401(k) blackout notices
It's a small but significant step for the millions
of Americans who participate in or are beneficiaries of a 401(k)
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
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."
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."