Reader Responses July 2, 2002

SURVEY SAYS: 'Reasonable' Blackout Periods?

February 7, 2002 (PLANSPONSOR.com) - Over the past several weeks we have touched on several aspects of the Enron case - but while notice may be an issue - the item gaining most of the press has been the length of the trading blackout.

Reported by

Nevin E. Adams

So, since many of you have actually been through a blackout (or two) – on one side or another of the process – we wanted to know what YOUR take on the issue is. So, we asked, ‘Should a reasonable blackout period be no longer than (a) a month, (b) 3 weeks, (c) 2 weeks, (d) 1 week, (e) less than a week, or (f) it depends (remembering of course, that those words almost never actually appear in legislation).’

We didn’t get anything like a clear ‘majority’ – and, given the complexity of the issue, that seems fitting. However, we were a bit surprised to find that the most ‘popular’ length suggested as reasonable was – a month, cited by nearly a third of our respondents. Roughly one in five lined up with the notion of a two-week blackout, while just about 10% each opted for a week, 3 weeks or less than a week.

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‘Your report that states that
some legislators are
supporting “a no blackout”
period really shows their lack
of understanding on how a
conversion of record keepers
occurs. Let’s see them try to
reconcile and administer
$100 million plan with 5,000
participants while allowing
account activity. They think
they have problems now….’

However, a whopping 19% said that the ‘right’ answer – was ‘it depends’ – even if it makes for sloppy legislative verbiage.

Reader comments ran the gamut – both in terms of experience and expectations. But, we also saw a fair number of ‘pleas’ for reason in the debate. As one noted, ‘Articles that have printed generic articles on how 401(k) work have understated the complexity of running DC programs. Blackout periods are the least understood by participants and the general population. Perhaps plan sponsors can be faulted for lack of information on the details they go through to convert, but how many would even understand the technical issues even if it were to be explained? … It is not as simple as transfer a balance.’

There were – as one might expect – war stories of broken promises and extended blackouts, such as ‘…when our firm switched to a new plan sponsor/administrator, the blackout period lasted 3 months, if not longer…and the employees were very frustrated. Initially, we were told 30 days. Of course, no one believed that when a plan is self-directed and going to a new plan sponsor with both brokerage option and ‘family of funds’ option, that this could and did result in a paper nightmare, but what did I know…long story short, my door was kept closed and I studied new places to live outside of the country.’

Another noted ‘. ‘I think one of the most surprising marketing ploys, even on the part of (an unnamed provider), who claims “zero” blackout, is that in their proposals, the recordkeepers fail to mention that the period of time they quote for a black out doesn’t take into account any additional time that the prior recordkeeper will need to do their final valuation and transfer of the records. Therefore, many of those that were promising “weekend” or “no” blackout period ultimately said it could be two weeks, depending upon how quickly the prior recordkeeper got them the records, and what shape they were in!

The ‘real world’ still has to be dealt with, as several readers reminded us. ‘Its all well and good for Congress to legislate what a blackout period SHOULD be, but the reality is that all record keepers are not created equal and if the outgoing record keeper is uncooperative and sloppy a blackout could last a minimum of three months and maybe longer. Sure, you can rush the process, but then you get participants whose records are incorrect which leads to even bigger problems …. ‘ If everything was great with the prior provider, you probably wouldn’t be switching in the first place.

There was the concern of many that Congress would use the ‘example’ of Enron in trying to determine pension policy, such as ‘I think we all need to get a grip on what happened with Enron – the stock went from 90 to 14 BEFORE the blackout period began; it only lost another 7 during the blackout …. ‘They should title these new suggested regulations: “In case your board of directors, executives and auditors are criminal and the market ridiculously over-values your stock, the recordkeeper and plan sponsor will protect you “…. The blackout didn’t cause the problem; the company caused the problem. There wasn’t a blackout as the stock went from $80 to $15, was there?

Or the reader who noted, ‘Those who can do, those who can’t teach or come up with legislation that just won’t be practical…or the other who said ‘Making DC plan restrictions hastily due to one of the largest companies coming to its knees because of rampant fraudulent accounting and dealings is a very bad combination.’

And then, there was this week’s EDITOR’S CHOICE : ‘Your report that states that some legislators are supporting “a no blackout” period really shows their lack of understanding on how a conversion of record keepers occurs. Let’s see them try to reconcile and administer $100 million plan with 5,000 participants while allowing account activity. They think they have problems now….’

Amen.

Thanks to everyone who participated in our survey!

Case Study: Blackouts: A survival kit
As featured in the Recordkeeping Solution Topic/Dec-Jan 1999 Issue

The question was: Should a reasonable blackout period be no longer than
(a) a month,
(b) 3 weeks,
(c) 2 weeks,
(d) 1 week,
(e) less than a week
(f) it depends (remembering of course, that those words almost never actually appear in legislation)

THE VERBATIMS

'I've also been involved in transfers that were so ugly you wanted to hop a plane, bring along a baseball bat, and visit the old recordkeeper. I think it's crazy to impose a "one size fits all" standard to blackouts.'

'Although diversification theory tells us that it's never wise to put all of your retirement nest egg in one stock, a company that gives employees company stock is better than a company that gives no match or has no retirement plan.'

In over 25 years of being in the retirement plan business I've seen transfers go smoothly.
I've also been involved in transfers that were so ugly you wanted to hop a plane, bring along a baseball bat, and visit the old recordkeeper. I think it's crazy to impose a "one size fits all" standard to blackouts. You don't know what you're getting until you open the package...if you get the package...from the old recordkeeper.

But beyond that, I think the point Congress (or other regulator) needs to realize that in the Enron case it wasn't the blackout, per se, that was the problem.

We changed plan administrators several years ago and experienced a 6-week blackout period. Our provider told us that this was normal and that a shorter blackout was not feasible, given the existing platforms and technology. This was not highly very controversial at the time, because we were moving from a plan that allowed participants to switch funds only every quarter - with 4 to 6 weeks notice. Of course, we offered what we thought were solid mutual funds (no company stock), and preached diversification and long-term investment strategy to our employees. Oh what a difference a few years make. With daily evaluation and switching, we have made it possible for our employees to be day traders with their supposed retirement funds.

Perhaps technology has changed to the point where a shorter blackout period is indeed possible and even expected. If that's the case, firms that far exceed the norm should be accountable. However, circumstances are always different, and being an HR professional, I lean towards the "it depends" answer.

I don't like government increasing their involvement in plans that are ultimately voluntary for employers. Although diversification theory tells us that it's never wise to put all of your retirement nest egg in one stock, a company that gives employees company stock is better than a company that gives no match or has no retirement plan. Employees have a choice to work for that company or not. If they chose to do so, they need to diversify their retirement savings as much as possible within the parameters available to them. From the little I know about it, the problem in Enron's case seems to be fact that investors, including employees with 401(k) accounts and huge investments in company stock, were misled.

Are we fixing the right problem?

Clearly anyone who wants to create a standard for black out periods has never done recordkeeping. There are so many variables including the condition of the prior records and the level of cooperation from the prior recordkeeper and/or trustee that a successor recordkeeper cannot control.

Anyone who has ever been a recordkeeper knows that you cannot mandate the prior recordkeeper to deliver timely, reconciled participant balances. The reality is...the plan sponsor fired the recordkeeper...so will the prior recordkeeper prioritize and/or facilitate the delivery of the participant records??? I have spent many a late night in the office trying to figure out how the participant records reconcile to the trust assets at conversion and usually wind up having to dig deep into the past to correct errors made by the previous recordkeeper.

Let's face it...why is the plan sponsor electing to move the participant recordkeeping...usually because of administrative issues. As your surveys have shown in the past, it is usually not cost that forces a plan sponsor to move. Creating an industry standard for black out periods without mandating that the prior recordkeeper deliver participant balances completely reconciled makes no sense.

The concept of forcing a successor recordkeeper into a corner with respect to the timing of conversions really bothers me. What will happen is that conversions will be done incorrectly just to meet the deadline...further perpetuating the problems with the participant records. I would much prefer having a conversion done correctly, rather than get a gold star for meeting some superfluous deadline.

Thanks for letting me blow off steam regarding this issue.

My Company did change 401(k) providers several years ago. Our prior service provider's funds were mapped to similar funds with the new service provider. After that, employees could make changes if they were not happy with the new mapped funds. This process was completed in one (1) week with relatively few difficulties. And, at that time, Company stock was involved.

If anything is clear to anyone among plan sponsors, many of us know that a conversion between providers, or to switch out of an investment fund is a complicated process. The notion that everything is automated and linked is far from the case - more so if the plan sponsor DC plan is in an unbundled arrangement.

Articles that have printed generic articles on how 401(k) s work have understated the complexity of running DC programs. Blackout periods are the least understood by participants and the general population. Perhaps plan sponsors can be faulted for lack of information on the details they go through to convert, but how many would even understand the technical issues even if it were to be explained? Settlements of 30 fund offerings, plus stock, plus ex-date and payable dates on stock for dividends, transitioning of records for various pieces of data on the recordkeeping system - it is not as simple as transfer a balance. Frozen hardships amounts, transferring loans and resetting them up - how many? It just isn't a simple thing.

In the absolute best of situations where everything balances between Trustees and Recordkeeper (no irreconcilable issues); the general population needs to understand that there is still the issue of trade settlements - T +1 (or T +3 in some cases) that delay the updating of records. If you are reregistering a position between Trustees, there is no automated means to re-register mutual funds - you will be at the mercy of more than one mutual fund house's procedures. This is unlike stocks that can be reregistered via DTC fairly quickly and efficiently, or bonds through Bank of New York. SEC has been much firmer on guidelines for the reregistration of these types of assets.

There are many details in the conversion process that our legislators and the general public are not knowledgeable about. Until they do, they should not be setting blackout guidelines that are impossible to meet for plan sponsors because the operational aspects are beyond their control. To further burden plan sponsors with additional liability for blackout periods will not be the answer.

Making DC plan restrictions hastily due to one of the largest companies coming to its knees because of rampant fraudulent accounting and dealings is a very bad combination.

Proper prior planning prevents pi&* poor performance. Our experience is 1 week or less, with 30 - 60 days of prior preparation. Of course this is daily-to-daily conversion. Traditional to daily is a different animal.

Why haven't our legislators devised a scheme to regulate / legislate the additional problem highlighted by Enron? Financial Accounting Standards & "Independent audits" or lack thereof.

Actually, I prefer "No blackout periods without a DOL exemption", but that wasn't one of your choices.

The blackout period should be based on the degree of change to the plan and the volatility of the plan's investment options. For example, a plan changing from monthly valuation to daily, adding new investment options and changing recordkeepers may need a 45-day black out period. Most record keepers will plan for a shorter black out, but the reality is that problems always occur in a massive change.

If the plan is already daily valued and is changing record keepers only, a one week black out should be sufficient depending on the recordkeeper involved. If a plan is invested heavily in company stock like the Enron plan, the black out period is more critical. The length of the black out is less critical in mutual funds or separately managed account because the level of risk is less.

I think the key issue is not how long the "freeze" on trading lasts, but that it applies to everyone involved. If the peons can't trade in their 401k accounts for a certain time period, the bosses can't sell on the open market either!

I think a one month standard is reasonable, given today's technology. Too short a blackout period may result in inaccurate record transfers or discourage conversions to new record keepers. This would be most unfortunate because competition between record keepers has greatly improved service in the industry and has thereby benefited the participants.

Response (f) - it depends. Actually, I was initially going to answer (e), less than one week, but in my experience in dealing with recordkeeper transitions, there can be certain extenuating circumstances in each & every case that all parties will agree to make it go either longer or shorter than one week. JUST CONSIDER THE CONSEQUENCES OF A RUSHED TRANSITION THAT GETS BOTCHED, and could potentially take weeks, or longer, to unravel.

One last point: the TECHNOLOGY will eventually bring us to the point of a zero blackout period - we're just not there yet.

Any legislation for blackout periods should be at the minimum A) a month.

But that's not the real issue with the Enron case. All of this focus on the blackout periods and the capabilities of recordkeepers is just attacking a symptom of the core 401k problem, which is: Participants STILL need to be educated on the value of diversification.

The issues that the government should be focusing on are the criminal acts allowed over a several year period by the executives and auditors of Enron. To somehow implicate the recordkeeping transition as part of the cause for individuals losing their retirement savings is ludicrous! They should title these new suggested regulations: "In case your board of directors, executives and auditors are criminal and the market ridiculously over-values your stock, the recordkeeper and plan sponsor will protect you". The government should focus on the root cause of this problem and leave the 401(k) administrators out of it.

The only change that the Enron debacle should have on 401(k) administrators is to become the 'poster-child' for every piece of educational material that a participant sees. And it needs to be delivered forcefully in a 'This is your 401(k)... This is your 401(k) on drugs. (Enron)' manner. Participants need to diversify their savings or they increase the risk of losing all of it. It's as simple as that.

I think two weeks should be adequate for most conversions. I have had clients experience 6 week blackouts or more from (an unnamed vendor) and other major investment companies that won't turn on the switch until every last penny ties out. That is toooo long.

I would suggest no more than one month, but with the intent of minimizing the blackout where possible. The problem with the government setting this standard is that the length of the blackout period is entirely in the hands of the recordkeeper. Some simply cannot make the conversion in a time span less than three weeks.

...when our firm switched to a new plan sponsor/administrator, the blackout period lasted 3 months, if not longer...and the employees were very frustrated. Initially, we were told 30 days. Of course, no one believed that when a plan is self-directed and going to a new plan sponsor with both brokerage option and 'family of funds' option, that this could and did result in a paper nightmare, but what did I know...long story short, my door was kept closed and I studied new places to live outside of the country.

In my experience, while a plan sponsor wants a blackout to last for the shortest period possible, the recordkeepers control this. The plan sponsor is at the mercy of recordkeepers (unless, of course, it's done in-house but that's relatively rare these days).

It should be b) or c), but given my experience with recordkeepers and all the issues that can come up, I would choose a) to be safe.

My experience has been a 6 month blackout period!! There is a lot of work involved in this type of conversion -- especially if there are significant changes in the methods of recordkeeping.

I still think the ENRON debacle has more to do with the disconnect between the company's executives' best interests and the shareholder's best interests than retirement plans. It is getting publicity because the employees' retirement savings was so heavily invested in company stock but that would not have been an issue if the executives (and their auditors) had not benefited from dishonest dealings at the investors' expense.

Which brings on another issue: the auditors. Exactly when did a CPA's professional ethics becoming completely divorced from ethics and morality in this country? And I can legitimately ask that question because I am a CPA. What I am seeing in the media and hearing at professional meetings is disgusting. And that is a retirement issue and an investment one. It does not seem that the full meaning and impact of fiduciary responsibility is understood except as something to evade. All the professional responsibility goes to the person (not the company) who approves the payment of the bill.

I know I'm in the minority, but I don't think any restrictions should be placed on a retirement plan (i.e., blackout periods or % of company stock held). Those who have stock through a 401(k) or other retirement vehicle should not be restricted from the trading or holding as much as they choose, just like any retail investor. Isn't that capitalism?

Enron's problems were not a matter of the plan's set-up; it was false financial reporting. Had Enron been honest with their financial reporting, employees would have been able to make the decisions they did based on true facts barring any blackouts.

Given how far automation has progressed in the recordkeeping business, I think that a 2 week blackout is reasonable. However, if I were designing the legislation, I would allow for 30 days with exceptions to be approved by the DOL. Our firm went through a change in recordkeepers in July 2001. Our blackout was 3 weeks and it really could not have been shorter given the limitations of the outgoing recordkeeper (they had system and accuracy issues that we are still dealing with). We were all very worried about a major market downturn during the blackout - thank goodness it did not happen.

Those who can do, those who can't teach or come up with legislation that just won't be practical.

It depends! Absolutely!!!!!!!!!!!!!!!

All these choices assume daily valuations, and that's not always the case. Any legislation on blackout dates will only restrict plans from moving to new providers. If you are dissatisfied with your current provider, all they need to do is tell you they can't convert in the allowed blackout period and then you won't be able to change providers. It will give third party administrators a license to provide poor service and raise fees! Is that what Washington wants for participants? That's what you get with knee jerk reactions. It is a very complex situation that needs thorough analysis to understand how to deal with the issues.

The blackout didn't cause the problem; the company caused the problem. There wasn't a blackout as the stock went from $80 to $15, was there?

C- I work with plans during the conversion periods- ideally 2 weeks. Realistically it all depends on how good the info is from the prior record keeper and how quickly the plan can get rebalanced. I have seen them drag on for over 6 months. Lots of items hold up a black out period- such as the Plan Sponsor has not paid the prior record keeper or the prior record keeper has to balance the accounts on his books before he relays the info to the new record keeper. Sometimes recordkeepers refuse to transfer balance info to a new record keeper so it has to be recreated- which is expensive & time consuming. Obviously Bush and legislators have no clue what might cause these delays!

Blackout period: one month, but perhaps mandatory advance notice. Until some recordkeepers improve their services... especially when transferring out.... anything less puts uncontrollable liability on the employer.

If all trustees and record keepers were created equal, I would vote for one or two weeks, depending on the size of the plan. However, after merging 3 subsidiary plans into our company plan, we've found that a lot depends on the record keeping (or lack thereof!) of the former trustee. If a firm time frame is set, it should include the ability to penalize a former trustee for poor record keeping if the new trustee can't complete the reconciliation in time due to the former trustee's poor accounting.

I think a black out period of 30 days is not unreasonable. It takes at least that amount of time to get all the records converted to the new administrator.

Our plan conversion resulted in a 3 month blackout period that obviously sparked numerous participant complaints (but thank goodness it was pre-Enron). (b) - 3 weeks seems reasonable.

Black out periods should never be more than 3 business days. If done over a weekend, this provides five actual days for transition. With sufficient lead time, systems can be run in tandem (with both the old plan and the new plan administrator) prior to the actual transition. In 1991, we accomplished a transition in a Section 457 plan with a black out period that was between Christmas and New Years, being fully functional on January 2nd (today this plan has 37,000 participants and $1 billion in assets).

I have to believe that technology advances over the past ten years have continued to improve an administrator's ability to accomplish a smooth transition in a relatively short span of time. The industry might not like it, because it does cost more than a month-long freeze, but don't believe them when they say it can't be done! If plan sponsors don't require this, why will they bother? They certainly are not going to propose or offer something more than they are being required to do.

(f) It depends. Assuming the blackout is due to a conversion, it depends on the valuation method used for the plan at the "old" provider vs. the method used at the "new" provider. For example, our company moved from a monthly balance forward valuation method to a daily valuation method. Our blackout period was 2-1/2 months. I can tell you that there would have been no way that we could have completed the conversion in the one month that is being discussed. Looking forward, if we were to convert to another daily provider, the blackout shouldn't be longer than a week at the most.

Therefore, I believe there should be different time limits for the various combinations of "old" and "new" methods. On a side note, if I were a consultant and a limit is being put in place, I would strongly recommend that any of my clients that use anything other than a daily valuation method convert to daily before it would be necessary to get a DOL exemption.

With today's technology, a month should be sufficient time to transfer a plan from one recordkeeper/trustee to another.

I recently (1998) changed recordkeepers/trustees and had a two month blackout. The problem was verifying data from the first recordkeeper to the second recordkeeper. We were also fortunate that there were no stocks/mutual funds with the first recordkeeper, just GIC's. Our only concern was the market price going into the new recordkeeper. We went live in early October

1998, when the stock market started it's current roller coaster ride.

A plan that I still have funds in will be going through a "quiet period" for the month of March. I guess they didn't want to use the term "black out" period given today's climate.

"e" for company stock, "c" for all other funds

This would allow employees to react quickly to a potential "Enron" situation. Most people don't "day trade" on a daily basis with their 401(k) funds. But individual stocks are another story, particularly if it is the company you work for. The whole issue comes down to the honesty and integrity of the leadership...Obviously the leadership of Enron had neither honesty nor integrity. How sad for all those hard-working employees.

(d) One week

I don't think we tolerate long delays in any other part of the institutional business. I think the 401k recordkeepers have built in a lot of "cushion" in their process because no one has held their feet to the fire. It is further complicated by the fact that the recordkeeper who's losing business has no great incentive to cooperate.

'…It seems like a good thing to allow companies up to a month for a blackout period. As you said in the call yesterday, most participants never touch their 401(k) investments to reallocate them or adjust them. Plus, it seems like it would place an undue burden on recordkeepers and servicers to have to complete changeovers so quickly. It would be just like congress to set a standard without realizing that the standard isn't at all realistic.

Less than a week. Why not schedule it over a three day holiday weekend when the markets are closed? This would make the transition over a period of time when the accounts of investors are frozen due to the lack of trading and would give almost 90 h for the transfer to occur. Surely the company picking up the new business would be willing to put in this amount of effort and bear the expense.

I'd set the bar at 1 week. Service providers should be able to hit that mark, but they may have to work harder to do it. Lock a plan down at the closing on a Friday, and it should be open for business on the Monday 10 days later. As with many things in life, it's interesting to see who rises to the challenge and who shrinks away from it.

When we changed providers we were blacked out for 30 days, but that was pre-Enron, there was no company stock in the plan (as a match or as an investment option) and there was no market meltdown during the blackout. There was much less sensitivity to the issue at that time, but I wouldn't want to tell employees now that we were going to lock down for 30 days.

We just put our recordkeeping out to bid about 6 months ago. One of our top 5 issues was the blackout period. I had lived through a horrible experience of going through a blackout during "black Monday" in 1987, where employees lost a tremendous amount of money, and vowed never to experience that again.

Many of the recordkeepers we spoke with were surprised that we were making such a big deal about the blackout period (this was pre-Enron publicity), but we stuck to our guns. I think one of the most surprising marketing ploys, even on the part of (an unnamed provider), who claims "zero" blackout, is that in their proposals, the recordkeepers fail to mention that the period of time they quote for a black out doesn't take into account any additional time that the prior recordkeeper will need to do their final valuation and transfer of the records. Therefore, many of those that were promising "weekend" or "no" blackout period ultimately said it could be two weeks, depending upon how quickly the prior recordkeeper got them the records, and what shape they were in! We pushed real hard, though, and our employees will truly experience just 3 business days where they won't be able to make fund changes. Our new recordkeeper (Strong) will actually do a weekend conversion - so there's no "blackout" on their part, and our current recordkeeper will turn the records over needing just 3 days with no activity. Given all the recent publicity, we're real glad we pushed so hard for this.

I think people need to be a little more specific about what they mean by blackout period, both vendors and plan sponsors alike. It's one of those things that may mean different things to different people . . ..

There will be periods where plans must have time for maintenance. I think two weeks should be adequate. In our recent blackout, I parked money in short-term until I could get to it.

Ideally, there should be no blackout period, but it is difficult to set a "standard." Therefore, "It depends" is the only real answer "globally." As you well know, it is so driven by where they are coming from, and where they are going to as to types of plans (Traditional/Daily). The provider on both sides obviously has a lot to do with it, as well. As you also know, there have been times where participants have benefited from blackout periods, though the downside is what always gets the attention.

I also like that some proposals would allow NO blackout (i.e., probably same day) without obtaining a DOL exemption, however, I would not want the exception to become so common that it swallows the general rule.

A month is reasonable provided that the participants have adequate notice. I think we all need to get a grip on what happened with Enron - the stock went from 90 to 14 BEFORE the blackout period began; it only lost another 7 during the blackout. People who lost their life savings because they were foolish and greedy, not because of the blackout period.

In talking about legislation, I think 30 days is fine, with some mechanism to get fast track approval from some body if it needed to be longer. I also think the advance notification requirement is a more important issue.

In talking about standards of practice, I think the sponsor/trustee/recordkeeper/investment management/advice giving community should address some ways of systemically shortening the necessary blackout/quiet-time/lockdown period to modify 401k plan structures (I think DASH had a piece on some plan which restructured over a weekend!). It should also find a way to keep company stock and "safe" choices (like stable value or money market funds) open continuously.

But I literally pray that whatever is enacted is benign because I'm most worried about Government screwing up the 401k plan (the most-liked benefit at our company) in the same way that it did the defined benefit plan. I also find it unbelievably coincidental that so many troubled companies "happened" to be restructuring their 401k at critical junctures. And I think what came out today about Enron's consideration of the lockdown showed "depraved indifference " to the welfare of their employees and , as such is not, I repeat, not representative of the vast majority of corporations.

I have experience coordinating the conversion of numerous smaller plans (5 to 150 employees with assets between $500,000 to $3 million) and have yet to have one complete the blackout period in less than 60 days (or under the "estimated" time). These plans were converted from a "balance forward" accounting to a "daily" system.

For larger plans (over $3 million and over 100 employees), the blackout period has been under 60 days and usually completed within the estimated time period or sooner.

There has been a movement about to change the "black out" to more of a "gray out" with participants eligible to still transfer a portion of their account balance. This might have helped in the Enron situation.

Your report that states that some legislators are supporting "a no blackout" period really shows their lack of understanding on how a conversion of record keepers occurs. Let's see them try to reconcile and administer $100 million plan with 5,000 participants while allowing account activity. They think they have problems now....

Thanks for the opportunity to express my thoughts on the recent announcements from Washington. Having been through a conversion from a monthly valued plan, which involved company stock to a daily plan and a change in investment provider/recordkeeper, I understand the need for a blackout period. Thinking back over our process, I am not sure how we could have accomplished the transition without a 30 day blackout period.

Perhaps the goal should be on advising participants prior to a blackout period and setting a minimum advance notice of an upcoming blackout period rather than the actual time they are prevented from trading their funds. My experience has been that the majority of participants do not transfer investments often and tend to stay with an investment even when given information about asset allocation and investment performance. Even when told a fund will no longer be offered, they do not take action.

Legislation has traditionally made life more complicated for plan sponsors and many times does not accomplish the intended goal. I do not feel Washington has any hands-on information about plan administration and therefore is ill equipped to make prudent decisions about recordkeeping issues. Hopefully our industry lobbyists will convince them that a maximum black out period is not the solution to the Enron participant's losses and will focus on the accounting and accountability issues that created this mess.

I think given today's technology providers should be able to meet a two week blackout period. Unfortunately we do a poor job of coordinating schedules and balancing workload. Regardless of the time period, the 'difference a day makes' whether it falls in a month, 3/2-weekor less will be moaned about anyway.

My expertise is not in the area of 401k plans but it seems to me that the issue of diversification cannot be separated from the blackout period issue. If participants are sufficiently diversified (which might be assumed depending upon investment choices provided and to what extent employees have employer stock among their investments) then blackout periods could be more liberal. Conversely, it could be argued that very restricted or NO blackout period should be allowed if employees are forced to invest heavily in employer stock.

I believe a "reasonable" blackout period should be no longer than 5 business days. I believe the legislation should set target dates for all providers to meet that schedule and then eventually move to 0 (zero) blackout days. The mutual fund industry took a similar course as they moved from 3-day settlement to 1-day settlement and eventually to same day settlement of trades.

As for another hot point, company stock, the industry and most sponsors have been working to educate participants for years now on the risks associated with being non-diversified. Individuals should be held responsible for their investment decisions; it's not my place (not with my tax money) to bail them out of a poor decision. Enron is an exception because of the company's deceptive practices but I am tired of having my taxes go to bailouts!

The blackout period should be held to a week at most. There is no need for an extended blackout if the providers coordinate their services ahead of time to reduce the administrative time it takes to change 401(K) administrators.

The time the administrators take to reconcile the transfer of assets needs to be streamlined to allow for only a one week blackout period

Depends - not a good answer, but it depends on whether the company is changing valuation frequencies. Although in today's environment most plans are daily there are still those that are not and there comes the problem of needing quiet time to bring the records and assets in balance. Perhaps the standard/time limit could be/should be based on whether the company is changing valuation frequencies. Daily to daily can be accomplished with a much shorter "quiet time" than annual to daily or quarterly to daily...

No longer than 2 weeks; however, 3 weeks is more realistic for changing funds or changing systems

Its all well and good for Congress to legislate what a blackout period SHOULD be, but the reality is that all record keepers are not created equal and if the outgoing record keeper is uncooperative and sloppy a blackout could last a minimum of three months and maybe longer. Sure, you can rush the process, but then you get participants whose records are incorrect which leads to even bigger problems. If you map investments from the old plan to the new, and do it conservatively, then the length of a blackout period shouldn't be a big issue.

With regard to the now infamous "blackout" periods, I must vote for "it depends." If everything was going well with the prior provider and there are no problems with the data conversion from the old provider to the new provider, there theoretically would be no reason for a "blackout" period at all, but those are big "ifs." If everything was great with the prior provider, you probably wouldn't be switching in the first place.

Most often the decision to change providers was precipitated by dissatisfaction with the service you were receiving. When there are problems, it is essential that they be fixed before you roll forward; particularly when you are operating in a daily processing environment. About fifteen years ago, we acquired a company with an in-house Recordkeeping system that was (to be polite, a bit porous). When we merged their plan into ours, it took us nearly six months to get things into balance so we could resume our normal (at that time) monthly processing cycles. While we learned a lot about how to do conversion from that nightmare, even if we knew then what we know now, we could not have completed that conversion with the 30 day "blackout" period that is being proposed.

Over the last 15 years the "Blackout" periods have gotten shorter and shorter and I believe that many firms are capable of a vendor transition with little or no blackout period, but not all. I still believe that employees would rather have their funds/accounts transferred correctly rather then quickly. I don't believe that any company elects to extend a blackout period when it is not necessary. However, the judgment of Enron executives to go forward with a vendor change/blackout period in the middle of a financial crisis is ludicrous. A notification to employees via email and sight postings can be done in a day, if necessary (with a follow-up letter to the employees' homes).

A month. Recordkeepers usually do not pass the information over to the new vendor for 10-15 business days and it takes a good week to 10 business days to check load and balance the information so anything less than a month or 20 business days will cause data problems.

3 weeks should usually be sufficient. However, we have done conversions where the previous recordkeeper's records were in terrible shape and, of course, they aren't willing to be of any help. The statement that politicians make that there is no excuse for having a long blackout period don't know what operation areas have to go through to get plans converted from one system to another, even in today's world. They don't know reality.

There are three of us here, and we are split 2 - 1 between (b) 3 weeks and (a) 1 month as a standard. However, practically speaking there must be some exceptions to any standards. The actual time will vary greatly based on factors including:

When assets and records are received from the prior trustee/custodian and recordkeeping. The new bank has no control over this time and the company that is losing the business may be in no hurry to facilitate the transfer. If standards are to be set, they should include a requirement for timely deliver of assets and information by the predecessor firm.

The types of assets - some are hard to value, participant loan amortization schedules have to be set up, etc. If there is a menu of mutual funds that can be mapped directly from the prior trustee's menu to the new trustee's menu, that could be done very quickly.

We have just completed a blackout that lasted 40 days. Our old administrator blacked us out on December 20 and our new administrator would not lift it on their side until everything had been reconciled. The old administrator didn't get the required info to the new one until the 16th of January.

In speaking with colleagues, I understand that a blackout this long isn't all that unusual. Unless deadlines are imposed on the old provider, there is little incentive to be speedy with providing data. And we were fortunate that the old administrator provided very clean data. I've heard nightmares about that too.

I left a company that had a black out period (the entire 1st quarter of 2001) when they elected to change 401k providers. The economy started to go south and I and a lot of other people lost money as the stock market fell. I believe that the employees should be given advance notification of the blackout period and it should not last more than 30 days.

In my former life I was a 401(k) daily valuation recordkeeper. How quickly a new plan can be converted depends on how good the records are from the previous recordkeeper. It takes a considerable amount of time to sort through "garbage in" to make sure that it doesn't become "garbage out." This situation is more often the case with small plans (say, less than 500 participants.) Large plans moving from one large bundled provider to another will rarely have this problem since the records are usually transferred electronically.

With all that said, my choice is (a) a month (although I'd sure like to say "It Depends!")

I have never worked on that side of a plan and would be very interested in learning what it takes to actually do the work. Not knowing that side of it I vote for a solid (e).

Every single day I can go on line and know what my balance was as of the end of business yesterday. Seems like a switch really shouldn't be all that complicated as long as the communication is directly from plan to plan. We have had a 401(k) for just over 4 1/2 years now and I can sell my shares for just under what I have deferred into the plan. A real motivator. Like they say buy low. I'm just getting tired of buying a little lower each week.

Not to name names but we have always had our funds invested with the same 10 funds. Just over two years ago we switched the record keeping from a third party to (an unnamed recordkeeper) and we had an official black out period of six weeks. The same 10 funds we had before the big switch are the same 10 funds we had after. Because of problems getting fund balances (from themselves mind you) we were blocked from loans, hardships, distributions and new investments other than money market deposits for nine weeks.

Any administrator working with a client should be able to structure a conversion with a very short or no "effective" blackout period for participants. The "it depends" fits in when the plan sponsor has a complicated investment structure and investment managers who are unable to support the minimal or no blackout period. There are other dependencies - prior recordkeeper unable to provide reconciled records and assets, etc., but more so I've seen it driven by the asset management side of the equation.

I've been around major conversions in the financial services business for years, the last 18 years more specifically focused on defined contribution plans as well as other benefit plans (DB, H&W, etc.). I've experienced just about every type of conversion process - from the no blackout to the long and drawn-out, very painful type - and I'd have to say that the usual answer has been (e) - less than a week.
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I felt compelled to reply to your question on blackouts since I work in the area of helping clients move their 401(k) plan from a prior provider to our company. In a perfect world with perfect people working in it, it should take less than a week to transfer a plan from one provider to another. However, there are numerous factors that slow down the process such as: the prior provider delays the wire or doesn't send the allocation report for weeks, the company your dealing with doesn't sign the documents due to a delay with their legal counsel, or you are waiting on a former employee to take a distribution before the wire can be sent. I have seen them take less than a week but as long as several months.

Setting a new standard means that someone will have to also set new policies and procedures for providers, participants, and companies to follow not to mention the penalties for not following them. If only the world were a perfect place.

As an "ex recordkeeper" the blackout period (or as we like to call it "quiet period") MUST be a facts and circumstance basis. If the data is coming from a prior recordkeeper whose books were messy, that must be cleaned up before going forward. If it's coming from a "periodic" platform to daily, then the final periodic allocation must be completed and that can take even longer, depending on how long it takes the EMPLOYER to provide census, final contributions, etc. etc. etc. to the prior recordkeeper, and their incentive to expedite work for a client who fired them.

We normally quote a 6-week projected quiet period, just to establish reasonable expectations, but of course, try to get it completed soonest possible. If the prior recordkeeper was "clean" and "daily" and preliminary system compatibility tests were done (as they should!) we've done it in as short as 1-week!

Definitely "less than a week". Modern technology - assuming it's properly configured and pretested - can make major plan conversions almost instantly, or - if necessary - perhaps "over the weekend" when financial activity is relatively stagnant. Since history has proven that individual securities as well as investment markets can turn on a dime, investors should NEVER be locked out of investment transactions to accommodate money managers' inability to quickly sort out the administrative functions of retirement plans or other managed portfolios.

We're in the process of preparing for a conversion now and it would appear that we won't be able to complete the blackout in less than 6 weeks . . . if all goes well.

A reasonable blackout period is a month. There are too many factors that cause delays and a month is the most realistic out of the options given.

In my opinion, a change of providers should happen over a weekend and should not have a blackout at all.

a) One month. A takeover and therefore a blackout can take 2 weeks or up to 2 months.
There are so many different organizations involved in the process. The prior recordkeeper, custodians-money movement, new recordkeepers, etc. It's such a time sensitive project with so many different people involved. For the most part it should be able to be done within 1 months time!

Blackouts should not last more than 2 (maybe 3) weeks. When we changed providers, we went through a nightmare. The blackout lasted a little more than 2 months. Our old provider apparently was miffed that we were moving the plan and was not at all cooperative. They finally budged when our attorney sent them a threatening letter. It was a miserable experience, but our employees were understanding, because we kept them informed of the situation. I never want to go through that again!

The receiving firm should do its homework before the assets arrive (such as enrollments and investment elections). The former firm should allow access to accounts for transfers up until the liquidation date. The day after liquidation, the money should be at the receiving firm via wire and I would think that the former firm could easily provide electronic account data to the receiving firm so that the receiving firm can quickly balance and reallocate the money to everyone's individual accounts.

(b) 3 weeks -- If your new provider can't manage the process to do it in that amount of time, look for a different provider.

I've never had a "blackout period" under a month and that's converting to three different outside vendors and one in-house. Includes plans with under $10 million in assets (7 weeks) and a couple with over a billion each (one was 4 weeks and one 5 weeks). These conversions were as recent as 1/1/2001 and as far back as 1988. However, I am very accounting oriented and would rather get it right on the front end than have to clean up the mess later and lose the credibility with participants. Amazingly, it wasn't that big an issue back in 1988, maybe the market wasn't so speculative then. When you invested, you invested.

We are a municipal retirement system. We are a defined benefit plan and all our assets are managed by external managers in separate accounts. From time to time we may terminate one manager, and hire another. The process is this:

1. Notify terminating manager to stop all trading by COB that day

2. Assets are frozen next day and Custodian prepares list of assets

3. After all pending trades are settled, which could take three days, Custodian sends list of assets to terminating manager

4. Terminating manager certifies list includes all assets that have been under their management

5. New manager receives certified list and determines whether they want to take any securities into the new portfolio

6. Custodian transfers assets new manager wants to new account; assets new manager doesn't want are liquidated

7. Cash from the asset liquidation is provided to the new manager who builds the new portfolio

8. New manager may take a few days or two - three weeks to purchase new securities for the portfolio depending on market conditions and market impact of the purchases

9. On average, the transition of a portfolio from one active manager to another takes one - two weeks

10. This does not include any time for reconciling individual participant accounts as would be required in a 401k transfer

Three weeks should be enough time.

My 401(k) Plan was just merged into the new owners plan. (I'm here until I finish the 2001 discrimination testing and then I get my severance)! The black out period began Dec. 14, 2001 and ended Jan. 22, 2002. The loans are still NOT reconciled. I can't help but wonder if the government set limits, it might force the recordkeepers to figure out a way to convert plans quicker. My vote would be for (c) 2 weeks. One week for each recordkeeper to do their thing.

Prior to my company being purchased I had just completed a recordkeeper change so I've had the pleasure of going through two conversions in 12 months! The first one went much smoother than the last but the black out period was still about the same amount of time, 6 weeks. I'm ready for retirement!

In our recent blackout to switch recordkeepers we were down 5 business days (9 calendar days). This was quicker than expected but we were working with two great vendors.

I think the blackout limit will have to depend on the situation. For example, if a plan is simply changing vendors, and they are daily valued, then a one month maximum should be sufficient. However, if a company's plan is currently monthly valued (why would anyone still be monthly valued), it is virtually impossible to have an accurate conversion in under a month.

The bottom line is that the blackout period wasn't the real issue. There were 2 issues that caused all the problems. If these 2 issues had addressed earlier, then everything else wouldn't have been such a big deal.

1. The Enron trustees evidently didn't fulfill their fiduciary responsibility by periodically reviewing all the funds in the 401(k) plan to determine if they are a viable retirement option. All the funds include employer stock funds. Just because it is a fund of employer stock, doesn't give them a pass on reviewing it.
2. The rules that prevented employees from diversifying out of the employer stock fund.

All the legislation that doesn't address these 2 issues will not accomplish anything. All it will do is allow elected representatives to get more votes come reelection time by them saying that they took action, even though it was on issues that didn't attach the real problem.

Probably best to define blackout as length of time employees cannot transfer funds. My vote for the total blackout from the prior to the new service provider: less than a week.

The black out limit should be set at no more than 2 weeks. If the provider wants anything longer, they are not doing a good job setting up and testing for the transition. In reality, 1 week should be enough but some providers would not be efficient enough to provide that kind of turnaround.

Our $6 million plan converted in summer 2001. We experienced a 60 day blackout period during that event.

The difference is that there is no Company stock in our plan, which uses mutual funds as investment vehicles. Many investment councilors would say 'time in the market', not 'time the market'. So our blackout period did not raise an eye brow.

It is rare for any of our plan participants to switch funds when events occur (i.e. Sept 11 or the Enron scandal).

Different situations require different reactions, that's what makes regulating blackout periods so tough. The recordkeepers need the time to get their house in order when changes are made.

A (one month). …Although I would prefer a longer period (as the maximum length of time -- such as six weeks). The main reason for this is that if a plan is a mess (and we all know way too many plans that are), it is extremely difficult to be certain that everything is correct in a short period of time, let alone correct it. I would strongly disagree with no blackout period -- this favors only the largest of recordkeepers and the largest of plans with significant resources to accomplish this feat. On a per capita basis, the cost of doing a no-blackout conversion would be extremely expensive for a company of a 1,000 employees or less.

It has been our experience when changing providers to use 10 days. This seems reasonable considering all the administrative processing and transaction reporting work that is involved. I would opt for the one week period in the final analysis. I am not sure it is feasible with all that is involved.