The Sarbanes-Oxley Act amended section 101 of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1021, to require that the plan administrator of an individual account plan (such as a 401(k) plan) provide 30 days advance notice to affected participants and beneficiaries of any "blackout period" that restricts the ability of participants and beneficiaries to direct investments, request loans or request distributions under the plan for a period of more than three business days. (The term "participants" is used throughout the remainder of this Legal Alert to refer to both participants and beneficiaries.)

The notice requirement is generally effective for blackouts occurring on or after January 26, 2003. On October 21, 2002, the Department of Labor ("DOL") published interim final regulations that established guidelines for advance notice to participants of blackout periods under defined contribution plans. On January 24, 2003, the DOL finalized these regulations with a few significant changes and certain clarifications, many of which are in the preamble, rather than the final regulations themselves. The Sarbanes-Oxley Act and the interim final regulations have been discussed in prior Legal Alerts. This Legal Alert focuses on the clarifications and amendments to the interim final regulations, and includes a model blackout notice reflecting certain of the changes.

Content of the Blackout Notice

As with the interim final rules, the final regulations generally restate the statutory requirements for the content of the notice, including the requirement that a blackout notice must set forth the expected beginning date and ending date of the blackout period. There have been a few notable clarifications of the content rules.

  • Under the final rules, plan administrators may reference a limited range of dates to define the beginning and ending dates for a blackout period, so long as participants also have access to information to determine whether the blackout period has actually begun or ended. Specifically, the blackout period may be described by referring to the calendar weeks during which the blackout period is expected to begin and end, provided that participants are also given access to a toll-free telephone number, web site or other means for obtaining information on the actual dates easily and without charge when it becomes available. Plan administrators may also combine methods of referring to the blackout period by providing a specific start date and using the calendar week for the expected end date or vice versa.
  • The final rules clarify that a single notice may be used to describe different blackout periods (e.g., a 20 day blackout period for loans and a 10 day blackout period for distributions and investment changes), and a blackout notice may be included in or with other benefits-related information. If the notice is included with other materials, such as a benefit statement or a notice of a service provider change, it must be prominently identified.
  • Both the interim final rules and the final rules require the inclusion of a statement advising participants to consider the limitations of the approaching blackout period when reviewing their investments, and the model notice in the interim final regulations included references to risks related to investments in individual securities. The final rules clarify that, if a plan does not permit investments in individual securities, the blackout notice is not required to include a statement concerning these risks.

Timing and Delivery of the Blackout Notice

Like the interim final rules, the final rules provide that notice must be furnished at least 30 calendar days, but not more than 60 calendar days, in advance of the last date on which affected participants can exercise their affected rights immediately before the commencement of any blackout period. Although the DOL received numerous comments requesting longer periods in which to provide notice, the final rules retain the 30/60 day time frame. The final rules also specifically allow administrators to supplement the regulatory requirements by furnishing earlier or more frequent notices than that required by the regulations, but at least one of the notices provided to participants must comply with the regulatory timing and content guidelines.

  • Under two exceptions, the 30-day advance notice requirement is not applicable where the deferral of the blackout would violate ERISA’s fiduciary standards or where commencement of the blackout period is the result of events that were unforeseeable or beyond the control of the plan administrator. In both of these circumstances, a plan fiduciary must reasonably determine which of the two exceptions is applicable and document the determination in an instrument which is signed and dated by a plan fiduciary.
  • The final rules clarify that if either of the two exceptions above are applicable, notice must still be furnished unless that is impracticable; moreover, if notice can be provided to some participants but not to others, plan administrators must furnish notices to those participants who can be notified.
  • As stated in the interim final rules, if the blackout occurs solely in connection with an individual’s becoming, or ceasing to be, a participant in a plan as a result of a merger, acquisition, divestiture, or a similar transaction involving the plan or the plan sponsor, the plan administrator must provide notice as soon as reasonably possible, rather than 30 days in advance. If this exception is applicable, the regulations do not require the administrator’s notice of the blackout period to include an explanation as to why 30-days advance notice was not provided.
  • The final rule provides that the blackout notice must be in writing and may be furnished electronically or through any permissible manner under the DOL’s general rules for disclosure. A blackout notice will be considered furnished as of the date of mailing if mailed by first class mail, certified mail or Express Mail, or, in the case of certain private delivery services, on the date of delivery to such services, and a blackout notice will be considered furnished on the date of transmission if furnished electronically. However, a blackout notice that is furnished through interoffice mail will be considered furnished on the date of receipt.
  • As under the interim final rules, if a plan holds employer securities issued by a public company that are subject to the blackout, the plan administrator must also provide notice of the blackout to the issuer of the employer securities. The final regulations say that where an issuer designates the plan administrator as the person to be given notice of a blackout period, the issuer shall be deemed to have been given notice on the same date the notice is furnished to affected participants, and the plan administrator is not required to notify itself of the blackout period.

Definition of Blackout Period

The DOL notes that the blackout notice requirements are intended to apply to rights that are temporarily suspended, limited or restricted, rather than those that are permanently eliminated. However, the final rules explain that if the implementation of a permanent restriction requires that certain rights be temporarily suspended, limited or restricted, the blackout notice rules will apply to the rights temporarily affected. For instance, while replacing investment option A with investment option B, a plan ceases further investments in option A and temporarily suspends participants’ right to direct investment of the funds being transferred to option B for 5 days during which the accounts are to be reconciled. In this scenario, the permanent restriction on investments in option A would not constitute a blackout period, but the 5 day temporary restriction on direction of funds in option B would constitute a blackout period and trigger the blackout notice rules. In addition, there are some notable exclusions from the definition of blackout period.

  • As amended, the final regulations specifically exclude from the definition of blackout period any suspensions, limitations or restrictions that are regularly scheduled, provided they are disclosed to affected plan participants through the summary plan description, participation or enrollment forms, or other similar plan documents.
  • Both the interim final rules and the final rules exclude from the definition of blackout period any suspensions, limitations or restrictions resulting from qualified domestic relations orders. The DOL has clarified that the qualified domestic relations order exclusion also applies to restrictions imposed while it is being determined whether a domestic relations order is qualified. Similarly, suspensions, limitations and restrictions occasioned by a participant’s action or those of a third party (e.g., a dispute between beneficiaries as to the proper recipient of death benefits) are excluded from the definition of blackout period under the final regulations.
  • The final rules clarify that the limitation of services, such as investment education and advice, retirement counseling and financial planning, will not constitute a blackout period as long as the suspension or other restriction of the services will not interfere with participants’ ability to exercise their investment, distribution or loan rights under the plan.

Model Notice

The revised model notice included at the end of this Legal Alert reflects the changes that have been made in the final regulations. Specifically, paragraph 3 of the model notice reflects the alternatives that may be selected when describing the length of the blackout period. Paragraph 4 of the model has been modified to show that the last two sentences concerning investments in individual securities are only applicable to plans that offer investments in individual securities. In addition, paragraph 6 of the model notice clarifies that individual persons are not required to be named as contacts for obtaining information about blackout periods.

Civil Penalties

The final regulations establish procedures concerning the assessment of civil penalties by the DOL for failures to provide notice of the blackout period. Like the interim final rules, the final rules provide that the Secretary of Labor may assess a civil penalty of up to $100 a day for each failure to provide a blackout notice to a plan participant. The penalty rules provide procedural guidance on the assessment of penalties and on the facts and circumstances that may lead to a waiver or reduction of penalties. In addition, the civil penalty rules reflect the requirements of the Federal Civil Penalties Inflation Adjustment Act of 1990, requiring that federal agencies adjust certain civil monetary penalties for inflation. The DOL will publish a separate final rule implementing the inflation adjustments.

Effective Dates

The rules regarding the notice requirements for blackout periods and civil penalties are effective for blackout periods commencing on or after January 26, 2003. For blackout periods beginning between January 26, 2003 and February 25, 2003, plan administrators are required to provide notice to participants as soon as reasonably possible.

Securities Trading Restriction

As noted above, if employer securities issued by a public company are subject to a plan blackout, the plan administrator must provide notice to the issuer of the securities. This requirement is designed to facilitate the issuer’s ability to comply with a companion rule that prohibits insiders from trading certain of the issuer’s securities during the plan blackout. The Securities Exchange Commission has issued final regulations regarding this blackout trading restriction, and we have briefly described key aspects of those regulations and other recent SEC guidance in a Legal Alert that is posted on our website. Please contact us if you have any questions concerning the regulations on the advance notice of plan blackout periods.

Model Notice

Important Notice Concerning Your Rights [Enter date of notice]

Under The [Enter Name of Individual Account Plan]

  1. This notice is to inform you that the [enter name of plan] will be [enter reasons for blackout period, as appropriate: changing investment options, changing recordkeepers, etc.].
  2. As a result of these changes, you temporarily will be unable to [enter as appropriate: direct or diversify investments in your individual accounts (if only specific investments are subject to the blackout, those investments should be specifically identified), obtain a loan from the plan, or obtain a distribution from the plan]. This period, during which you will be unable to exercise these rights otherwise available under the plan, is called a "blackout period." Whether or not you are planning retirement in the near future, we encourage you to carefully consider how this blackout period may affect your retirement planning, as well as your overall financial plan.
  3. The blackout period for the plan [enter the following as appropriate: is expected to begin on [enter date] and end [enter date] / is expected to begin during the week of [enter date] and end during the week of [enter date]. During these weeks, you can determine whether the blackout period has started or ended by [enter instructions for use toll-free number or accessing web site]].
  4. [In the case of investments affected by the blackout period, add the following: During blackout period you will be unable to direct or diversify the assets held in your plan account. For this reason, it is very important that you review and consider the appropriateness of your current investments in light of your inability to direct or diversify those investments during the blackout period. For your long-term retirement security, you should give careful consideration to the importance of a well-balanced and diversified investment portfolio, taking into account all your assets, income and investments.] [If the plan permits investments in individual securities, add the following: You should be aware that there is a risk to holding substantial portions of your assets in the securities of any one company, as individual securities tend to have wider price swings up and down, in short periods of time, than investments in diversified funds. Stocks that have wide price swings might have a large loss during the blackout period, and you would not be able to direct the sale of such stocks from your account during the blackout period.]
  5. [If timely notice cannot be provided (see paragraph (b)(1)(v) of this section) enter: (A) Federal law generally requires that you be furnished notice of a blackout period at least 30 days in advance of the last date on which you could exercise your affected rights immediately before the commencement of any blackout period in order to provide you with sufficient time to consider the effect of the blackout period on your retirement and financial plans. (B) [Enter explanation of reasons for inability to furnish 30 days advance notice.]]
  6. If you have any questions concerning this notice, you should contact [enter name, address and telephone number of the plan administrator or other contact responsible for answering questions about the blackout period].

Sutherland Legal Alerts are intended to provide clients with information on recent legal developments, not to render legal advice.