In the aftermath of the Enron bankruptcy and the demise of so many investors' 401(k)s, some 401(k) plan providers are finding employers newly motivated to minimize blackout periods. These are the periods when a provider is transitioning to a new provider, when plan participants are unable to make any transactions in their accounts.
And providers are responding. Mellon Financial Corp. of Pittsburgh said it is working with its biggest new clients to reduce blackouts, and MassMutual Financial of Springfield, Mass., said employers have taken the initiative to ask about the speed of conversions. Since 1999, the 401(k) provider has offered zero-blackout and 24-hour-blackout service to sponsors with more than $20 million in plan assets, and this has become a selling point, a MassMutual executive said.
Enron drew heavy criticism for restricting its employees' ability to reduce their 401(k) portfolios' dependence on Enron stock last year, but perhaps the most harmful blackout occurred last fall, when the company switched providers shortly before filing for bankruptcy. The stock became nearly worthless during this period.
Since then, the U.S. House of Representatives and the Senate have been considering ways to limit the length of blackouts or prohibit them altogether. In February, a bill was introduced in the House to repeal the legal "safe harbor" that protects employers and fund managers who meet their fiduciary duties from liability if plan participants suffer losses during a blackout.
A New Selling Feature
Curt Morgan, a senior vice president at Mellon HR Solutions, said the Pittsburgh-based 401(k) provider is working closely with its biggest new clients to reduce blackouts during the transition to Mellon's retirement service. He said Mellon would try to schedule blackouts over weekends or over long holiday weekends. In fact, Morgan said some transfers have been accomplished without a blackout.
"We are certainly looking at minimizing blackouts," he said. "We are working very hard with prior recordkeepers to streamline the data exchange. We hold dry runs and dress rehearsals just to try to avoid all the snags and roadblocks."
Bob Cunningham, a vice president of defined contribution plans at MassMutual, said that this year, prospective corporate clients have frequently asked about blackouts and the speed of conversions.
He said MassMutual's zero-blackout service has become a strong marketing point. The company is marketing this feature through the press rather than advertising, he said. MassMutual markets its 401(k) plan through television, radio, and newspaper ads, he said, and future advertisements may include the zero-blackout issue.
Since the beginning of the year, MassMutual has sold plans to 11 employers with more than $20 million in 401(k) assets, and four more conversions are planned through July. The zero-blackout service was used in each conversion, Cunningham said.
His company has collected data indicating an average of 24,000 blackouts a year. Blackouts last a week to a month, he said.
MassMutual's system is totally integrated so that, when 401(k) data is received from an old provider, the information is translated into MassMutual's record-keeping system and then automatically integrated into its toll-free hotline, participant information center and Web site. He said other providers must first load data, then interface with them.
Necessary Evil?
However, Warren Cormier, president of Boston Research Group, said blackouts are not really a significant issue. Even since Enron, he said, blackouts, which he called a necessary evil, are not a significant reason to avoid changing 401(k) plans.
"Employers change their 401(k) plans because fees are too high, service is poor, or investment performance is weak," Cormier said. "If employer[s] see one of these problems, they are willing to endure a blackout because it is their fiduciary responsibility to avoid these hurdles."
Jenny Engle, a spokeswoman for Fidelity Investments of Boston, agreed. She called blackouts a "normal part of the transition from one 401(k) plan to another."
Fidelity has discussed the issue a lot, she said, but is not considering any change right now.
Cunningham said that with today's technology, there is no reason blackouts should be considered a necessary evil.
"Sponsors should demand from vendors less of a blackout period to move from one plan to another," Cunningham added. "Are they necessary in today's world of technology? Maybe a day or two, but weeks or months is really unacceptable and unlawful."
