401(k) Plan Blackout Period

401k-blackout-period-graphic With the meltdown of the banking industry just the latest in a long line of shenanigans that Main Street remembers happening thanks to Wall Street, it is no wonder that ordinary people are nervous about their finances. In particular, many people are worried about their 401(k) and how they will ever be able to retire if things keep happening to their hard earned savings and investments.

That is why getting an official looking letter in the mail or delivered at work informing you of your “rights” and about an upcoming blackout period can make even savvy investors nervous.

401K Changing Plan Administrators

All 401(k) plans are administered by a third-party. This arrangement protects workers retirement savings by ensuring that the company does not have any access to the money invested by workers in their defined contribution plans like a 401k plan. The third-party is a financial company such as a mutual fund company, insurance company, bank, or brokerage, that takes on the responsibility of accepting deposits, investing money into the proper funds or other investment choices, and keeping track of those investments. And, when the time comes, this third-party is also in charge of completing the withdrawals from your 401(k) and getting the monies to you in the form of a check, band deposit, transfer, or rollover.

This third party is called the plan administrator, because they are responsible for the administration of the plan. The plan administrator does not work for free. Typically, the administrator receives compensation in the form of a cash payment from the company and from each plan participant (worker who invests in the 401k) in the form of extra expenses charged on investments via a higher expense ratio.

Like any other vendor that provides services to the company, they can be replaced by another vendor. This can happen for lots of reasons. The most common reasons a company changes their 401(k) plan administrator are to get lower expenses (usually for both the company and the employees), to get better service, and to better investment choices.

When a 401(k) plan changes its administrator, there are several things that need to happen. Most critical to the employees contributing to the 401(k) plan is that the money currently invested with the old administrator has to be transferred to the new plan administrator. Doing this requires a blackout period.

Why A Blackout Period?

To understand the purpose of the blackout period, it is useful to think about how any financial account, such as a bank account, works.

Unless you deposit cash (actually dollar bills) into the account, the bank must “clear” the funds with wherever the money is coming from. This is just like when you write a check, the money doesn’t disappear immediately from your account, but rather, whoever you wrote the check to, presents the check to your bank for payment. Your bank verifies the check and your account balance and then transfers the money and deducts it from your account.

A similar thing happens in investing. When you sell and investment, the money doesn’t show up instantly. Instead, stock trades “settle” in 3 days. That means that if you sell 100 Shares of XYZ stock on Monday for $5,000 then your brokerage firm will transfer the 100 shares of stock three days later to whoever you sold them to and that person’s brokerage firm will transfer the $5,000 to your brokerage firm on the same day. This is known as “settling.”

However, the money appears in your account instantly and can be re-invested or withdrawn right away. This is because your brokerage firm executed the trade and therefore is certain that it will receive the money from the other firm. But, what if you transferred your account?

The new brokerage firm did not execute your trade, they won’t be the ones receiving the money. So, your account at the new firm will not show your $10,000 cash immediately. (This is typically taken care of automatically via a “residual sweep” where the new broker transfers whatever is left at the old broker a few days later.) This setup works fine on an individual basis, but you can imagine the complexity of doing the same thing for hundreds or thousands of employees.

To avoid any these issues, your 401k plan will impose a blackout period during which time you cannot make any adjustments to how your money is invested. In other words, you can’t buy or sell anything. Since no one can make any trades during this period, when the transfer occurs there won’t be any “unsettled” trades to cause issues. The transfer can happen cleanly and once all of the cash and securities have been received by the new plan administrator, the employee participants can resume buying and selling their investments in their 401(k) account.

What About Enron?

If you paid close attention to the Enron scandal and bankruptcy you may remember that one of the issues was that the Enron retirement plan was in a blackout period while the company was going under and the employees could not move their money out of Enron stock (it probably wouldn’t have helped much if they could have anyway). As a result, 401k regulations were changed to provide for a shorter blackout period. Today, a blackout period is typically only a week or two depending upon the size of the plan.

What Should I Do During Blackout Period?

Usually, you don’t have to do anything when you get a notice that your 401(k) will be in a blackout period. The exception is if you were planning to make changes to your investment allocation within your plan for some other reason. In that case, you will need to decide whether to make the changes before or after the blackout period.

The other exception is if you are retired and withdrawing money from the 401k plan, then you want to make sure that enough money is in cash during the blackout period since you will not be able to sell any existing investments or make a withdrawal. It is especially important to act if you rely on an income distribution from the plan that would normally occur during the blackout period.

For example, if you normally get $3,000 on the 20th of each month and the blackout period will be from the 15th to the 25th, you will NOT get your distribution on the 20th. Therefore, you will need to make arrangements to get your money by the 14th. However, make sure you check with your HR department to find out what will happen to “missed” automatic distributions or you might end up getting paid twice if the company executes missed withdrawals automatically after the blackout period.

If the plan is your only source of income, it makes sense to raise a little extra cash before the blackout period because you will not be able to withdraw money during the blackout period.

Just understanding what the blackout period is should be enough for most workers. If you have plans to do something with your account and the blackout will get in the way, then take action to have it done first. Otherwise, just keep contributing the maximum amount you can to your 401(k) and follow your smart, long-term, diversified investing strategy.

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4 thoughts on “401(k) Plan Blackout Period”

  1. My company was in a blackout period, and mid-way through our funds moved from a low-yield safe fund into a fund based on your age. We were not notified of this move (until afterwards) or have access to redistribute our funds. Once we were able to access our funds, I had already lost over $850 over 7 business days. I was told once all the funds transfer over to the new provider, they were put into the market, but the blackout continued while reconcile accounts such as loans. Am I simply just out of luck on this or can I look for reimbursement of my losses?

    1. Unfortunately, you are probably out of look. The best way to look at it is that over numerous years with your 401k, $850 won’t end up being a very big deal in the long run, especially if the plan you were moved into is better. For example, lower expenses will save you way more money over the years than $850.

  2. Hi – thanks for the info – we just got notice of a blackout period (switching administration) from Oct. 31 – Dec. 9. You mention that nowadays it is typically a week or so, not over a month. Should I be concerned at all at this length of time?

    Thank you.

    1. The length of the blackout period depends on both the changes and the plan. The point is to not have trades and transfers taking place while the plan is being moved around. It also allows for money that is invested in options that do not exist in the old plan to be migrated, which involves selling the old securities and buying new ones. The length is not a concern that there is something bad happening, although shorter is better.

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