Question QUESTION: I have 401k and stocks in financial company that is being purchased by another. I have received notification that completion of deal is going to happen soon and they provided rate per share for stock on closing date. Does this mean the stock will be dropped? What will happen to my stock portion of this 401k that is with the company? Will it lock at this rate as well? Should I roll it over into something else?
ANSWER: Tammy, it's hard to tell without knowing the specifics but in general, when Company A acquires Company B the original shareholders of Company B get cash, stock in Company A or some new entity, or a mix of the two. It depends entirely on the deal. You mention that "they provided a rate per share" suggesting this is an all-cash buyout.
If so, and the deal goes through as planned, then anyone holding shares of Company B will be bought out, whether they hold shares in a brokerage account, IRA, 401k plan, etc. And in that case yes you would see the shares of Company B disappear and be replaced by cash. You could then reinvest that cash in the other investment alternatives of your 401k plan.
(You may be able to do that before the deal closes, though typically the share price when you sell would be a bit lower than the price set in the buyout deal...e.g. if you'll get $20/share in a couple months it might be at $19.50 or something like that now. That's if the shares are traded on an exchange...if this is a smaller/private company then you may have no way of selling beforehand.)
There are a few more-complicated scenarios involving company stock in a 401k, such as if this is a 401k from a former employer. I'd really suggest talking to your benefits/HR department so you understand exactly what will happen and what your alternatives are. As I said it depends on the specifics of the deal so there's no standard answer.
-Tad
---------- FOLLOW-UP ----------
QUESTION: I appreciate your response and took your advice. I contacted the HR department and they said that nothing has been finalized in reqards to the 401K and the rate per share only pertains to the direct stock that I have. The 401K is with a former employer and they are Company B. Some stock units for Company B are included in my portfolio but they couldn't provide any information in regards to anything concerning my 401K because announcements haven't been made. They weren't much help. Is it typical to handle stock units held in employee's 401K plan different? Since they are the managing company of the 401K, I am assuming that it would be sold or managed by another institution or brokerage firm. If this happens, would the investment selections change? I'm not sure what will happen to my other investment selections within the portfolio. Is there a regulated time that is required for notifications for changes of 401K plans?
Answer So this is the unusual case where Company B is
a) your former employer
b) the company being acquired and
c) the administrator of your 401k plan?
If so...
If this is a lot of stock you should speak with a CPA to see if you can/should make use of a special tax rule regarding "net unrealized appreciation" (NUA) in stock held in a 401k of a former employer. This is way beyond the kind of question I can answer here, it's complicated. If the amount is small you might not bother, but if it's a decent amount of money you may be able to save some taxes.
I don't know if your 401k alternatives will change, that depends on what happens to Company B - which is very specific to the deal. If it continues to run under its old name as a subsidiary of the acquirer, you might see no changes at all. If it's going away as a company, then yes it seems likely that your 401k alternatives will change, to whatever is offered by the new custodian.
Keep in mind that former-employer 401k plans can be rolled over to an IRA at an institution of your choice. It may not be possible at the moment if this deal is underway, because plans can be "frozen" for a period in circumstances like that. And that NUA question would need to be answered before doing a rollover. But many people rollover their old 401k plans to IRAs after leaving a job, just to get access to investments they prefer.
Sorry - lots of very-specific questions here so I may not be of much help. Again, use the HR department as a resource, as they'll need to keep you informed of the changes with the plans and your alternatives. If the amount of stock is substantial, consider having the situation reviewed by a CPA or other tax professional.
