PSCA Releases Answers To Frequently Asked Questions About Lock-Out Periods
Enron's bankruptcy and the uproar over the "lock-out" imposed on Enron employees that kept them from being able to sell their company stock has caused confusion. As a result, the Profit Sharing/401k Council of America (PSCA) has released answers to the most frequently asked questions about defined contribution transaction suspension periods, also know as blackout periods and lockouts. The Q&A's will answer questions about the purpose, operation and frequency of transaction suspension periods. "The lockout of Enron employees from their retirement plan has raised many questions," said David Wray, PSCA's President. "We hope the following Q&A's will help."
Frequently Asked Questions About Transaction Suspension Periods
What is a transaction suspension period, or "lock-out"?
The period of time during a change in recordkeepers (who also may be fund managers) in which no participant financial transactions (e.g. , transfers among investment options, in-service withdrawals, loans, or final distributions) are allowed. Employers switch recordkeepers to lower costs and improve plan features for participants by, for example, adding on-line features, adding more or different investment options, and shortening the interval in which a participant may change investment or contribution decisions from quarterly or monthly to daily.
Why do recordkeepers impose transaction suspension periods?
The old recordkeeper suspends financial transactions during the transition period to allow adequate time to (1) perform a final reconciliation of participant records and plan assets, and (2) provide the participant records to the new recordkeeper. The new recordkeeper imposes a suspension to allow adequate time to build participant accounts on its system and verify their accuracy.
Why do recordkeepers suspend financial transactions during the transition period?
Financial transactions are suspended so the transition of participant accounts and assets is not a "moving target". For example, the new recordkeeper needs information about outstanding participant loans to properly establish participants' accounts. If a participant is allowed to take a new loan after that information is conveyed to the new recordkeeper, the participant's account will be inaccurate when established by the new recordkeeper.
What determines the duration of a transaction suspension period?
There are numerous reasons for this on each side. For the prior recordkeeper: (1) it takes time to reconcile the participant records to assets; and (2) it takes time to produce an electronic file of the records, with participant demographic data as well as account balance information. For the new recordkeeper: (1) it takes time to build participant records on the new recordkeeper's system; and (2) it takes time to verify and reconcile plan assets to participants' records. Depending on a myriad of factors, these tasks can be extremely complex and time-consuming. A suspension period can last from a few days to more than a month.
What happens to existing investments during the transition period?
Assets in participant directed plans usually remain invested throughout the transition period in accordance with participant directions given before the transition period begins. On occasion, plan assets are transferred into a money market or other "safe" fund during the transition.
What happens to new contributions during the transition period?
Throughout the transition period new contributions are invested in accordance with the participant's investment selection.
How commonplace are transaction suspension periods?
Approximately 24,000 plans converted to new recordkeepers in 2001 according to the Society of Professional Administrators and Recordkeepers. This figure represents 6.8 percent of all plans. Based on this 2001 data, any one plan would, on average, change recordkeepers once every 14.7 years.
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