management restructuring and financial restructuring.

Increasingly, as a way of saving money, companies are offering their current and former employees an option known as a “buyout.” This means they'll pay you a lump sum up front in exchange for any other payments.

Ownership of the company and the associated retirement plan typically stays with the seller. The choice for maintaining or terminating the plan rests with the seller. If the seller decides to terminate the plan, they would be responsible for distributing assets and filing the final Form 5500.

But, if the company is a sale for stock or membership benefits, the 401(k) plan can continue unless the entity buying the company wants it to be terminated. For plans that include matching or profit sharing that aren't fully vested, those accounts will be made fully vested if the plan is terminated.

The private equity industry has touted its contributions to the US economy by employing millions of workers. However, since private equity firms acquire companies with existing workers, they often do not create new jobs. Studies show that private equity takeovers typically result in job losses at companies they buy.

What happens to existing employees' jobs after an acquisition? An employee's future is entirely dependent on the existing organization. Some new employers keep current staff, while some replace current staff with their own team. The truth is, employees can't be sure about what is going to happen to their jobs.

The severance pay offered is typically one to two weeks for every year worked, but it can be more. If the job loss will create an economic hardship, discuss this with your former employer. The general practice is to try to get four weeks of severance pay for each year worked.

What are the problems with private equity? ›

Slow economic growth, labor issues, high interest rates, inflation, geopolitical tensions, potential recessionary pressures, and instability could all dampen fundraising and exit opportunities. Despite the slowdown in 2023, private equity firms remain optimistic.

Companies usually tie earning equity to tenure (a process called vesting). In most cases, you have to stay for at least a year to vest any equity (your grant may call this a “one-year cliff”). When you leave, you are only entitled to the portion of that equity that has vested as of the date of your departure.

On the “Uses side,” private equity salaries and bonuses are straightforward. These are cash payments made each month during the year (base salaries), with one lump-sum payment at the end of the year (the bonus). Management fees and deal fees tend to pay for base salaries since these fees are fixed.

Under the rule, if the monthly pension offer is 6% or more than the lump sum, it makes more sense for your clients to go with the guaranteed monthly income. But if the value is less than 6%, your clients would benefit more by getting the lump sum and making smart investments.

Take the value of your early retirement or pension buyout as a lump-sum payment which can be rolled over to an IRA. The advantage is the ability to manage this money outside the employer's plan, perhaps growing the value to a level that would provide a more significant benefit than taking your payments every month.

Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans even if you plan to roll over the taxable amount within 60 days. Note that the default rate of withholding may be too low for your tax situation.

In a stock sale, the buyer typically also acquires the seller's ben- efit plans, either intentionally or acciden- tally. If the buyer does not want to acquire the benefit plans, it needs to work with the seller so that those plans are terminated prior to the sale.

There's no transfer of your retirement contributions or service credit between retirement systems.

For many years, companies often provided workers with a pension plan, a valuable benefit that set them up with a steady source of guaranteed income during retirement. These days, fewer employers offer a pension: Only 15% of private industry workers had access to one in 2022, according to the Bureau of Labor Statistics.

What happens to employees in mergers and acquisitions will depend on the specific merger/acquisition. There are often layoffs in a merger/acquisition because there are overlapping personnel and departments. For example, a company will not need two HR departments.