DOL Penalties and Blackout Notices

Several years ago, as a part of the Sarbanes-Oxley legislation Congress amended ERISA to require notices for blackout periods. The notice must be given at least 30 days before the last day on which a participant can make changes (which is the practical equivalent of saying at least 31 days before the blackout begins). For this purpose, a “blackout” is a period of more than three consecutive business days in which a participant cannot exercise certain rights relative to a plan, for example, the right to change the investments in his account. (As a cautionary note, the rules are more detailed than described.)

Most often, a blackout occurs when a plan sponsor switches providers, which is called a “conversion.” A blackout can also occur when the fiduciaries remove and replace an investment.

If the notice is not properly given, the Department of Labor can impose substantial penalties. But, the DOL has discretion to reduce those penalties.

For the first few years, we did not hear of any cases where the DOL imposed penalties on failed or late blackout notices. However, more recently the DOL has been imposing penalties. Those penalties are at a significantly discounted rate, but the amounts are still punitive. For example, if a plan covers 100 employees and the notice is five days late, the DOL could impose a reduced penalty of $10 per day, times the number of employees. That would amount to a $5,000 penalty.

However, the DOL will often start with a higher proposed penalty and a reduction would need to be negotiated based on the facts and circumstances of the case. In that regard, we are beginning to see some patterns in the amounts assessed after serious and thoughtful negotiations. As a result, it is important that plan sponsors be represented by experienced ERISA counsel in the discussions with the DOL.

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