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Shedding Light on Blackouts: What Happens When 401k Providers Change

Suppose you wanted to bail out of the plunging stock market but couldn't find your parachute.


That was the situation facing some Enron employees last October. As the company's shares tanked, 401k participants who owned large quantities of company stock discovered that they were stuck taking the same plunge as their employer.

The reason: Enron had decided to go ahead with its plan to change its 401k recordkeeper even in the middle of the turmoil. As a result, participants were locked out of the plan and forced to watch helplessly as the stock price plummeted.

Under normal circumstances, today's 401k plans, with 24-hour telephone and Internet access, make it pretty unlikely that you won't be able to change your investments on demand. One exception is if your employer decides to change a plan service provider, in which case employees are locked out of the plan for days or weeks.

A plan changeover involves a lot of administrative activity, of which the blackout is the most visible part (no pun intended), particularly following the publicity of the Enron case. Participants may also find their investment options changed.

Here's a look at what happens when an employer changes 401k plan providers, the mechanics of a lockout, and how one might affect you.

Why Change Providers?

Employers change 401k providers regularly, usually for one of these reasons:

  • They are dissatisfied with performance of the current investments
  • They are dissatisfied with the current recordkeeper's services and/or fees
  • Their current service provider leaves the business
  • The company is sold and employees switch to the new company's plan
  • The provider resigns from handling the company's business.

Denise Laussade knows some of these reasons intimately. Since October 2000, her employer, Dan River Inc., a textile manufacturer, has gone through three plan provider changes. That's a lot, observed Bob Cunningham, assistant vice president with Mass Mutual Retirement Services.

But, not all the elements of the changes were within Dan River Inc.'s control, said Laussade. The first occurred in October 2000, when Dan River merged three 401k plans into two. Then, in June 2001, the company's recordkeeper abruptly left the business, leaving the company with a recommended replacement. That relationship didn't work out and in April 2002, the company moved to a new recordkeeper and investment provider.

In each change the impact on Laussade was different. In the first, she gained additional investment choices and made new selections. In the second, there were no fund changes but she had serious worries about the reliability of the plan. The recordkeeper regularly made mistakes in valuing accounts, creating headaches for Laussade who, as senior vice president of finance, had to regularly double check the recordkeeper's work and follow up with it to make corrections. "I had to baby-sit the plan," said Lassaude.

The final change put her mind back at ease. Even though she had to select new investments, she was confident that the plan was being managed properly.

The Players

Several players may be involved when a plan switches providers. There are commonly three: the trustee, the investment company and the recordkeeper. They may all be the same firm or they may be independent firms.

The investment provider offers the mutual funds, stocks, bonds or other vehicles in which you can invest your money.

The trustee actually holds the investments on behalf of the plan's participants.

The recordkeeper tracks the administrative details of the plan, such as your contributions and how they are invested, a loan if you take one, your date of hire, your vesting and your hardship withdrawals.

On the surface it seems like moving a plan should be a simple process, but it isn't. One reason has to do with the way 401k plans are set up and the assets held. Your contributions and earnings are not held in your name, but in what is known as an omnibus account -- a large account that holds all the investments and assets contained in your employer's 401k plan.

The name on the account is the 401k plan trustee, often an official at your employer or an official with a trust company. In either case, this person is obligated to hold and protect these assets on your behalf.

The recordkeeper sorts out your specific contributions and holdings in the plan, and those of all the other participants.

Mechanics of a Change

Changing 401k plan providers is daunting because the employer is moving the plan from a vendor that usually knows all the details intimately to one that doesn't. Despite the fact that the plan assets are not guaranteed by any federal agency, the trustee is on the hook if any assets are lost.

Even though a blackout may take several weeks, the complete changeover process often takes about three months, said Cunningham of Mass Mutual Retirement Services.

The steps typically are as follows:

  • The new provider reviews the 401k plan documents, going through the plan provisions "line by line," said John Fletcher, certified pension consultant with Plan Advisory Services.
  • The old recordkeeper or investment provider provides payroll and 401k plan balances, investment and loan information for each participant to the new recordkeeper.
  • The new recordkeeper writes and tests a computer program to accept this data at the changeover.
  • The employer and new provider communicate with employees to explain the reasons for the change, how it will affect them, and the basics of the blackout. Employees are told how their investments will be mapped to new investments, if the investment provider is changed.
  • New legal documents are prepared listing the new provider.
  • The old provider begins the blackout. It runs a final tally on how much each participant has in his or her account. In a plan that values accounts daily, this can be done in a day. In a plan that values accounts less frequently, this can take several weeks. Blackouts typically last about 10 business days.
  • If the plan is changing investment providers, the assets are sold and the proceeds are wired to the new provider where they are commonly reinvested in similar funds, in a process called mapping.
  • The old provider issues final statements based on the liquidation balance.
  • Participants' new account data is forwarded to the recordkeeper. When the data is entered in the new provider's computer system, the plan goes live and the blackout ends.

If there is a delay in the changeover, this last step is when it commonly occurs, Cunningham said. His firm advertises it can do a "no blackout" conversion. "What we depend on to do one is that the old provider get us the records as soon as the service ends. That doesn't happen very often," he said.

The reason: sour grapes. In many cases the recordkeeper has lost business and isn't about to go out of its way to make it easy on the new recordkeeper, said Rick Shoff, president of Plan Advisory Services. This tends to happen more often with smaller providers, he said. "If you are taking a plan from a well-known, established firm, you are more likely to get a 24-hour conversion."

Blackout Nuts and Bolts

You can't have access to your 401k plan during the time when the assets and/or records are moved from one provider to another. This period of time, the blackout, can be a short as overnight or as long as two months. Generally during this time you can't select new investments, take a loan or make withdrawals.

However, your contributions continue to be invested and any loan repayments are credited to the account.

A blackout is needed so that the old provider can tally up your account and pass on the data and assets to the new provider. In cases where the 401k plan's value is updated daily (daily valuation) the blackout should take no more than a few days, said Ted Benna, creator of the first 401k plan.

"There's nothing inherently wrong with blackouts," said a spokesman with Retirement Planners and Administrators Inc. of Falls Church, Va.

Still, as a result of the Enron meltdown, Congress is considering adding blackout regulations to the 401k rules.

Very few regulations currently cover the changing of providers, said Carol Calhoun, a benefits attorney who runs the site www.benefitsattorney.com.

"The law has never provided any specifics about what you have to tell people in advance" of a blackout, she said. "It has been a reasonableness standard."

Employee's Role

For the most part, employees are observers of this process. Yet, a plan changeover can provide a good chance to bone up on the features of the new plan and to review your investments.

"The conversion is a good time to take a look at allocations and to reallocate prior to conversion," Cunningham said.

And finally, when the changeover is done, doublecheck your records and statements to make sure your investment choices, contributions and balance are correct.

"My message to participants is, 'Don't be afraid to ask questions. The sponsor and the trustee are looking out for you, but if you don't understand, ask,'" said Laussade.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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