A Streamlined Retirement Solution for Spin-Off Organizations

A Streamlined Retirement Solution for Spin-Off Organizations
September 13, 2024 5 mins

A Streamlined Retirement Solution for Spin-Off Organizations

A Streamlined Retirement Solution for Spin-Off Organizations

Pooled Employer Plans (PEPs) can offer a streamlined solution to the retirement planning challenges inherent in spin-off and M&A events.

Key Takeaways
  1. Spin-offs and M&A activities remain strong, with the Bloomberg Spin-Off Index rising by 38% as of June 2024. PEPs are also expected to become more prevalent by 2030.
  2. Pooled Employer Plans (PEPs) can help growing organizations reduce compliance and administrative burdens.
  3. Economies of scale can make PEPs cost-effective, enabling smaller organizations to access high-quality retirement plans. PEPs also help manage fiduciary, compliance, and litigation risks.

Organizations undergoing mergers, acquisitions, or spin-offs aim to increase shareholder value through strategic restructuring. These change of ownership events bring numerous and regulatory challenges, including the management of retirement plans. Pooled Employer Plans (PEPs) offer a streamlined solution to these challenges, providing cost-efficiency, reduced fiduciary risks, and enhanced employee retirement outcomes.

The Current Landscape of M&A and Spin-offs

The current market trends underscore the strategic value of spin-offs. As of June 2024, the Bloomberg Spin-Off Index (BNSPIN) has risen by 38%, significantly outperforming the S&P 500, which has increased by 12% during the same period. Although the number of spin-offs has slightly declined from the record highs of 2021 and 2022, the upward trend remains strong, with 2023 witnessing 211 deals, the third highest in recent years. Similarly, M&A activity, which peaked in 2021-2022, is gradually returning to pre-pandemic levels.1

Challenges of Retirement Planning in M&A and Spin-off Scenarios

Organizations involved in spin-offs, M&A, or other business combinations face significant hurdles related to retirement planning. Spin-offs, for example, must set up new retirement plans and deal with regulatory compliance and administrative complexities. This can be challenging for newly independent organizations without dedicated HR and retirement staff.

Mergers and acquisitions present their own set of challenges, such as integrating and aligning disparate retirement plans. This can strain program management teams and constrain the administrative cost savings often promised in merger theses. This is where PEPs come into play.

PEPs provide a solution by offering a ready-made yet customizable retirement plan that reduces the need to hire and train new staff and allows organizations to focus on their primary business activities.

Understanding Pooled Employer Plans (PEPs)

PEPs were established under the SECURE Act to make retirement plans more accessible and manageable for U. S. employers. They allow unrelated organizations to join a single retirement plan managed by a Pooled Plan Provider (PPP). This arrangement significantly reduces individual employer responsibilities, as PPPs handle fiduciary duties, compliance, and administration, ensuring regulatory adherence and mitigating risks for participating employers.

How Can Growing Organizations Use PEPs?

PEPs offer numerous advantages for organizations of all sizes and situations. They can provide a comprehensive solution outsourced to experts, including plan management, monitoring, and compliance. This is especially beneficial during mergers, acquisitions, and spin-offs, where maintaining focus on core business activities is crucial.

Economies of scale make PEPs cost-effective, enabling smaller organizations to access high-quality retirement plans and investment options typically reserved for larger companies. Additionally, PEPs help manage increasing fiduciary, compliance, and litigation risks associated with traditional 401(k) and 403(b) plans.

Navigating the Transition to a PEP

Transitioning to a PEP involves several key steps. Organizations should research the market and request information from PPPs, including cost structures, plan design flexibility, and participating vendors. In this transition, for example, the organization’s responsibility is to evaluate the investment management capabilities of the PPP or the delegated 3(38) fiduciary. A robust PEP should offer diversified investment options that cater to various retirement planning needs. Independent third-party evaluators can provide valuable insights, comparing different PPPs and their offerings to ensure a thorough evaluation of fees and services.

Conclusion

PEPs offer a streamlined approach to managing employee retirement plans for organizations undergoing mergers, acquisitions, or spin-offs. They provide cost efficiency, simplified administration, reduced risk, and enhanced employee retirement outcomes. As of August 2024, Aon has over 90 employers providing 401(k) and 403(b) benefits to more than 70,000 workers through PEPs. These employers speak highly of their experience. One Total Rewards and HRIS Leader remarked, "We cannot speak highly enough of the Aon PEP team! In addition to their stellar customer service, their product knowledge and attentiveness to compliance are outstanding. The Aon PEP team makes it easier for us to effectively manage our plan and feel confident that we are providing a compliant plan to our team members."

Market watchers expect PEPs to become dominant in the coming years. By 2030, more than half of U.S. employers are likely to merge their traditional 401(k)s and 403(b)s into PEPs.

Contact Aon today to learn more about how a PEP can help your organization achieve the full potential of your merger, acquisition, or spin-off.

Real-World Applications

Consider the example of a fast-growing mid-sized company with around 900 participants in its 401(k) plan. This company struggled with compliance and administrative burdens due to a lack of dedicated retirement plan staff. By adopting a PEP, they outsourced these responsibilities, allowing the company to focus on its core activities while ensuring robust retirement benefits for employees.

In another case, a Fortune 500 company spun off a unit that needed to establish a new retirement plan. Instead of setting up a standalone program, they chose a PEP, which provided a comprehensive solution with all the necessary components. This approach allowed the new management team to concentrate on business operations while benefiting from customized retirement plan provisions and improved employee experience.

1 https://www.forbes.com/sites/joecornell/2024/06/03/us-spin-offs-beat-sp-500-up-34-ytd/

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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