Everything you need to know about 401(k) blackout periods

Maybe you’ve heard of a 401(k) blackout period, but if you don’t know exactly what it is or how to explain it to your employees, read on.

You’ve probably heard of a 401(k) plan blackout period – but do you know what it is and how to explain it to your employees? Read on for answers to the most frequently asked questions about blackout periods.

A blackout period is a time when participants are not able to access their 401(k) accounts because a major plan change is being made. During this time, they are not allowed to direct their investments, change their contribution rate or amount, make transfers, or take loans or distributions. However, plan assets remain invested during the blackout period. In addition, participants can continue to make contributions and loan repayments, which will continue to be invested according to the latest elections on file. Participants will be able to see these inflows and any earnings in their accounts once the blackout period has ended.

Typically, a blackout period is necessary when:

1. 401(k) plan assets and records are being moved from one retirement plan provider to another
2.  New employees are added to a company’s plan during a merger or acquisition
3. Available investment options are being modified

Blackout periods are a normal and necessary part of 401(k) administration during such events to ensure that records and assets are accurately accounted for and reconciled. In these circumstances, participant accounts must be valued (and potentially liquidated) so that funds can be reinvested in new options. In the event of a plan provider change, the former provider must formally pass the data and assets to the new plan provider. Therefore, accounts must be frozen on a temporary basis before the transition.

A blackout period typically lasts two to four weeks, depending on your prior provider. However, it may need to be extended due to unforeseen circumstances, which are rare; but there is no legal maximum limit for a blackout period. Regardless, you must give advance notice to your employees that a blackout is on the horizon.

Keep in mind: If the blackout affects certain participants or beneficiaries solely because they are joining or leaving the plan as a result of a merger, acquisition, divestiture, or similar transaction, the 30-day advance requirement doesn't apply to them. In that case, you must furnish the notice as soon as reasonably possible under the circumstances.

Is your blackout going to last for more than three days? If so, you’re required by federal law to send a written notice of the blackout period to all of your plan participants and beneficiaries. The notice must be sent at least 30 days–but no more than 60 days–before the last date on which participants can exercise the rights that are being suspended. 

Typically, your plan provider will provide you with language so that you can send an appropriate blackout notice to your plan participants. If you are moving your plan from another provider to Betterment, we will coordinate with your previous recordkeeper to establish a timeline for the transfer, including the timing and expected duration of the blackout period. Betterment will draft a blackout notice on your behalf to provide to your employees, which will include the following:

• Reason for the blackout
• Identification of any investments subject to the blackout period
• Description of the rights otherwise available to participants and beneficiaries under the plan that will be temporarily suspended, limited, or restricted
• The expected beginning and ending date of the blackout
• A statement that participants should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets during the blackout period
• If at least 30 days' notice cannot be given, a statement that federal law generally requires 30 days' advance notice, together with an explanation of why that notice could not be provided
• The name, address, and telephone number of the plan administrator or other individual who can answer questions about the blackout

If the expected end date of the blackout changes after the notice goes out, you must furnish an updated notice to affected participants and beneficiaries as soon as reasonably practicable.

Federal law requires notice to all affected participants and beneficiaries, which includes beneficiaries and any alternate payees under a qualified domestic relations order (QDRO), not just current employees. As a conservative practice, we recommend sending the notice to everyone with a balance regardless of employment status, plus eligible active employees who don't yet have a balance, since they may wish to start contributing and should be made aware of the upcoming blackout period.

Reassure your employees that a blackout period is normal and that it’s a necessary event that happens when significant plan changes are made. Also, encourage them to look at their accounts and make any changes they see fit prior to the start of the blackout period.

If you’re thinking about changing plan providers, but are concerned about the ramifications of a blackout period, know that Betterment is here to help. Our team is here to guide you through the process, and we are committed to making the transition as seamless as possible for you and your participants.