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Guest Article

Deloitte logo

(From the September 7, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Staff Offer Opinions on Issues Relating to Blackout Periods

Responding to questions posed by the American Bar Association's Joint Committee on Employee Benefits, Department of Labor officials have provided informal guidance on applying new blackout period notice rules to situations involving a transfer of assets from one individual account plan to another as part of a corporate transaction or otherwise. The DOL officials also responded to a question about whether ERISA section 404(c) protections apply during blackout periods.

Background on Blackout Period Notice Rules

In general, ERISA Section 101(i) requires individual account plan administrators to provide affected plan participants and beneficiaries with 30-day advance written notice of any blackout periods. The statute defines "blackout period," subject to certain specific exceptions, as "any period for which any ability of participants or beneficiaries under the plan, which is otherwise available under the terms of such plan, to direct or diversify assets credited to their accounts, to obtain loans from the plan, or to obtain distributions from the plan is temporarily suspended, limited, or restricted, if such suspension, limitation, or restriction is for any period of more than 3 consecutive business days."

When required, the blackout period notice must include, among other things--

  • the reasons for the blackout period;
  • a description of the rights otherwise available to participants and beneficiaries under the plan that will be temporarily suspended, limited, or restricted by the blackout period (e.g., right to direct or diversify assets in individual accounts, right to obtain loans from the plan, right to obtain distributions from the plan), including identification of any investments subject to the blackout period;
  • the expected beginning date and length of the blackout period; and
  • in the case of investments affected, a statement that the participant or beneficiary should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversity assets credited to their accounts during the blackout period.

Question and Answer

The Joint Committee on Employee Benefits' question involves a transfer of assets from one individual account plan (Transferor Plan) to another (Transferee Plan). Specifically, the Joint Committee asked if a blackout period (within the meaning of ERISA sec. 101(i)) occurs if the rights of participants whose assets are being transferred are restricted (a) for two consecutive business days under the Transferor Plan prior to the transfer, and (b) for two consecutive business days under the Transferee Plan following the asset transfer-- a total of four consecutive business days.

DOL staff responding to the question indicated a blackout period does not occur in this situation "because the period during which participants cannot exercise their rights under the Transferor Plan is not more than three consecutive business days and such period under the Transferee Plan is not more than three consecutive business days." Thus, the blackout period determination is made separately for each plan, and the restricted periods are not aggregated for this purpose. This result makes sense because the Transferor Plan generally does not have control over the duration of any restrictions imposed by the Transferee Plan, and vice versa.

As a follow-up, the Joint Committee also asked whether the nature of the asset transfer (i.e., as part of a corporate transaction or otherwise) was relevant to the analysis. The DOL confirmed the nature of the asset transfer does not matter.

ERISA Section 404(c) and Blackout Periods

A separate blackout period-related question the Joint Committee raised is whether ERISA section 404(c) protections are available to fiduciaries during blackout periods when participants cannot change their investment elections. In general, ERISA section 404(c) protects individual account plan fiduciaries from liability for investment decisions made by participants and beneficiaries that exercise control over the assets in their accounts.

The Joint Committee suggested in a proposed answer that ERISA section 404(c) protections should apply in this situation if the blackout period is not longer than reasonable under the circumstances. (According to DOL Reg. Sec. 2550.404c-1(b)(2)(ii), "A plan does not fail to provide an opportunity for a participant or beneficiary to exercise control over his individual account merely because it ... (C) Imposes reasonable restrictions on frequency of investment instructions." The DOL staff disagreed with this analysis, arguing a blackout period would not be considered a reasonable restriction for purposes of the section 404(c) regulations.

However, the DOL staff went on to say that providing timely notice of a blackout period, as required by ERISA section 101(i), might be a viable defense to liability for investment losses incurred during the blackout period. The reason is that the purpose of the notice is to afford participants a chance to review their investment choices and make any necessary changes before the blackout period begins. Of course, it will be up to the courts to decide if, and under what circumstances, they will recognize such a defense.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955.

Copyright 2004, Deloitte.

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