Post-Enron, blackout periods for vendor
transitions are under scrutiny.
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Putting Things Off
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Avoiding Trouble
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Timing Is Everything
When Dick Corporation, a Pittsburgh-based general
contractor and construction manager, decided last year to
change recordkeepers for its 401(k) plan, it also decided
to get employees directly involved and announce the change
heavily in advance. It could not have picked a better time
to adopt such a strategy.
Dick's $72 million plan, which has 1,000-some
participants and no company stock option, switched to The
Vanguard Group, Inc. as of January 1. Vanguard also manages
the plan's 12 mutual funds. The blackout period when
participants did not have access to their accounts lasted
from December 20 to January 23, just as news stories
revealed that many Enron Corporation employees saw their
401(k) balances plummet when the stock continued its
nosedive during a lockdown.
The process of imposing a blackout when changing
providers is getting a lot more attention these days. "The
Enron situation has plastered it all over the popular
press," says Patricia Pou, a Tampa-based principal at
consultant William M. Mercer.
"Unless the problems are really bad," says Robyn
Credico, eastern division defined contribution practice
leader at Watson Wyatt Worldwide in Washington, "[plan
sponsors] are thinking twice about changing providers."
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Putting Things Off
Moreover, many employers are putting off plans to make
what, until recently, may have been considered routine
provider changes, says Michael Barry, a Chicago-based
attorney who heads the Plan Advisory Services Group.
Why did Dick Corporation's recordkeeping transfer go so
smoothly? One reason, no doubt, was the lack of company
stock in the plan, but Janet Love, senior vice president of
human resources at Dick, pulls several lessons from her
experience.
To harness their wide-ranging expertise, Dick gathered a
group of 10 cross-functional employees from its five
locations in Hawaii, Guam, Puerto Rico, and the mainland US
to pick the new recordkeeper. After the group selected
Vanguard last September, a Dick human resources manager
became central coordinator of the conversion. "He became
the point man," says Love, and spent a third to half of his
time on the transition.
Another lesson, says Love: "You can never communicate
too much. We did a lot of upfront communication, so I think
our employees were fairly well educated going in." Dick
announced plans to make the switch in spring 2001 in its
employee newsletter, which it then used to update
participants every couple of months. At their open
enrollment benefits meetings in the fall, company officials
offered more information about the transition and blackout
period. Vanguard sent several mailers with details on
topics such as new funds available and held informational
sessions at all company sites.
Whether and how Washington will act on blackouts is not
yet known. One attorney involved in a 401(k) lawsuit
against Enron says he does not expect to see a big jump in
new lawsuits, however. "I think most sponsors, fiduciaries,
and directed trustees use common sense," says Eli
Gottesdiener, principal at the Washington-based
Gottesdiener Law Firm.
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Avoiding Trouble
Nevertheless, sponsors would be wise to proceed with
caution. Credico says "it does not at all make sense" to
push for a shorter lockdown period. "The transition needs
to be communicated properly, and participants have to
understand their new plan design, if any, and the new
investment elections," she says. "In addition, the data and
systems need to be structured properly-up front-or the data
will never be correct. The last thing you need is a date in
the wrong field that will miscalculate eligibility,
vesting, etc."
Given that reality, how can plan sponsors avoid trouble
during lockdowns? Credico offers some advice for employers
with company stock in their 401(k)s.
Vendor changes typically happen at the end of a quarter,
she says-just when companies' earnings are released, and
the point when stocks may be most likely to fluctuate. If
your 401(k) contains company stock, she says, try to
coordinate the switch to happen at another time.
In addition, have a Plan B on tap in case the market
suffers a major drop or your company's stock plummets,
Credico advocates. "You most likely are going to want to
have a contingency plan to potentially lift the blackout
period," she says. "If you look at the Enron situation,
they thought about lifting the blackout period and chose
not to."
Beyond that, sources say, plan carefully to increase the
odds that events will go smoothly once the transition
begins and communicate often with participants. Recognize
from the start how much employer effort a vendor transition
requires, advises Pou. Employers often have "a false sense
of security," she adds. "Many times, plan sponsors believe
that, once they have selected a new recordkeeper and the
new recordkeeper has a transition team in place, the new
recordkeeper is going to handle everything." Sponsors may
not realize the extent of the work involved.
Credico advises developing a clear project plan for the
entire transition period, from new vendor selection to the
lockdown's end-something she says many plan sponsors do not
do. "Manage it like any kind of systems implementation,"
she advises. Elements in the project plan should include
detailed timelines for such items as payroll changes, steps
to be taken by the new vendor and the old vendor, and
participant communications.
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Timing Is Everything
Consider timing. Skimping on the time allotted for the
transition may mean skimping on steps such as data-transfer
testing, Pou says, increasing the chance of snafus and a
longer lockdown.
As Love learned, participant communication is key. Send
an initial communication about a month in advance that
discusses, in general, the enhancements to the plan and the
time period involved for the blackout, suggests Jackie
Cuthbert, an Atlanta-based principal at Mercer. A second
notice should go out a couple of weeks before the lockdown,
she says, providing details, including any new investment
options that will become available plus any deadlines
participants will need to know. Credico advises sending a
note a week before the lockdown begins, recapping the
upcoming highlights. In addition, get the word out when the
lockdown ends, Cuthbert says, to let participants know that
the system is back up and running.
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