401(k) blackout notices

Plan administrators now must give at least 30 days notice of any blackout period. The notice must be in writing and stated in a way that the average plan participant can understand -- no legalese.

During a blackout period, participants and beneficiaries are usually not allowed to trade or make any other changes in their accounts.

The new rule is a result of the Sarbanes-Oxley Act, which was passed in 2002 in response to scandals involving companies such as Enron, Arthur Andersen and WorldCom, where employees and shareholders paid a heavy price for alleged misdeeds by executives.

Blackout periods could happen for a number of reasons, but most often it's because the company is switching to a new plan provider or because there's a change in one or more investment options.

Rick Meigs, president of 401(k) Help Center, says the majority of companies already provide advance notice of a blackout.

"But the new rule is necessary. Not from a standpoint that a majority of plan sponsors already do this but because there's enough confusion to warrant it.

"We get a number of questions every week regarding provider changes; mainly from participants who were unaware it had occurred and are unhappy it's happening. The blackout notice will inform them a blackout is coming and give them a heads up if there's a rider change."

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The new rule is a bit too late for Tracey Smith, a California technical writer. She had been laid off from her San Jose company when she decided to make a change in her 401(k), which she left with the company.

"I called the third party administrator who handled my 401(k) and said I needed to make a temporary withdrawal. They said I couldn't because the company had switched providers two weeks earlier and that my funds were being transferred to the new provider."

Smith says her former company had given advance notice of the blackout to current employees, but not to former employees; a situation that should be rectified by this rule because it applies to all plan participants.

Employees sometimes unfairly claim they weren't notified about 401(k) changes because some people have a tendency to ignore letters, especially if they look like regulatory legalese. So they received notice, but they just didn't know it.

And remember, while these notices shouldn't be ignored, they're not necessarily a call to action, either.

"Don't overreact to a notice about a blackout period," says John Scott, director of retirement policy at the American Benefits Council in Washington, D.C.

"These plans are for the long term; these investments will provide income in retirement. Shifting money for the short-term may not be a wise thing."

David Wray, of the Profit Sharing/401(k) Council of America, says the only thing participants might want to do when they receive a blackout notice is make sure their portfolio has the right mix of equities, bonds and cash.

"Historically, 401(k) participants make an asset allocation decision when they join the plan, and they never touch their plans again. About 75 percent of participants never change their plans, and the average participant has been in a plan for eight years," Wray says.

"The participants are getting the first step right, they're making the allocation. But they're not rebalancing their accounts on an annual basis. You don't microbalance, but if the normal rebalancing period for you is during the blackout period, you should rebalance before the blackout period."

A blackout period is definitely not a sign to liquidate funds and go to cash.

"I think most employees have decided their companies are not Enron, and they continue to approach their plans as they always have," says Wray. "They're clearly uncomfortable about where the stock market is as a whole, bit it's not angst directed at their own company."

-- Posted: Jan. 31, 2003