Most defined contribution plans allow participants to direct the investment of their accounts in the plan. Sometimes, a plan sponsor must temporarily suspend the ability of participants to change investment selections under the plan, or to take loans or distributions. These periods, known as "blackout periods," can occur for a number of reasons, but the most common are when changes occur in the plan's third party administrator, investment fund provider or other service providers.
In the wake of Enron, on July 30, 2002, Congress passed an accounting reform bill known as the Sarbanes-Oxley Act of 2002 (Act). You've probably heard about the provision in the Act that restricts executives and directors from selling stock or exercising stock options when their company's retirement plan (which contains company stock) has a "blackout period" which prevents employees from transacting in stock within the plan. However, the Act also contains blackout period requirements that apply to all defined contribution retirement plans.
The Act directed the Department of Labor (DOL) to issue a model notice and other guidance. The DOL issued a model notice and final rules.
What Must Be In The NoticeUnder the Act, defined contribution plan administrators are required to provide affected participants and beneficiaries with at least 30 (but not more than 60 days) advance notice of a blackout period if the blackout period is expected to last more than 3 days. This period is measured from the last day on which the participant or beneficiary may exercise the right or rights that will be affected (blacked out). The notice must contain the following information:
- The reasons for the blackout period.
- An explanation of the investments and other rights affected.
- The expected beginning date and the length of the blackout period.
- A statement informing the participants and beneficiaries that they should evaluate their current investment selections in light of their inability to direct or diversify their investment choices during the blackout period.
- The name, address and telephone number of the plan administrator or other person responsible for answering questions about the blackout period.
- Such other matters the DOL may require by regulation.
When The Notice Is Not Required
The 30-day notice requirement contains certain exceptions. These include when: (i) waiting to initiate the blackout period would result in a fiduciary breach, and the fiduciary reasonably determines this in writing; (ii) the inability to provide 30-days advance notice is due to unforeseeable events beyond the control of the plan administrator, and the fiduciary reasonably determines so in writing; and (iii) the blackout is due to certain provisions of federal securities laws. In these situations, the fiduciary must prepare a written memorandum describing the rationale for the failure to provide the 30-day notice. The preamble to the DOL rules gives examples for the exceptions above. For the first exception, the example describes a company that will declare bankruptcy, and the plan administrator determines that it would be prudent to immediately suspend the ability of participants to invest in company stock. For the second exception, the example describes a computer failure that makes it impossible to process loans and distributions. Another exception to the 30-day notice requirement arises in certain merger and acquisition situations affecting the plan or the plan sponsor. In such cases, the notice must be provided as soon as reasonably possible.
The notice can be delivered in writing or electronically (if participants can be reasonably expected to receive the notice, if it provided in electronic form). The same standard used for electronic delivery of summary plan descriptions applies to blackout notices.
Changes In Length Of Blackout Periods
If the beginning date or the length of the blackout period is changed after the initial notice is given, the plan administrator must give a subsequent notice of this change as soon as possible to all affected participants and beneficiaries. The subsequent notice must state whether any matters discussed above have changed.
Penalties For Failure To Comply
The DOL may assess a civil penalty of up to $100 per day for each failure to comply with the notice requirements. Each participant to whom the plan administrator fails to timely give notice is treated as a separate violation. For example, if a plan has 10 affected participants, and the notice is provided 10 days late, the civil penalty could be as much as $10,000, calculated as follows: [10 (participants) x 10 (days) x $100) = $10,000]. However, the DOL may charge a lesser penalty.
The rules require that the DOL give a plan administrator 30 days, from the date the DOL gives notice of an intent to levy, to file a "statement of reasonable cause" demonstrating (i) that the administrator did comply or (ii) the mitigating circumstances regarding the degree or willfulness of the non-compliance. Based on this statement, the DOL may either determine that no penalty assessment is warranted or waive all or a part of the penalty.
What To Do?
For assistance with the blackout period notice requirements or other employee plan compliance issues, please contact us.