Exploring Corporate Retirement Plans in M&A
Mergers and acquisitions (M&A) are complex – truly a rodeo of wrangling details – and it's easy for retirement plans to get lost in the shuffle. However, as I discussed with Corey Kupfer on the Deal Quest podcast, handling retirement plans correctly and compliantly during M&A is crucial!
Key points from our discussion include:
Types of M&A Deals: The distinction between asset sales, where the retirement plan typically stays with the seller, and stock sales, where the buyer may assume responsibility for the plan.
Common Mistakes: Failure to address retirement plan implications in due diligence, leading to compliance issues, unexpected costs, and potential employee dissatisfaction.
Importance of Communication and Planning: Proactive communication with vendors and employees about changes to retirement plans can mitigate risks and ensure a smoother transition, especially important if you’re trying to retain the workforce.
Current Trends and Legislation: Recent legislation, such as the SECURE Act 2.0, aims to expand retirement plan coverage and mandates participation for certain part-time employees, but that can mean something different for budgets and EBITDA.
Best Practices: Maintaining thorough documentation, conducting regular plan reviews, and seeking expert advice can help companies navigate the complexities of retirement plans in M&A scenarios. Missing that? Find an advisor now.
If you're involved in M&A, don't let retirement plans fall by the wayside. Proper handling is essential for compliance, employee satisfaction, and long-term success. And if you need help, we’re here for any part of the process – advance due diligence, working through the middle of the deal to help position it for success, or cleaning up the unintentional consequences (ahem, mess) on the other side!
You can listen to the episode on Spotify, Podchaser, Pandora, and pretty much any other podcast distributor, or if reading is more your thing, you can check out the transcript below!
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Corey Kupfer (00:02):
Do you want your business to grow faster? Are you open to new and out of the box ways to drive revenues and increase value? How do you imagine the most successful entrepreneurs and business leaders double, triple, or expand their businesses tenfold or more? This is a weekly podcast featuring conversations with business owners, executives, and leaders as we reveal behind the scenes details that give you, our listeners, the confidence to pursue your own deal driven growth. On the show, we discuss a huge variety of deals, everything from large complex mergers and acquisitions, capital raising joint ventures, strategic alliances, real estate, affiliate and sponsorship deals, and more, including smaller deals that you could do without significant capital. My name is Corey Kupfer and I have been supporting deal driven growth for businesses for over 35 years. As a successful entrepreneur, professional negotiator and attorney, my goal is to help you strategize, plan for, find and complete deals that will help your company grow faster.
(01:00):
Welcome to the Deal Quest podcast. Let's get started. Courtenay Shipley is the founder and Chief Planologist of Retirement Planology, a consulting and registered investment advisory firm for corporate sponsored retirement plans, with a wealth of experience in the retirement plan industry. Courtenay not only offers her clients expertise in investment analysis, plan design and employee education, but also helps them leverage their employee benefits in a way that supports their own business goals. And we'll talk about that, because one of those goals could be M&A. She also works with qualified retirement plans, developing strategies for third-party administrators, and conducted over 10,000 educational meetings. Courtenay's various designations include accredited investment fiduciary, chartered retirement plan specialist, certified plan fiduciary advisor, and certified exit planning advisor. She is also the esteemed president of the Retirement Advisors Council, and her outstanding contributions have earned her accolades such as Top Woman Advisor, NAPA Young Gun, and Financial Times Top 401k advisor. Courtenay, welcome to the podcast.
Courtenay Shipley (02:09):
Hey, thanks so much for having me!
Corey Kupfer (02:12):
So listen, I'm excited to have you on, and as regular listeners of the show know, I love the fact that we cover all aspects of all types of deals, and it's not only capitalizing in M&A, although we do a lot of that, but it's other types of deals, and even within the categories of what people think about deals, we cover aspects of them that not everybody else covers. And this is certainly going to be one of those in terms of the impact of retirement plans. So I'm excited about that. But before we get into all of that, I want to take you back to when you were a little kid growing up, maybe 10, 12 years old. What did you want to be? Because I'm guessing a certified retirement plan specialist, an entrepreneur, probably wasn't it at that time, but you tell me.
Courtenay Shipley (02:53):
Ooh, 10 or 12. No, that was definitely not on my radar. I think that if anything, I probably wanted to be a musical theater performer.
Corey Kupfer (03:05):
I love it. Did you do any theater through school or in college?
Courtenay Shipley (03:09):
Yeah, I did a fair amount of that. I did end up with a degree in music performance, so adjacent to that.
Corey Kupfer (03:17):
So it's interesting because there are a lot of lawyers who…not really, fewer that do what I do, but a surprising number of litigators, or maybe not surprising, wanted to be actors, whether it was theater or movies or whatever. And I think it's maybe why they went to litigation and they present before juries. It's very interesting. Very interesting. Alright, one other question. Looking back, what was the first deal of any type that you can remember doing? Could be something young, when you were young, or something early in your career, anything that's a deal that you remember that comes to mind
Courtenay Shipley (03:52):
The first deal that I observed in my professional career was a chain of hospitals that were buying up other hospitals. And that was fascinating because I mean, you can imagine how many moving parts go into those deals, let alone the retirement plans. Other deals though, lemme think about that.
Corey Kupfer (04:11):
That's an interesting example. I mean there were healthcare lawyers that really focused on that, but I've been involved in some deals where we've had clients in the healthcare space and we bring in healthcare experts. Yeah, I mean you want to talk about moving pieces. I mean, not only do you have all the regulatory stuff that goes on and that kind of stuff, as well. Yeah, no question. So obviously we covered the bit, your bio, but even before we get into the specific deal aspect of it, whatever, just tell us a little more on exactly what you do and who your ideal clients are in terms of what you do in your core business.
Courtenay Shipley (04:40):
Yeah, we're definitely super nerds. We're looking over corporate retirement plans. How exciting could that be, right? But it actually is pretty interesting. So any company that's sponsoring a 401k or 403b, 457, if it's got some sort of tax code like that, that's probably something we oversee. We work in the area of fiduciary responsibility, so these plans are complicated. There's a lot of oversight. So we're there to be all hands-on to help the plan sponsor figure out what they're supposed to be doing and what the best practices are and what works for their organization, but more importantly, what this plan is supposed to do for their organization. Because as you know, the employees use it, they want to retire someday. They want to have the luxury of deciding how they spend their time later in life and the employer looks at it as a benefit. So there's probably some sort of constraint around the budget, as well as how do we make sure that it serves our employees in a way that's good for recruiting as well as retention. So I would say everything that we do falls under those umbrellas, be it that it's the investment choice,s or it's how do we educate employees and help them understand the plan, to just being support for the plan sponsor.
Corey Kupfer (05:47):
Yeah, I love that. And it's interesting, I mean we get into that conversation of employee attraction and retention and incentivizing is really, I mean it's always super important, but anytime that the labor market's a little tight or whatever, it even becomes more important, right?
Courtenay Shipley
Absolutely.
Corey Kupfer
You're competing for talent and one of the things that we've talked about a number of times on this podcast is how deals can help solve business challenges. And one of those business challenges, certainly when that, we hear a lot from clients these days and my context is the ability to attract and retain is key. So sometimes we talk about things like phantom equity plans and other things, profit sharing plans and things that we do to help folks that might be non-qualified plans or obviously, but certainly the stuff that you do, it comes into that category, right?
Courtenay Shipley (06:33):
Yeah, absolutely. Yeah. And finding out who are the most important people in your business and how are you keeping them around, and whether that's through the qualified plan or what you just mentioned, the non-qualified, like a deferred compensation plan or something that gives them an ownership feel without having ownership or a profit sharing plan. Something like that are so important in keeping those people because they're the ones that are the lifeblood of the business besides the ownership. So anything to keep them around, to keep them incentivized is super important.
Corey Kupfer (07:03):
And not only on an operating level, but obviously, I mean, listen, if you're doing a deal, if you’re looking at selling your company eventually, or even raise capital, your investors and/or your buyers are going to be really…they look at th management team, they look at absolutely the executive team especially, and how dependent the business is upon you as an owner.
Courtenay Shipley (07:22):
Yeah, there was one situation where it was really interesting, the ownership was definitely very important, but it was like these mid-level managers that were two levels down that were absolutely the most important ones. There were only four of them in the business, they were extremely hard to replace and that's where you start to really get into trouble. There's a small amount and they’re super important and hiring is awful, and the job that they have is just…it's what keeps the company going. And so that was the perfect place for that non-qualified plan…always had a bonus that they were giving up if they left with a longer vesting period that was rolling. Yeah.
Corey Kupfer (08:01):
Good stuff. Alright, so listen, I mean I think people can gather already just on a general level what the impact of obviously retaining and attracting key talent can have on enterprise value of a company and deals, but you also get involved much more specifically related to retirement plans when deals are happening, but when companies are buying other companies or selling. So tell us a little bit about that aspect of your business and where your services come in because I think that a lot of folks, I mean they understand retirement plans, they understand the concept of having them be good incentives for employees and maybe they have them in their company, but I don't know that people really talk that often about what happens when you have a deal going on, in terms of the retirement plan side.
Courtenay Shipley (08:44):
No, we are so far down on the to-do list. Unfortunately in the deal they're like retirement who, what plan? Yeah. Oh, that's benefits. But yeah, it's so important. That's one of the biggest things that people can mess up is just not realizing the impact that this plan can have, especially on what happens going on in the future. So when you think of it in terms of asset sale versus stock sale and the asset sale, you got the house, but all you're buying is the furniture out of it. So that's not that big a deal because generally the retirement plan stays behind with the house, right? With the seller. So there's not a lot to be thinking about necessarily other than when the employees come over to the buyer's company, will they be eligible for benefits right away? Where are they going to be on the investing schedule?
(09:33):
Are you recognizing prior service and things like that? But on the other side, when it's a stock sale situation, I mean you've got decisions you have to make because you're buying the house and the furniture, and that means you are buying anything that is hidden behind those walls, too. And the retirement plan oftentimes does not get the attention that it deserves. And unfortunately that's just bad risk management all the way around. Do you know for sure that they've been using the right definition of compensation for matching people? Do you know for sure that they haven't screwed up the accounting with the plan and there's all kinds of stupid stuff that can really just waylay you in the future and be costly to fix? Did they accidentally not enroll a group of employees because the payroll system freaked out? So just taking some time, and I know that is not something that usually people want to do when they're in the middle of the deal.
(10:24):
They just want to get it done. But at least outsourcing it to somebody like us or an ERISA attorney who can take a look and just ask the questions about what's been happening in this plan, where are your meeting notes? What kind of advisor were you using? Was it someone who was a specialist in retirement plans versus just a regular financial advisor broker off the street? Because that's where you make sure you keep yourself covered. If you are going to take over the plan now your other option is to terminate right away before the actual date of the sale. And if that's the case, no big deal. You're terminating the plan, but it has to be done before you actually do the sale because then you lose the ability to terminate it if the buying company already sponsors a plan. And then you've got one year to figure out how to get everything in motion and lined up and the proper design features figured out because you’ve got to aggregate those plans in the future.
Corey Kupfer (11:19):
Got it. So yes. All right. So you raised a few things. I want to drill down on some of 'em maybe in reverse order. So lemme just say this for the list, as well. Obviously most people know if they're in the M&A space that most deals are done as asset deals, but there are a lot of reasons why a deal is done as a stock deal. I mean, we have one going on now with a company, with a selling company who happens to be our client on the sell side. It’s a C corp, and there's reasons why they performed as a C corp. It's rare that you form any kind of growth company as a C corp these days, but if they've been around for a while, or maybe they came about due to some sort of merger acquisition where there were net operating losses, carry forward reasons, I'm not going to get into all the deals, but there were reasons why companies are C corps, that's a situation in which you will often see a stock sale.
(12:06):
There's other situations, especially maybe with international players and things like that, that sometimes come into play. So although it's a minority of the deals, there are definitely deals that are being done as stock deals or equity deals if it's an LLC membership and their sales, whatever you want to call it. And you also certainly have that with minority investors. If somebody's investing in a minority stake and those minority investors are going to want to do their due diligence as well, even though you don't have the merger issues on a sale, you still have, if a minority investor is smart, they're going to want to know. I mean that's part of due diligence with the liabilities. So you rattle off some things that could go wrong. How often do we see those issues? How do people prevent 'em? I mean, I know, I'll be frank, it's the reason why we work with somebody on our plans, right? Because I'm an attorney, but I'm not an ERISA attorney, I don't understand this stuff, I'll be frank. So we pay a professional and we have our meetings every…on a regular basis as required and they go over it with us and we…minutes and all that kind of stuff. How often do you see these issues and why do they come up?
Courtenay Shipley (13:15):
Well, they come up pretty much because what I said before is, it's the last thing on the list or if it maybe didn't even get on the list. So they're more focused on how do we structure the deal, what's it going to look like going forward? How's the money getting transferred? All those things or the synergies between companies and the purpose behind the whole deal in the first place. How often is it? I would say it's more often than not, we've had probably a record number of mergers and acquisitions in our client base, I would say in the last two, three years, which makes sense. Covid certainly did ignite some things there. The issue that I've seen most commonly is that they've brought some companies together with common ownership where there's like an 80% or more common ownership across them, and they've completely ignored the fact that they're a controlled group for ERISA purposes, which means that all the plans have to be tested together and there's certain thresholds that they have to meet as far as criteria on the different plan design.
(14:12):
And so we have one client right now where I said, wait, hold on, back up. What did you say? You just purchased? What? Who? And so they're like, well, that's so funny. We pay the attorneys a lot of money. And they never pointed that out. And so I'm really upset because they should have told us that. And I thought, well, if they don't have an ERISA attorney on the team or it's not on somebody's radar, then it does slip through the cracks. And in this case, they've got two 401k plans and a simple IRA; now they're going to have to put those plans together someday, but for right now, they're in the one year waiting period. So they do have some time before they have to get everything straight. And that's at least nice that you have that grace period. I would say the other situation we've seen is where they did everything.
(14:53):
They just didn't consider what was going to happen. And so what I mean by that is it was totally an asset sale. So easy, breezy, right? They're going to leave that plan behind. But what happened was they didn't tell the advisor or the recordkeeper until the 11th hour and they're like, okay, we just signed these papers. Well, really it was after the 11th hour, I should say, but we signed these papers, we've sold, we need to terminate the plan. It's like, okay, well that doesn't happen overnight. That's going to take about 90 days at least to get everything set up, get the proper compliance stuff done, and then get everybody brought up to full vesting. Now you are letting everybody go. There's no more vesting schedule in that situation. And so just the amount of time that it took was very surprising because they hadn't said anything about it prior.
(15:40):
And of course there's nondisclosure agreements and things like that that may prevent that from happening. But on the flip side, the more heads up you can give your vendors that something may happen, the better off you'll be as far as timing. But what happened in that situation is that the buy-in company brought on the employees, they started 'em over, they didn't recognize any of their prior service in this case. They had some 10, 20, 30 year employees…subjected them all to the waiting period of a year before they could get in the plan and get the match and they would have a six-year vesting schedule. And so as you can imagine, no one's going to leave over the retirement plan itself. But that definitely sent a message in my book when I read that and I was like, whoa, hold on here, but phone call after phone call, I'm leaving. I'm not going to roll my money to the new company. I'm actually going to this company over here. And I think they lost about 20 to 30% of the workforce within the first six months of that acquisition just because it was clear they didn't really want those employees around, or at least that was the message that they sent.
Corey Kupfer (16:42):
So I hear you saying that, well, the retirement plan itself, if that's the only thing, it's not, but yeah, it's intuitive, right? And certainly one of the things we have talked about, that's why I guess, is that integration, the cultural integration with employee and how you retain them or whatever, and also, if they're not recognizing people's prior service and they're putting people on a wait…experienced employees, when they acquire a company, on a wait list, there's probably other things they're doing culturally along those lines to create attrition.
Courtenay Shipley (17:11):
Definitely only one in a number of things, and that was kind of the straw that broke the camel's back.
Corey Kupfer (17:15):
Yeah, it's amazing how badly companies do on that sometimes, it's like, and especially because in some of these businesses, the talent is really crucial.
Courtenay Shipley (17:24):
Yeah, it's really precious.
Corey Kupfer (17:25):
Let's take a break from the show for a minute. So I can tell you about an incredible resource my team and I have put together for you. Secrets of Deal Driven Growth: Creative ways to grow your business, even in challenging times is a powerful ebook that helps you take Deal Quest podcast episodes and apply them to your own life and business. This is the ideal tool for anyone looking for creative ways to grow as dealmakers. And you can get yours now. It's as easy as heading to coreykupfer.com/workbook and downloading your copy while you're there. You can also consider joining our dynamic deal driven community of founders, experts, small business owners and entrepreneurs. Now back for the show. Alright, so in terms of the company on the sell side, so one of the things that we do with clients from a legal point of view on other things, and again, we're not ERISA attorneys, but whether it's their contracts, whether…we know the due diligence that a buyer's going to do. So we try to do a pre-due diligence process with the clients so that the issues aren’t discovered by the buyer, right?
Courtenay Shipley (18:26):
Right. Set ‘em up for success,
Corey Kupfer (18:28):
So the buyers, whatever, we try to get ahead of it. So in terms of… if somebody's a seller and they have a deal coming, what are those things that they should be looking at to say, hey, what might we need to clean up in advance of a deal so that we don't have these problems unless…so not only after the fact, but even in discovery and due diligence of issues. And similar to what you said on the other point, I mean I doubt if the only thing that seems sloppy or whatever is the retirement plan and they get…especially if they can leave it behind to clean it up. Maybe that's not alone, but I always preach that the thing is, you want to be buttoned up in due diligence because the people who are doing the due diligence normally, not the CEO or the head of M&A or whatever, who greenlit the deal, the people they send in, the accountants, the lawyers, the HR people, the whatever, they're always looking for a reason why they should do the deal because they don't want to miss anything because their job's on the line.
(19:26):
So everything that isn't clean, and due diligence creates a risk of the deal not going through. So what would be some of the things that they should look for to get their house in order before they even get into a deal if they want to really do it right?
Courtenay Shipley (19:42):
Yeah, the requirement for retirement plans is basically that you don't want to have a file folder full of problems and then nothing that says, but generally speaking, we run this plan well, right? You want to document the ordinary and it shows 99% of the time the plan runs well, it's just this 1%, then we discovered it and we fixed it and here's how we did it. That's the type of stuff that a good person doing due diligence on the retirement plan would be looking for is credible evidence that you keep an eye on the plan. You've got regular meetings, you take meeting notes during that time or meeting minutes that talk about what you discussed and how you made the decisions that you made. So red flags would be that you haven't looked at the investments in years - oh, those are the ones that came with the plan.
(20:32):
That's not how that works. Or you don't have a third party advisor. A lot of times that's not a good recipe for success, or let's see, what else? Employees, you don't have a record of what the employees received. So there's these notices that are required to go out every year. Normally the record keeper holds onto them, but it's just a good idea to download them and have them in your own file to say, these are the ones that went out for this year. So having all of that readily available at your fingertips is super important. And if you haven't done it in the past, you've still…I mean, start today, you've probably got a year or so before things actually close. And so it's a good time to establish those good habits of showing that you've monitored the costs of the plan, that you've taken a look at the investments, that employees have been informed about the plan.
(21:21):
They understand it, they appreciate it. You look like you've done some numbers tying back to each other at the end of the year as far as compliance is concerned, and making sure that your definition of compensation that you use for the plan is a hundred percent buttoned down, tied up, everything's good to go, t's crossed, i's dotted, the whole nine yards, because that is the number one thing that would get you in trouble, is if you have really screwed up your match because you forgot that you excluded bonuses, or you included bonuses or something like that. And now there's a discrepancy in numbers.
Corey Kupfer (21:55):
And this is a more general question, but I'm just curious…more sort of less specific to the deal side, but more just what we're seeing out there, especially with people looking for talent. Is there a general sense on what people are doing in terms of the waiting periods for the eligibility periods or with regard to vesting or anything like that? Trends in that or differences that you're seeing? Anything that’s, I would say…
Courtenay Shipley (22:20):
Things are shorter these days than they have been. One year is the statutory limit for how long you can make somebody wait and we're not seeing one year being exercised as often anymore. Having said that though, every industry is different and so you may have a general sense of what the turnover is that you want to align with when they become eligible for the plan. You may want to use that as a retention strategy, as well. Oh look, in a month you get this and three months you get that sort of thing. But overall, the vesting schedules used to be something that would really keep people around, but people do not stay for vesting schedules anymore. So the longer five and six years I've seen go away, it's now down more to three years in most cases. If you do have a vesting schedule, you're not a safe harbor plan that gives everybody vested automatically. But those are the main things that I'm seeing. And of course, a vesting schedule's not a bad thing. You never hire a person thinking they're going to work there less than five years, but again, it doesn't really do much for you.
Corey Kupfer (23:24):
And you also talked about the fact that if it is a stock deal or equity deal and you don't terminate the plans in advance, that there is this integration that has to happen, without getting too technical, audit. What's involved in that? Is it the kind of thing where the seller's plans have to roll into the buyer's plan or is it that it creates something new or there are differences in terms amongst those plans? How does that integration work if you haven't terminated the prior plans?
Courtenay Shipley (23:55):
Yeah. Yes to all of that. Basically, if you're going to be taking over the old plan, the seller's plan, then there's a lot of different things you need to be considering. So as far as provisions, there are certain protected provisions usually having to do with eligibility and retirement age and things like that. So if you do maintain their plan and you want to merge it into your plan now, and so you don't have multiple plans to be keeping up with, you're going to have to look at the provisions and see how similar they are and see which ones are protected and which ones aren't, how you can amend things to where it makes sense to merge those plans. Or maybe you keep operating them separately and that's when you have to consider the compliance testing and will it pass what the IRS says is okay, and what DOL says is okay.
(24:45):
So there's just a lot of comparing and contrasting, making sure that rules are followed. It's not a bad thing, but it does take a minute, for sure. And at the end of the year, all of that stuff has to be aggregated together. And so when you get in a situation…we had one client where they were purchased by a larger entity that bought, I don't know, five or six different companies in that year at the same time. And I said, okay, well what are we doing with this retirement plan? Who do we need to send the compliance information to? And they're like, what are you talking about? And so I mean, I know that plan was not being operated correctly because they needed to aggregate all those numbers. They were out of their one year period, so they needed to be tested together. And I'm sure it would not have gone very well because the plans that we were hearing about were substantially different. So it's just important to, again, stay on top of these types of things and not just trust maybe that the buying entity knows everything that they should know about it.
Corey Kupfer (25:44):
If this is not done, who has the risk? Is this the thing where both the seller and the buyer can have risk depending upon what happens? Or is it one side or the other?
Courtenay Shipley (25:55):
I mean, at that point, it's pretty much the buyer's going to have all the risk. And especially in a stock sale, you're buying the house and the furniture and whatever's hidden behind the walls. In an asset sale, it's less common for the buyer to take over the plan or to keep the plan going, right? Yeah.
Corey Kupfer (26:12):
Yeah. I mean, sometimes I prompt questions that I know the answer to because I want to make sure the audience hears it, obviously that's the case. One of the things…although, I mean…so as a buyer, if you're buying equity, you by law default to taking all of the liabilities of the company. Now you can and will have indemnity provisions in the agreement for anything that happened prior to sale, but that doesn't mean you're not liable for it. It just means that you can go back to the seller if it's something that's, it's a prior issue, but then depending upon how you deal with structured…whether you have backend money to secure it or not or whatever, you might have to chase 'em for the money. You might have something secured again. So it brings up all the indemnity issues as well. But as to any governmental agency or as to any participant, if there was an issue or whatever, you're taking on that liability if you're doing an equity, you got it.
Courtenay Shipley:
You got it.
Corey Kupfer (27:06):
Yeah, good stuff. Okay. What else? So this is an area a lot of my guests who I have on this podcast are talking about, stuff that I do every single day and I know really well, and I know all the questions to ask. I am not an ERISA attorney, I'm not a retirement plan attorney. I know enough that when I do these deals to identify it as an issue to the client to make sure they're speaking to their retirement plan administrators and record keepers and specific counsel. But what else should I be asking you? What else should the audience know about anything that is triggered by deals in terms of these plans, if anything?
Courtenay Shipley (27:43):
I would say one of them kind of comes back to the compensation and benefits package. So there was a law firm deal…this is going back a long time. I can't remember all the particulars, but basically what it came down to is they had a really generous health insurance plan and a really generous retirement plan. And the buying firm did not have nearly as generous plans. And so it was actually perceived as a huge compensation cut because they had to come out of pocket so much more for their health insurance and some other benefits, and they were getting less of a match on their retirement side or less of a contribution from the employer. And it really started things with a pretty bad taste in folks' mouth. So think about that, and if you are the seller and you realize that this is going to happen, that this is something that's going to happen because the buyer's…they don't have as good of benefits or something along those lines, maybe try and negotiate some sort of pay raise in to cover the difference between what would be coming out of the employee's pocket or something along those lines.
(28:49):
But I would say that don't ignore the benefits for sure, because that's part of the compensation package overall. And so if they're feeling like they're just about to get a 15% pay cut, the employees will not stick around for that. That's not going to be helpful for anybody. So that's one thing to be thinking about. Going back to what we were talking about before with, how do you get your house in order prior, making sure that you know what the cost of your retirement plan is. There's a lot of times that has not been benchmarked in a few years or knowing how your plan stacks up against your competitors. That could be useful information to say, look, we got a pretty good plan and here's how we know, and this is why our benefits package, including our retirement plan, looks really good against the people that we're recruiting talent from in the area or something along those lines. That's going to be good information for your buyer, as well. And then I would say the other thing is just making sure the house is in order. So do you have all your plan documents at your fingertips? If somebody were to ask any questions about, how did you make this decision two years ago to remove this investment from your plan, you would have an answer for that and one that makes sense. So any sort of documentation that you can just dust off and get in order just makes life so much easier.
Corey Kupfer (30:06):
Yeah, I like one of the first things you said about anticipating…because say if the buyer's plan isn't as generous as the seller’s, and listen, if you're a bigger company, and it's not always the case, but it's most deals, usually the buyer's bigger than the seller. And so they're not going to go change their entire plan in most cases.
Courtenay Shipley (30:26):
No. Yeah, yeah.
Corey Kupfer (30:27):
Upgraded to what they're…they're not going to let the tail wag the dog, but I like the way you said it. They got out of the stand that that's effectively a pay cut. So maybe they can make it up some other way and have that communication. Also, one of the things I found that…I dunno if you've seen this, and again, I know you sort of see this sort of sleeve of it, but I've seen it in other situations where the messaging out to the employees is super important. It's easy for them. There's a certain number of the employees who just have the kind of mentality where they're going to be comparing each slice to the same slice on the other side. So the retirement plan is not as generous. That's a negative. Now, they might be getting a bonus to come over, they might be getting equity in the equity class or some sort of phantom or profits interest or something like that. And the buyer, which they didn't have before, but they get focused on this thing that's lesser than. And if you don't communicate it well with the entire package to show that overall they're going to be doing at least as good and hopefully better, it becomes a problem. So I see you shaking your head. So it sounds like you've seen that as well.
Courtenay Shipley (31:34):
Yeah, definitely. I would say total compensation statements are the most underrated, but so stinking important things that a company can do to say, look how much we do pay for your health insurance that you don't see. It's all invisible until you put it out there. So yeah, I mean, even just as a healthy company that you're thinking about selling in the future, you want employees who appreciate the benefits that you offer. You want them to use it, you want them to be relevant, all that stuff. And then as the transition happens, you'll absolutely have those employees and you know them. You already know them. We're going to go line by line and say, well, this isn't better. Well, this is better. Well, this isn't better. And if you think about employees as a whole in a transition, they're scared. They don't know they have the devil that they know, and now they're going to the devil they don't know.
(32:20):
And so they're looking for indications that everything's going to be okay or everything's not going to be okay. And unfortunately, most people view it through the lens of, this is change and change is bad. And so the messaging, the communication, the thinking about what's going through their minds, getting it out in the open in the town hall, yeah, you're right. You know what? The match isn't as good and I'm sorry about that, but I want you to know that we've considered X, Y, Z or whatever. But having that transparency with them, they know they're going to know it's really important, really important.
Corey Kupfer (32:55):
And if one of them is not going to know, they're going to speak to somebody who knows, and then they're going to know because especially when there's a deal going on, everybody talks.
Courtenay Shipley (33:05):
Something on the buyer side…so I think that this is also a forgotten thing about retirement plans is that if you have a situation where it's like a cash balance pension plan that's going to need to have a contribution made every year, how much is that? What's it look like going in? What are you buying? What kind of liabilities are you buying on a pension plan, also for 401k, or there's been an ongoing profit sharing contribution made every year to the 401k that the employees are going to expect or a mandatory contribution because you have a safe harbor plan, so you have to put in 3% or you have to match up to 4%, something like that. Knowing where that falls in the balance sheet, I mean, it's on there, but just keeping that in the back of your mind. It can be a large liability if you think we're about to pump all this money into this company to hire a bunch more staff. So make sure that's not something that becomes a larger expense than you meant it to be, especially with how the plan is structured.
Corey Kupfer (34:00):
Yeah, no, that's great advice. So I want to throw out a question, just…I think it may be on some people's minds, and this is something you used to hear more about in the news with big companies about this, and I know it's because the industry is evolved in terms of the type of plans that most companies have versus what they used to have. But you used to hear a lot more in the news about these underfunded pension plans, whatever. And obviously if you're a buyer, that could be a liability. You want to just give a little insight as to…if you're aware as to where those came up and why? I believe it's the case that's less of an issue as the way plans have evolved these days. But you want to talk about that a little bit?
Courtenay Shipley (34:40):
So the defined benefit plan has kind of gone the way of the dodo, and the reason is because the company had to fund it, and it's based on your pool of employees, the actuarial numbers that come back, and interest rates. So it's a giant math equation with very smart people calculating it that are paid more and know more than I do. However, what ends up happening is you get this surprise bill, and companies don't like surprise bills, at the end of the year, especially when interest rates change or there's new mandates or something like that…the defined benefit plan, because it was defining the benefit in the future to be paid with a pool of money that they're investing today, it was a lot of liability, quite frankly. And so companies just didn't want to tolerate that and would rather have a defined contribution, meaning that they are defining on the front end what they will put in, and then it's up to whatever happens with the investments for how much that person gets in the future rather than defining the outcome. And so there's been a large shift over time away from the defined benefit plans. Most of them have been frozen, many of them have been terminated towards something that's contributory, where the employee is also putting some money in, i.e., the 401k plan. So you are special if you still have a defined benefit plan…as far as employees are concerned, they're like, wow, they're really taking care of me. But how attractive that looks to a buyer, I'm not sure these days…
Corey Kupfer (36:09):
It’s better, like you said…
Courtenay Shipley (36:11):
But there are some pretty decent tax benefits to having a defined benefit plan too. So it is definitely not something to be thrown out, for sure. But certain industries and certain size companies, I think still have them. But I would say in the smalle, mid market, it’s pretty unusual to see the defined benefit plan. Now, I say that, and then there's professional practices like law firms, dental firms, what else? Medical practices where it made a lot of sense for the owners to set up those plans to tax shelter more for their own money. Anytime you go into a deal and it's a solely owned business, the owner’s taxes and the owner’s desire for what their retirement should look like in the future always plays into how the retirement plan has been structured in the past. So it is something that buyers who are buying those types of firms need to be aware of and take into consideration as well.
Corey Kupfer (37:06):
Yeah, I just want to put that out there, just because something that people have heard about and yeah, I mean that's obviously why I've been doing this for 38 years. So there was a time when this was a much bigger block because that was something that was much more common and it's not totally extinct, but certainly, yeah, and you're right, we've occasionally seen it with long…older, large companies, but even most of those have moved off of it. But yeah, so the plans we have now, that is, the odds are if you're a buyer, and especially these days, in a small and medium size, that that's not going to be a risk you're dealing with just because of the type of plans that, even if you're taking them on, exist in this day and age. But it used to be a much bigger problem. Great.
(37:46):
Anything else you're seeing, whether it's related or not, just in terms of these plans or what's happening or anything new on the horizon that people might not look forward to? I mean, I know there's often talk about changes and obviously sometimes they get political, we don't have to get into the politics of it, but I guess if there’s anything, it's always interesting because listen, it comes up for me, right? We've investigated the different types of plans and there are certain…and a lot of times, I don't know if this is a hundred percent true, but a lot of times you mentioned these professional services firms and the benefits even of a defined benefit plan potentially. A lot of times there is some correlation between the ability of an owner or owners to put away more money and the amount they need to commit to their employees. And it's sort of a tradeoff, and I guess it's one of the things that's sort of logical. The government has said, hey, if you want to get more of a benefit, we want to have a policy that has you create some opportunities for your employees. But in any case, anything that's interesting that you're seeing or anticipating?
Courtenay Shipley (38:52):
Yeah, two things come to mind. Back in the end of 2019, right before Covid, what when was that? There was a SECURE 1.0 act, that's an acronym for a long name of a bill, and then also SECURE 2.0, which came out a year and a half, two years later. And so one of the goals that they had was to make some things easier and restructure some existing IRS language and some ERISA language. But the other thing that it did…so there's 95 provisions that are related to retirement plans in there, but the other thing that it did was it was trying to expand coverage. And so a lot of states nowadays are requiring companies to have a retirement plan for their employees when they didn't necessarily have that mandate prior. And the SECURE Act 2.0 also has made it to where if you have long-term part-time employees, so you've got these part-timers who've worked for you for years, let's say two years, and they've worked 500 hours in those two years, then you have to let them in the plan.
(39:56):
You have to let them use the plan. They can just put their own money in. You don't have to match them or give them profit sharing or the normal employer contribution, but you do have to at least give them the opportunity to contribute. And I think that's great because how do people save for retirement through a work sponsored plan? I mean, they're 13 times more likely to save if they have it there than if they have to go set up an IRA on their own. So that's an important thing that employers all over need to be tracking those hours. And they're part-time workforce and part-timers are fantastic. The additions to your company, in many cases, they do a lot of work that couldn't otherwise be done, or they need the flexibility in their own lives or whatever the case may be. So I'm a big proponent of that, but it's important for employers to know that that's there. And then the other is that those mandates are in certain states already. I think it's 13 states that require you to have a retirement plan of some sort. Either the state IRA plan or start your own 401k or other type of IRA plan.
Corey Kupfer (40:54):
Great. Great. Okay. Well, this has been great. I mean, listen, as you've indicated, it's way down the priority list from…
Courtenay Shipley (41:02):
So far down.
Corey Kupfer (41:04):
But it's those kinds of things.
Courtenay Shipley (41:06):
Well, I think it goes back to establishing that you need a really good team around you when you go through these deals. Bottom line, you can't just wing it, right? You've got to bring in the right people like you to advise on these sorts of transactions, what the best way and what the most successful way to have the right outcomes is.
Corey Kupfer (41:25):
And as we sort of indicated, I mean, at a minimum, these things that you put low on the priority list can then become a scramble or a headache later. And beyond that, they could be even more so, meaning like the situation we talked about where it's just one of the indicators of things that you didn't focus on that let's say, affects employee retention and then the lack of employee retention can become a much more serious issue. So these are important. And frankly, it's why you look at…we do deals on the sell side, on the buy side, on the buy side we have clients that are serial acquirers and do this all the time. And then we have some folks who are doing their first and second deal. And it's one of the reasons why the serial acquirers get so good at this stuff because they've got teams and they got checklists and they got experience and whatever.
(42:10):
And if you go with a serial buyer, trust me, they're going to have, it may not show up on the first few items or even maybe the first page of their, but on their due diligence list, they're going to have a checkpoint to take a look at the retirement plans, right? Because they've been doing 'em so many times, and maybe before they became serial acquirers, they got burned on it once or twice. So yeah, good stuff. It's been great having you on. So two final things. One, let people know where they can find out more about you and your company and your services.
Courtenay Shipley (42:39):
You can follow me on LinkedIn at www.linkedin.com/in/cshipley, or you can go to our website, which is retirementplanology.com/learnmore, and you can book a call to have a quick chat about your retirement plan. There's also a bunch of other resources on that website as well to help guide you in the right direction.
Corey Kupfer (42:57):
And that's going to be in the show notes as well, I mean, for you to take it down so you can definitely check it out. So Courtenay, my final question on the podcast is always about my highest value in life, which is freedom. And for me, that means everything from freedom, from all people around the world, from oppression to why I've been an entrepreneur for decades now and haven't had a boss. What does freedom mean to you and how does it impact your life and business?
Courtenay Shipley (43:19):
Oh, my gosh. As somebody who's married to someone in the Special Forces - de oppresso liber, “to liberate the oppressed” - I would say it has a huge impact on our family. For me, freedom of choice, that's what that means. The ability to, down the line, have the luxury of deciding how I spend my time and being able to choose how I do things and spend my time today. That's what it's about for me.
Corey Kupfer (43:42):
I love it. And listen, it is not lost on me. The fact that helping people with their retirement also provides them with that choice and that freedom…
Courtenay Shipley:
Absolutely.
Corey Kupfer:
…that they wouldn't otherwise have for those…too many people who don't have, are not adequately covered in retirement. Courtenay, thanks for being such a great guest on the Deal Quest podcast.
Courtenay Shipley (44:01):
Hey, thanks so much for having me. I enjoyed it.
Corey Kupfer (44:04):
Excellent. Thank you for joining me on this episode of Deal Quest, where we help you understand how deal driven growth can be your ticket to freedom. I want to invite you to a unique way to tap into the wisdom and experience of the Deal Quest community. The Deal Den is a place where entrepreneurs, high level executives and business leaders come together, support each other's growth and success, and share what's working best, as well as what challenges we are facing right now. You will get input not only from me, but from all our members. We collaborate and serve each other. To join us, go to coreykupfer.com/dealden. I'll see you there. I'm Cory Kupfer. Until next week, wishing you the freedom and financial prosperity that I know your Deal Quest will bring.