The Department of Labor’s Pension and Welfare Benefits Administration (PWBA) has issued so-called “interim final rules” on new rules that require that participants and beneficiaries be given 30 calendar days of advance written notice of any “blackout” period.  

The PWBA also outlined the application of civil penalties under the Sarbanes-Oxley Act of up to $100 per day per each affected participant or beneficiary for failure or refusal by plan administrators to provide such notice.

Personal Liability

Plan sponsors will certainly want to be cognizant of the changes.   Liability for the payment of penalties assessed is a personal liability of the person against whom the penalty is assessed and not a liability of the plan, according to the rule. Additionally, the PWBA said that payment of penalties assessed from plan assets would not constitute a reasonable expense of administering a plan.

A blackout period generally includes any period during which participants or beneficiaries are blocked from being able to direct, transfer, or withdraw monies in their retirement accounts, generally during a period when either the plan, the plan’s options, or the plan’s provider are undergoing change.  

Under the new rules, written notices must be furnished at least 30 calendar days, but not more than 60 days, in advance of the last date on which affected participants and beneficiaries could exercise those rights immediately before the commencement of any blackout period.   The rule says the 30 calendar day period must be counted back from the last date on which the participant or beneficiary had the right to take action under the terms of the plan in anticipation of the blackout period.

The PWBA said the 60 day limitation is intended to ensure that notice is not furnished so far in advance of the commencement date that it undermines the impact of the notice to affected participants and beneficiaries.   However, the PWBA asked for comments on this requirement.

Notice Effects

Those written notices must be written in a manner calculated to be understood by the average plan participant, and must include a description of the rights otherwise available under the plan to affected participants and beneficiaries that will be temporarily suspended during the blackout period, in addition to the identification of the investments subject to the blackout period.

Written notices must contain the expected beginning and ending date of the blackout period, so that participants can factor the duration of the blackout into their pre-blackout period investment and other decisions, as well as to give participants and beneficiaries some idea as to when they will be able to recommence exercising their rights under the plan.

Also required to be included in the notice is a statement advising participants and beneficiaries to review their current investments in light of their inability to direct or diversify their assets during the blackout period.   The written notice must contain the name, address, and telephone number of the plan administrator or other person responsible for answering questions regarding the blackout period, the rule said.

PWBA specifically requested comments on what, if any, additional information should be required to be contained in the blackout notice furnished to participants, beneficiaries, and issuers.

For purposes of the rule, a blackout notice will be considered furnished as of the date of mailing, if mailed by first class mail, or as of the date of electronic transmission, if transmitted electronically. Plan administrators also will be obligated to provide notice of a blackout period to the issuer of employer securities held by the plan and subject to the blackout period, though the PWBA specifically asked for comments on the appropriateness of such a requirement.   The PWBA did say that a plan administrator could satisfy its obligation to notify the issuer by providing the same notice furnished to participants and beneficiaries.

In those situations where 30 days advance notice is not furnished, participants and beneficiaries should be furnished notification that a 30 day advance notice is required and an explanation as to why the plan was unable to furnish at least 30 days advance notice. This requirement does not apply to mergers, acquisitions, divestitures, or similar transactions, inasmuch as notices of such blackout periods are required to be furnished as soon as reasonably possible, the rule said.

Penalty “Flag”

Regarding penalties, the rule said that the amount assessed for each violation under the regulation will be computed from the date of the administrator’s failure or refusal to provide a notice of blackout period up to and including the date that is the final day of the blackout period for which the notice was required.   Each violation with respect to each participant or beneficiary will be treated as a separate violation.

Prior to assessing a penalty, the agency will provide the plan administrator with written notice indicating the agency’s intent to assess a penalty, the amount of such penalty, the number of participants and beneficiaries on which the penalty is based, the period to which the penalty applies, and the reason(s) for the penalty.   Plan administrators will have an opportunity to contest the facts alleged in the agency’s notice, a review of the facts alleged, and an opportunity to request a hearing.

Time Lines

Recognizing that the potential impact of trading blackouts is not limited to plans that are daily valued, the notice offered examples of how to determine the start of the 30-day period in a monthly program.   The notice said that, in a monthly valuation, the 30-day notice would have to be given at least 30 days prior to the month preceeding the month in which a blackout impacting access rights would occur – in sum, at least 30 days in advance of the last date on which participants could exercise their rights.  

Plan sponsors are not precluded from providing notices before the 60-day period, or after the    30-day window, so long as at least one notice is provided within the prescribed periods.   However, they also asked for comments on the need for, and length of, any such limitations on advance notice.

Thirty-day notice would NOT be required in circumstances where doing so would violate ERISA’s prudence requirement (e.g., the perceived need to block continued investment in company stock by participants) or where circumstances are beyond the control of the plan administrator.   Specifically cited was a hypothetical situation where a recordkeeper suffered a massive computer failure that required an extended period to correct the situation.   However, the regulations did say that in such a case the plan sponsor would be expected to notify participants as “soon as reasonably possible.”   The PWBA also said it expects the latter to be used only in rare circumstances.

In any event, the plan administrator is expected to make a written determination with respect to the circumstances precluding compliance – a determination that is expected to be signed and dated by the plan administrator.

In issuing the regulations, the PWBA noted that while many plan administrators may currently provide such disclosures, the new requirement will ensure that appropriate information is provided in a “consistent and timely manner.”

The PWBA estimates that administrators of about 85,150 affected plans will spend an estimated $13.9 million each year to comply with the new requirements in distributing notices to 12 million covered participants.   They further broke down the cost to $8 million/year for smaller plans, at a cost of about $110/plan, and $5.8 million for 45,000 large plans, an average of $510/plan due to more participants and greater distribution costs.   However, the PWBA also said it was interested in comments on these estimates, which were derived from 1998 Form 5500 information – and based on an assumption that potentially impacted plans impose transaction blackouts on average once every four years.

Effective Dates

Both interim final rules will become effective January 26, 2003, without advance notice and comment, and will be applied to blackout periods commencing on or after that date. For blackout periods beginning between Jan. 26, 2003, and Feb. 25, 2003, plan administrators must furnish notice as soon as reasonably possible, according to the rules.   The PWBA said this provision was intended to ensure that a statutorily required notice be provided with respect to blackout periods which commence prior to February 26.

However, the new rules do not deal with the application of the fiduciary provisions as they relate to the timing and administration of a blackout period during which plan participants cannot access their accounts.

Comment Airing

Written comments on both rules are due by Nov. 20 to Office of Regulations and Interpretations, Pension and Welfare Benefits Administration, Room N-5669, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210, Attention: Blackout Notice Regulation. Written comments may also be sent by Internet to the following address: e-ORI@pwba.dol.gov.

The contact person for the written notification rule is Janet A. Walters at (202) 693-8510. The contact person for the civil penalties rule is Susan Elizabeth Rees at (202) 693-8505.