How startups can work with their 401(k) advisor to prepare employees for an acquisition

Startup leaders and plan sponsors are buckling up for another gangbuster year of acquisitions, according to Morgan Stanley’s Merger and Acquisition (M&A) team. 

Amid elevated M&A, startups the world over are smart to think deeply about the employee experience if their company is acquired.  So how can startups equip their people to not only function, but thrive once the deal is done/? One existing – and possibly underutilized – resource that can help address the gap: The financial advisor who works with your retirement provider.

From bootstrapping to boom

Many startup employees may not know about the ins and outs of M&A activity, and how it can affect their personal wealth management; this is normal, however, and a huge opportunity for startup employers to provide educational and actionable benefits available through access to a financial advisor.

Our research shows that more than 9 in 10 US employees faced financial issues in their personal lives in the last year, and nearly 4 in 5 say their company needs to help them understand how to maximize their benefits. Yet many HR executives admit they can’t effectively help employees navigate specific financial challenges, with 9 in 10 saying their company needs to do a better job helping employees understand how to make the most of their financial benefits. And that is all before mixing in the added complexity of a merger or acquisition. 

Just as an acquisition deal shoots your startup to scale and expands your capital, something similar takes place in the personal balance sheets of many of your employees. Raising employees up to an adequate level of financial literacy can be a heavy burden for your internal team alone, which is why it can help to tap the financial advisors (FAs) who work with your retirement benefits providers.

Beyond equity compensation

Conversations around how acquisitions affect employees tend to zero in on equity compensation, since equity ownership can become an almost overnight source of wealth (and a major life change) for many in your organization. But don’t lose sight of the forest for the trees. 

In other words, your employee equity compensation program matters—but even more important is that your employees learn to shift their mindset to encompass an entirely new relationship with their workplace benefits and a new ecosystem of financial planning needs, including retirement.

Just as it takes a village to raise a child, it takes a community of professionals to help support individuals through the complex intersection of startup acquisitions and responsible wealth management. Here are two critical areas to discuss with your 401(k) plan advisor:

Don’t skimp on the fundamentals. Talk to your 401(k) plan advisor about how to educate employees on wealth management basics. Especially relevant before an acquisition are topics like integrating company stock holdings into a retirement-oriented financial plan, the risks of holding a single stock, and the importance of diversifying one’s total portfolio while being mindful of tax consequences. Patience, speaking plainly, and comprehensive support are all critical—and all a part of your plan advisor’s basic training. 

Tackle single stock risk and taxes head-on. Along with a windfall, employees who hold company stock will immediately face single stock risk. This means that since their company stock comprises an outsize portion of total net worth, that total net worth can take a serious hit as market conditions fluctuate.

Some financial advisors say the total amount of company stock employees hold should represent no more than 25% of their total net worth, but there is no one-size-fits-all approach. To develop an appropriate asset allocation strategy, your employees will need to talk to your retirement plan provider and any advisors available through the program. Ask your FA to develop custom direct indexed portfolios that account for your company’s stock.

An FA can also often work with individuals to coordinate with other financial professionals to adapt for personal circumstances and different stages of equity’s lifecycle, including how taxes, commissions and fees will affect possible net proceeds.

Retirement ROI

As your employees learn to understand and manage their evolving net worth, equity is only one slice of the pie. They will need professional support as they navigate a larger scale of workplace benefits and a much more complex personal financial picture. Don’t forget to lean on your 401(k) plan advisor for help taking actionable steps to define and support these changing needs. 

Acquisitions are exciting, but it can be hard to prepare employees for the scope of how much an acquisition can change their financial lives. Laying the groundwork today can help your whole organization thrive in the future by setting employees up for personal financial success.

Anthony Bunnell is Managing Director and Head of Retirement, Morgan Stanley at Work.

This article has been prepared for informational purposes only. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Morgan Stanley at Work services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.

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