Proposed Class Exemption for Plan Fiduciaries When Plan Service
Arrangements Fail To Comply With ERISA Section 408(b)(2)
[12/13/2007]
Volume 72, Number 239
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
RIN 1210-ZA13
Proposed Class Exemption for Plan Fiduciaries When Plan Service
Arrangements Fail To Comply With ERISA Section 408(b)(2)
AGENCY: Employee Benefits Security Administration.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (the Act or ERISA). If granted, the
proposed exemption would relieve a plan fiduciary from engaging in a
transaction that constitutes a prohibited furnishing of services to an
employee benefit plan. The exemption would apply to a plan fiduciary
who enters into (or extends or renews) a written contract or
arrangement for the provision of services to an employee benefit plan
by a service provider to the plan when the resulting contract or
arrangement between the plan and the service provider fails to
constitute a ``reasonable contract or arrangement'' due to the service
provider's failure to comply with its contractual obligation to
disclose certain information as required by 29 CFR Sec. 2550.408b-
2(c)(1), as amended (``disclosure obligations''). The proposed
exemption, if granted, would also affect participants and beneficiaries
of employee benefit plans to the extent such plans enter into any
contracts or arrangements for ``necessary services'' with entities that
do not provide sufficient disclosures to the plan to enable the
responsible plan fiduciary to determine that there is a ``reasonable
contract or arrangement'' that complies with ERISA section 408(b)(2).
DATES: Written comments must be received by the Department on or before
February 11, 2008.
ADDRESSES: To facilitate the receipt and processing of comment letters,
the Employee Benefits Security Administration (EBSA) encourages
http://www.regulations.gov (follow instructions for submission of comments).
Persons submitting comments electronically should not submit paper
copies. Persons interested in submitting paper copies should send or
deliver their comments to the Office of Regulations and
Interpretations, Employee Benefits Security Administration, Attn: Plan
Fiduciary Class Exemption for Section 408(b)(2) Amendment, Room N-5655,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. All comments will be available to the public, without charge,
online at http://www.regulations.gov or http://www.dol.gov/ebsa and at
the Public Disclosure Room, N-1513, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Fil Williams, Office of Regulations
and Interpretations, Employee Benefits Security Administration, (202)
693-8510. This is not a toll-free number.
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from the
restrictions of section 406(a)(1)(C) of the Act. The Department is
proposing the class exemption on its own motion pursuant to section
408(a) of the Act, and in accordance with the procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).
I. Executive Order 12866
Under Executive Order 12866, the U.S. Department of Labor (the
Department) must determine whether a regulatory action is
``significant'' and therefore subject to the requirements of the
Executive Order and subject to review by the Office of Management and
Budget (OMB). Under section 3(f) of the Executive Order, a
``significant regulatory action'' is an action that likely will result
in a rule: (1) Having an annual effect on the economy of $100 million
or more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
It has been determined that the proposed exemption is significant
under section 3(f)(1) of the executive order because it likely will
materially affect a sector of the economy. Accordingly, the proposed
exemption has been reviewed by OMB.
As explained in the preamble above, the proposed exemption will
only be used in connection with the proposed regulation published in
this same Federal Register entitled ``Reasonable Contract or
Arrangement Under Section 408(b)(2)--Fee Disclosure.'' The Department
conducted a Regulatory Impact Analysis (RIA) for the proposed
regulation, published elsewhere in this issue of the Federal Register.
The RIA discusses the costs and benefits of the proposed regulation and
quantifies the costs to service providers. In considering costs to
plans, the Department determined that, because fiduciaries already have
a duty to evaluate the reasonableness of contracts and arrangements
with service providers, the proposed regulation generally reduces the
time and effort fiduciaries need to spend to obtain the necessary
information. The Department acknowledges that some plans may incur
increased costs from the proposed
[[Page 70894]]
regulation if they need to review unnecessary or increasingly detailed
disclosure information. The Department concluded that any additional
effort on the part of fiduciaries due to the proposed regulation would
be offset by the reduced effort fiduciaries would need to spend to
obtain the required information from service providers. The Department
thus did not attempt to quantify these additional costs. The proposed
class exemption could result in additional costs to plans due to the
requirement that fiduciaries must notify the service provider and
possibly the Department upon discovering an inadequate disclosure. The
Department determined that these additional costs, which likely would
accrue to only a small percentage of plan fiduciaries, were still
within the range of what would be reasonably offset by the reduced
costs for plans under the proposed regulation. The Department therefore
did not attempt to quantify the costs of the proposed exemption for
plan fiduciaries.
II. Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a pre-clearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public
understands the Department's collection instructions, respondents can
provide the requested data in the desired format, the reporting burden
(time and financial resources) is minimized, and the Department can
properly assess the impact of collection requirements on respondents.
The proposed exemption, if granted, will be used only by plan
fiduciaries that have unknowingly entered into a contract or
arrangement which is not reasonable according to the requirements of
the proposed regulation (published elsewhere in this issue of the
Federal Register). The Department has combined the paperwork burdens
for the proposed regulation and the proposed class exemption under one
Information Collection Request (ICR). By combining the two collections
of information, the Department believes that the general public will
gain a better understanding of the burden impact as it relates to
different kinds of respondents. The specific burden for the proposed
exemption includes labor and materials costs of fiduciaries' written
requests to service providers and notifications to the Department. The
hour and cost burdens for the ICR are described more fully in the
preamble to the proposed regulation, ``Reasonable Contract or
Arrangement Under Section 408(b)(2)--Fee Disclosure,'' under the
section on the Paperwork Reduction Act.
III. Background
The Department has published in today's Federal Register a proposal
to amend its regulations under ERISA section 408(b)(2). Specifically,
the Department is proposing to amend its regulations at 29 CFR Sec.
2550.408b-2(c) to provide that any contract or arrangement for services
to an employee benefit plan by certain service providers, in order to
be considered a ``reasonable contract or arrangement'' in compliance
with such regulations, must require specific written disclosures
regarding the service provider's compensation, fees and conflicts of
interest that might affect its performance of services.
The service providers affected by the proposed regulation, as
discussed therein, include those who: (i) Provide or may provide
services to an employee benefit plan pursuant to a written contract or
arrangement as a fiduciary, within the meaning of section 3(21) of
ERISA or under the Investment Advisers Act of 1940; (ii) provide or may
provide any one or more of the following services to the plan pursuant
to the contract or arrangement: Banking, consulting, custodial,
insurance, investment advisory (plan or participants), investment
management, recordkeeping, securities or other investment brokerage, or
third-party administration; or (iii) receive or may receive indirect
compensation or fees, as described in proposed Sec. 2550.408b-
2(c)(1)(iii)(A)(1), in connection with the following services to the
plan: Accounting, actuarial, appraisal, auditing, legal, or valuation.
As noted in the preamble to the proposed regulation, as published
in today's Federal Register, when selecting service providers, a
fiduciary must have enough information to make informed decisions about
the services to be provided, the costs of those services, and potential
conflicts of interest. The proposed regulation requires that a
``reasonable contract or arrangement'' for certain services under
section 408(b)(2) must be in writing and that the terms of the contract
or arrangement must require the service provider to disclose specific
information. The regulation further requires that the service provider
furnish the appropriate plan fiduciary with the specified information
in accordance with the terms of the contract or arrangement.
As also discussed in the preamble to the proposed regulation, a
failure to satisfy the conditions of the regulation will, among other
things, cause the responsible plan fiduciary to violate the prohibited
transaction provisions of ERISA section 406(a)(1)(C) because the
transaction would not satisfy the statutory exemption under section
408(b)(2) of ERISA. A failure to comply with the regulation would also
result in a prohibited transaction under section 4975(c)(1)(C) of the
Internal Revenue Code (the Code) because the transaction would not
satisfy the Code's parallel statutory exemption for services at 26
U.S.C. Sec. 4975(d)(2). A prohibited transaction under section 4975 of
the Code subjects the service provider as a ``disqualified person'' to
excise taxes as described in section 4975(a) and (b) of the Code.
The Department recognizes that there may be circumstances when a
plan fiduciary enters into a contract or arrangement that appears to
meet the requirements of the regulation for relief under ERISA section
408(b)(2), but unbeknownst to the plan fiduciary, the service provider
fails to disclose information consistent with the terms of the
regulation and the contract or arrangement. In the absence of an
exemption providing otherwise, the service provider's failure to comply
will result in a prohibited transaction by both the service provider
and the plan fiduciary. In an effort to address this situation, the
Department proposes to adopt a class exemption that would relieve the
plan fiduciary from liability for a prohibited transaction resulting
from the service provider's failure to comply with the regulation. A
description of the proposed class exemption follows.
IV. Description of the Proposed Class Exemption
The proposed exemption consists of three parts. Section I sets
forth the general exemption and describes the transactions covered.
Section II contains specific conditions applicable to transactions
described in section I and requires the plan fiduciary to notify the
Department under certain circumstances of the service provider's
failure to comply with their disclosure obligations. Section III sets
forth the timing, content and other requirements applicable to the
notice required to be filed with the Department by the
[[Page 70895]]
responsible plan fiduciary pursuant to section II.\1\
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\1\ As with any exemption from ERISA's prohibited transaction
provisions, the party seeking to avail itself of the relief provided
by the exemption has the burden of demonstrating compliance with the
conditions of the exemption.
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The exemption set forth in section I would, upon adoption, provide
relief from the restrictions of section 406(a)(1)(C) of ERISA to a plan
fiduciary with authority to cause the plan to enter into, extend or
renew a written contract or arrangement for the provision of necessary
services (``the responsible plan fiduciary''), notwithstanding the
service provider's initial or subsequent failure to comply with its
disclosure obligations, provided that the conditions set forth in
section II are met. As noted below, once the responsible plan fiduciary
discovers that the service provider failed to meet its disclosure
obligations, the fiduciary must, as a condition for relief under the
exemption, take steps to address the failure.
Section II.A. of the proposed exemption requires that the
responsible plan fiduciary, taking into account all of the information
available at the time the contract or arrangement was entered into,
extended or renewed, reasonably believed that the contract or
arrangement met the requirements of 29 CFR Sec. 2550.408b-2(c)(1). In
addition, at the time referred to above, the responsible plan fiduciary
must not know, or have reason to know, that the service provider
failed, or would fail, to comply with its disclosure obligations. This
condition reinforces the principle that the plan fiduciary must have
entered into the contract or arrangement with a reasonable belief that
the contract or arrangement met the requirements for a reasonable
contract or arrangement under Sec. 2550.408b-2(c)(1) and without
knowing of the service provider's disclosure failures.
Section II.B.1 of the proposal requires that, upon discovery that
the service provider failed to comply with its disclosure obligations,
the responsible fiduciary shall, if it has not already received the
information that the service provider failed to disclose under its
disclosure obligations, request in writing that the service provider
furnish the information. If the service provider fails to comply with
the plan fiduciary's written request within 90 days, section II.B.2
provides that the plan fiduciary shall notify the Department. The
Department believes that this condition will increase the likelihood
that service providers will furnish plan fiduciaries the information
they need to make informed decisions about the contract or arrangement
with the service provider.\2\
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\2\ The notice requirement will not relieve a plan administrator
of the obligation to report a prohibited transaction in accordance
with the instructions to the Annual Report Form 5500 Series, without
regard to whether the service provider furnishes information in
response to the fiduciary's request.
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Section II.C. of the proposal further provides that, after the
responsible plan fiduciary discovers that the service provider failed
to comply with its disclosure obligations, the fiduciary shall
determine whether to terminate or continue the contract or arrangement.
In this regard, it is expected that responsible plan fiduciaries would
evaluate the nature of the particular disclosure failure and determine
the extent of the actions necessary under the facts and circumstances.
Such fiduciary should consider, among other factors, the availability,
qualifications and costs of potential replacement service providers,
and the responsiveness of the service provider in furnishing the
missing information. Section II.C., however, does not abrogate or
supersede the duties imposed upon the fiduciary by section 404(a) of
ERISA, which also require the fiduciary to consider what steps to take
in response to the service provider's nondisclosure.
Section III of the proposal sets forth the timing, content and
other requirements applicable to notifying the Department of a service
provider's failure to meet its disclosure obligations. Specifically,
section III.B. provides that the responsible plan fiduciary shall file
a notice with the Department not later than 30 days following the
earlier of: (i) The service provider's refusal to furnish the requested
information; or (ii) the date which is 90 days after the date the
written request referred to in Section II.B.1 is made. In this context,
a service provider's refusal to provide information to the responsible
plan fiduciary, following such fiduciary's written request, shall
constitute a service provider's failure to meet its disclosure
obligations prior to the end of the 90-day period. The notice to the
Department must contain the following information: (i) The name of the
plan; (ii) the three digit plan number used for the plan's Annual
Report; (iii) the plan sponsor's name, address, and EIN; (iv) the name,
address and telephone number of the responsible plan fiduciary; (v) the
name, address, phone number, and, if known, EIN of the service
provider; (vi) a description of the services provided to the plan;
(vii) a description of the information that the service provider failed
to furnish; (viii) the date on which such information was requested in
writing from the service provider; and (ix) a statement as to whether
the service provider continues to provide services to the plan. This
notice should be sent to the U.S. Department of Labor, Employee
Benefits Security Administration, Office of Enforcement, 200
Constitution Ave., NW., Suite 600, Washington, DC 20210. Such notices
may also be sent electronically to: OE-DelinquentSPnotice@dol.gov.
The Department will provide specific information for the written or
electronic submission of the required notice as part of the final
exemption. The Department also anticipates development of a model
notice by the Department that will facilitate compliance with the
notification requirement.
V. Effective Date
The Department is proposing an effective date for the proposed
class exemption which is 90 days after the publication of the final
exemption in the Federal Register. This date corresponds with the
effective date for the proposed amendments to the Department's
regulations at 29 CFR 2550.408b-2(c).
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act does not relieve a fiduciary or other
party in interest or disqualified person from other provisions of the
Act, including any prohibited transaction provisions to which the
exemption does not apply and the general fiduciary responsibility
provisions of section 404 of the Act. Section 404 requires, among other
things, that a fiduciary discharge its duties with respect to the plan
prudently and solely in the interests of the plan's participants and
beneficiaries. A transaction's qualification for an exemption also does
not affect the requirement of section 401(a) of the Code that the plan
must operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act, the Department must find that the exemption is administratively
feasible, in the interests of the plans and their participants and
beneficiaries and protective of the rights of participants and
beneficiaries of such plans;
(3) If granted, the proposed exemption will apply to a transaction
only if the conditions specified in the exemption are met; and
[[Page 70896]]
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act, including
statutory or administrative exemptions and transitional rules.
Proposed Exemption
The Department has under consideration the grant of the following
class exemption under the authority of section 408(a) of the Act and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(55 Fed Reg. 32836, 32847, August 10, 1990).
Section I--Exemption for the Plan Fiduciary Entering Certain Contracts
or Arrangements With a Service Provider
Effective [90 days after publication of the final exemption in the
Federal Register], the restrictions of section 406(a)(1)(C) of the Act
shall not apply to a plan fiduciary who uses its authority to cause an
employee benefit plan to enter into (extend or renew) a written
contract or arrangement for the provision of services (``the
responsible plan fiduciary''), notwithstanding the service provider's
initial or subsequent failure to comply with its contractual obligation
to disclose certain information as required by 29 CFR 2550.408b-2(c)(1)
(``disclosure obligations''), provided that the conditions set forth in
section II below are met.
Section II--Conditions
A. The responsible plan fiduciary, taking into account all of the
information available at the time the contract or arrangement was
entered into, extended or renewed, reasonably believed that the
contract or arrangement met the requirements of 29 CFR Sec. 2550.408b-
2(c)(1) and did not know, or have reason to know, that the service
provider failed or would fail to comply with its disclosure
obligations; B.1. The responsible plan fiduciary, upon discovering that
the service provider failed to comply with its disclosure obligations,
shall, if it has not already received the information that the service
provider failed to disclose under its disclosure obligations, request
in writing that the service provider furnish the information;
2. If the service provider fails to comply with the plan
fiduciary's written request within 90 days of the date of that request,
the responsible plan fiduciary shall, in accordance with Section III,
notify the Department of Labor of the service provider's failure; and
C. The responsible plan fiduciary, following discovery that the
service provider failed to comply with its disclosure obligations,
shall determine whether to terminate or continue the contract or
arrangement. The responsible plan fiduciary will evaluate the nature of
the particular disclosure failure and determine the actions necessary
under the facts and circumstances. Such fiduciary shall consider, among
other factors, the availability, qualifications and costs of potential
replacement service providers, and the responsiveness of the service
provider in furnishing the information that the service provider should
have disclosed, but did not, under its disclosure obligations.
Section III--Notice Requirements
A. The notice required by Section II.B.2 shall contain the
following information: (i) The name of the plan; (ii) the three digit
plan number used for the plan's Annual Report; (iii) the plan sponsor's
name, address, and EIN; (iv) the name, address, and telephone number of
the responsible fiduciary; (v) the name, address, phone number, and, if
known, EIN of the service provider; (vi) a description of the services
provided to the plan; (vii) a description of the information that the
service provider failed to furnish; (viii) the date on which such
information was requested in writing from the service provider; and
(ix) a statement as to whether the service provider continues to
provide services to the plan;
B. The notice required by Section II.B.2 shall be filed with the
Department not later than 30 days following the earlier of: (i) The
service provider's refusal to furnish the requested information; or
(ii) the date which is 90 days after the date the written request
referred to in Section II.B.1 is made; and
C. The notice required by Section II.B.2 shall be sent to the
following address: U.S. Department of Labor, Employee Benefits Security
Administration, Office of Enforcement, 200 Constitution Ave., NW.,
Suite 600, Washington, DC 20210; or may be sent electronically to
OE-DelinquentSPnotice@dol.gov.
Signed at Washington, DC, this 7th day of December, 2007.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E7-24063 Filed 12-12-07; 8:45 am]
BILLING CODE 4510-29-P
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