DOL Releases Blackout Notice Guidelines

The U.S. Department of Labor (DOL) has released requirements for blackout notices to 401(k) plan participants as required by the Sarbanes-Oxley Act enacted earlier this year (see Watson Wyatt Insider, August 2002). The guidance addresses the required contents and timing, includes a model participant notice and is effective for blackout periods beginning on or after January 26, 2003.

Blackout Disclosure Requirements

Plan sponsors must meet the new disclosure requirements whenever a blackout — defined as a suspension of participants’ and beneficiaries’ rights to diversify or direct investments, or obtain a loan or distribution — will last for three consecutive business days or more.

The guidance indicates that:

• The notice must describe participants’ and beneficiaries’ rights otherwise available under the plan during the blackout period and its projected duration, including the expected start and end dates.
• If notice of the blackout period is not issued at least 30 days before it begins, the notice must explain the delay. The notice may not be issued more than 60 days before the blackout, although supplemental communication may be provided to participants before then.
• The notice must provide the name, address and phone number of the plan administrator or other person responsible for answering participants’ questions about the blackout.
• There are two circumstances under which the 30-day advance notice requirement does not apply: when deferring the blackout period for 30 days after giving the notice would violate ERISA’s fiduciary standards (e.g., if the plan fiduciary immediately suspends investment in employer stock because the employer has filed for bankruptcy), and when the events prompting the blackout were unforeseeable or beyond the plan administrator’s control.

The penalty for violations is $100 per participant per day, which means that a plan with 1,000 participants that has a 14-day blackout but fails to give timely notice may be penalized $1.4 million. If there are regularly scheduled blackout periods for which the employer doesn’t send out notices, they should be mentioned in the summary plan description or summary of material modifications before January 26, 2003.

Using the model amendment is not mandatory, but many employers will want to use it, especially the provision that satisfies the requirement to advise participants of the importance of reviewing their investments before the blackout, and a general statement that federal law requires furnishing the notice in advance of the blackout.

A Reform in Search of an Abuse?

A related provision in Sarbanes-Oxley bans company insiders (i.e., those employees already restricted from short-swing trading under securities law) from selling employer stock during certain blackout periods, even stock held outside the 401(k) plan. To facilitate this ban, notice must be provided to the affected executives and the Securities and Exchange Commission.

Both blackout provisions arose in response to the Enron scandal and were initially part of broader legislation that included diversification rights, participant education and advice, and plan information. Although Congress has been discussing the broader legislation for months, it will not become law this year. The blackout provisions are the only Enron-inspired pension reforms to be enacted, even though there is no evidence that other participants have been misinformed or not informed of blackouts, or that blackouts in other plans have caused significant losses for participants.

After several high-profile corporate scandals, Congress felt it needed to act quickly on accounting reform. Since Sarbanes-Oxley imposes new requirements on executives and bans certain activities, legislators included the insider-trading ban and blackout notice in the new law — leaving out other reform provisions unconnected to executive trading. Taken out of the broader 401(k) reform context, these new requirements seem to some observers to be putting the reform before the problem.