Robert M. Wyrick, Jr. - CIO
As mergers and acquisitions sweep the industry, employees should take steps to prepare for a potential layoff or early retirement
Robert Wyrick is the Chief Investment Officer of Post Oak Private Wealth Advisors, a Houston-based wealth management firm that specializes in serving oil and energy industry employees.
The oil industry is consolidating, and that is not good news for many energy company employees. With several mergers and acquisitions taking place within the industry, layoffs are more prevalent now than ever before. According to a recent study by Deloitte Insights, the industry’s employment situation took a turn for the worst due to the COVID-led slowdown of the economy and the resulting oil price crash, leading to the fastest layoffs in the industry—about 107,000 workers were laid off between March and August 2020. Even industry giants haven’t been spared:
- Chevron spokeswoman Veronica Flores-Paniagua told Beaumont Enterprise, that Chevron is laying off a quarter of Noble Energy employees after the California behemoth acquired the Houston-based company in early October.
- Energy giant Exxon Mobil announced layoffs on October 29, with most of the job cuts earmarked for its Houston office. Exxon Mobil said the layoffs of about 1,900 employees in the United States are the result of COVID-19 continuing to batter energy demand and prices.
As mergers and acquisitions sweep the energy industry, undersized companies are ground into larger companies to withstand the market’s boom and bust cycles. M&As are expected to continue as smaller and often debt-plagued companies struggle to survive in a low-price environment.
But it’s the employees who often suffer – especially financially.
3 Financial Decisions Everyone Should Consider
Regardless if a merger or acquisition forces you into retirement or you’re still in your working years and looking for new employment, there are several financial decisions industry employees must consider. These have to do with your 401(k), pension plans and company stock.
401(k) -- Generally speaking, you can begin withdrawing funds from your 401(k) or IRA once you reach age 59 ½. However, there is a little known “Rule of 55” that allows employees that have been separated from service to withdraw funds penalty-free from their 401(k) beginning at age 55 so long as they were separated from service at age 55 or later. It is important to consider this option because many make the mistake of rolling their entire 401(k) to an IRA upon leaving the company when, in fact, if you have not yet reached age 59 ½ you would be better served to leave some or all your money in your 401(k) to provide flexibility in your planning.
Pension -- If your employer offered a pension plan, several factors should be considered with regard to when and how to take your pension, and this is one of those decisions that is irrevocable. Therefore, it’s important to consider your options carefully. In most cases, you will have the option to take your pension as a lump-sum distribution and roll it over to an IRA without paying taxes, or you may choose to take the company annuity that will pay a certain amount to you and your beneficiary for a pre-determined period of time. The amount of your pension is determined by several factors including your age, years of service and a calculation referred to as the “discount rate” which is based upon current interest rates. Lower interest rates increase the value of lump-sum distributions, but other factors should be considered when choosing how and when to receive this benefit. For example, do you plan to continue working and how does this benefit fit in with other benefits such as your 401(k)?
The payout option you choose has many long-term tax and lifestyle implications so be sure to discuss carefully with a qualified advisor to make sure you select the option that is best for you.
Company Stock -- Company stock in your 401(k) represents one of the most interesting tax opportunities, as well as the area prone to most errors for departing employees. Though I could write an entire article on this topic, I want to touch upon the key points to consider.
If you have company stock in your 401(k), it would be beneficial to explore a tax option referred to as Net Unrealized Appreciation (NUA). This strategy allows you to take company stock out of your 401(k) and pay taxes now, but only on the cost basis of the stock. This is an especially attractive option for those of you with low-cost basis stock as it allows you to place stock previously held in a retirement account and own it in a more tax-efficient individual account where the sale of the stock would ultimately result in long term capital gains. This is much more favorable than the tax rate you would pay when withdrawing from a retirement account.
While it’s not terribly complicated to determine if NUA makes economic sense for you, the process of exercising your right under NUA must be followed very carefully for the transaction to be allowed.
An Extra Decision for Those Entering Retirement: Strategizing How to Take Your Retirement Distributions
There is one additional crucial decision I would like to touch on if you’ve been forced into an unexpected early retirement. One of the most significant decisions you need to make is how to take distributions of the funds you have accumulated in your retirement plan. You’ve probably heard about IRA rollovers, transfers, annuitization, and other distribution methods, but you may not know which method is right for you based upon your age, goals and financial needs.
Most likely, you will have to make certain decisions on your retirement distribution before you leave your company, and it is possible to make an incorrect choice even before you receive your distribution. Unfortunately, most people nearing retirement are often not counseled properly to make this decision. The complexity of these plans has increased significantly over the years, and you have to be aware of the various pitfalls of each type of distribution. If you have recently been laid off or you’re fearful of a potential layoff in the near future, working with a qualified financial professional to help identify the best distribution strategy for your personal situation can help ensure you avoid these unnecessary taxes and penalties.
The uncertainty surrounding the oil and energy industry is unsettling for every employee. With mergers and acquisitions happening at every turn, it seems nearly every company is changing or evolving. But, the important thing to remember is when it comes to your finances, some proactive planning for your retirement and benefits packages can help you better cope with a layoff or unexpected early retirement.
About the author: Robert M. Wyrick, Jr.
Robert M. Wyrick, Jr. is Chief Investment Officer with Houston based Post Oak Private Wealth Advisors (www.postoakprivatewealth.com), a highly specialized, fiduciary fee-based firm focused exclusively on advanced risk managed investing and retirement distribution planning for corporate employees. Robert is a contributing writer for Retirement Daily and a multi-year Five Star Wealth Manager as listed in Texas Monthly Magazine. He serves as a resource for journalists from Yahoo Finance, Reuters, The Houston Business Journal, USA Today, Nerd Wallet, Seeking Alpha and others for his commentary on the markets and perspective on the complexities of retirement planning for corporate employees.