A 401(k) is a great tool to help you save for retirement, but hearing that you might have to deal with a 401K blackout period can be frightening. A blackout period can mean you aren’t able to select new investments or make withdrawals, and knowing that your money is there but that you cannot touch it can be nerve-wracking.
This guide will help you understand what 401K blackout periods are, why they are necessary, how it affects your retirement, and how long they last.
What is a 401(k)?
A 401(k) plan is a tax advantaged retirement plan created by the Internal Revenue Service (IRS), is only available through an employer who offers it as a benefit to their employees. Here’s what you should know:
- Traditional 401(k) plans are tax-free deposits and you pay tax on the money when you make a withdrawal in retirement.
- You have options for 401(k) plans, including a Roth 401(k).
- Just like a Roth IRA, a Roth 401(k) taxes your contributions now, allowing you to take retirement distributions tax-free.
- This can have its benefits if you think you may be in a lower tax bracket now than when you enter retirement.
- Your tax advisor can help you understand the tax implications of each type.
One of the biggest advantages of a 401(k) is the option for your employer to match your contributions. It is not required, but employers may match up to a certain percentage of the contributions you make, helping your retirement fund grow faster. Withdrawing money from your 401(k) early can cause penalties up to 10%, however, so you want to make sure you will not need the funds you contribute to the account. Once you reach age 59½ or meet other criteria, you can make withdrawals penalty-free.
What is a 401(k) Blackout Period?
A 401(k) blackout period is a period of time — usually up to 60 days — during which you cannot make changes to your investment options. This often occurs when you or your employer change 401(k) plan administrators. Plan participants should receive notice at least 30 days before the period starts, giving them opportunities to ask their providers or employers questions, plus review their investment options and make any changes.
During the time when your 401(k) plan provider is changing, you do not have access to your assets or your records and cannot see your investment options, make changes, or view your portfolio value. Any contributions you make (including any loan payments) to your 401(k) will still occur, though, and there is nothing inherently dangerous about this process.
Quick Facts You Need to Know About 401K Blackout Periods
- 401K Blackout Periods are periods of time when employers suspend their employees’ access to employer-sponsored retirement plans.
- During Blackout Periods, employees cannot access their account, borrow money or make contributions to their accounts.
- Generally, these periods last anywhere from a few days up to six months and are typically used when the plan is being amended or restructured.
- During this time, it can be difficult for employees to plan for their retirement savings goals as they cannot access the information they need and make changes to their accounts.
- All employers must give advance notice (at least 30 days) before instituting a Blackout Period in order to comply with ERISA regulations.
- It’s important for all employees to understand how these blackout periods work so that they can plan accordingly and not miss any opportunities for planning for retirement.
401(k) Blackout Period FAQs
If your employer changes your 401(k) plan provider, you will receive a blackout notice to let you know exactly what to expect. Here are answers to a few of the most common questions that arise during this process.
1. Why would my company change plan providers?
It is not uncommon for companies to move plan providers. That may happen for many reasons, including:
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- It’s current investments are not performing
- The associated fees are too high
- The plan administrator is leaving the business
- And more
Any of these reasons would be legitimate reasons for your company to change plan providers. You should not worry when that happens.
2. How long does a blackout period last?
The Sarbanes-Oxley Act provides for blackout notice requirements that plan administrators must provide to you. Standard blackout periods last 60 days or less. Any time there is going to be a blackout in your plan, your provider must provide you with adequate notice so you can prepare.
3. I can’t see my funds, are they gone forever?
No, your funds are still there and still invested for your retirement. Just because you cannot access the funds does not mean they have disappeared or been stolen. It also does not mean your funds are not fully invested and working for you. They are, and you will see your portfolio balance again as soon as the blackout period ends.
4. What if I need to access my funds?
Generally, you cannot access your funds during blackout periods. The contributions you make to your plan during the blackout are still invested and working to grow your retirement nest egg, however.
5. Will this cost me anything?
No. In fact, your employer may be switching plan providers to save on administration fees. So, while this can seem like a hindrance, it may actually help your retirement funds grow faster with lower fees.
6. What do I need to do before the blackout starts?
You should review your investment options at least 30 days before the blackout period begins. Doing this gives you the chance to change your investments before you cannot access your account for a period of time. It is generally good practice to review your investment options at least annually.
It is vital for your retirement that you set aside funds as soon as you can. The more time you have funds invested, the more likely it is that your retirement will be secure. Every savings plan is different, though: A 401(k) is just one of many options available to you.><
Have Additional 401(k) or Retirement Planning Questions?
Understanding investments is not always easy, but rest assured that 401(k) blackout periods are both normal and common. They are also highly regulated, so your plan administrator must take proactive steps to keep your money safe and working for you — even when you cannot see it. This is a normal and secure process, but it does cause plan participants worry and stress.
Speak with a trusted financial advisor today to have all your 401(k) blackout period questions answered, along with any other retirement and tax planning questions you may have. Our tax attorneys are experienced in setting up retirement income in a way that minimizes your future burden. The expert team at Silver Tax Group can help you figure out your best investment options to give you a worry-free retirement. Give us a call to set up a consultation.
