Missed blackout notice

A 401k plan sponsor was changing investments and recordkeepers and overlooked distributing the blackout notice.  The plan is now out of the blackout period.  Is there a correction vehicle in EPCRS for this?  Is self-correction an option?

At least one of the participants lost significant $$$ due to not knowing about the blackout as well as the mapping of his investments from old to new not aligning the way he wanted.  If the Plan Sponsor makes the individual(s) whole and documents everything from start to finish, would that be a sufficient fix?  

Do you think this is something that would be covered by the plan sponsor's E&O policy?

Thank you

The potential consequences of failing to furnish an ERISA § 101(i) blackout notice (if it was required) might include fiduciary responsibility for an individual account’s losses that result from the directing individual’s lack of notice, and a civil penalty. (There can be other consequences, but those might be beyond your query and this discussion.)

Fiduciary liability. Failing to furnish a required blackout notice is a breach of the plan administrator’s fiduciary duties. ERISA § 404(a)(1). A fiduciary is liable to make good losses that result from the fiduciary’s breach. ERISA §§ 409, 502. Although it might be difficult to prove causation, some lawyers believe a directing individual could assert she would have made different investment directions had the individual received the proper notice.

Civil penalty. If a plan’s administrator fails to furnish a required blackout notice, the Labor department may impose a civil penalty. In 2024, the maximum penalty is $169 per affected participant, beneficiary, or alternate payee multiplied by the number of days that the administrator failed to furnish the notice. ERISA §502(c)(7); 29 C.F.R. §§ 2560.502c-7, 2575.3; Dep’t of Labor, Federal Civil Penalties Inflation Adjustment Act Annual Adjustments for 2024, 89 Fed. Reg. 1810, 1819 (Jan. 11, 2024). If more than one person is responsible for a failure to furnish a blackout notice, all responsible persons are jointly and severally liable for the penalties on that failure. 29 C.F.R. § 2560.502c-7(j).

There is no Internal Revenue Service correction procedure; ERISA § 101(i) is an ERISA title I command.

A failure to deliver an ERISA § 101(i) notice is not a breach with a routine correction under EBSA’s Voluntary Fiduciary Correction program.

The Labor department might not assert a civil penalty if EBSA doesn’t know that the plan’s administrator failed to deliver the notice.

Restoring a loss caused by a lack of a blackout notice, especially if the affected individual otherwise seems likely to complain, might help lessen both exposures. An administrator would want its lawyer’s advice, including about whether to condition restoration on the individual’s release of claims against the plan’s administrator. There can be a range of strategies about this.

If the plan’s administrator has ERISA fiduciary liability insurance or other insurance that might respond to a claim, the administrator should get its lawyer’s advice, including advice about the insured’s obligation to give the insurer notice of a claim or of even an occurrence that could lead to a claim. Insurance contracts differ about these obligations and opportunities. And again, there can be a range of strategies.

Santo Gold might want to present information without giving legal advice.

This is not advice to anyone.

Peter thank you for that lengthy explanation.  This is more serious than the Plan Sponsor would expect.  ERISA attorney time seems needed.  The individual who noticed and lost money made it known in an employee meeting so everyone will be checking now.  This is going to get messy.

If more than a few people know about the notice failure, an employer/administrator should lawyer-up.

And if anyone might assert that a recordkeeper, TPA, or other service provider did something (or failed to do something) in a way that helped the employer/administrator’s breach, a service provider too might lawyer-up (with a lawyer who’s conflict-free regarding the employer/administrator). Even if an assertion is baseless, defending against an assertion can be $$$, often unrecoverable.

A fiduciary might, at least until it considers its lawyer’s advice, be careful not to concede or admit liability or responsibility. Among other reasons, a too-early concession can defeat one of the conditions of a prohibited-transaction exemption for settlements and releases.

A situation like this might call for quick work: one might seek to quiet participants so no one thinks of a telephone call to the Employee Benefits Security Administration. Once EBSA has even an inquiry file open, it’s more likely that unwelcome things can happen.

This is not advice to anyone.

Theres also the question on the 5500, whether a blackout notice was provided.  They would have to answer "no" and that could catch someones attention.  Which has to be factored in as well.