Recordkeepers: Blackouts Can be Shorter

December 10, 2001 ( - As controversy continues brewing about the three-week trading blackout imposed in Enron's 401(k) plan, several prominent retirement-plan recordkeepers say such a trading ban shouldn't be necessary for longer than a week at most.

But, regardless of whether their claims about short blackouts prove overoptimistic, the recordkeepers’ attention is riveted on the goings-on over how the former giant Houston energy trader handled its plan in the days before its December 2 filing for federal bankruptcy protection.

In particular, the recordkeepers are listening to the growing chorus of calls for reform from lawmakers and regulators, as the industry representatives caution that people shouldn’t overreact to the problems in Enron’s plan.

“I think we have an unfortunate circumstance that has arisen with respect to Enron that is clearly not pervasive with the industry,” Tom Kinzler, Mass Mutual’s associate general counsel told .

Typical Blackout Lengths

Recordkeepers say the challenge of setting up an incoming plan’s account records on their computer system shouldn’t require weeks to complete because of the state of technology and general industry know-how these days.

That’s why:

  • executives at MassMutual Financial Group say they only need a 24-hour blackout in seven out of ten cases
  • officials at Principal Financial Group say they meet their goal of 24 to 72 hours for a blackout 90% of the time
  • the Vanguard Group says it can wrap things up in three to five days.

Recordkeepers typically impose a blackout on most new transactions in an incoming plan as part of a process sometimes known as a “conversion.”

That allows them to more precisely reconcile the plan’s account records from the previous recordkeeper to make sure participants end up with the correct balances, that plan loans get properly transferred, etc.

However, the conduct of the prior recordkeeper represents a difficult wild card in wrapping up the process because sloppy or incomplete plan accounting records that ultimately need to be reconciled down the penny can make for a tough transition, the industry officials said. 

“We’re very dependent when we’re taking on plans as to what they (a prior recordkeeper) are handing over to us – that they’re able to do the accounting and successfully move the (plan) assets in a timely manner,” Kinzler said.

Other potential delays to lifting a blackout include:

  • a plan’s size – a plan with 100,000-plus participants can take longer to move to a new provider than one with fewer people involved.
  • complicated rules – unraveling complex vesting procedures or those governing plan loans or investments in company stock shares can drag things out.

Worker Communications Critical

The industry officials agreed that the potential for participants being unhappy because they couldn’t trade during the transition period is a sticky issue with every transition. The key to coping with it: Effective and oft-repeated communication.

“We’ve found that the best conversions are the ones where you tell people over and over again exactly what’s going to happen, when its going to happen, and what (potential plan actions) they should think about,” said Gerry Mullane, a Vanguard principal.

To better plan that communications program, Jim Cushing, a Principal client relations officer, said Principal representatives find out from the plan sponsor what “significant business events” are underway that could affect participant behavior. This might include mergers and acquisitions or layoffs, he said.

And, while they’re communicating about the upcoming blackout, Mullane said Vanguard representatives remind participants about investing basics such as the importance of a diversified portfolio.

“If you’ve told people upfront that you can exchange money in or out (of a plan’s fund options) and if (a participant) is in a non-diversified investment, (Tell them) ‘Gee, you may want to look at that and move the money into a more balanced portfolio’,” Mullane said.

The new recordkeeper can also take the opportunity to urge non-participants to join the plan and those with anemic savings programs to set aside more for retirement, he said.

We’re From the Government…

Even with the many reported problems with Enron’s 401(k) plan, the industry representatives said the secret to dealing with problem plan conversions over the long term isn’t likely to be found in the halls of Congress, state legislatures, or even with regulators.

And there has been no shortage of threatened outside intervention in recent weeks, including:

Massachusetts Secretary of State William Galvin became the first state-level official to suggest that companies couldn’t keep retirement plan participants from selling company stock shares.

Sen. Barbara Boxer, (D-California) charged that Enron broke the law when it kept participants from selling their company stock shares.

Industry Fixes to Industry Problems

Rather than wait for potential legislative or regulatory changes, industry officials said needed reforms are likely to come from the retirement plan providers themselves.

For example, because of Enron, recordkeepers are now likely to focus more than ever before on making their conversions as short as possible.

“It’s going to force providers to look a their own processes,” said Jim Cushing, a Principal client relations officer. “I think it’s going to force providers to look at their own systems to see how quickly they can get the data and the money out of their shop (to the new recordkeeper).”

Finally, recordkeepers and plan sponsors will recognize even more than before how critical communications is to a smooth process.

“I think the most likely scenario that people will increase the amount of participant education that gets done,” said Vanguard’s Mullane. “That will be one of the positive outcomes of this.”

– Fred Schneyer