Over the past several years, two trends have dominated the retirement services industry. First, mergers—whether among advisors, recordkeepers or other service providers—have become an almost daily occurrence. And second, announcements of comprehensive service solutions from increasingly consolidated service providers addressing aspects of health, retirement and general wealth planning have become a nearly daily occurrence. If the first several months of 2022 are any indication, these trends continue to look like unstoppable forces.
As is often the case, however, there seem to be two immovable objects in the road: regulatory enforcement and expanding theories of litigation from plaintiffs lawyers. So given the mergers and acquisitions world we currently live in, what are steps advisor can take?
Recently, I have seen an increase in focus for a number of clients on pre-acquisition due diligence to determine and manage the risks of potential acquisition targets. With active Department of Labor enforcement and litigation, “purchasing” an ongoing DOL investigation or pending or ongoing litigation can be an expensive endeavor. While in some transactions there may be a limited ability to address these risks in a deal’s terms proactively, even analyzing and understanding can help a purchaser begin onboarding an acquisition with clarity.
Separately, even after a transaction closes, there are many risk management steps to consider in the post-M&A world. While it is common to repaper contracts after a transaction, understanding “how” contracts can be repapered and what consents are necessary is always important. In addition, given that after a transaction, the combined entity may have plans to offer more comprehensive service solutions—whether at the employer level or the participant level—proactively understanding how these new services will be integrated can often be key to proactively manage future DOL investigations and/or private litigation.
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Taking Action Beforehand…
Given all these facts, what are some basic action steps a buyer and seller advisor might consider before the transaction? First, a seller may benefit from understanding the services—and any enforcement activity and/or litigation involving them—that the purchaser provides to its clients.
Second, a buyer may benefit from understanding the seller’s full range of service offerings and their operation. In addition, it can be beneficial to have legal counsel who knows the industry take a deeper dive into the seller’s operations prior to closing to address potential escrows, although that is not always possible.
…and Afterwards
Separately, what steps might a buyer taken after closing?
First, in some cases the process of repapering clients can be a complex one that may rely on various consents. Careful planning for the transition is a key aspect of many acquisitions.
Second, since the combined entity will probably have a larger scale than before the transaction, an advisor consolidation can often lead to the advisor being viewed as a larger, more complex target for DOL investigations and class action litigation. Periodic reevaluation of contracts, disclosures and insurance, as well as the “process” by which these services are sold, becomes more essential than ever. Missing this step after the closing can lead to significant legal and reputational costs at a later date.
Third, as a buyer organization grows with multiple lines of business, a comprehensive review of its services and how they relate to each other can be very beneficial in proactively addressing perceived conflicts of interests, especially in light of increased DOL activity and plaintiff claims in this area, as well as theoretical legal risk.
Consolidation and the introduction of new solutions remains an inevitable part of the retirement services industry. Advisors have to play a large role. However, because of the technicalities of ERISA, it can be beneficial to keep in mind that the devil is in the details—and that proactive steps before, during and after a transaction to review ERISA compliance can pay dividends many times over.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column appears in the latest issue of NAPA Net the Magazine.
