EBSA
Final Rules
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure
[ 2/3/2012]
[ PDF]
Federal Register, Volume 77 Issue 23 (Friday, February 3, 2012)
[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Rules and Regulations]
[Pages 5632-5659]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2262]
[[Page 5631]]
Vol. 77
Friday,
No. 23
February 3, 2012
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee
Disclosure; Final Rule
Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules
and Regulations
[[Page 5632]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB08
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee
Disclosure
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final regulation under the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) requiring
that certain service providers to pension plans disclose information
about the service providers' compensation and potential conflicts of
interest. These disclosure requirements are established as part of a
statutory exemption from ERISA's prohibited transaction provisions.
This regulation will affect pension plan sponsors and fiduciaries and
certain service providers to such plans.
DATES: Effective Date: The final rule is effective on July 1, 2012.
FOR FURTHER INFORMATION CONTACT: Fil Williams or Allison Wielobob,
Office of Regulations and Interpretations, Employee Benefits Security
Administration, (202) 693-8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
1. General
In recent years, the Department has undertaken a series of
regulatory initiatives to ensure that employee benefit plan
fiduciaries, as well as plan participants and beneficiaries, obtain
comprehensive information about the services that are provided to
employee benefit plans, and the cost of those services.\1\ Today, the
Department is publishing in the Federal Register a final rule
concerning the disclosures that must be furnished to plan fiduciaries
in order for a contract or arrangement for plan services to be
``reasonable,'' as required by ERISA section 408(b)(2). A proposed rule
was published in December 2007 (72 FR 70988).\2\ Following review of
public comments on the proposal and testimony presented at the
Department's 2008 public hearing,\3\ the Department published an
interim final rule in the Federal Register on July 16, 2010 (75 FR
41600). Both the proposal and the interim final rule required that
reasonable contracts or arrangements between employee pension benefit
plans and certain providers of services to such plans include specified
information to assist plan fiduciaries in assessing the reasonableness
of the compensation paid for services and the conflicts of interest
that may affect a service provider's performance of services. The
Department believes that plan fiduciaries need this information, when
selecting and monitoring service providers, to satisfy their fiduciary
obligations under ERISA section 404(a)(1) to act prudently and solely
in the interest of the plan's participants and beneficiaries and for
the exclusive purpose of providing benefits and defraying reasonable
expenses of administering the plan.
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\1\ The ``408(b)(2)'' regulation finalized by the Department in
this Notice addresses disclosures that must be furnished before plan
fiduciaries enter into, extend or renew contracts or arrangements
for services to certain pension plans. The Department also
implemented changes to the information that must be reported
concerning service provider compensation as part of the Form 5500
Annual Report. These changes to Schedule C of the Form 5500
complement this final rule by assuring that plan fiduciaries have
the information they need to monitor service providers consistent
with their duties under ERISA section 404(a)(1). See 72 FR 64731;
see also frequently asked questions on Schedule C, available on the
Department's Web site at http://www.dol.gov/ebsa. Finally, the
Department published a final rule in October 2010 requiring the
disclosure of specified plan and investment-related information,
including fee and expense information, to participants and
beneficiaries of participant-directed individual account plans. See
75 FR 64910.
\2\ A notice of proposed rulemaking was published in the Federal
Register (72 FR 70988) on December 13, 2007. On the same day, the
Department also published, separately, a proposed class exemption
from the restrictions of ERISA section 406(a)(1)(C) in the Federal
Register (72 FR 70893). For ease of reference, the exemptive relief
for fiduciaries was incorporated into the interim final rule; the
final rule continues to incorporate the class exemption.
\3\ Public comments on the proposed regulation, as well as
supplemental materials submitted in connection with the Department's
March 31 and April 1, 2008, public hearing, are available on the
Department's Web site at http://www.dol.gov/ebsa.
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2. Public Comments on Interim Final Regulation
Commenters on the December 2007 proposed regulation raised a number
of technical issues, which persuaded the Department to make significant
changes to the regulation. Because of these changes, the Department
published the regulation in July 2010 as an interim final rule and
invited comments from interested persons on all aspects of the rule. In
response to this invitation, the Department received 45 written
comments from a variety of persons, including plan sponsors,
fiduciaries, service providers, financial institutions, and industry
representatives of employee benefit plans and participants. These
comments are available for review under ``Public Comments'' on the
``Laws and Regulations'' page of the Department's Employee Benefits
Security Administration Web site at http://www.dol.gov/ebsa.
Set forth below is an overview of the final regulation and the
public comments received on the Department's interim final regulation.
B. Overview of Final Regulation and Public Comments
The Department's final regulation retains the basic structure of
the proposal and interim final rule by requiring that covered service
providers satisfy certain disclosure requirements in order to qualify
for the statutory exemption for services under ERISA section 408(b)(2).
The furnishing of goods, services, or facilities between a plan and
a party in interest to the plan generally is prohibited under section
406(a)(1)(C) of ERISA. As a result, a service relationship between a
plan and a service provider would constitute a prohibited transaction,
because any person providing services to the plan is defined by ERISA
to be a ``party in interest'' to the plan. However, section 408(b)(2)
of ERISA exempts certain arrangements between plans and service
providers that otherwise would be prohibited transactions under section
406 of ERISA. Specifically, section 408(b)(2) provides relief from
ERISA's prohibited transaction rules for service contracts or
arrangements between a plan and a party in interest if the contract or
arrangement is reasonable, the services are necessary for the
establishment or operation of the plan, and no more than reasonable
compensation is paid for the services. Regulations issued by the
Department clarify each of these conditions to the exemption.\4\
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\4\ See 29 CFR 2550.408b-2.
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The interim final rule, as modified in this final rule, amends the
regulation at 29 CFR 2550.408b-2(c) to add new conditions to the
meaning of a ``reasonable'' contract or arrangement for covered plans.
Previously, this paragraph stated only that a contract or arrangement
is not reasonable unless it permits the plan to terminate without
penalty on reasonably short notice. In publishing the July 2010 interim
final rule, the Department added a requirement that, in order for
certain contracts or arrangements for services to be reasonable, the
covered service provider must disclose specified information to a
``responsible plan
[[Page 5633]]
fiduciary.'' The regulation defines this term as a fiduciary with
authority to cause the plan to enter into, or extend or renew, a
contract or arrangement for the provision of services to the plan.
The final rule published today reflects several modifications to
the interim final rule. For example, as discussed in detail below, the
final rule conforms the investment-related disclosure requirements to
the Department's recently finalized participant-level disclosure
regulation, at 29 CFR 2550.404a-5 (75 FR 64910, Oct. 20, 2010) (the
``participant-level disclosure regulation''), and requires more
specific information concerning ``indirect'' compensation that will be
received by a covered service provider. The Department has retained
most of the disclosures required by the interim final rule, subject to
minor technical modifications, explained below. A comprehensive
analysis of these disclosures, and how they differ from those contained
in the Department's December 2007 proposed rule, is included in the
Supplementary Information published with the interim final rule.\5\ The
discussion below focuses on the final rule and how it has been modified
in response to comments on the interim final rule.
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\5\ See 75 FR 41600.
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As required by Executive Order 12866, the Department evaluated the
benefits and costs of this final rule. The Department believes that
mandatory proactive disclosure will reduce plan sponsor information
costs, discourage harmful conflicts, and enhance service value.
Additional benefits will flow from the Department's enhanced ability to
redress abuse. Although the benefits are difficult to quantify, the
Department is confident they more than justify the cost. The Department
estimated costs for the rule over a ten-year time frame for purposes of
this analysis and used information from the quantitative
characterization of the service provider market presented below as a
basis for these cost estimates. This characterization did not account
for all service providers, but it does provide information on the
segments of the service provider industry that are likely to be most
affected by the rule (i.e., those with contracts listed on the Form
5500). In addition to the costs to service providers, the Department
also considered, and discusses below, the potential costs to plans.
In accordance with OMB Circular A-4,\6\ Table 2 below depicts an
accounting statement showing the Department's assessment of the
benefits and costs associated with the final rule. The estimates vary
from those in the interim final rule by updating the analysis to
reflect 2008 Form 5500 data (the latest available data) and 2011 labor
rates.
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\6\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
Table 1--Accounting Table
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Primary Discount Period
Category estimate Year dollar rate covered
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Benefits:
Qualitative: The final regulation will increase the amount of information that service providers disclose to
plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
interest, service value improvements through improved decisions and value, better enforcement tools to redress
abuse, and harmonization with other EBSA rules and programs.
The Department believes that the non-quantified benefits are substantial and exceed the quantified costs of the
rule. A detailed analysis of the non-quantified benefits exceeding the quantified costs is contained in the
impact analysis of the July 16, 2010 interim final regulation. The Department is confident that the benefits of
the final rule exceed the costs.
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Costs:
Annualized Monetized ($millions/year)................... $63.7 2011 7% 2012-2021
58.9 2011 3% 2012-2021
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Note: Quantified costs include costs for service providers to perform compliance review and implementation, for
disclosure of general, investment-related, and additional requested information, for responsible plan
fiduciaries to request additional information from service providers to comply with the exemption and to
prepare notices to the Department if the service provider fails to comply with the request.
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Transfers................................................... Not Applicable
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1. General
The final regulation amends paragraph (c) of Sec. 2550.408b-2 by
moving, without change, the original provisions of paragraph (c) to a
newly designated paragraph (c)(3) and adding new paragraphs (c)(1) and
(c)(2) to address the disclosure requirements applicable to a
``reasonable contract or arrangement.'' Paragraph (c)(1) describes the
disclosure requirements for pension plans. Paragraph (c)(2) is reserved
for future guidance concerning the disclosure requirements for welfare
plans.\7\
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\7\ This separate initiative, including the Department's
December 2010 public hearing, is discussed below.
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Paragraph (c)(1)(i) has not changed from the interim final rule. It
provides that no contract or arrangement for services between a covered
plan and a covered service provider, nor any extension or renewal, is
reasonable within the meaning of ERISA section 408(b)(2) and this
regulation unless the requirements of the regulation are satisfied. The
terms ``covered plan'' and ``covered service provider'' are defined in
paragraph (c)(1)(ii) and (iii), respectively.
The Department notes that some contracts or arrangements will fall
outside the scope of the final regulation because they do not involve a
``covered plan'' and a ``covered service provider.'' ERISA nonetheless
requires such contracts or arrangements to be ``reasonable'' in order
to satisfy the ERISA section 408(b)(2) statutory exemption. ERISA
section 404(a) also obligates plan fiduciaries to obtain and carefully
consider information necessary to assess the services to be provided to
the plan, the reasonableness of the compensation being paid for such
services, and potential conflicts of interest that might affect the
quality of the provided services.\8\
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\8\ See, e.g., Field Assistance Bulletin 2002-3 (Nov. 5, 2002),
Advisory Opinion 97-15A (May 22, 1997), Advisory Opinion 97-16A (May
22, 1997), Understanding Retirement Plans Fees and Expenses, (http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html), and Selection
and Monitoring Pension Consultants--Tips for Plan Fiduciaries,
(http://www.dol.gov/ebsa/newsroom/fs053105.html).
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[[Page 5634]]
The general paragraph in section (c)(1)(i) of the final rule goes
on to provide, as in the interim final rule, that the rule's disclosure
requirements are independent of a fiduciary's obligations under ERISA
section 404.\9\ A few commenters on the interim final rule requested
that the Department more directly address the treatment, for ERISA
section 404 purposes, of information that is requested by the
responsible plan fiduciary, but that is not specifically required from
the covered service provider under the final rule. These commenters are
concerned that responsible plan fiduciaries may believe that they need
additional information, which a service provider is not willing to
furnish, to satisfy their obligations under ERISA section 404 to
prudently select and monitor plan service providers. It is the view of
the Department that if a plan fiduciary needs particular information to
make an informed decision when selecting or monitoring a plan service
provider, then ERISA section 404's duty of prudence requires that
fiduciary to request such information. If the service provider fails or
refuses to furnish the requested information, then ERISA section 404
may preclude the plan fiduciary from entering into (or continuing) the
service contract or arrangement. The disclosure requirements of the
final rule are independent of a fiduciary's obligations under ERISA
section 404.
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\9\ Two commenters on the interim final rule suggested that the
final rule should explicitly state that compliance does not provide
relief from fiduciary obligations under ERISA section 404. Such a
provision was already included in the interim final rule, and has
not been removed or revised for purposes of the final rule.
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Moreover, the final rule's disclosure requirements should be
construed broadly to ensure that responsible plan fiduciaries base
their review of a service contract or arrangement on comprehensive
information.
2. Scope--Covered Plans
Paragraph (c)(1)(ii) defines a ``covered plan'' to mean, with
certain exceptions, an employee pension benefit plan or a pension plan
within the meaning of ERISA section 3(2)(A) (and not described in ERISA
section 4(b)). A ``covered plan'' shall not include a ``simplified
employee pension'' described in section 408(k) of the Internal Revenue
Code of 1986 (the Code), a ``simple retirement account'' described in
section 408(p) of the Code, an individual retirement account described
in section 408(a) of the Code, or an individual retirement annuity
described in section 408(b) of the Code. For purposes of the final
rule, paragraph (c)(1)(ii) includes an additional exclusion from the
definition of ``covered plan.'' The Department was persuaded by
commenters on the interim final rule to exclude all or that part of a
Code section 403(b) plan (hereafter ``403(b) plan'') that consists
exclusively of ``frozen'' contracts or accounts, as described in the
Department's Field Assistance Bulletins addressing the limited
application of the annual reporting requirements to such contracts or
accounts.\10\ Plan sponsors and fiduciaries likely would be unable to
comply with this rule because they often have no dealings with the
relevant plan service providers and are unable to obtain information
about these contracts and accounts. Accordingly, paragraph (c)(1)(ii)
of the final rule now provides that, in the case of a Code section
403(b) plan subject to Title I of ERISA, the ``covered plan'' would not
include annuity contracts and custodial accounts described in section
403(b) of the Code with respect to which the plan sponsor ceased to
have any obligation to make contributions (including employee salary
reduction contributions) and in fact ceased making contributions to
such contracts or accounts for periods before January 1, 2009. Further,
the contract or account has to have been issued to a current or former
employee before January 1, 2009; all the rights and benefits under the
contract or account have to be legally enforceable against the insurer
or custodian by the individual owner of the contract or account without
any involvement by the employer; and such individual owner has to be
fully vested in the contract or account.
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\10\ See Field Assistance Bulletins 2010-01 (Feb. 17, 2010) and
2009-02 (July 20, 2009).
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One commenter requested that the Department clarify that health
savings accounts are not ``covered plans.'' The Department notes that
health savings accounts are not pension plans within the meaning of
ERISA section 3(2)(A) and generally are not employee benefit plans
within the meaning of ERISA section 3(3), when employer involvement
with the accounts is limited. Therefore, a health savings account would
not be a ``covered plan'' for purposes of the final rule. See the
Department's discussion of health savings accounts and ERISA section
3(2)(A) in Field Assistance Bulletins 2004-1 and 2006-02.\11\
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\11\ See Field Assistance Bulletins 2004-1 (April 7, 2004) and
2006-02 (Oct. 27, 2006).
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Another commenter asked whether the definition of a covered plan
would include a plan that provides benefits only to a business owner
and his or her spouse, such as a Keogh or ``HR-10'' plan. The final
rule describes a ``covered plan'' as a pension plan within the meaning
of ERISA section 3(2)(A), which is an ``employee benefit plan'' under
section 3(3) subject to Title I. The Department's existing regulations
at 29 CFR 2510.3-3 clarify the definition of ``employee benefit plan''
in section 3(3) for purposes of Title I coverage.\12\ Under such
regulations, the term ``employee benefit plan'' does not include any
plan, including a pension plan, under which no employees are
participants in the plan (referred to therein as ``common law
employees''). Section 2510.3-3(c) provides that an individual and his
or her spouse are not ``employees'' with respect to a trade or
business, incorporated or unincorporated, which is wholly owned by the
individual and his or her spouse. Nor does ``employee'' include a
partner in a partnership and his or her spouse with respect to the
partnership. For example, a ``Keogh'' or ``H.R. 10'' plan under which
only partners or only a sole proprietor are plan participants is not an
``employee benefit plan'' subject to Title I. Thus, under the final
rule, a pension plan without ``employees'' who are participants in the
plan, as defined in Sec. 2510.3-3(c), would not be a ``covered plan.''
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\12\ See also Raymond B. Yates, M.D., P.C. Profit Sharing Plan
v. Hendon, 541 U.S. 1 (2004).
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3. Scope--Covered Service Provider
The final rule, in paragraph (c)(1)(iii)(A), (B), and (C), covers
the same categories of service providers as the interim final rule. A
``covered service provider'' is a service provider that enters into a
contract or arrangement with the covered plan and reasonably expects
$1,000 or more in compensation, direct or indirect, to be received in
connection with providing one or more of the services described in
paragraphs (c)(1)(iii)(A), (B), or (C) of the final rule.\13\ A service
provider will
[[Page 5635]]
be covered even if some or all of the services provided pursuant to the
contract or arrangement are performed (or some or all of the
compensation for such services is received) by affiliates of the
covered service provider or subcontractors. The limitation contained in
paragraph (c)(1)(iii)(D)(1) ensures that services providers do not
themselves, separately, become ``covered service providers'' solely as
a result of services that they perform in their capacity as an
affiliate of the covered service provider or a subcontractor.
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\13\ Some commenters on the interim final rule suggested that
$1,000 is not an appropriate threshold for covered service
providers. Some believe that $1,000 is too low, because it will
subject relatively insignificant arrangements to the required
disclosures, and suggested that $2,500 or $5,000 would be more
appropriate. Others, however, argued that $1,000 is too high and
will adversely affect small plans, many of which are likely to have
smaller service arrangements (for less than $1,000) and less
sophistication and bargaining power to obtain detailed information
about such arrangements. Some commenters argued that the standard
should be tied to a percentage of plan assets, subject to a cost-of-
living adjustment, or conformed to Form 5500 Schedule C standards.
The Department was not persuaded to revise this provision and
believes that $1,000 strikes an appropriate balance between these
competing concerns. Some commenters asked the Department to more
specifically delineate the time period over which the $1,000 must be
measured, for example, over a calendar or plan year or during the
term of the contract. The Department notes that the focus is on
whether $1,000 is expected to be received in connection with
providing the services specified in the contract, regardless of
whether compensation is expected to be received in a particular year
or during the stated term of the contract. Some compensation, for
example, trailing commissions, may be received after the services
have been furnished, but still be ``in connection with'' those
services. In response to some expressed concerns, the Department
cautions parties against attempting to structure contracts for
ongoing services specifically to avoid the $1,000 threshold. In
determining compliance with the threshold, the Department will look
to the substance, rather than form, of the contract or arrangement
between the plan and service provider(s).
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The first category of covered service providers, described in
paragraph (c)(1)(iii)(A), includes those providing services as an ERISA
fiduciary or as an investment adviser registered under either the
Investment Advisers Act of 1940 (Advisers Act) or any State law. This
category is split into three subsections, as in the interim final rule:
Paragraph (1) includes ERISA fiduciary services provided directly to
the covered plan; paragraph (2) includes ERISA fiduciary services
provided to an investment contract, product, or entity that holds plan
assets and in which the covered plan has a direct equity investment (a
direct equity investment does not include investments made by the
investment contract, product, or entity in which the covered plan
invests); and paragraph (3) includes services provided directly to the
covered plan as an investment adviser registered under either the
Advisers Act or State law.
The second category of covered service providers, described in
paragraph (c)(1)(iii)(B), includes providers of recordkeeping services
or brokerage services to a covered plan that is an ERISA section 3(34)
individual account plan that permits participants and beneficiaries to
direct the investment of their accounts, if one or more designated
investment alternatives will be made available (e.g., through a
platform or similar mechanism) in connection with such recordkeeping
services or brokerage services.
The third category of covered service providers, described in
paragraph (c)(1)(iii)(C), includes those providing specified services
to the covered plan when the covered service provider (or an affiliate
or subcontractor) reasonably expects to receive ``indirect''
compensation or certain payments from related parties. As discussed
below, the final rule defines the terms ``affiliate,'' ``indirect
compensation,'' and ``subcontractor'' in paragraph (c)(1)(viii). The
services set forth in this category, which have not changed from the
interim final rule, are accounting, auditing, actuarial, appraisal,
banking, consulting (i.e., consulting related to the development or
implementation of investment policies or objectives, or the selection
or monitoring of service providers or plan investments), custodial,
insurance,\14\ investment advisory (for plan or participants), legal,
recordkeeping, securities or other investment brokerage, third party
administration, or valuation services provided to the covered plan.
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\14\ One commenter on the interim final rule requested
clarification that insurance brokerage services were included in
this category; the commenter explained, for example, that insurance
brokers often are involved in selling pension plan arrangements,
especially to small plans. The Department does intend that such
insurance services are included in this category of covered service
providers.
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Paragraph (c)(1)(iii)(D) of the final regulation clarifies that,
notwithstanding the preceding categories of ``covered service
providers,'' no person or entity is a ``covered service provider''
solely by providing services (1) as an affiliate or a subcontractor
that is performing one or more of the services to be provided under the
contract or arrangement with the covered plan (see paragraph
(c)(1)(iii)(D)(1)), or (2) to an investment contract, product, or
entity in which the covered plan invests, regardless of whether or not
the investment contract, product, or entity holds assets of the covered
plan, other than services as a fiduciary described in paragraph
(c)(1)(iii)(A)(2) (see paragraph (c)(1)(iii)(D)(2)).
Paragraph (c)(1)(iii)(D) clarifies the disclosure obligations of
multiple parties within an arrangement for plan services. The party
entering into the contract or arrangement with the covered plan is the
covered service provider responsible for making the rule's disclosures,
even if other parties perform some of the services.\15\ For example, in
cases when a ``bundled'' arrangement of multiple services is offered to
the covered plan, only one service provider would need to furnish the
required disclosures for the bundled services. For example, a
recordkeeper (Recordkeeper) who enters into a contract with a covered
plan to furnish specified recordkeeping services and to make available
a platform of investments may outsource some of the recordkeeping and
plan administration services, and pay transaction-based compensation,
to an affiliated third party administrator (TPA). The TPA does not have
any separate contract or arrangement with the covered plan. Although
both the Recordkeeper and the TPA provide services that are described
in the categories of covered service providers under the final rule
(the Recordkeeper under paragraph (c)(1)(iii)(B) and the TPA under
paragraph (c)(1)(iii)(C)), only the Recordkeeper is the covered service
provider. The Recordkeeper is the ``covered'' service provider because
he or she is the party entering into the service contract or
arrangement with the covered plan.
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\15\ The final rule should not be interpreted, however, as
requiring that any services which otherwise would be provided
separately must be packaged together pursuant to one contract or
arrangement. In many cases, more than one service provider will
enter into a contract or arrangement with a covered plan, and, in
that case, there may be more than one ``covered'' service provider,
whose separate contract or arrangement with the covered plan must
comply with the final rule.
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Multiple service providers that furnish services pursuant to a
single contract or arrangement with a covered plan may agree among
themselves who will enter into the contract or arrangement with the
covered plan and be the covered service provider. The other service
providers may be affiliates of or subcontractors to the covered service
provider; and covered service providers' disclosures would reflect
their status in accordance with the final rule.
4. Initial Disclosure Requirements
The final rule continues to require that covered service providers
furnish specified disclosures to responsible plan fiduciaries in
writing.\16\ As discussed in detail below, these disclosures generally
must be furnished reasonably in advance of entering into, or extending
or renewing, the contract or arrangement for services. The disclosed
information will assist plan fiduciaries in understanding the services
and in
[[Page 5636]]
assessing the reasonableness of the compensation, direct and indirect,
that the service provider will receive.
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\16\ Consistent with the Department's position in the interim
final rule, although required information must be disclosed ``in
writing,'' the final rule does not require that a formal contract or
arrangement itself be in writing or that any representations
concerning the obligations of the covered service provider be
included in such written contract or arrangement.
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a. Description of Services
Paragraph (c)(1)(iv)(A) of the final rule requires that the covered
service provider describe the services to be provided to the covered
plan pursuant to the contract or arrangement (but not including certain
non-fiduciary services to an investment product, contract, or entity in
which the covered plan invests, as described in paragraph
(c)(1)(iii)(A)(2) of the final rule). This paragraph has not changed
from the interim final rule.
The description of services should be clear and understandable to
the responsible plan fiduciary. In the preamble to the interim final
rule, the Department explained that a detailed description of the
services may not be necessary when the parties to the contract or
arrangement already understand the nature of the services. Some
commenters on the interim final rule pointed out that they do not
believe all plan fiduciaries have a basic understanding of plan
services. They recommended that the final rule explicitly define the
level of detail necessary for a description of services and perhaps
require ``plain English'' disclosures, model language, or a ``check the
box'' format. The Department has not included additional standards for
the description of services. As noted earlier, and consistent with the
Department's position in the interim final rule, responsible plan
fiduciaries have a duty to carefully review the information they
receive when entering into a contract or arrangement for plan services.
This regulation requires that responsible plan fiduciaries receive the
basic information needed to make informed decisions about service costs
and potential conflicts of interest. If responsible plan fiduciaries
need assistance in understanding any information furnished by the
service provider, as a matter of prudence, they should request
assistance, either from the service provider or elsewhere.
A few commenters on the interim final rule asked whether a covered
service provider must disclose only the services that make the service
provider a ``covered'' service provider. The final rule provides that a
covered service provider must describe all services that will be
provided to the covered plan ``pursuant to the contract or
arrangement[.]'' This includes services that will be performed by its
affiliates and subcontractors pursuant to the contract or arrangement.
Thus, a covered service provider may need to disclose services beyond
those that make it a ``covered'' service provider.
b. Status of Covered Service Providers, Affiliates, and Subcontractors
Paragraph (c)(1)(iv)(B) of the final rule requires, if applicable,
a statement that the covered service provider, an affiliate, or a
subcontractor will provide, or reasonably expects to provide, services
pursuant to the contract or arrangement directly to the covered plan
(or to an investment vehicle that holds plan assets and in which the
covered plan has a direct equity investment) as a fiduciary (within the
meaning of section 3(21) of ERISA); and, if applicable, a statement
that the covered service provider, an affiliate, or a subcontractor
will provide, or reasonably expects to provide, services pursuant to
the contract or arrangement directly to the covered plan as an
investment adviser registered under either the Advisers Act or any
State law. If a service provider will, or reasonably expects to,
provide services both as a fiduciary and a registered investment
adviser, the statement must reflect both of these roles. This paragraph
has not changed from the interim final rule except that, for
clarification purposes, the parenthetical ``within the meaning of
section 3(21) of the Act'' was added to modify use of the term
``fiduciary'' for this purpose.
Two commenters on the interim final rule suggested that covered
service providers should be required to state affirmatively whether or
not they will be providing services as an ERISA fiduciary or a
registered investment adviser. The Department declined to accept this
suggestion, because statements explaining that a service provider will
not be providing services as an ERISA fiduciary or as a registered
investment adviser may be more confusing than helpful to responsible
plan fiduciaries. Another commenter requested that the Department
affirm that formal agreements stating whether a person is an ERISA
fiduciary are not dispositive of whether the person actually is a
fiduciary by virtue of a factual analysis of the functions performed.
The Department agrees that a formal agreement that a person is not a
fiduciary is not dispositive. The definition of ``fiduciary'' in ERISA,
as set forth in section 3(21), is based on a person's actual functions,
authority and responsibility.\17\
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\17\ The Department issued a proposed amendment to the
regulation on fiduciary investment advice at 29 CFR 2510.3-21. Among
the parties treated by the proposal as ERISA fiduciaries are persons
who provide investment advice (as defined in the proposal) for a
fee, and who represent or acknowledge that they are acting as an
ERISA fiduciary with respect to providing such advice. See 75 FR
65263 (Oct. 22, 2010). See also 29 CFR 2509.75-8. The Department
recently announced its decision to re-propose this amendment as a
response, in part, to requests from the public, including members of
Congress, that the agency allow an opportunity for additional input
(Sept. 19, 2011).
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c. Disclosure of Compensation
Paragraph (c)(1)(iv)(C) of the final rule requires the covered
service provider to disclose comprehensive information about the
compensation that will be received in connection with the services
provided pursuant to the contract or arrangement. This paragraph,
including paragraphs (1) through (4), is structured the same as in the
interim final rule. One substantive change, discussed below, has been
made to the disclosures required for the receipt of ``indirect''
compensation. Also, cross references have been modified as necessary to
reflect the reordering of paragraphs (c)(1)(iv)(E) through (G).
Otherwise, the final rule retains the same concepts as the interim
final rule with respect to what types of compensation have to be
disclosed for purposes of a reasonable contract or arrangement.
Paragraph (c)(1)(iv)(C)(1) requires a description of all direct
compensation, either in the aggregate or by service, that the covered
service provider, an affiliate, or a subcontractor reasonably expects
to receive in connection with the services described in paragraph
(c)(1)(iv)(A). For purposes of the final rule, ``direct'' compensation
is compensation received directly from the covered plan. See paragraph
(c)(1)(viii)(B)(1) of the final rule. This paragraph has not changed
from the interim final rule. In response to comments raised on the
interim final rule, the Department notes that ``direct'' compensation
includes compensation that initially is paid by the plan sponsor, but
who then is reimbursed from the plan.\18\ Parties cannot avoid this
disclosure requirement by creating intermediary payments and arguing
that, as a technical matter, such payments do not constitute
``compensation'' for purposes of the final rule. The Department also
confirms, as requested by a commenter,
[[Page 5637]]
that ``direct'' compensation, described in the final rule as coming
from the covered plan, includes compensation that is paid directly from
participants' and beneficiaries' accounts.
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\18\ The Department notes that such reimbursement could be
appropriate if there was a clear understanding or agreement, as a
result of plan language or otherwise, on or before the time the
services were performed, that the plan would reimburse the
reasonable expenses paid for by the plan sponsor. However, once the
obligation to reimburse arises but is not fulfilled, the monies then
outstanding may become an extension of credit to the plan by the
sponsor. Prohibited Transaction Exemption 80-26 (45 FR 28545; April
29, 1980; amended at 71 FR 17917; April 7, 2006) may provide relief
for such an extension of credit, depending upon the facts and
circumstances.
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Paragraph (c)(1)(iv)(C)(2) requires a description of all indirect
compensation that the covered service provider, an affiliate, or a
subcontractor reasonably expects to receive in connection with the
services described in paragraph (c)(1)(iv)(A). For purposes of the
final rule, ``indirect'' compensation is compensation received from any
source other than the covered plan, the plan sponsor, the covered
service provider, or an affiliate. Compensation received from a
subcontractor is indirect compensation, unless it is received in
connection with services performed under the subcontractor's contract
or arrangement described in paragraph (c)(1)(viii)(F). A non-
substantive revision to this definition, in paragraph
(c)(1)(viii)(B)(2) of the final rule, is discussed below.
The covered service provider also must identify the services for
which the indirect compensation will be received, and the payer of the
indirect compensation. In addition, this paragraph has been modified
from the interim final rule to include one more requirement: the
covered service provider must identify not only the payer of the
indirect compensation, but also describe the arrangement between the
payer and the covered service provider, an affiliate, or a
subcontractor, as applicable, pursuant to which such indirect
compensation is paid.
This new requirement will illustrate for the responsible plan
fiduciary potential conflicts of interest on the part of the covered
service provider (or an affiliate or subcontractor) resulting from the
receipt of indirect compensation. The covered service provider must
describe its arrangement with the payer of indirect compensation so
that the responsible plan fiduciary can analyze why the payer,
generally an unrelated third party, is compensating the covered service
provider in connection with the covered service provider's contract or
arrangement with the covered plan. The proposed rule, published in
December 2007, contained a series of specific conflict of interest
disclosure provisions. These provisions were eliminated in the interim
final rule, which relied instead on fuller disclosure of the
circumstances under which the covered service provider will be
receiving compensation from parties other than the plan (or plan
sponsor). For instance, the interim final rule required identification
of such parties, in addition to the compensation expected to be
received. Although one commenter on the interim final rule suggested
that the Department should reinstate the conflict of interest
disclosures from the proposal, the Department continues to believe, for
the reasons stated in the preamble to the interim final rule, that the
scope of the proposed conflict of interest requirements, especially as
to ``potential'' conflicts of interest, was inappropriately broad in
the context of this regulation. The Department determined that the most
effective way to achieve disclosure of conflicts of interest for
purposes of the final rule is to inform plan fiduciaries of what
compensation will be received and from whom. However, the Department
also is persuaded that a responsible plan fiduciary would benefit from
an explanation of the arrangement between the parties that gives rise
to the indirect compensation paid in connection with the covered plan's
service contract or arrangement, and, accordingly, has provided for
such a disclosure in the final rule.
The Department intends that the concept of compensation to be
received by a covered service provider, or its affiliates or
subcontractors, ``in connection with'' a particular contract or
arrangement for services be construed broadly. To the extent a covered
service provider reasonably expects that compensation will be received,
which is based in whole or in part on its service contract or
arrangement with the covered plan, the compensation will be considered
``in connection with'' such contract or arrangement. For example, a
recent report pertaining to conflicts of interest prepared by the
Department's Office of Inspector General \19\ identified a fact pattern
in which a service provider had not disclosed that certain financial
institutions subsidized the cost of attendance at a conference that the
service provider offered for its clients. Specifically, to help defray
the costs of the conference, plan sponsor attendees paid a registration
fee of $850, while the financial institution paid a subsidy fee of
$20,000. In this regard, it is the Department's view that, when a
covered service provider is engaged to provide consulting services to a
covered plan (or plans) and receives subsidies or other remuneration
from financial institutions or other parties with respect to whom the
service provider may be making recommendations to attending plan
sponsors or representatives, such subsidies or remuneration would be
compensation received ``in connection with'' the service provider's
contract or arrangement with the covered plan.
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\19\ See ``EBSA Needs To Do More To Protect Retirement Plan
Assets From Conflicts Of Interest'' (U.S. Department of Labor,
Office of Inspector General, Office of Audit, Sept. 30, 2010).
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With respect to the requirement to describe arrangements between a
covered service provider and a payer of indirect compensation, the
Department notes that certain commenters expressed concerns about the
ability of a broker-dealer to properly identify the payer of such
compensation in advance of service arrangements involving securities
purchased through brokerage windows, self-directed brokerage accounts,
or similar arrangements. The Department understands these concerns and
believes that descriptions of indirect compensation for this purpose
may be expressed in general terms, provided that the description
contains information that is sufficient to permit a responsible plan
fiduciary to evaluate the reasonableness of such compensation in
advance of the service arrangement. Therefore, to the extent that such
information is unknown at the time the disclosures are made, the
description need not identify the specific payer in advance of the
service arrangement. Instead, the description may provide information
that would allow the responsible plan fiduciary to compare the expected
compensation with compensation that would be received by competing
broker-dealers for similar investment services.
Paragraph (c)(1)(iv)(C)(3) requires a description of any
compensation that will be paid among the covered service provider, an
affiliate, or a subcontractor, in connection with the services
described pursuant to paragraph (c)(1)(iv)(A) of the final rule if it
is set on a transaction basis (e.g., commissions, soft dollars,
finder's fees or other similar incentive compensation based on business
placed or retained) or is charged directly against the covered plan's
investment and reflected in the net value of the investment (e.g., Rule
12b-1 fees). The covered service provider also must identify the
services for which such compensation will be paid and identify the
payers and recipients of such compensation (including the status of a
payer or recipient as an affiliate or a subcontractor). Compensation
must be disclosed pursuant to this paragraph regardless of whether such
compensation also is disclosed pursuant to paragraph (c)(1)(iv)(C)(1)
or (2) (direct or indirect compensation) or (c)(1)(iv)(E) or
(c)(1)(iv)(F) (investment disclosure) of the final rule. The final rule
further clarifies that this paragraph (c)(1)(iv)(C)(3) shall not apply
to compensation received by an employee
[[Page 5638]]
from his or her employer on account of work performed by the employee.
This paragraph has not changed from the interim final rule.
Finally, paragraph (c)(1)(iv)(C)(4) requires a description of any
compensation that the covered service provider, an affiliate, or a
subcontractor reasonably expects to receive in connection with the
termination of the contract or arrangement, and how any prepaid amounts
will be calculated and refunded upon such termination. This paragraph
has not changed from the interim final rule, except to the extent cross
references to other sections of the final rule have been updated.
d. Disclosures Regarding Recordkeeping Services
Paragraph (c)(1)(iv)(D) of the final rule requires disclosure
concerning the cost to the covered plan of recordkeeping services, to
the extent such services will be provided to the covered plan. This
disclosure must be provided without regard to the disclosure of
compensation pursuant to paragraph (c)(1)(iv)(C), (c)(1)(iv)(E), or
(c)(1)(iv)(F) of the final rule. Specifically, if recordkeeping
services, as defined in paragraph (c)(1)(viii)(D), will be provided to
the covered plan, paragraph (1) requires a description of all direct
and indirect compensation that the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive in
connection with such recordkeeping services. Paragraph (2) also
requires that, if the covered service provider reasonably expects
recordkeeping services to be provided, in whole or in part, without
explicit compensation for such recordkeeping services, or when
compensation for recordkeeping services is offset or rebated based on
other compensation received by the covered service provider, an
affiliate, or a subcontractor, the covered service provider must
furnish a reasonable and good faith estimate of the cost to the covered
plan of such recordkeeping services, including an explanation of the
methodology and assumptions used to prepare the estimate and a detailed
explanation of the recordkeeping services that will be provided to the
covered plan. The estimate shall take into account, as applicable, the
rates that the covered service provider, an affiliate, or a
subcontractor would charge to, or be paid by, third parties, or the
prevailing market rates charged, for similar recordkeeping services for
a similar plan with a similar number of covered participants and
beneficiaries.
This provision was added to the interim final rule to reflect the
Department's belief that information relating to recordkeeping services
and the costs to covered plans of those services should be disclosed to
responsible plan fiduciaries in a meaningful way. The Department
believes that, especially in the context of complicated service
arrangements when a variety of services (including recordkeeping
services) are provided to a covered plan, separate disclosure is
necessary for fiduciaries to make informed evaluations of a covered
plan's recordkeeping costs. Commenters on the interim final rule
generally supported this requirement. Some commenters argued that this
disclosure element would provide little value to responsible plan
fiduciaries, especially to the extent it might appear to create a
``cost'' for something that does not really have a cost. One commenter
argued that it is insufficient to require only the separate disclosure
of the cost of recordkeeping services, and that investment management
and administrative services also should be separately disclosed. In
consideration of the Department's rationale for including this
provision, discussed in more detail in the preamble to the interim
final rule, the Department was not persuaded by these commenters that
the requirement should be eliminated or revised. Accordingly, this
paragraph has not changed from the interim final rule, except to the
extent that cross references have been updated as necessary.
Commenters also requested a few clarifications concerning this
requirement. For example, a couple of commenters are concerned that the
definition of ``recordkeeping services'' (paragraph (c)(1)(viii)(D) of
the final rule) is so broad that it will be difficult for responsible
plan fiduciaries to make meaningful comparisons, especially to the
extent the data provided will be in some cases mere estimates of the
cost of recordkeeping services. The Department believes that this
provision has been constructed to manage these concerns. First, the
definition of ``recordkeeping services'' in the final rule is designed
to be broad and provide a basic parameter for ensuring that providers
of recordkeeping services understand when they will be covered service
providers under paragraph (c)(1)(iii)(B) of the final rule. The
Department does not want service providers to avoid this responsibility
by narrowly defining the services that they provide. However, the
Department understands that the breadth of this definition could create
difficulty for responsible plan fiduciaries when comparing the
recordkeeping services of different providers. Thus, the final rule (as
in the interim final rule) requires as part of this paragraph
(c)(1)(iv)(D) that the covered service provider include ``a detailed
explanation of the recordkeeping services that will be provided to the
covered plan.'' This detailed explanation will better enable the
responsible plan fiduciary to understand precisely what is included in
a particular service provider's ``recordkeeping services'' such that
comparisons among service providers' offers can be made. Second, by
requiring ``an explanation of the methodology and assumptions used to
prepare the estimate[,]'' this provision enhances the ability of
responsible plan fiduciaries to analyze and compare estimates. A
responsible plan fiduciary who understands why, and how, a particular
service provider prepared an estimate will be better able to compare
that estimate to other service providers' disclosures concerning the
cost of recordkeeping services.
Finally, a few commenters asked the Department to take definitive
positions on whether certain specified services constitute
``recordkeeping services'' for purposes of this provision. Although the
Department declines to make general pronouncements concerning these
highly contextual and fact-specific questions, the Department again
notes that the final rule broadly defines ``recordkeeping services.''
Regardless of how a service arrangement is structured or funded, plan
fiduciaries need to know when such administrative services are being
provided and how much they contribute to the total cost of plan
services.
e. Investment Disclosure--Fiduciary Services
Paragraph (c)(1)(iv)(E) of the final rule (previously paragraph
(c)(1)(iv)(F) in the interim final rule) requires additional investment
disclosures from covered service providers described in paragraph
(c)(1)(iii)(A)(2) (providers of fiduciary services to an investment
contract, product, or entity that holds plan assets and in which the
covered plan has a direct equity investment). The information set forth
in paragraphs (c)(1)(iv)(E)(1) through (3) must be furnished for each
investment contract, product, or entity for which fiduciary services
will be provided pursuant to the contract or arrangement with the
covered plan, unless such information is disclosed to the responsible
plan fiduciary by a covered service provider providing recordkeeping
services or
[[Page 5639]]
brokerage services (as described in paragraph (c)(1)(iii)(B)).\20\
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\20\ Several commenters on the interim final rule requested
clarification concerning the meaning of ``unless such information is
disclosed to the responsible plan fiduciary by a covered service
provider providing recordkeeping services or brokerage services[.]''
Specifically, commenters were confused as to whether this language
implies an affirmative obligation on the part of recordkeepers and
brokers to provide this information, or whether duplicative
disclosure is intended. The Department confirms that the ERISA
fiduciary service provider to a plan asset vehicle has the
obligation to furnish this investment information. This language is
intended to avoid duplicative disclosure if, for some reason, the
information already is disclosed to the responsible plan fiduciary
by a recordkeeper or a broker. For instance, a recordkeeper or
broker, separately, may agree with the ERISA fiduciary to furnish
such information. In that case, the ERISA plan asset fiduciary would
not also have to furnish the same information.
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The interim final rule required the disclosure of three categories
of compensation information concerning such plan investments, as
applicable: (1) A description of any compensation that will be charged
directly against the amount invested in connection with the
acquisition, sale, transfer of, or withdrawal from the investment
contract, product, or entity (e.g., sales loads, sales charges,
deferred sales charges, redemption fees, surrender charges, exchange
fees, account fees, and purchase fees); (2) a description of the annual
operating expenses (e.g., expense ratio) if the return is not fixed;
and (3) a description of any ongoing expenses in addition to annual
operating expenses (e.g., wrap fees, mortality and expense fees). These
categories of investment-related information have been modified from
the interim final rule, as discussed below, to better conform this
provision of the final rule to the investment-related information
required pursuant to the Department's participant-level disclosure
regulation and to enhance the ability of the responsible plan fiduciary
or covered plan administrator to comply with the participant-level
disclosure regulation.
Paragraph (c)(1)(iv)(E)(1) requires a description of any
compensation that will be charged directly against an investment, such
as commissions, sales loads, sales charges, deferred sales charges,
redemption fees, surrender charges, exchange fees, accounts fees, and
purchase fees; and that is not included in the annual operating
expenses of the investment contract, product, or entity. Although this
language has been modified from that used in paragraph (c)(1)(iv)(F)(1)
of the interim final rule, the provision is intended to capture the
same information; the Department merely revised the language to conform
to the language used in a comparable provision of the participant-level
disclosure regulation. Accordingly, the substance of the information
required to be disclosed pursuant to this paragraph has not changed
from the interim final rule.
Paragraph (c)(1)(iv)(E)(2) requires a description of the annual
operating expenses (e.g., expense ratio) if the return is not fixed
\21\ and any ongoing expenses in addition to annual operating expenses
(e.g., wrap fees, mortality and expense fees), or, for an investment
contract, product, or entity that is a designated investment
alternative, the total annual operating expenses expressed as a
percentage and calculated in accordance with 29 CFR 2550.404a-5(h)(5).
This first part of the requirement combines paragraphs (c)(1)(iv)(F)(2)
and (3) from the interim final rule, requiring a description of both
the annual operating expenses and, if applicable, any additional
ongoing expenses. However, the latter part of this requirement is
intended to provide consistency for parties that also are required to
comply with the Department's participant-level disclosure regulation
for designated investment alternatives in a participant-directed
individual account plan. If an investment contract, product, or entity
subject to this paragraph is a ``designated investment alternative''
(as defined in paragraph (c)(1)(viii)(C) of the final rule), then the
covered service provider must disclose the total annual operating
expenses for the designated investment alternative, calculated in
accordance with 29 CFR 2550.404a-5(h)(5), rather than rely on the
interim final rule's more general standards. This will ensure
consistent disclosure and prevent confusion to the extent a covered
service provider under this final rule otherwise may have had to
disclose expense information for the same investment differently under
the participant-level disclosure regulation. For investment contracts,
products, or entities that are not designated investment alternatives,
a covered service provider may continue to disclose annual operating
expenses and any additional ongoing expenses, in accordance with the
standards first introduced in the interim final rule. To avoid creating
unnecessary cost and burden for disclosure with respect to investments
that are not designated investment alternatives in a participant-
directed individual account plan, a covered service provider will not
be required to calculate total annual operating expenses for such
investments according to the participant-level disclosure regulation's
definition.
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\21\ A few commenters requested further guidance on how to
determine if an investment's return is fixed. This determination
should be made in the same manner as under the participant-level
disclosure regulation. The preamble to the participant-level
disclosure regulation provides that designated investment
alternatives with fixed returns are those that provide a fixed or
stated rate of return to the participant, for a stated duration, and
with respect to which investment risks are borne by an entity other
than the participant (e.g., insurance company). 75 FR 64910 (Oct.
20, 2010).
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Paragraph (c)(1)(iv)(E)(3) also requires, for an investment
contract, product, or entity that is a designated investment
alternative, any other information or data about the designated
investment alternative that is within the control of, or reasonably
available to, the covered service provider and that is required for the
covered plan administrator to comply with the disclosure obligations
described in 29 CFR 2550.404a-5(d)(1) (the participant-level disclosure
regulation). Although this information was not explicitly required in
the interim final rule, the Department does not anticipate that it will
create an undue burden on covered service providers, because the
requirement applies only to designated investment alternatives, for
which the same disclosures otherwise will have to be made by plan
administrators pursuant to the participant-level disclosure regulation.
The Department believes that this requirement will enhance compliance
with the participant-level disclosure regulation by ensuring that a
responsible plan fiduciary and, therefore, the covered plan's
administrator, will obtain the investment-related information
concerning designated investment alternatives that must be furnished to
participants and beneficiaries. The Department does not intend to
create a new or increased burden on a covered service provider, or
require the covered service provider to obtain or prepare information
that otherwise is not within the covered service provider's control or
reasonably available to the covered service provider. For example, in
the case of a recordkeeper that offers a platform of designated
investment alternatives consisting of mutual funds, the recordkeeper
could satisfy its obligations under this provision by passing through
to the covered plan the prospectuses for such funds, in view of the
fact that such disclosures would contain much of the required
information and be reasonably available to the recordkeeper (the
covered service provider).
This provision does not require a covered service provider to
furnish information from the plan sponsor, from
[[Page 5640]]
another unrelated service provider to the plan, or from the issuer of a
designated investment alternative, unless it is reasonably available to
the covered service provider. Accordingly, this requirement is limited
to information or data that is within the control of, or reasonably
available to, the covered service provider.
Paragraph (c)(1)(iv)(E)(3), to the extent applicable, requires
disclosure of information that the plan administrator will need in
order to comply with its own disclosure obligations to participants
under 29 CFR 2550.404a-5. This includes the following additional
investment information about a designated investment alternative (an
``alternative''): identifying information such as the name and type or
category of the alternative (29 CFR 2550.404a-5(d)(1)(i)); performance
data (29 CFR 2550.404a-5(d)(1)(ii)); benchmarks (29 CFR 2550.404a-
5(d)(1)(iii)); and fee and expense information for alternatives with
respect to which the return is fixed (29 CFR 2550.404a-5(d)(1)(iv)(B)).
The covered service provider already is required to disclose the fee
and expense information described in 29 CFR 2550.404a-5(d)(1)(iv)(A)(1)
and (2) pursuant to paragraphs (c)(1)(iv)(E)(1) and (2) of the final
rule.
Although the requirement in 29 CFR 2550.404a-5(d)(1)(v) to furnish
an Internet Web site address falls on the covered plan's administrator,
the covered service provider may have within its control, or reasonably
available to it, some of the data that must be provided at the Web site
address, such as the name of the investment alternative's issuer (29
CFR 2550.404a-5(d)(1)(v)(A)); the alternative's objectives or goals (29
CFR 2550.404a-5(d)(1)(v)(B)); the alternative's principal strategies
and principal risks (29 CFR 2550.404a-5(d)(1)(v)(C)); and the
alternative's portfolio turnover rate (29 CFR 2550.404a-5(d)(1)(v)(D)).
The covered service provider would not be responsible for preparing the
glossary required by 29 CFR 2550.404a-5(d)(1)(vi), as that is not
specific information about a particular designated investment
alternative.
If the covered service provider has information about designated
investment alternatives that fall within the participant-level
disclosure regulation's special rules, contained in 29 CFR 2550.404a-
5(i), the covered service provider may have to furnish information
necessary for the covered plan administrator to comply with such
regulation's requirements for annuity options (29 CFR 2550.404a-
5(d)(1)(vii) and 29 CFR Sec. 2550.404a-5(i)(2)); employer securities
(29 CFR 2550.404a-5(i)(1)); fixed-return investments (29 CFR 2550.404a-
5(i)(3)); and target date or similar funds (29 CFR 2550.404a-5(i)(4)).
As set forth above, in each case, the covered service provider is
responsible only for specific data about designated investment
alternatives that is within the provider's control or reasonably
available. Some of the information required pursuant to 29 CFR
2550.404a-5 pertains to information that, although relevant to an
investing participant or beneficiary, is not specific data about a
particular designated investment alternative. Thus, for example, the
covered service provider is not responsible for furnishing an Internet
Web site address or for preparing cautionary statements designed to
inform a plan's participant and beneficiaries. The covered service
provider does not, by virtue of paragraph (c)(1)(iv)(E)(3), assume
responsibility for obligations of the covered plan administrator, who
continues to bear legal responsibility for the requirements of the
participant-level disclosure regulation.\22\
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\22\ Of course, as is recognized in the participant-level
disclosure regulation, the covered plan administrator is permitted
to retain a service provider to fulfill the plan administrator's
obligations under the participant-level disclosure regulation.
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f. Investment Disclosure--Recordkeeping and Brokerage Services
Paragraph (c)(1)(iv)(F) of the final rule requires the same
investment disclosure, discussed above, from covered service providers
described in paragraph (c)(1)(iii)(B) (providers of recordkeeping
services or brokerage services to an individual account plan that
permits participants and beneficiaries to direct the investment of
their accounts, if one or more designated investment alternatives will
be made available in connection with such recordkeeping services or
brokerage services). Paragraph (1) requires that such covered service
providers furnish the additional information described in paragraph
(c)(1)(iv)(E)(1) through (3) with respect to each designated investment
alternative for which recordkeeping services or brokerage services will
be provided pursuant to the contract or arrangement with the covered
plan. Apart from updating cross references as necessary, paragraph (1)
has not changed from the interim final rule.
Several commenters on the interim final rule questioned statements
in the preamble to the interim final rule and asked whether
recordkeepers who make available a platform of investments must furnish
the investment information for designated investment alternatives that
are not on their platform. The commenters explained that sometimes a
recordkeeper will administer and provide some level of recordkeeping
services for off-platform investments as a concession to pension plan
clients. These commenters argued that the direct relationship that
exists between the responsible plan fiduciary and the issuer of these
off-platform investments (which are separately selected by the plan
fiduciary) is a more appropriate basis for requiring the provision of
investment information from such issuer. The Department explained, in
the preamble to the interim final rule, its view that this category of
covered service providers encompasses service providers who provide
recordkeeping or brokerage services that include designated investment
alternatives independently selected by the responsible plan fiduciary.
These ``off-platform'' investment alternatives may be included in the
covered plan's investment options when the responsible plan fiduciary
enters into a contract or arrangement with the recordkeeper or broker,
or they may later be added. The Department continues to believe that
these covered service providers are in the best position to furnish the
required investment information. To the extent the covered service
provider is not affiliated with the issuer of the designated investment
alternative, the covered service provider may benefit from compliance
with paragraph (2) of this paragraph (c)(1)(iv)(F).
Paragraph (2) provides that a covered service provider may comply
with this paragraph (c)(1)(iv)(F) by providing current disclosure
materials of the issuer of the designated investment alternative, or
information replicated from such materials, that include the
information described in such paragraph, provided that three conditions
are satisfied. First (paragraph (i)), the issuer cannot be an affiliate
\23\ of the covered service provider. Second
[[Page 5641]]
(paragraph (ii)), the issuer must be a registered investment company,
an insurance company qualified to do business in any State, an issuer
of a publicly traded security, or a financial institution supervised by
a State or federal agency. Finally, third (paragraph (iii)), the
covered service provider must act in good faith and not know that the
materials are incomplete or inaccurate, and furnish the responsible
plan fiduciary with a statement that the covered service provider is
making no representations as to the completeness or accuracy of such
materials. The Department included this provision in recognition that
recordkeepers and brokers, unlike fiduciaries to investment vehicles
holding plan assets, are not directly involved in the day-to-day
management of the investment vehicles that they represent; rather, they
generally serve merely as intermediaries between plans and the issuers
of the investment vehicles for purposes of furnishing such information.
The final rule, like the interim final rule, enables them to comply
with the regulation without having to vouch for the completeness and
accuracy of such information.
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\23\ A few commenters on the interim final rule requested
clarification that, even though the relief provided by this
paragraph is available only for non-affiliated issuers, covered
service providers still can pass through disclosure materials from
affiliated issuers. These commenters believed that the provision
could be read to imply that covered service providers must create
separate, potentially different, disclosure materials for
investments of affiliated issuers. The Department confirms that
covered service providers may pass through disclosure materials from
affiliated issuers; this provision was not intended to limit the
ability of covered service providers to do so. However, covered
service providers will be responsible for the content of the
affiliated materials pursuant to this paragraph of the final rule.
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This paragraph has been modified from the interim final rule, which
previously required that the disclosure materials must be regulated by
a State or federal agency. The Department was persuaded by commenters
that the ``pass through'' relief was too narrow when applied to only
regulated disclosure materials. Commenters explained that disclosure
materials for many common investments offered in pension plans, such as
collective trusts, insurance general accounts, and guaranteed
investment contracts, are not ``regulated'' as required by the interim
final rule. Retaining this standard, commenters argued, might dissuade
recordkeepers and brokers from offering these products on their
platforms. Commenters also are concerned that responsible plan
fiduciaries would expend considerable resources to find other
recordkeepers or brokers willing to offer the products. Accordingly,
the Department revised this provision of the final rule. Rather than
focusing on the disclosure materials, paragraph (ii) now requires that
the issuer of the designated investment alternative be regulated.
Specifically, the issuer must be a registered investment company (i.e.,
by filing a registration statement with the Securities and Exchange
Commission as required by the Investment Advisers Act of 1940), an
insurance company qualified to do business in any State, an issuer of a
publicly traded security, or a financial institution supervised by a
State or federal agency. This provision focuses the requirement more
narrowly on entities that are ``regulated'' in connection with their
issuance of investment products, and allows the covered service
provider to satisfy paragraph (c)(1)(iv)(F) by passing through these
issuers' disclosure materials. Paragraph (iii) provides ``pass
through'' relief solely for purposes of determining whether or not a
contract or arrangement with a covered service provider falls within
ERISA section 408(b)(2). The ``pass through'' provision does not
provide relief from any other legal obligations or liabilities under
ERISA or other applicable law.
Paragraph (iii) also requires that the covered service provider
furnish the responsible plan fiduciary with a statement that the
covered service provider is making no representations as to the
completeness or accuracy of such materials. This will ensure that the
responsible plan fiduciary understands that these materials are merely
being passed through and that the covered service provider is not,
therefore, vouching for their completeness or accuracy. The Department
does not intend that the covered service provider must furnish a
separate statement for each item of investment disclosure material.
Rather, the covered service provider could, for example, include the
statement once in the service contract or arrangement, along with a
description of the investment disclosure material(s) to which the
statement applies.
Other commenters requested that this provision be expanded to cover
information from such regulated issuers that is consolidated or
summarized into a user-friendly format. Otherwise, these commenters
maintain, covered service providers will be more likely to pass through
lengthy, technical disclosure documents, for example multiple
Securities and Exchange Commission prospectus documents. The Department
agrees that covered service providers should not be discouraged from
presenting the required information in a more user-friendly format for
responsible plan fiduciaries. Accordingly, covered service providers
may rely on this provision if they merely are replicating information
received from a regulated, unaffiliated issuer that the covered service
provider does not know to be inaccurate or incomplete.
g. Manner of Receipt of Compensation
Paragraph (c)(1)(iv)(G) of the final rule requires a description of
the manner in which the compensation described in paragraph
(c)(1)(iv)(C) through (F) of the final rule, as applicable, will be
received, such as whether the covered plan will be billed or the
compensation will be deducted directly from the covered plan's
account(s) or investments. This provision has not substantively changed
from the interim final rule. However, this provision has been moved
from paragraph (c)(1)(iv)(E) of the interim final rule to paragraph
(c)(1)(iv)(G) of the final rule, and cross references have been updated
throughout the final rule as necessary, to ensure that the manner of
receipt of all compensation (including compensation received in
connection with plan investments in paragraphs (c)(1)(iv)(E) and (F) of
the final rule) is described.
h. Summary or Guide to Initial Disclosures; Format and Delivery
In the preamble to the interim final rule, the Department requested
comment on the format of disclosures required under the rule. Neither
the proposal nor the interim final rule required covered service
providers to disclose information in any particular format. Further,
the preamble to the proposal specifically noted that covered service
providers could use different documents from separate sources, as long
as all of the documents, collectively, contained the required
information. Commenters on the proposal disagreed as to whether this
would lead to a cost-effective and meaningful presentation of the
required information to responsible plan fiduciaries. In the preamble
to the interim final rule, the Department explained that it had not
determined whether it was feasible to provide specific and meaningful
formatting standards. Accordingly, the Department requested comment on
whether to revise the final rule to require a summary of, or guide to,
the mandated disclosures, or to include other formatting requirements.
Commenters on the interim final rule, as on the proposed rule,
continued to disagree about the utility of, and feasibility of,
requiring a summary or guide, or otherwise mandating any particular
format for the required disclosures. Many commenters argued that the
Department should retain the position taken in the proposal and the
interim final rule, giving covered service providers flexibility to
determine the format of their disclosures. These commenters expressed
concern that a ``one-size-fits-all'' approach could not accommodate the
tremendous variety of current pension plan service arrangements and
likely changes in the future. They also believed that the costs
[[Page 5642]]
to pension plans, and the participants and beneficiaries of such plans,
of such an approach will be significant. The commenters expressed
concern that responsible plan fiduciaries would rely solely, and thus
improperly, on the summary, rather than reviewing the fuller and more
detailed disclosures required by the rule. These commenters also were
concerned that requiring the comprehensive disclosures and a summary
would simply result in unnecessarily duplicative disclosures. In
addition, in the case of discrepancies between the two, questions may
arise over which disclosures would govern. These commenters preferred
that the Department retain the flexible position taken in the proposal
and interim final rule or, at most, require covered service providers
to furnish an index or ``roadmap'' to the disclosures. Commenters also
suggested that any summary or other formatting requirement the
Department may adopt be flexible and not mandate any particular
language, formatting, or page limits.\24\
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\24\ A few commenters on the interim final rule discussed, and
disagreed on, whether a ``single document'' rule should be adopted,
requiring that all disclosures be furnished in one document. The
Department was convinced neither that such a requirement would be
feasible and cost-effective for all service arrangements, nor that
it would necessarily result in the most meaningful delivery of
required information to responsible plan fiduciaries. The Department
therefore declined to adopt such a requirement.
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Other commenters, however, supported the addition of a summary
disclosure, guide, or similar requirement. They argued that plan
fiduciaries, especially those for small and medium-sized plans, often
are overwhelmed by highly technical disclosures from separate sources,
especially concerning plan investments. These commenters suggested
placing the burden of organizing this information on covered service
providers, who can do so more effectively and at less cost. Further,
these commenters believe that the costs should not be overstated and
are likely to be minimal following an initial transition to compliance
with any new summary or other formatting requirement. These costs, they
argued, would be greatly outweighed by the benefit of increased clarity
to responsible plan fiduciaries. One commenter, for example, pointed
out that fuller disclosure will not result in increased transparency if
the information continues to be obscured in lengthy, technical
documents. A few of these commenters suggested information that should
be contained in a separate, summary disclosure requirement.\25\
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\25\ Commenters generally suggested, for example, that the
Department focus on a summary of the rule's compensation information
and information concerning designated investment alternatives, while
cross referencing to assist fiduciaries in locating the primary
information contained in other disclosures. One commenter cautioned
that a summary should focus on total cost, not just one component of
the cost, such as recordkeeping.
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Following a careful review and analysis of the comments on this
issue, the Department has decided to reserve paragraph (c)(1)(iv)(H) of
the final rule and intends ultimately to publish in a separate proposal
a guide or similar requirement with respect to the initial disclosures
(in paragraph (c)(1)(iv) of the final rule) that covered service
providers may be required to furnish to responsible plan fiduciaries.
Given the lack of specific suggestions or data on how best to structure
such a requirement and what the real costs of such a requirement would
be, the Department is not prepared at this time to implement a guide or
similar requirement as part of the final rule. Rather, given the policy
and economic considerations presented by commenters, the Department has
decided not to include such a requirement in this final rule without
providing separately for public review and comment.
Accordingly, in the near future, the Department intends to publish
in the Federal Register a Notice of Proposed Rulemaking, under which
covered service providers may be required to furnish a guide or similar
tool along with the rule's initial disclosures. For example, a proposed
provision could require that, in addition to the information that must
be disclosed pursuant to paragraph (c)(1)(iv)(A) through (G) of the
final rule (the initial disclosures), the covered service provider must
separately furnish to the responsible plan fiduciary a guide that
specifically identifies the document, section and page number where
specified information, as applicable to the contract or arrangement, is
located. Furnishing the guide as a separate document would ensure that
the responsible plan fiduciary is aware of such document and can use it
effectively in his or her review of the required disclosures.
Alternatively, a regulatory provision could require some or all of the
required disclosures to be included in a chart or similar summary
format. In any event, by separately proposing such a requirement as a
new provision in paragraph (c)(1)(iv)(H) of the final rule, the
Department will ensure that all interested parties can fully review the
regulatory provision and provide feedback to the Department.
In the meantime, the Department understands that many service
providers already are moving in this direction. For example, service
providers have represented to the Department that, as a best practice,
they currently furnish their plan clients with a guide or index to the
service providers' disclosures, a summary of certain key disclosures,
or, in some cases, both. The Department strongly supports such
innovation, because these tools will assist responsible plan
fiduciaries, especially fiduciaries to small and medium-sized plans, in
managing and analyzing the potentially complex disclosure documents
that are provided to them or if disclosures are located in multiple
documents. Further, the Department believes that covered service
providers are in the best position to construct these tools, given
their increased familiarity with and access to the various and
potentially lengthy and technical documents that they may use to
disclose information.
To further encourage service providers to assist plan fiduciaries
in this manner, the Department is including a ``sample guide'' to
initial disclosures as an appendix to the final rule. Several
commenters on the interim final rule suggested that if the Department
were to adopt a summary or other formatting requirement in the final
rule, it should provide an illustration of how a covered service
provider may comply with such requirement to encourage consistency and
to enable lower-cost compliance. Although the Department is not
adopting such a requirement at this time, the sample guide published
today may be useful, on a voluntary basis, to covered service providers
as a format to assist responsible plan fiduciaries with the required
disclosures. Similarly, to the extent a responsible plan fiduciary
experiences difficulty finding and reviewing the required disclosures
in lengthy, technical, or multiple disclosure documents received from a
covered service provider pursuant to the requirements of the final
rule, the fiduciary should consider requesting assistance from the
covered service provider, for example, discussing with the covered
service provider the feasibility and cost of using the attached sample
guide.
The sample guide has been included because the Department believes,
at this time, that such a guide may strike an appropriate balance
between the need to facilitate a responsible plan fiduciary's review of
information important to a
[[Page 5643]]
prudent decision-making process, and the costs and burdens attendant to
the preparation of a new disclosure document. A guide would provide a
basic framework for responsible plan fiduciaries concerning the
disclosures they receive, and where to find such disclosures, while
avoiding the uncertainty and burdens inherent in attempting to
construct a ``summary'' of existing documents and provisions. Of
course, the Department will continue to review these issues, and
interested persons are encouraged to submit their views on the relative
benefits and costs of a guide requirement, versus a summary or other
formatting requirement, in response to the Department's forthcoming
Notice of Proposed Rulemaking.
Finally, in addition to providing their views on a formatting
requirement in the final rule, commenters on the interim final rule
requested further guidance on how required information may be delivered
to responsible plan fiduciaries. Specifically, several commenters asked
the Department to affirm that covered service providers could furnish
the required disclosures electronically, including by making
information available on a secure Web site if responsible plan
fiduciaries are notified as to how to access such information. These
commenters argued that electronic delivery enables more cost-effective
compliance, permits easy confirmation of delivery, and enables service
providers to create and use tools that can enhance the review of
information by responsible plan fiduciaries. Consistent with the views
expressed in the 2007 proposed rule,\26\ there is nothing in the
regulation that limits the ability of covered service providers to
furnish information required by the regulation to responsible plan
fiduciaries via electronic media.\27\ However, unless the covered
service provider's disclosure information on a Web site is readily
accessible to responsible plan fiduciaries, and fiduciaries have clear
notification on how to gain such access, the information on the Web
site may not be regarded as furnished within the meaning of the
regulation.
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\26\ See 72 FR 70988.
\27\ The Department's regulations at 29 CFR 2520.104b-1 apply
solely for purposes of disclosures from plans to participants and
beneficiaries and do not extend to disclosures from third parties to
plan fiduciaries.
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5. Timing of Initial Disclosures; Changes
Paragraph (c)(1)(v) of the final rule addresses the timing
requirements for the initial disclosures described in paragraph
(c)(1)(iv), as well as the requirements for when a covered service
provider must disclose changes to the initial disclosures in compliance
with the final rule. Paragraph (c)(1)(v)(A) of the final rule,
concerning the timing of initial disclosures, has not changed from the
interim final rule. A covered service provider must disclose the
information required by paragraph (c)(1)(iv) of the final rule to the
responsible plan fiduciary reasonably in advance of the date the
contract or arrangement is entered into, and extended or renewed. A few
commenters requested clarification on the meaning of ``the date the
contract or arrangement is entered into.'' The Department was not
persuaded to adopt the alternative dates that were proposed, such as
the date the written contract is signed, the date that compensation is
first received, or the date the contract is legally binding. The
Department does not believe that these standards are clearer or more
appropriate than the standard used in the final rule. Commenters on the
proposal argued that service arrangements often go into effect without
a signature by a plan fiduciary. In addition, delaying disclosure of
compensation until it is received would result in piecemeal disclosures
during the term of a service arrangement and would undercut an
important purpose of the disclosure, which is to assist fiduciaries in
selecting service providers. Tying disclosures to a determination of
when a contract or arrangement becomes legally binding is not
practicable because such determinations may depend on many facts and
circumstances, as well as different State laws. The final rule gives
plan fiduciaries and service providers some flexibility to determine
when an arrangement is entered into. However, to ensure that the
responsible plan fiduciary can review, analyze, and consider the
disclosures in compliance with his or her ERISA fiduciary obligations,
the covered service provider must furnish the disclosures ``reasonably
in advance'' of the date that the parties enter into the contract or
arrangement. The Department is confident that the parties to a service
contract or arrangement will be able to determine what is
``reasonable'' in this context.
The final rule contains two exceptions to this ``reasonably in
advance'' timing requirement. The first exception, contained in
paragraph (c)(1)(v)(A)(1), has not changed from the interim final rule.
When an investment contract, product, or entity is determined not to
hold plan assets upon the covered plan's direct equity investment, but
subsequently is determined to hold plan assets while the covered plan's
investment continues, the information required by paragraph (c)(1)(iv)
of the final rule must be disclosed as soon as practicable, but not
later than 30 days from the date on which the covered service provider
knows that such investment contract, product, or entity holds plan
assets. The second exception, contained in paragraph (c)(1)(v)(A)(2),
has not changed substantively. The investment information described in
paragraph (c)(1)(iv)(F) of the final rule relating to any investment
alternative that is not designated at the time the contract or
arrangement is entered into must be disclosed as soon as practicable,
but not later than the date the investment alternative is designated by
the covered plan.\28\ The cross reference to paragraph (c)(1)(iv)(F)
was updated to reflect minor restructuring in the final rule, discussed
above, and the reference to investment alternatives designated by the
``covered plan'' conforms to the final rule's slightly modified
definition of ``designated investment alternative,'' discussed below.
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\28\ One commenter on the interim final rule suggested that the
exceptions to the ``reasonably in advance'' requirement should be
expanded for circumstances when a responsible plan fiduciary changes
a designated investment alternative during the term of the service
contract or arrangement; the Department believes that this situation
would be addressed as a ``change'' to the initial disclosures and a
covered service provider should comply with the provisions regarding
such changes contained in paragraph (c)(1)(v)(B).
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Paragraph (c)(1)(v)(B) of the final rule, concerning when a covered
service provider must disclose changes to the initial information
previously disclosed, has been modified in response to comments
received on the interim final rule. Specifically, this paragraph has
been divided into two paragraphs (1) and (2). Paragraph (1) continues
to provide that a covered service provider must disclose a change to
required information as soon as practicable, but not later than 60 days
from the date on which the covered service provider is informed of such
change, unless such disclosure is precluded due to extraordinary
circumstances beyond the covered service provider's control, in which
case the information must be disclosed as soon as practicable. However,
this 60-day standard has been limited to the information required by
paragraphs (c)(1)(iv)(A) through (D), and (G) of the final rule (e.g.,
information concerning the services to be provided; the status of the
covered service provider, an affiliate, or a subcontractor as an ERISA
fiduciary or registered investment adviser; the compensation to
[[Page 5644]]
be received in connection with the contract or arrangement; the cost of
recordkeeping services (if applicable); and the manner of receipt of
compensation).
Some commenters suggested that the 60-day period should be expanded
to, for example, 90 days or 60 days following the later of the date the
service provider is informed of the change or the effective date of the
change. The Department was not persuaded to revise the 60-day period
and believes that it gives covered service providers enough time to
make the disclosure while ensuring that responsible plan fiduciaries
receive prompt notice of changes. A few commenters suggested that the
Department reintroduce the ``materiality'' standard used in the
proposed rule to avoid requiring disclosure of de minimis and
meaningless changes. The Department did not adopt this suggestion. For
the reasons stated in the preamble to the interim final rule, the
Department continues to believe that a materiality standard, in this
context, would be ineffective. 72 FR 70988.
Paragraph (c)(1)(v)(B)(2) contains a new requirement applicable to
the revised investment disclosures required by paragraph (c)(1)(iv)(E)
and (F). Several commenters on the interim final rule argued that the
ongoing, or ``rolling,'' requirement to disclose changes to previously
furnished information within 60 days would result in a highly
burdensome process with respect to investment information. For example,
commenters explained that for a covered plan offering a large number of
designated investment alternatives, minor modifications to the
investment information concerning those alternatives might occur
continuously and a covered service provider would have to inundate
responsible plan fiduciaries with frequent notifications about what are
often nominal changes. The commenters argued that responsible plan
fiduciaries may eventually ignore the notices. Further, covered service
providers constantly would have to monitor all of the investment
alternatives on their platform for changes. These commenters suggested,
as an alternative standard, that covered service providers should have
to periodically update the investment disclosures; this approach would
be more consistent with current industry practice and more likely to
focus the responsible plan fiduciary's attention on the information at
specified intervals.
The Department agrees that the need to constantly furnish notices
of even minor changes to investment information could be burdensome,
especially for plans offering a large number of investment
alternatives. The Department also agrees that a non-stop stream of such
notifications is inconsistent with the goal of ensuring that
responsible plan fiduciaries receive useful and meaningful disclosures.
Accordingly, the final rule has been modified to provide an alternate
timing standard for changes to investment information. Rather than
furnishing notification of each such change within 60 days, paragraph
(2) requires that a covered service provider must, at least annually,
disclose any changes to the investment information required by
paragraph (c)(1)(iv)(E) and (F).
6. Reporting and Disclosure Information
Paragraph (c)(1)(vi)(A) of the final rule requires a covered
service provider to furnish, upon request of the responsible plan
fiduciary or covered plan administrator, any other information relating
to the compensation received in connection with the contract or
arrangement that the covered plan needs in order to comply with the
reporting and disclosure requirements of Title I of ERISA and the
regulations, forms and schedules issued thereunder. The substantive
requirement, in paragraph (c)(1)(vi)(A), has not changed from the
interim final rule, except that the language has been modified to refer
to ``the written'' request of the responsible plan fiduciary or covered
plan administrator.\29\ The timing requirement, in paragraph
(c)(1)(vi)(B), however, has been modified.
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\29\ The timing requirement contained in paragraph (c)(1)(vi)(B)
of the interim final rule previously referred to the responsible
plan fiduciary's or covered plan administrator's ``written''
request. Because paragraph (c)(1)(vi)(B) was modified for purposes
of the final rule, the concept of the ``written'' request was
incorporated into paragraph (c)(1)(vi)(A) of the final rule.
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The interim final rule required, in paragraph (c)(1)(vi)(B), that
the covered service provider disclose the information required by
paragraph (c)(1)(vi)(A) not later than 30 days following receipt of a
written request from the responsible plan fiduciary or covered plan
administrator, unless such disclosure is precluded due to extraordinary
circumstances beyond the covered service provider's control, in which
case the information must be disclosed as soon as practicable. A number
of commenters on the interim final rule requested that the Department
better align this timing requirement with existing reporting and
disclosure standards. For example, service providers currently must
furnish information necessary to complete the Form 5500 Annual Report
no later than 120 days after the end of the plan year. The Department
is persuaded that the timing requirement for this reporting and
disclosure information should be based on the reporting or disclosure
requirements in question, rather than on the time that a responsible
plan fiduciary chooses to request the information. Accordingly,
paragraph (c)(1)(vi)(B) now requires that such information be furnished
reasonably in advance of the date upon which such responsible plan
fiduciary or covered plan administrator states that it must comply with
the applicable reporting or disclosure requirement, unless such
disclosure is precluded due to extraordinary circumstances beyond the
covered service provider's control, in which case the information must
be disclosed as soon as practicable. The Department believes that this
modification will address commenters' concerns.\30\
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\30\ The final rule is not intended to alter any otherwise
applicable obligation to provide information to plan fiduciaries.
See, e.g., ERISA section 103(a)(2) (information certification
requirements for insurance carriers or other organizations which
provide benefits under the plan or hold plan assets, banks or
similar institutions which hold plan assets, and plan sponsors).
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7. Disclosure Errors
Paragraph (c)(1)(vii) of the final rule addresses inadvertent
disclosure errors and omissions. Specifically, the rule provides that
no contract or arrangement will fail to be reasonable solely because
the covered service provider, acting in good faith and with reasonable
diligence, makes an error or omission in disclosing the information
required by the rule. The covered service provider must disclose the
correct information to the responsible plan fiduciary as soon as
practicable, but not later than 30 days from the date on which the
covered service provider knows of such error or omission.\31\ This
provision includes one change from the interim final rule. The
Department revised the paragraph to clarify that it covers errors and
omissions made when covered service providers disclose changes to the
initially required information, which must be disclosed pursuant to
paragraph (c)(1)(v)(B) of the
[[Page 5645]]
rule. Otherwise, this provision has not changed from the interim final
rule.
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\31\ The class exemption, included in paragraph (c)(1)(ix) of
the final rule, addresses situations in which a responsible plan
fiduciary discovers an error or other deficiency in the disclosure.
Paragraph (c)(1)(vii) is meant to provide the parties an opportunity
to avoid a prohibited transaction by addressing errors up front.
Once a prohibited transaction has occurred, the responsible plan
fiduciary will need to rely on the relief provided by the class
exemption.
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One commenter on the interim final rule requested that the
Department extend the turn-around time to 90 days. The Department did
not accept this request. Although it is important to provide a
correction mechanism for inadvertent errors or omissions, which
inevitably will occur as suggested by commenters on the proposal, it is
the Department's view that errors and omissions must be communicated
promptly to responsible plan fiduciaries. Another commenter argued that
this provision is insufficient to protect covered service providers and
that the class exemption should be extended to protect covered service
providers. The Department also declined to accept this suggestion, as
discussed in the context of the class exemption (paragraph (c)(1)(ix)
of the final rule), below.
A number of commenters asked whether this provision would be
available to covered service providers (e.g., recordkeepers) who
provide the investment disclosures described in paragraphs
(c)(1)(iv)(E)(1)-(3) or (c)(1)(iv)(F)(1) of the final rule by using
data obtained from a central digital database maintained by a third
party. These commenters state, for instance, that instead of providing
the plan fiduciary with paper or electronic versions of the issuer's
current disclosure materials for each of the plan's designated
investment alternatives, as permitted by paragraph (c)(1)(iv)(F)(2), it
may be more efficient for the recordkeeper to prepare a summary
disclosure document, tailored to the requirements of the final rule,
using third party information technology (IT) systems that collect and
provide access to the necessary investment disclosure information. The
commenters maintain that third party IT systems can receive investment
related information directly from mutual funds and other investment
funds or from their investment advisers, or pull such information from
regulated filings made by the issuers with the Securities and Exchange
Commission or other State or federal agencies. These systems may, or
may be modified to, allow recordkeepers and others to access the data
and incorporate it into summary disclosure documents designed to meet
the final rule.
In the Department's view, a covered service provider's use of a
reputable and reliable third party commercial database as a source of
the investment information described in paragraphs (c)(1)(iv)(E)(1)-(3)
or (c)(1)(iv)(F)(1) of the final rule would ordinarily constitute
disclosure made ``in good faith and with reasonable diligence'' under
paragraph (c)(1)(vii) of the final rule. An important element in
demonstrating reliability would be a contractual provision that makes
the third-party provider responsible for ensuring that the information
obtained from the central database is passed on accurately to the
covered service provider. Of course, if the covered service provider
subsequently becomes aware of an error or omission in the data, it
would need to disclose the correct information to the responsible plan
fiduciary as soon as practicable, but not later than 30 days after the
covered service provider knows of the error or omission.
8. Definitions
Paragraph (c)(1)(viii) of the final rule defines the terms
``affiliate,'' ``compensation,'' ``designated investment alternative,''
``recordkeeping services,'' ``responsible plan fiduciary,'' and
``subcontractor.'' Several minor modifications from the interim final
rule have been made to this definitional paragraph. Paragraph
(c)(1)(viii)(B)(3), concerning how a description of compensation may be
expressed, has been modified to apply to a description of
``compensation or cost,'' rather than only to ``compensation.'' A
commenter on the interim final rule pointed out that paragraph
(c)(1)(iv)(D)(2) may require a covered service provider to disclose the
``cost'' of recordkeeping services, rather than the compensation
received from recordkeeping services. The Department agrees that the
flexibility provided in paragraph (c)(1)(viii)(B)(3) should extend to
how such costs may be expressed and revised this paragraph. Paragraph
(c)(1)(viii)(B)(3) also was modified to clarify that the use of
estimates is not limited to recordkeeping costs. The paragraph now
provides that a description of compensation or cost may be expressed as
a monetary amount, formula, percentage of the covered plan's assets, or
a per capita charge for each participant or beneficiary or, if the
compensation or cost cannot reasonably be expressed in such terms, by
any other reasonable method. The description may include a reasonable
and good faith estimate if the covered service provider cannot
otherwise readily describe compensation or cost and the covered service
provider explains the methodology and assumptions used to prepare such
estimate. This modification is intended to make it clear that all
covered service providers, not just those providing recordkeeping
services, may provide estimates of monetary amounts, provided that the
other requirements of the regulation are satisfied. Paragraph
(c)(1)(viii)(B)(3) also provides that any description, including any
estimate of recordkeeping cost under paragraph (c)(1)(iv)(D), must
contain sufficient information to permit evaluation of the
reasonableness of the compensation or cost.
A few commenters also asked whether compensation or costs may be
disclosed in ranges, for example by a range of possible basis points.
The Department believes that disclosure of expected compensation in the
form of known ranges can be a ``reasonable'' method for purposes of the
final rule. However, such ranges must be reasonable under the
circumstances surrounding the service and compensation arrangement at
issue. To ensure that covered service providers communicate meaningful
and understandable compensation information to responsible plan
fiduciaries whenever possible, the Department cautions that more
specific, rather than less specific, compensation information is
preferred whenever it can be furnished without undue burden.
A minor, non-substantive modification was made to the definition of
``designated investment alternative'' in paragraph (c)(1)(viii)(C). The
modified definition, which now refers to designation of investment
alternatives by the ``covered plan,'' merely conforms this definition
to other Departmental regulatory guidance, such as the participant-
level disclosure regulation (75 FR 64910). For purposes of the final
rule, a ``designated investment alternative'' is any investment
alternative designated by the covered plan into which participants and
beneficiaries may direct the investment of assets held in, or
contributed to, their individual accounts. The term does not include
brokerage windows, self-directed brokerage accounts, or similar plan
arrangements that enable participants and beneficiaries to select
investments beyond those designated by the covered plan.
In light of this exclusion, some commenters requested clarification
on what information would have to be disclosed concerning brokerage
windows and similar arrangements. Because brokerage windows and similar
arrangements are not designated investment alternatives subject to
paragraph (c)(1)(iv)(E) and (F), a covered service provider need not
furnish the investment-specific information required in these
paragraphs concerning each possible investment available through the
brokerage window. However, the covered service provider must disclose
all applicable information
[[Page 5646]]
concerning the brokerage window that is required by the other
provisions of the final rule. For example, a covered service provider
must describe the services that will be available to participants who
elect to take advantage of the brokerage window; any fees or charges
that may be paid ``directly'' from the plan (or from a participant's or
beneficiary's account); and any compensation that may be received
``indirectly'' or from related parties in connection with the brokerage
window. In the case of indirect compensation, the covered service
provider would have to identify the party from whom such compensation
will be received and otherwise comply with the requirements of the
applicable provisions of the final rule. The Department understands
that some of the required information (for example with respect to
compensation to be received) may depend on investments ultimately
selected by participants through the brokerage window. The Department
is confident nonetheless that the final rule provides sufficient
flexibility for how compensation may be disclosed, in paragraph
(c)(1)(viii)(B)(3), to enable the covered service provider to
communicate meaningful information to the responsible plan fiduciary
about the compensation the covered service provider, affiliates, and
subcontractors expect to receive in connection with offering a
brokerage window to the covered plan.
A minor, non-substantive modification also was made to the
definition of ``indirect'' compensation in paragraph
(c)(1)(viii)(B)(2). The interim final rule defined ``indirect''
compensation as compensation received from any source other than the
covered plan, the plan sponsor, the covered service provider, an
affiliate, or a subcontractor (if the subcontractor receives such
compensation in connection with services performed under the
subcontractor's contract or arrangement described in paragraph
(c)(1)(viii)(F) of this section). To more clearly describe when
compensation received by a subcontractor is ``indirect'' compensation
for purposes of the final rule, the concept contained in the
parenthetical to paragraph (c)(1)(viii)(B)(2) of the interim final rule
has been moved to a separate sentence. This modification is not
intended to substantively alter the definition. Accordingly, this
paragraph now describes ``indirect'' compensation as compensation
received from any source other than the covered plan, the plan sponsor,
the covered service provider, or an affiliate. Compensation received
from a subcontractor is indirect compensation, unless it is received in
connection with services performed under the subcontractor's contract
or arrangement described in paragraph (c)(1)(viii)(F) of the final
rule.
The other definitions contained in paragraph (c)(1)(viii) have not
changed from the interim final rule. A person or entity's ``affiliate''
(paragraph (c)(1)(viii)(A)) directly or indirectly (through one or more
intermediaries) controls, is controlled by, or is under common control
with such person or entity; or is an officer, director, or employee of,
or partner in, such person or entity. As in the interim final rule,
unless otherwise specified, an ``affiliate'' refers to an affiliate of
the covered service provider. ``Compensation'' (paragraph
(c)(1)(viii)(B)) is anything of monetary value (for example, money,
gifts, awards, and trips), but does not include non-monetary
compensation valued at $250 or less, in the aggregate, during the term
of the contract or arrangement.\32\ ``Direct'' compensation (paragraph
(c)(1)(viii)(B)(1)) is compensation received directly from the covered
plan. The definition of ``indirect'' compensation (paragraph
(c)(1)(viii)(B)(2)) is modified as described above. Paragraph
(c)(1)(viii)(B)(3), concerning how compensation may be expressed, also
is modified as discussed above.
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\32\ Some commenters on the interim final rule argued that the
$250 threshold for non-monetary compensation should be revised so
that the amount would be measured on a calendar- or plan-year basis,
rather than over the term of the contract or arrangement. The
Department declined to accept this suggestion. Commenters also
requested further guidance regarding accounting for and allocating
non-monetary compensation. The Department notes that, for purposes
of the final rule, covered service providers may look to the
guidance and methodologies concerning non-monetary compensation that
have been approved for purposes of the Form 5500 Annual Report. See
Form 5500 Instructions, available on the Department's Web site at
http://www.dol.gov/ebsa/forms.html; see also Frequently Asked
Questions concerning the Form 5500 Schedule C, at http://www.dol.gov/ebsa/faqs/faq_scheduleC.html and http://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html.
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``Recordkeeping services'' (paragraph (c)(1)(viii)(D)) include
services related to plan administration and monitoring of plan and
participant and beneficiary transactions (e.g., enrollment, payroll
deductions and contributions, offering designated investment
alternatives and other covered plan investments, loans, withdrawals and
distributions); and the maintenance of covered plan and participant and
beneficiary accounts, records, and statements. A ``responsible plan
fiduciary'' (paragraph (c)(1)(viii)(E)) is a fiduciary with authority
to cause the covered plan to enter into, or extend or renew, the
contract or arrangement. Finally, a ``subcontractor'' (paragraph
(c)(1)(viii)(F)) is any person or entity (or an affiliate of such
person or entity) that is not an affiliate of the covered service
provider and that, pursuant to a contract or arrangement with the
covered service provider or an affiliate, reasonably expects to receive
$1,000 or more in compensation for performing one or more services
described pursuant to paragraph (c)(1)(iii)(A) through (C) of the final
rule provided for by the contract or arrangement with the covered plan.
Additional background information concerning these definitions can be
found in the preamble to the interim final rule (75 FR 41600).
9. Exemption for Responsible Plan Fiduciary
Paragraph (c)(1)(ix) of the final rule permits a responsible plan
fiduciary to avoid engaging in a prohibited transaction when a covered
service provider fails to disclose required information.\33\
Specifically, the final class exemption exempts a responsible plan
fiduciary from the restrictions of ERISA section 406(a)(1)(C) and (D)
if, among other things, the fiduciary did not know that the covered
service provider failed to make required disclosures and ``reasonably
believed'' that such disclosures were made.\34\ Upon discovery of a
disclosure failure, the responsible plan fiduciary must take certain
specified steps within designated timeframes, as described in paragraph
(c)(1)(ix), including notifying the Department of any disclosure
failures that are not corrected.
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\33\ When the Department proposed this rule in 2007, the
prohibited transaction class exemption was proposed separately; for
ease of reference, the class exemption was included as paragraph
(c)(1)(ix) of the interim final rule and continues to be part of the
final regulation.
\34\ The Department notes that the fact that the service
transaction, for the responsible plan fiduciary, is the subject of
an exemption will not relieve the covered service provider, as the
other party in interest to the transaction, from ERISA's prohibited
transaction provisions. Thus, regardless of the relief available to
the responsible plan fiduciary pursuant to this paragraph
(c)(1)(ix), a disclosure failure will nonetheless result in a
prohibited transaction, and resulting excise taxes, on the part of
the covered service provider.
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This paragraph continues to set forth the specific conditions
applicable to covered transactions. These conditions require, among
other things, a responsible plan fiduciary to notify the Department
under certain circumstances of a covered service provider's failure to
comply with its disclosure obligations. The conditions also set forth
the timing, content and other requirements
[[Page 5647]]
applicable to the notice required to be filed with the Department by
the responsible plan fiduciary. The Department notes that parties
seeking to avail themselves of the relief provided by the exemption
have the burden of demonstrating compliance with the conditions of the
exemption.
The exemption provides relief from the restrictions of ERISA
section 406(a)(1)(C) and (D) to a responsible plan fiduciary,
notwithstanding any failure by a covered service provider to comply
with its disclosure obligations, provided that the conditions set forth
in paragraph (c)(1)(ix)(A) through (G) are met.
Paragraph (c)(1)(ix)(A) of the regulation requires that the
responsible plan fiduciary did not know that the covered service
provider failed or would fail to make required disclosures and
reasonably believed that the covered service provider disclosed the
information required by the final rule. This condition is intended to
reinforce the principle that the plan fiduciary must have entered into,
and thereafter continued, an arrangement for services with a reasonable
belief that the covered service provider met, and would continue to
meet, the requirements of the final rule and without knowing of the
covered service provider's disclosure failure.
Paragraph (c)(1)(ix)(B) of the regulation requires that, upon
discovering that the covered service provider failed to disclose the
required information, the responsible plan fiduciary must request in
writing that the covered service provider furnish such information. If
the covered service provider fails to comply with the responsible plan
fiduciary's written request within 90 days, paragraph (c)(1)(ix)(C)
requires that the responsible plan fiduciary notify the Department. The
Department believes that this condition, along with a covered service
provider's exposure to excise tax liability under the Code, will
provide covered service providers with a sufficient incentive to
address disclosure failures within a reasonable time. The notice
requirement does 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
covered service provider furnishes information in response to the
fiduciary's request.
Paragraph (c)(1)(ix)(D) through (F) of the regulation sets forth
the content, timing, and other requirements applicable to notifying the
Department of a covered service provider's failure to meet its
disclosure obligations. Paragraph (c)(1)(ix)(D) states that the notice
to the Department must contain the following information: (1) The name
of the covered plan; (2) the plan number used for the covered plan's
Annual Report; (3) the plan sponsor's name, address, and EIN; (4) the
name, address and telephone number of the responsible plan fiduciary;
(5) the name, address, phone number, and, if known, EIN of the covered
service provider; (6) a description of the services provided to the
covered plan; (7) a description of the information that the covered
service provider failed to disclose; (8) the date on which such
information was requested in writing from the covered service provider;
and (9) a statement as to whether the covered service provider
continues to provide services to the covered plan.
Paragraph (c)(1)(ix)(E) provides that the responsible plan
fiduciary shall file a notice with the Department not later than 30
days following the earlier of: (1) The covered service provider's
refusal to furnish the requested information; or (2) the date which is
90 days after the date the written request referred to in paragraph
(c)(1)(ix)(B)(1) is made. In this context, a covered service provider's
refusal to provide information to the responsible plan fiduciary,
following such fiduciary's written request, would constitute a covered
service provider's failure to meet its disclosure obligations prior to
the end of the 90-day period.
Paragraph (c)(1)(ix)(F) provides that the 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 a notice also may be sent
electronically to: OE-DelinquentSPnotice@dol.gov. The Department has
developed a sample notice that will facilitate compliance with the
notification requirement; this sample notice will be available on the
Department's Web site at: http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc.
Finally, paragraph (c)(1)(ix)(G) of the final rule requires the
responsible plan fiduciary, following the discovery of a failure to
disclose, to determine the extent to which the contract or arrangement
at issue can be continued consistent with the fiduciary's duty of
prudence under ERISA section 404. The final rule, like the interim
final rule, assumes that plan fiduciaries will take into account
certain factors in making such determinations, such as the nature of
the failure and the availability and costs of a replacement service
provider. Although this paragraph is intended to afford to the
responsible plan fiduciary some flexibility in securing replacement
services, this paragraph is not intended to permit fiduciaries to
continue contracts or arrangements indefinitely when there has been an
unresolved disclosure failure. In this regard, the final rule has been
modified to emphasize that determinations in this area are governed by
the prudence provisions of ERISA section 404. Thus, the final rule
requires that if the requested information relates to future services
(i.e., services that will be performed after the end of the 90-day
period referred to in paragraph (c)(1)(ix)(C)) and is not disclosed
promptly after the end of such 90-day period, then the responsible plan
fiduciary shall terminate the contract or arrangement as expeditiously
as possible, consistent with the duty of prudence.
The Department received four comments on the class exemption as
part of the public comments received on the interim final rule. Three
commenters generally supported the class exemption, noting its
importance to an otherwise ``innocent'' plan fiduciary. These
commenters stated that since a plan's service provider is often the
only party with all information about a service arrangement,
particularly indirect compensation, the class exemption rightly imposes
the compliance burden for disclosure on the covered service provider.
However, two commenters were concerned about requiring the responsible
plan fiduciary to have ``reasonably believed'' that service providers
disclosed the requisite information. These commenters noted that
availability of the exemption should not be determined based upon
whether a responsible plan fiduciary can recognize disclosure omissions
or errors. Thus, the exemption should be available, they say, if the
fiduciary merely did not ``know or have reason to know'' that the
covered service provider failed to make required disclosures.
The Department has considered these comments, but has chosen not to
modify the requirements of the class exemption based upon these
concerns. The Department does not believe that responsible plan
fiduciaries should be entitled to relief provided by the class
exemption absent a reasonable belief that disclosures required to be
provided to the covered plan are complete. To this end, responsible
plan fiduciaries should appropriately review the disclosures made by
covered service providers. Fiduciaries should be able to, at a minimum,
compare the disclosures they receive from a covered service
[[Page 5648]]
provider to the requirements of the regulation and form a reasonable
belief that the required disclosures have been made.
Another commenter expressed concern about the requirement in
paragraph (c)(1)(ix)(G) that a responsible plan fiduciary determine
whether to terminate or continue a service contract after discovering
that information remains undisclosed. This requirement, the commenters
stated, means that any unresolved disclosure failures that continue
will result in a non-exempt prohibited transaction in which case the
covered plan has no choice but to discontinue the existing service
arrangement. In such instances, the commenter believes that contractual
requirements for a covered plan to compensate the covered service
provider for losses or expenses relating to termination should be null
and void. The Department does not believe that the class exemption
should require that parties to an otherwise appropriately negotiated
and approved service contract or arrangement simply disregard all
agreed-upon contractual provisions designed to reasonably compensate a
covered service provider for losses or expenses relating to a
contract's termination. The requirements and obligations of parties to
service contracts or arrangements pursuant to paragraph (c)(3) of the
final rule remain unchanged, including arrangements between covered
plans and covered service providers under this final rule.
Finally, a commenter was concerned about the Department's failure
to expand relief to covered service providers who may become liable for
excise taxes despite their inability to obtain, through no fault of
their own, information from other parties. Thus, the commenter would
have the class exemption also cover an otherwise ``innocent'' covered
service provider. The Department believes that the final rule's
mechanisms for correcting inadvertent errors and omissions, and for
updating changes in disclosures, partially address this concern.
However, the Department maintains that the covered service provider
dealing directly with the covered plan bears ultimate responsibility
for disclosing the information required by the final rule, including
information from its affiliates or subcontractors. Therefore, the
Department has not modified the class exemption as requested by the
commenter.
10. Preemption of State Law
Paragraph (c)(1)(x) of the final rule states that the regulation
does not supersede any State law that governs disclosures by parties
that provide services to covered plans, except to the extent that such
law prevents application of the regulation. The Department understands
that the service provider relationship with the plan may be subject to
various State laws, including those relating to contract, tax, and
consumer protection. The Department's regulation does not supersede
these State laws, which may require disclosures by parties that provide
services described in the final rule, except to the extent that
compliance with such State law would make compliance with this
regulation impossible or would otherwise conflict with one of the
regulation's protections. This provision has not changed from the
interim final rule.\35\
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\35\ Two commenters on the interim final rule believe that such
rule was not an appropriate place for a preemption provision and
that the provision must be proposed. The Department is not persuaded
by these commenters and views this provision as a logical outgrowth
of the proposed rule. In addition, the interim final rule itself
provided notice to affected parties and the opportunity for comment.
Therefore, the final rule retains the preemption provision.
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Paragraph (c)(1)(x) of the final rule addresses only the preemptive
effect of the regulation itself, and does not speak to any preemptive
effect that ERISA Title I generally, or ERISA section 514 specifically,
may have on State laws that regulate parties that provide services to
employee benefit plans. A State law that requires disclosure in
connection with services or service provider contracts or arrangements,
regardless of whether the services are provided directly to an ERISA
plan or other entity, generally would not be viewed by the Department
as ``relating to'' employee benefit plans within the meaning of ERISA
section 514 or as otherwise preempted by Title I of ERISA.
11. Application of Section 4975 of the Internal Revenue Code
Code section 4975(d)(2) contains a provision that is parallel to
ERISA section 408(b)(2). The interim final rule included a new
provision in paragraph (c)(1)(xi) to clarify that compliance with the
Department's regulation will be required for a covered service provider
to avoid the excise taxes imposed by Code section 4975. The final rule
includes the same provision, without modification from the interim
final rule. Specifically, paragraph (c)(1)(xi) provides that in
accordance with the transfer of authority of the Secretary of the
Treasury to promulgate regulations of the type published herein to the
Secretary of Labor, pursuant to section 102 of the Reorganization Plan
No. 4 of 1978, 5 U.S.C. App. 214 (2000 ed.), which was effective
December 31, 1978, under the final regulation, all references to
section 408(b)(2) of ERISA and the regulations thereunder should be
read to include references to the parallel provisions of section
4975(d)(2) of the Code and the regulations thereunder at 26 CFR
54.4975-6.
If a covered service provider fails to disclose the information
required by the final rule, then the contract or arrangement will not
be ``reasonable'' unless the failure satisfies the rule's cure
provision for inadvertent disclosure errors and omissions. The service
contract or arrangement will not qualify for the relief from ERISA's
prohibited transaction rules provided by section 408(b)(2). The
resulting prohibited transaction will have consequences for both the
responsible plan fiduciary and the covered service provider. The
responsible plan fiduciary, by causing the transaction, will have
violated ERISA section 406(a)(1)(C) and (D). The covered service
provider, as a ``disqualified person'' under the Code's prohibited
transaction rules, will be subject to the excise taxes that result from
the service provider's participation in a prohibited transaction under
Code section 4975.\36\ Section 4975(a) of the Code provides that the
rate of the excise tax is fifteen percent of the ``amount involved''
with respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The Code goes on to provide in section
4975(b) that if the prohibited transaction is not corrected within the
taxable period, the rate of the excise tax increases to 100 percent of
the ``amount involved.''
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\36\ The Code also includes definitions related to plans subject
to the prohibited transaction and excise tax provisions in Code
section 4975. See Code section 4975(e)(1) and (g).
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The Department continues to believe that the application of the
excise tax will provide incentives for all parties to service contracts
or arrangements to cooperate in exchanging the disclosures required by
the final regulation. As noted above, however, the Department does not
believe that an otherwise diligent responsible plan fiduciary should be
penalized as a result of a failure on the part of a covered service
provider to make the required disclosures. Accordingly, the final rule
continues to include the exemptive relief described above (see
paragraph (c)(1)(ix) of the final rule). But, as required as a
condition of that exemptive relief and more generally under ERISA
section 404, following the responsible plan fiduciary's discovery
[[Page 5649]]
that the covered service provider failed to disclose required
information, the fiduciary must consider what steps should be taken in
response to the covered service provider's nondisclosure, and may in
certain circumstances have to terminate the contract or arrangement
with the service provider.
Several commenters asked how to determine the ``amount involved''
and what would be required to ``correct'' the prohibited transaction
that results from a failure to satisfy the disclosure requirements in
the final rule. Under Reorganization Plan No. 4 described above, the
Secretary of the Treasury retained interpretive and regulatory
authority over the provisions in Code section 4975(a) and (b) regarding
calculation of excise taxes and correction of prohibited
transactions.\37\ Accordingly, those issues are beyond the scope of
this regulation.
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\37\ The Reorganization Plan at Section 102 provides: ``Except
as otherwise provided in Section 105 of this Plan, all authority of
the Secretary of the Treasury to issue the following described
documents pursuant to the statutes hereinafter specified is hereby
transferred to the Secretary of Labor: (a) Regulations, rulings,
opinions, and exemptions under section 4975 of the Code * * * EXCEPT
for (i) subsections 4975(a), (b), (c)(3), P(d)(3), (e)(1), and
(e)(7) of the Code.'' Section 105 of the Reorganization Plan further
details the scope of the Secretary of the Treasury's authority
relating to section 4975(a) & (b): ``The transfers provided for in
Section 102 of this Plan shall not affect the ability of the
Secretary of the Treasury, subject to the provisions of Title III of
ERISA relating to jurisdiction, administration, and enforcement, (a)
to audit plans and employers and to enforce the excise tax
provisions of subsections 4975(a) and 4975(b) of the Code, to
exercise the authority set forth in subsections 502(b)(1) and 502(h)
of ERISA, or to exercise the authority set forth in Title III of
ERISA, including the ability to make interpretations necessary to
audit, to enforce such taxes, and to exercise such authority * * *.
However, in enforcing such excise taxes and, to the extent
applicable, in disqualifying such plans the Secretary of the
Treasury shall be bound by the regulations, rulings, opinions, and
exemptions issued by the Secretary of Labor. * * *[.]''
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12. Effective Date
Commenters on the interim final rule continued to express concern
with the effective date for the final regulation and class exemption,
which was July 16, 2011 (one year following publication of the interim
final rule in the Federal Register).\38\ Both new and existing
contracts and arrangements between covered plans and covered service
providers must be in compliance as of and following the rule's
effective date. The Department extended the 90-day proposed effective
date to a one-year effective date in the interim final rule in order to
accommodate concerns as to the cost and burden associated with
transitioning current and future service contracts or arrangements to
satisfy the rule's requirements.
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\38\ One commenter on the interim final rule strongly supported
the July 16, 2011, effective date, arguing that the industry
dialogue concerning fee transparency has been going on for years and
that service providers have been adequately forewarned that
increased transparency will be required.
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Some commenters on the interim final rule asserted that even one
year is not enough time, suggesting that the Department delay the
regulation's effectiveness, for example, for another year. A few
commenters also requested that the Department modify the effective date
for existing contracts or arrangements, giving affected parties more
time to bring them into compliance with the regulation. However, most
of the commenters on this issue primarily were concerned that if
significant modifications are made from the interim final to the final
rule, then the Department should consider extending the effective date
to ensure that parties have sufficient time to revise necessary systems
and comply with such modifications.
The Department continues to believe that both existing contracts
and arrangements, as well as those entered into on or after the final
regulation's effective date, must comply with the final rule. However,
given commenters' concerns about the burden associated with updating
all existing contracts and arrangements, and the fact that the final
rule does reflect some substantive modifications from the interim final
rule, the Department was persuaded that the effective date should be
delayed. Further, the final rule conforms to the Department's final
participant-level disclosure regulation, which applies for plan years
beginning on or after November 1, 2011 (so, for calendar year plans,
the plan year beginning on January 1, 2012). The Department believes
that all parties, including covered service providers, responsible plan
fiduciaries (and their plan administrators), and plan participants and
beneficiaries, would benefit from closer alignment in the application
of these two disclosure initiatives. Accordingly, the Department
previously published a notice in the Federal Register extending the
effective date for the interim final rule to April 1, 2012.\39\ The
final rule published in this notice, however, includes a new effective
date of July 1, 2012. The Department decided to further extend the
effective date due to delays in the publication of this final rule.
Given the date of this notice, the Department determined that July 1,
2012 would be a more appropriate effective date to ensure that covered
service providers and other parties have sufficient time to prepare for
compliance with the final rule. Thus, contracts or arrangements between
a covered service provider and a covered plan that are entered into on
or after July 1, 2012 must comply with the final rule, and contracts or
arrangements in existence prior to July 1, 2012 also must be brought
into compliance as of such date.
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\39\ 76 FR 42539 (July 19, 2011). The Department also made
corresponding changes to the transition rule for the participant-
level disclosure regulation, which are discussed in the
Supplementary Information contained in such Federal Register notice.
The revised effective date and transition rule published at that
time reflected the Department's review of public comments received
in response to its proposal to extend these dates, published on June
1, 2011. 76 FR 31544. These comments similarly influenced the
Department's decision to further extend the effective date herein.
These public comments are available on the Department's Web site at
http://www.dol.gov/ebsa/regs/cmt-1210-AB08a.html.
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C. Welfare Plan Disclosure--Reserved
As explained in the Supplementary Information for the interim final
rule, the Department reserved paragraph (c)(2) of the final rule for a
comprehensive disclosure framework applicable to ``reasonable''
contracts or arrangements for welfare plans to be developed by the
Department. The Department believes that fiduciaries and service
providers to welfare benefit plans would benefit from regulatory
guidance in this area for the same reasons that apply to defined
contribution and defined benefit plans. The Department is persuaded
that there are significant differences between service and compensation
arrangements of welfare plans and those involving pension plans and
that the Department should develop separate, more specifically
tailored, disclosure requirements under ERISA section 408(b)(2) for
welfare benefit plans. Although one commenter on the interim final rule
argued that fee transparency guidance, as a general matter, is
unnecessary in the welfare plan context, most of the commenters on this
issue supported the Department's decision to separately address welfare
plans. To further this distinct regulatory initiative, the Department
held a public hearing on December 7, 2010, to explore operational,
disclosure, and fee transparency issues concerning welfare benefit
plans. Testimony and other materials submitted to the Department in
connection with this hearing are available on the Department's Web
site.
[[Page 5650]]
D. Existing Requirement Concerning Termination of Contract or
Arrangement
The interim final rule contained no amendments to the existing
requirements addressing termination of contracts or arrangements for
purposes of section 408(b)(2). Although one commenter on the interim
final rule generally requested additional guidance on this requirement,
no specific suggestions or problems were identified. No further
comments or recommendations were received. Accordingly, the Department
has not revised this provision and adopted the paragraph, without
change, in paragraph (c)(3) of the final rule.
E. Effect on Other Statutory and Administrative Exemptions
A few commenters on the interim final rule asked the Department to
clarify the effect of the final rule on the availability of previously
issued exemptions. The Department is reviewing a number of pertinent
class exemptions involving service provider arrangements, and we
anticipate providing guidance in this regard in the near future.
F. Regulatory Impact Analysis
1. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility. OMB has determined that this action is ``economically
significant'' within the meaning of 3(f)(1) of the executive order
because it is likely to have an effect on the economy of $100 million
or more in any one year. Accordingly, the rule has been reviewed by
OMB.
2. The Need for Regulatory Action
As documented in the regulatory impact analysis of the July 16,
2010 interim final regulation, compensation arrangements in retirement
plan services market are complex. Payments from third parties and among
service providers can create conflicts of interest between service
providers and their clients. For example, a 401(k) plan vendor may
receive ``revenue sharing'' from a mutual fund that it makes available
to its clients, and a consultant may receive a ``finder's fee'' from an
investment adviser it recommends to its clients.
Such compensation arrangements and the conflicts they can create
are myriad and in the past have been largely hidden from view. Their
opacity has sometimes prevented plan fiduciaries from assessing the
reasonableness of the costs for plan services and allowed harmful
conflicts to persist in the market.
In evaluating the reasonableness of contracts or arrangements for
services, responsible plan fiduciaries have a duty to consider
compensation that will be received by a covered service provider from
all sources in connection with the services it provides to a covered
plan pursuant to the service provider's contract or arrangement.
However, many plans, especially small plans, lack the knowledge and
bargaining power to require service providers to disclose the
compensation that they expect to receive from third parties as a result
of the service provider's arrangement with the plan. To the extent that
plan fiduciaries are unable to obtain relevant compensation
information, or unable to use it to choose among service providers in a
manner that upholds their fiduciary duty, a failure exists in the
market for services for employee benefit plans. This final rule will
improve the transparency of service arrangements by requiring specific
disclosures of service provider compensation before a service contract
or arrangement can be considered reasonable under ERISA Section
408(b)(2).
3. Summary of Impacts
As further discussed below, the Department is confident that this
final rule will provide substantial benefits by reducing search time
and costs for fiduciaries to identify the relevant fee and compensation
information that they need to fulfill their fiduciary responsibility
under ERISA. The final rule will also discourage harmful conflicts,
reduce information gaps, improve fiduciary decision-making about plan
services, enhance value for plan participants, and increase the
Department's ability to redress abuses committed by service providers.
Covered service providers will incur compliance and implementation
costs to create and provide disclosures that satisfy the requirements
of the final rule, but the Department is confident that the benefits of
the final regulation will exceed its costs.
The final regulation retains the structure of the interim final
rule by requiring covered service providers to provide certain
disclosures to responsible plan fiduciaries in order to qualify for the
statutory exemption under ERISA section 408(b)(2). Generally, the
Department has retained most of the disclosure concepts and
requirements from the interim final rule. The modifications in this
final rule do not significantly affect the costs and benefits of the
interim final rule.
In accordance with OMB Circular A-4,\40\ Table 2 below depicts an
accounting statement showing the Department's assessment of the
benefits and costs associated with the final rule. The estimates vary
from those in the interim final rule by updating the analysis to
reflect 2008 Form 5500 data (the latest available data) and 2011 labor
rates.
---------------------------------------------------------------------------
\40\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
Table 2--Accounting Table (Total Impact of the Final Rule)
----------------------------------------------------------------------------------------------------------------
Primary Year Discount Period
Category estimate dollar rate covered
----------------------------------------------------------------------------------------------------------------
Benefits:
Qualitative: The final regulation will increase the amount of information that service providers disclose to
plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
interest, service value improvements through improved decisions and value, better enforcement tools to redress
abuse, and harmonization with other EBSA rules and programs.
The Department believes that the non-quantified benefits are substantial and exceed the quantified costs of the
rule. A detailed analysis of the non-quantified benefits exceeding the quantified costs is contained in the
impact analysis of the July 16, 2010 interim final regulation. The Department is confident that the benefits of
the final rule exceed the costs.
----------------------------------------------------------------------------------------------------------------
[[Page 5651]]
Costs:......................................................
Annualized Monetized ($millions/year)................... $63.7 2011 7% 2012-2021
58.9 2011 3% 2012-2021
----------------------------------------------------------------------------------------------------------------
Note: Quantified costs include costs for service providers to perform compliance review and implementation, for
disclosure of general, investment-related, and additional requested information, for responsible plan
fiduciaries to request additional information from service providers to comply with the exemption and to
prepare notices to the Department if the service provider fails to comply with the request.
----------------------------------------------------------------------------------------------------------------
Transfers................................................... Not Applicable.
----------------------------------------------------------------------------------------------------------------
4. Affected Entities and Other Assumptions
This final rule will affect about 48,000 defined benefit pension
plans with over 42 million participants and almost 669,000 defined
contribution pension plans with approximately 83 million participants.
Out of these pension plans, about 38,000 are small defined benefit
plans and 597,000 small individual account plans.\41\ Most of the
defined contribution pension plans, approximately 498,000, are
participant-directed individual account plans.
---------------------------------------------------------------------------
\41\ Estimates of the number of plans and participants are taken
from the EBSA's 2008 Pension Research File, http://www.dol.gov/ebsa/publications/form5500dataresearch.html#planbulletins. Small pension
plans are plans with generally less than 100 participants, as
specified in the Form 5500 instructions.
---------------------------------------------------------------------------
The final regulation applies to contracts or arrangements between
covered plans and covered service providers. In order to estimate the
number of covered service providers and the number of service provider-
plan arrangements, the Department has used data from plan year 2008
submissions of the Form 5500 and its Schedule C.
In general, only plans with 100 or more participants that have made
payments to a service provider of at least $5,000 are required to file
the Form 5500 Schedule C. These plans are also required to report the
type of services provided by each service provider. The Department
counted the service providers most likely to provide the services
described in paragraph (c)(1)(iii) of the final rule, which defines
which service providers are ``covered.'' \42\ In total, there were
nearly 9,500 unique covered service providers reported in the Form 5500
Schedule C data, almost 1,000 of which were reported to have received
in aggregate $1 million or more in direct and indirect compensation.
---------------------------------------------------------------------------
\42\ In order to provide a reasonable estimate, service
providers with reported type codes corresponding to contract
administrator, administration, brokerage (real estate), brokerage
(stocks, bonds, commodities), consulting (general), custodial
(securities), insurance agents and brokers, investment management,
recordkeeping, trustee (individual), trustee (corporate) and
investment evaluations were assumed to be covered service providers.
---------------------------------------------------------------------------
The Department acknowledges that this estimate may be imprecise. On
the one hand, some of the service providers counted here may not be
covered service providers, but the Department is unable to further
refine this group due to the limitations of the Schedule C data. On the
other hand, because small plans generally do not file Schedule C, the
number of covered service providers will be understated if a
substantial number of them service only small plans. However, the
Department believes that most small plans use the same service
providers as large plans; therefore, the estimate based on the Schedule
C filings by large plans is reasonable.\43\
---------------------------------------------------------------------------
\43\ While in general small plans are not required to file a
Schedule C, some voluntarily file. Looking at Schedule C filings by
small plans, the Department verified that most small plans reporting
data on Schedule C used the same group of service providers as
larger plans.
---------------------------------------------------------------------------
Schedule C data was also used to count the number of covered plan-
service provider arrangements. On average, defined benefit plans employ
more covered service providers per plan than defined contribution
plans, and large plans use more covered service providers per plan than
small plans. In total, the Department estimates that defined benefit
plans have over 120,000 arrangements with covered service providers,
while defined contribution plans have over 836,000 arrangements.
In the interim final rule, the Department assumed that 50 percent
of disclosures would be delivered electronically. The Department did
not receive any comments regarding this assumption; therefore, the
Department continues to assume that about 50 percent of disclosures
between covered service providers and responsible plan fiduciaries are
delivered only in electronic format.
5. Benefits
As explained in the regulatory impact analysis for the interim
final rule, mandatory proactive disclosure will reduce the plan's
information costs, discourage harmful conflicts, and enhance service
value. Additional benefits will flow from the Department's enhanced
ability to redress abuse. Although the benefits and costs are difficult
to quantify, the Department is confident that the benefits more than
justify the costs.
6. Costs
This section summarizes the total costs of the final regulation.
The Department estimated costs for the rule over a ten-year time frame
for purposes of this analysis. In addition to the costs to service
providers, the Department also considered the potential costs to plans.
These costs include the following: Cost incurred for compliance
review and implementation; costs to make initial and investment
disclosures and to disclose additional information on request; costs
for responsible plan fiduciaries to request additional information from
service providers to comply with the class exemption and to prepare
notices to the Department if the covered service provider fails to
comply with the request, and costs to prepare the guide. These costs
are identical to the estimates in the interim final regulation except
they have been updated to reflect more recent Form 5500 data and 2011
labor rates.
As shown in Table 3 below, total costs for covered service
providers and covered plans total approximately $164 million for the
year 2012.
[[Page 5652]]
Table 3--Total Discounted Costs Rule (Shown With 7 Percent Discount Rate)
----------------------------------------------------------------------------------------------------------------
Cost of Cost of
Cost of legal general investment Cost of
Year review information information qualifying for Total costs
disclosure disclosure exemption
(A) (B) (C) (D) A + B + C + D
----------------------------------------------------------------------------------------------------------------
2012............................ $64,061,000 $82,842,000 $14,584,000 $2,588,000 $164,076,000
2013............................ 7,248,000 23,690,000 8,471,000 1,209,000 40,619,000
2014............................ 6,774,000 22,140,000 7,917,000 1,130,000 37,962,000
2015............................ 6,331,000 20,692,000 7,399,000 1,056,000 35,478,000
2016............................ 5,917,000 19,338,000 6,915,000 987,000 33,157,000
2017............................ 5,530,000 18,073,000 6,463,000 923,000 30,988,000
2018............................ 5,168,000 16,891,000 6,040,000 862,000 28,961,000
2019............................ 4,830,000 15,786,000 5,645,000 806,000 27,066,000
2020............................ 4,514,000 14,753,000 5,275,000 753,000 25,296,000
2021............................ 4,219,000 13,788,000 4,930,000 704,000 23,641,000
-------------------------------------------------------------------------------
Total with 7% Discounting... .............. .............. .............. .............. 447,244,000
-------------------------------------------------------------------------------
Total with 3% Discounting... .............. .............. .............. .............. 502,475,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
7. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601, et seq.) (RFA)
imposes certain requirements with respect to Federal rules that are
subject to the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551, et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency determines that a proposal is not
likely to have such an impact, section 604 of the RFA requires that the
agency present a final regulatory flexibility analysis (FRFA)
describing the rule's impact on small entities and explaining how the
agency made its decisions with respect to the application of the rule
to small entities. Small entities include small businesses,
organizations and governmental jurisdictions.
a. Need for and Objectives of the Rule
Service providers to pension plans increasingly have complex
compensation arrangements that may present conflicts of interest. Thus,
small plan fiduciaries face increasing difficulty in carrying out their
duty to assess whether the compensation paid to their service providers
is reasonable. This rule is necessary to help both large and small plan
fiduciaries get the information they need to negotiate with and select
service providers who offer high quality services at reasonable rates
and to comply with their fiduciary duties. The Department's requirement
for covered service providers to provide disclosures to responsible
plan fiduciaries will be especially helpful to small plan fiduciaries.
b. Affected Small Entities
The Department estimates that the final rule will apply to
approximately 9,300 small service providers (generally, those with
revenue less than $7.0 million per year). These service providers
generally consist of professional service enterprises that provide a
wide range of services to plans, such as investment management or
advisory services for plans or plan participants, and accounting,
auditing, actuarial, appraisal, banking, consulting, custodial,
insurance, legal, recordkeeping, brokerage, third party administration,
or valuation services. Many of these service providers have special
education, training, and/or formal credentials in fields such as ERISA
and benefits administration, employee compensation, taxation, actuarial
science, law, accounting, or finance.
c. Compliance Requirements
The classes of small service providers subject to the final rule
include service providers who are ERISA fiduciaries (for example,
because they manage plan investments or are fiduciaries to investment
vehicles holding plan assets), who provide services as registered
investment advisers to plans, who receive indirect compensation (or
certain compensation from related parties) in connection with provision
of specified services (namely, accounting, auditing, actuarial,
appraisal, banking, certain consulting, custodial, insurance,
participant investment advisory, legal, recordkeeping, securities or
other investment brokerage, third party administration, or valuation
services) or who provide recordkeeping or brokerage services involving
an investment platform of investment options for participant-directed
individual account plans.
These small covered service providers will be required to disclose
certain written information to responsible plan fiduciaries in
connection with their covered service arrangements. Such information
will include a description of the services that will be included in the
arrangement and what direct and indirect compensation the covered
service provider will receive, or that will be paid among related
parties, in connection with the arrangement. Service providers whose
arrangements include making investment products available to plans
additionally must disclose specified investment-related information
about such products. The required disclosures must be provided to the
responsible plan fiduciary reasonably in advance of the parties
entering into the contract or arrangement for covered services.
Preparing compliant disclosures often will require one or more
professional skills such as financial or legal expertise, and knowledge
of financial products and services and related compensation and revenue
sharing arrangements.
d. Agency Steps To Minimize Negative Impacts
The Department took a number of steps to minimize any negative
impact of the interim final rule on small service providers. These
include clarifying the scope of the rule's application to include only
those categories of service providers likely to be involved in
undisclosed or indirect compensation arrangements, excepting from the
rule's requirements contracts or arrangements for which compensation or
fees are less
[[Page 5653]]
than $1,000, omitting from the rule a requirement that all arrangements
be maintained under formal contracts, and not requiring covered service
providers to disclose information in any particular format. Moreover,
the disclosure requirements included in the final rule are necessary to
ensure that plan fiduciaries can efficiently and effectively carry out
their duties in purchasing services for plans.
The policy justification for these requirements includes benefits
to fiduciaries, who will realize savings in the form of reduced search
costs more than commensurate to the compliance costs shouldered by
service providers. Small plan fiduciaries are likely to benefit most--
lacking economies of scale and negotiating power, they would otherwise
face the greatest potential cost to obtain and consider the information
necessary to the performance of their fiduciary duty. Small service
providers, while shouldering the cost of providing disclosure, will
likely often pass these costs to their plan clients, who in turn will
reap a net benefit on average that will more than offset this shifted
compliance cost.
The Department rejected as unnecessarily costly approaches that
would have applied disclosure requirements to arrangements involving
compensation or fees of less than $1,000, or to a broader scope of
service providers, or that would have required a formal, written
contract. The Department also rejected these approaches as inadequate
to achieve a central policy and legal goal--namely, enabling
responsible plan fiduciaries, including especially small plan
fiduciaries, to efficiently and effectively carry out their duty to
assess information needed to purchase of plan services at a reasonable
rate.
8. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department submitted an
information collection request (ICR) to OMB in accordance with 44
U.S.C. 3507(d), contemporaneously with the publication of the interim
final regulation, for OMB's review. OMB approved the ICR under OMB
Control Number 1210-0133 on May 20, 2010, which will expire on May 31,
2013.
Although no public comments were received that specifically
addressed the paperwork burden analysis of the information collections
at the interim final rule stage, the comments that were submitted and
described earlier in this preamble, contained information relevant to
the costs and administrative burdens attendant to the proposals. The
Department took into account such public comments in connection with
making changes to the final rule and in developing the revised
paperwork burden analysis summarized below.
In connection with publication of this final rule, the Department
submitted a revised ICR to OMB for approval. The Department intends to
publish a notice announcing OMB's decision regarding the revised ICR
upon completion of OMB review. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
A copy of the ICR may be obtained by contacting the PRA addressee
shown below or at http://www.RegInfo.gov. PRA Addressee: G. Christopher
Cosby, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue NW.,
Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax:
(202) 219-4745. These are not toll-free numbers.
The information collection requirements of the final rule are
contained in paragraph (c)(1)(iv), which requires service providers to
disclose, in writing, specific information to responsible plan
fiduciaries related to the compensation to be received under the
contract or arrangement. Generally, the information must be disclosed
reasonably in advance of the date the contract or arrangement is
entered into, or extended or renewed. These disclosure requirements are
discussed fully in Section B of this SUPPLEMENTARY INFORMATION.
Annual Hour Burden
In order to estimate the potential costs of the disclosure
provisions of the final rule, the Department estimated the number of
service providers, plans, and arrangements covered by the rule. Based
on information from the 2008 Form 5500, the Department estimates that
approximately 48,000 defined benefit pension plans (DB plans) covering
more than 42 million participants and approximately 669,000 defined
contribution plans (DC plans) covering almost 83 million participants
are covered by the rule.\44\
---------------------------------------------------------------------------
\44\ Out of these pension plans, about 38,000 are small DB plans
and 597,000 small DC plans. Small plans generally are those with
less than 100 participants.
---------------------------------------------------------------------------
The Department also estimates that based on data from the 2008 Form
5500 Annual Return/Report and Schedule C that there are about 9,500
covered service providers. The 2008 Form 5500 Schedule C data was also
used to count the number of covered plan-covered service provider
arrangements. On average, DB plans employ more covered service
providers per plan than DC plans, and large plans use more covered
service providers per plan than small plans. In total, the Department
estimates that DB plans have approximately 120,000 arrangements with
covered service providers, while DC plans have an estimated 836,000
arrangements. For purposes of this analysis, the Department assumes
that about 50 percent of disclosures between covered service providers
and responsible plan fiduciaries are made only electronically.
The final regulation retains the basic structure of the interim
final rule by requiring covered service providers to provide certain
disclosures to responsible plan fiduciaries in order to qualify for the
statutory exemption under ERISA section 408(b)(2). Generally, the
Department has retained most of the disclosure concepts and
requirements from the interim final rule. As noted above, the
Department estimates that there are approximately 9,500 covered service
providers and 960,000 arrangements with covered plans that are affected
by this rule.
Summary
Table 4 shows the total hour burden of the information collection
and Table 5 shows the total equivalent cost. The total three-year
average hour burden for covered service providers and covered plans is
estimated to be 1.6 million hours with an equivalent cost of $134.7
million.
Table 4--Hour Burden
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Service Providers........................................... 2,315,000 813,000 813,000 1,313,000
[[Page 5654]]
Plans....................................................... 758,000 117,000 117,000 331,000
---------------------------------------------------
Total................................................... 3,072,000 930,000 930,000 1,644,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 5--Equivalent Cost
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Service Providers........................... $202,623,000 $68,769,000 $68,769,000 $113,387,000
Plans....................................... 48,912,000 7,563,000 7,563,000 21,346,000
-------------------------------------------------------------------
Total................................... 251,535,000 76,332,000 76,332,000 134,733,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Annual Cost Burden
Table 6 reports the estimated printing and postage costs associated
with each required disclosures and notices. The Department assumes that
50 percent of the disclosures will be sent electronically at no cost,
and that the cost of printing and paper for the remaining 50 percent of
documents will be 5 cents per page. The Department estimates that the
total cost burden of the rule in 2012 will be $9.5 million, and $1.5
million in subsequent years. The three-year average cost burden is
estimated to be more than $4.2 million.
Table 6--Cost Burden
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Initial Disclosure.......................................... $401,000 $54,000 $54,000 $170,000
Update Initial Disclosure................................... 0 107,000 107,000 71,000
Information Upon Request.................................... 45,000 45,000 45,000 45,000
---------------------------------------------------
General Information Total............................... 446,000 206,000 206,000 286,000
---------------------------------------------------
Investment Disclosure....................................... 8,929,000 1,210,000 1,210,000 3,783,000
Update Investment Disclosure................................ 116,000 116,000 116,000 116,000
---------------------------------------------------
Investment Disclosure Total............................. 9,045,000 1,326,000 1,326,000 3,899,000
---------------------------------------------------
Request for Additional Information for Exemption............ 19,000 10,000 10,000 13,000
Notice to the Department.................................... 2,000 1,000 1,000 1,000
---------------------------------------------------
Total............................................... 9,513,000 1,543,000 1,543,000 4,200,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals
These paperwork burden estimates are summarized as follows:
Type of Review: Revision of existing collection
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Reasonable Contract or Arrangement Under Section 408(b)(2)--
Fee Disclosure.
OMB Control Number: 1210-0133.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Estimated Number of Respondents: 81,000 (first year); 57,000
(three-year average).
Estimated Number of Responses: 1,628,000 (first year); 1,274,000
(three-year average).
Frequency of Response: Annually; occasionally.
Estimated Annual Burden Hours: 3,072,000 (first year); 1,644,000
(three-year average).
Estimated Annual Burden Cost: $9,513,000 (first year); $4,200,000
(three-year average).
Congressional Review Act
The final rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The final rule is a ``major rule'' as
that term is defined in 5 U.S.C. 804, because it is likely to result in
an annual effect on the economy of $100 million or more.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, the final rule does not
include any Federal mandate that may result in expenditures by State,
local, or tribal governments in the aggregate of more than $100
million, adjusted for inflation, or increase expenditures by the
private sector of more than $100 million, adjusted for inflation.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism, and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. The final rule does not have federalism
implications because it has no substantial direct
[[Page 5655]]
effect on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Section 514 of
ERISA provides, with certain exceptions specifically enumerated, that
the provisions of Titles I and IV of ERISA supersede any and all laws
of the States as they relate to any employee benefit plan covered under
ERISA. The requirements implemented in the final rule do not alter the
fundamental reporting and disclosure requirements of the statute with
respect to employee benefit plans, and, as such, have no implications
for the States or the relationship or distribution of power between the
national government and the States.
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Exemptions, Fiduciaries, Investments,
Pensions, Prohibited transactions, Reporting and recordkeeping
requirements, and Securities.
For the reasons set forth in the preamble, the Department of Labor
is amending chapter XXV, subchapter F, part 2550 of title 29 of the
Code of Federal Regulations as follows:
PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
0
1. The authority citation for part 2550 continues to read as follows:
Authority: 29 U.S.C. 1135 and Secretary of Labor's Order No. 6-
2009, 74 FR Sec. 21524 (May 7, 2009). Sec. 2550.401c-1 also issued
under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec. 657,
Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and 2550.404c-5
also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also issued under
29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 1. Sec. 2550.408b-19 also issued under sec. 611,
Pub. L. 109-280, 120 Stat. 780, 972, and sec. 102, Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. 1. Sec. 2550.412-1 also issued
under 29 U.S.C. 1112.
0
2. Section 2550.408b-2(c) is revised to read as follows:
Sec. 2550.408b-2 General statutory exemption for services or office
space.
* * * * *
(c) Reasonable contract or arrangement--
(1) Pension plan disclosure.
(i) General. No contract or arrangement for services between a
covered plan and a covered service provider, nor any extension or
renewal, is reasonable within the meaning of section 408(b)(2) of the
Act and paragraph (a)(2) of this section unless the requirements of
this paragraph (c)(1) are satisfied. The requirements of this paragraph
(c)(1) are independent of fiduciary obligations under section 404 of
the Act.
(ii) Covered plan. For purposes of this paragraph (c)(1), a
``covered plan'' is an ``employee pension benefit plan'' or a ``pension
plan'' within the meaning of section 3(2)(A) (and not described in
section 4(b)) of the Act, except that the term ``covered plan'' shall
not include a ``simplified employee pension'' described in section
408(k) of the Internal Revenue Code of 1986 (the Code); a ``simple
retirement account'' described in section 408(p) of the Code; an
individual retirement account described in section 408(a) of the Code;
an individual retirement annuity described in section 408(b) of the
Code; or annuity contracts and custodial accounts described in section
403(b) of the Code issued to a current or former employee before
January 1, 2009, for which the employer ceased to have any obligation
to make contributions (including employee salary reduction
contributions), and in fact ceased making contributions to the contract
or account for periods before January 1, 2009, and for which all of the
rights and benefits under the contract or account are legally
enforceable against the insurer or custodian by the individual owner of
the contract or account without any involvement by the employer, and
for which such individual owner is fully vested in the contract or
account.
(iii) Covered service provider. For purposes of this paragraph
(c)(1), a ``covered service provider'' is a service provider that
enters into a contract or arrangement with the covered plan and
reasonably expects $1,000 or more in compensation, direct or indirect,
to be received in connection with providing one or more of the services
described in paragraphs (c)(1)(iii)(A), (B), or (C) of this section
pursuant to the contract or arrangement, regardless of whether such
services will be performed, or such compensation received, by the
covered service provider, an affiliate, or a subcontractor.
(A) Services as a fiduciary or registered investment adviser.
(1) Services provided directly to the covered plan as a fiduciary
(unless otherwise specified, a ``fiduciary'' in this paragraph (c)(1)
is a fiduciary within the meaning of section 3(21) of the Act);
(2) Services provided as a fiduciary to an investment contract,
product, or entity that holds plan assets (as determined pursuant to
sections 3(42) and 401 of the Act and 29 CFR 2510.3-101) and in which
the covered plan has a direct equity investment (a direct equity
investment does not include investments made by the investment
contract, product, or entity in which the covered plan invests); or
(3) Services provided directly to the covered plan as an investment
adviser registered under either the Investment Advisers Act of 1940 or
any State law.
(B) Certain recordkeeping or brokerage services. Recordkeeping
services or brokerage services provided to a covered plan that is an
individual account plan, as defined in section 3(34) of the Act, and
that permits participants or beneficiaries to direct the investment of
their accounts, if one or more designated investment alternatives will
be made available (e.g., through a platform or similar mechanism) in
connection with such recordkeeping services or brokerage services.
(C) Other services for indirect compensation. Accounting, auditing,
actuarial, appraisal, banking, consulting (i.e., consulting related to
the development or implementation of investment policies or objectives,
or the selection or monitoring of service providers or plan
investments), custodial, insurance, investment advisory (for plan or
participants), legal, recordkeeping, securities or other investment
brokerage, third party administration, or valuation services provided
to the covered plan, for which the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive indirect
compensation (as defined in paragraph (c)(1)(viii)(B)(2) of this
section or compensation described in paragraph (c)(1)(iv)(C)(3) of this
section).
(D) Limitations. Notwithstanding paragraphs (c)(1)(iii)(A), (B), or
(C) of this section, no person or entity is a ``covered service
provider'' solely by providing services--
(1) As an affiliate or a subcontractor that is performing one or
more of the services described in paragraphs (c)(1)(iii)(A), (B), or
(C) of this section under the contract or arrangement with the covered
plan; or
(2) To an investment contract, product, or entity in which the
covered plan invests, regardless of whether or not the investment
contract, product, or entity holds assets of the covered plan, other
than services as a fiduciary described in paragraph (c)(1)(iii)(A)(2)
of this section.
(iv) Initial disclosure requirements. The covered service provider
must disclose the following information to a responsible plan
fiduciary, in writing--
(A) Services. A description of the services to be provided to the
covered
[[Page 5656]]
plan pursuant to the contract or arrangement (but not including non-
fiduciary services described in paragraph (c)(1)(iii)(D)(2) of this
section).
(B) Status. If applicable, a statement that the covered service
provider, an affiliate, or a subcontractor will provide, or reasonably
expects to provide, services pursuant to the contract or arrangement
directly to the covered plan (or to an investment contract, product or
entity that holds plan assets and in which the covered plan has a
direct equity investment) as a fiduciary (within the meaning of section
3(21) of the Act); and, if applicable, a statement that the covered
service provider, an affiliate, or a subcontractor will provide, or
reasonably expects to provide, services pursuant to the contract or
arrangement directly to the covered plan as an investment adviser
registered under either the Investment Advisers Act of 1940 or any
State law.
(C) Compensation--(1) Direct compensation. A description of all
direct compensation (as defined in paragraph (c)(1)(viii)(B)(1) of this
section), either in the aggregate or by service, that the covered
service provider, an affiliate, or a subcontractor reasonably expects
to receive in connection with the services described pursuant to
paragraph (c)(1)(iv)(A) of this section.
(2) Indirect compensation. A description of all indirect
compensation (as defined in paragraph (c)(1)(viii)(B)(2) of this
section) that the covered service provider, an affiliate, or a
subcontractor reasonably expects to receive in connection with the
services described pursuant to paragraph (c)(1)(iv)(A) of this section;
including identification of the services for which the indirect
compensation will be received, identification of the payer of the
indirect compensation, and a description of the arrangement between the
payer and the covered service provider, an affiliate, or a
subcontractor, as applicable, pursuant to which such indirect
compensation is paid.
(3) Compensation paid among related parties. A description of any
compensation that will be paid among the covered service provider, an
affiliate, or a subcontractor, in connection with the services
described pursuant to paragraph (c)(1)(iv)(A) of this section if it is
set on a transaction basis (e.g., commissions, soft dollars, finder's
fees or other similar incentive compensation based on business placed
or retained) or is charged directly against the covered plan's
investment and reflected in the net value of the investment (e.g., Rule
12b-1 fees); including identification of the services for which such
compensation will be paid and identification of the payers and
recipients of such compensation (including the status of a payer or
recipient as an affiliate or a subcontractor). Compensation must be
disclosed pursuant to this paragraph (c)(1)(iv)(C)(3) regardless of
whether such compensation also is disclosed pursuant to paragraph
(c)(1)(iv)(C)(1) or (2), (c)(1)(iv)(E), or (c)(1)(iv)(F) of this
section. This paragraph (c)(1)(iv)(C)(3) shall not apply to
compensation received by an employee from his or her employer on
account of work performed by the employee.
(4) Compensation for termination of contract or arrangement. A
description of any compensation that the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive in
connection with termination of the contract or arrangement, and how any
prepaid amounts will be calculated and refunded upon such termination.
(D) Recordkeeping services. Without regard to the disclosure of
compensation pursuant to paragraph (c)(1)(iv)(C), (c)(1)(iv)(E), or
(c)(1)(iv)(F) of this section, if recordkeeping services will be
provided to the covered plan--
(1) A description of all direct and indirect compensation that the
covered service provider, an affiliate, or a subcontractor reasonably
expects to receive in connection with such recordkeeping services; and
(2) If the covered service provider reasonably expects
recordkeeping services to be provided, in whole or in part, without
explicit compensation for such recordkeeping services, or when
compensation for recordkeeping services is offset or rebated based on
other compensation received by the covered service provider, an
affiliate, or a subcontractor, a reasonable and good faith estimate of
the cost to the covered plan of such recordkeeping services, including
an explanation of the methodology and assumptions used to prepare the
estimate and a detailed explanation of the recordkeeping services that
will be provided to the covered plan. The estimate shall take into
account, as applicable, the rates that the covered service provider, an
affiliate, or a subcontractor would charge to, or be paid by, third
parties, or the prevailing market rates charged, for similar
recordkeeping services for a similar plan with a similar number of
covered participants and beneficiaries.
(E) Investment disclosure--fiduciary services. In the case of a
covered service provider described in paragraph (c)(1)(iii)(A)(2) of
this section, the following additional information with respect to each
investment contract, product, or entity that holds plan assets and in
which the covered plan has a direct equity investment, and for which
fiduciary services will be provided pursuant to the contract or
arrangement with the covered plan, unless such information is disclosed
to the responsible plan fiduciary by a covered service provider
providing recordkeeping services or brokerage services as described in
paragraph (c)(1)(iii)(B) of this section--
(1) A description of any compensation that will be charged directly
against an investment, such as commissions, sales loads, sales charges,
deferred sales charges, redemption fees, surrender charges, exchange
fees, account fees, and purchase fees; and that is not included in the
annual operating expenses of the investment contract, product, or
entity;
(2) A description of the annual operating expenses (e.g., expense
ratio) if the return is not fixed and any ongoing expenses in addition
to annual operating expenses (e.g., wrap fees, mortality and expense
fees), or, for an investment contract, product, or entity that is a
designated investment alternative, the total annual operating expenses
expressed as a percentage and calculated in accordance with 29 CFR
2550.404a-5(h)(5); and
(3) For an investment contract, product, or entity that is a
designated investment alternative, any other information or data about
the designated investment alternative that is within the control of, or
reasonably available to, the covered service provider and that is
required for the covered plan administrator to comply with the
disclosure obligations described in 29 CFR 2550.404a-5(d)(1).
(F) Investment disclosure--recordkeeping and brokerage services.
(1) In the case of a covered service provider described in
paragraph (c)(1)(iii)(B) of this section, the additional information
described in paragraph (c)(1)(iv)(E)(1) through (3) of this section
with respect to each designated investment alternative for which
recordkeeping services or brokerage services as described in paragraph
(c)(1)(iii)(B) of this section will be provided pursuant to the
contract or arrangement with the covered plan.
(2) A covered service provider may comply with this paragraph
(c)(1)(iv)(F) by providing current disclosure materials of the issuer
of the designated investment alternative, or information replicated
from such materials, that include the information described in such
paragraph, provided that:
[[Page 5657]]
(i) The issuer is not an affiliate;
(ii) The issuer is a registered investment company, an insurance
company qualified to do business in any State, an issuer of a publicly
traded security, or a financial institution supervised by a State or
federal agency; and
(iii) The covered service provider acts in good faith and does not
know that the materials are incomplete or inaccurate, and furnishes the
responsible plan fiduciary with a statement that the covered service
provider is making no representations as to the completeness or
accuracy of such materials.
(G) Manner of receipt. A description of the manner in which the
compensation described in paragraph (c)(1)(iv)(C) through (F) of this
section, as applicable, will be received, such as whether the covered
plan will be billed or the compensation will be deducted directly from
the covered plan's account(s) or investments.
(H) Guide to initial disclosures. [Reserved]
(v) Timing of initial disclosure requirements; changes.
(A) A covered service provider must disclose the information
required by paragraph (c)(1)(iv) of this section to the responsible
plan fiduciary reasonably in advance of the date the contract or
arrangement is entered into, and extended or renewed, except that--
(1) When an investment contract, product, or entity is determined
not to hold plan assets upon the covered plan's direct equity
investment, but subsequently is determined to hold plan assets while
the covered plan's investment continues, the information required by
paragraph (c)(1)(iv) of this section must be disclosed as soon as
practicable, but not later than 30 days from the date on which the
covered service provider knows that such investment contract, product,
or entity holds plan assets; and
(2) The information described in paragraph (c)(1)(iv)(F) of this
section relating to any investment alternative that is not designated
at the time the contract or arrangement is entered into must be
disclosed as soon as practicable, but not later than the date the
investment alternative is designated by the covered plan.
(B) (1) A covered service provider must disclose a change to the
information required by paragraph (c)(1)(iv)(A) through (D), and (G) of
this section as soon as practicable, but not later than 60 days from
the date on which the covered service provider is informed of such
change, unless such disclosure is precluded due to extraordinary
circumstances beyond the covered service provider's control, in which
case the information must be disclosed as soon as practicable.
(2) A covered service provider must, at least annually, disclose
any changes to the information required by paragraph (c)(1)(iv)(E) and
(F) of this section.
(vi) Reporting and disclosure information; timing.
(A) Upon the written request of the responsible plan fiduciary or
covered plan administrator, the covered service provider must furnish
any other information relating to the compensation received in
connection with the contract or arrangement that is required for the
covered plan to comply with the reporting and disclosure requirements
of Title I of the Act and the regulations, forms and schedules issued
thereunder.
(B) The covered service provider must disclose the information
required by paragraph (c)(1)(vi)(A) of this section reasonably in
advance of the date upon which such responsible plan fiduciary or
covered plan administrator states that it must comply with the
applicable reporting or disclosure requirement, unless such disclosure
is precluded due to extraordinary circumstances beyond the covered
service provider's control, in which case the information must be
disclosed as soon as practicable.
(vii) Disclosure errors. No contract or arrangement will fail to be
reasonable under this paragraph (c)(1) solely because the covered
service provider, acting in good faith and with reasonable diligence,
makes an error or omission in disclosing the information required
pursuant to paragraph (c)(1)(iv) of this section (or a change to such
information disclosed pursuant to paragraph (c)(1)(v)(B) of this
section) or paragraph (c)(1)(vi) of this section, provided that the
covered service provider discloses the correct information to the
responsible plan fiduciary as soon as practicable, but not later than
30 days from the date on which the covered service provider knows of
such error or omission.
(viii) Definitions. For purposes of paragraph (c)(1) of this
section:
(A) Affiliate. A person's or entity's ``affiliate'' directly or
indirectly (through one or more intermediaries) controls, is controlled
by, or is under common control with such person or entity; or is an
officer, director, or employee of, or partner in, such person or
entity. Unless otherwise specified, an ``affiliate'' in this paragraph
(c)(1) refers to an affiliate of the covered service provider.
(B) Compensation. Compensation is anything of monetary value (for
example, money, gifts, awards, and trips), but does not include non-
monetary compensation valued at $250 or less, in the aggregate, during
the term of the contract or arrangement.
(1) ``Direct'' compensation is compensation received directly from
the covered plan.
(2) ``Indirect'' compensation is compensation received from any
source other than the covered plan, the plan sponsor, the covered
service provider, or an affiliate. Compensation received from a
subcontractor is indirect compensation, unless it is received in
connection with services performed under the subcontractor's contract
or arrangement described in paragraph (c)(1)(viii)(F) of this section.
(3) A description of compensation or cost may be expressed as a
monetary amount, formula, percentage of the covered plan's assets, or a
per capita charge for each participant or beneficiary or, if the
compensation or cost cannot reasonably be expressed in such terms, by
any other reasonable method. The description may include a reasonable
and good faith estimate if the covered service provider cannot
otherwise readily describe compensation or cost and the covered service
provider explains the methodology and assumptions used to prepare such
estimate. Any description, including any estimate of recordkeeping cost
under paragraph (c)(1)(iv)(D), must contain sufficient information to
permit evaluation of the reasonableness of the compensation or cost.
(C) Designated investment alternative. A ``designated investment
alternative'' is any investment alternative designated by the covered
plan into which participants and beneficiaries may direct the
investment of assets held in, or contributed to, their individual
accounts. The term ``designated investment alternative'' shall not
include brokerage windows, self-directed brokerage accounts, or similar
plan arrangements that enable participants and beneficiaries to select
investments beyond those designated by the covered plan.
(D) Recordkeeping services. ``Recordkeeping services'' include
services related to plan administration and monitoring of plan and
participant and beneficiary transactions (e.g., enrollment, payroll
deductions and contributions, offering designated investment
alternatives and other covered plan investments, loans, withdrawals and
distributions); and the maintenance of covered plan and participant and
beneficiary accounts, records, and statements.
(E) Responsible plan fiduciary. A ``responsible plan fiduciary'' is
a
[[Page 5658]]
fiduciary with authority to cause the covered plan to enter into, or
extend or renew, the contract or arrangement.
(F) Subcontractor. A ``subcontractor'' is any person or entity (or
an affiliate of such person or entity) that is not an affiliate of the
covered service provider and that, pursuant to a contract or
arrangement with the covered service provider or an affiliate,
reasonably expects to receive $1,000 or more in compensation for
performing one or more services described pursuant to paragraph
(c)(1)(iii)(A) through (C) of this section provided for by the contract
or arrangement with the covered plan.
(ix) Exemption for responsible plan fiduciary. Pursuant to section
408(a) of the Act, the restrictions of section 406(a)(1)(C) and (D) of
the Act shall not apply to a responsible plan fiduciary,
notwithstanding any failure by a covered service provider to disclose
information required by paragraph (c)(1)(iv) or (vi) of this section,
if the following conditions are met:
(A) The responsible plan fiduciary did not know that the covered
service provider failed or would fail to make required disclosures and
reasonably believed that the covered service provider disclosed the
information required by paragraph (c)(1)(iv) or (vi) of this section;
(B) The responsible plan fiduciary, upon discovering that the
covered service provider failed to disclose the required information,
requests in writing that the covered service provider furnish such
information;
(C) If the covered service provider fails to comply with such
written request within 90 days of the request, then the responsible
plan fiduciary notifies the Department of Labor of the covered service
provider's failure, in accordance with paragraph (c)(1)(ix)(E) of this
section;
(D) The notice shall contain the following information--
(1) The name of the covered plan;
(2) The plan number used for the covered plan's Annual Report;
(3) The plan sponsor's name, address, and EIN;
(4) The name, address, and telephone number of the responsible plan
fiduciary;
(5) The name, address, phone number, and, if known, EIN of the
covered service provider;
(6) A description of the services provided to the covered plan;
(7) A description of the information that the covered service
provider failed to disclose;
(8) The date on which such information was requested in writing
from the covered service provider; and
(9) A statement as to whether the covered service provider
continues to provide services to the plan;
(E) The notice shall be filed with the Department not later than 30
days following the earlier of--
(1) The covered service provider's refusal to furnish the
information requested by the written request described in paragraph
(c)(1)(ix)(B) of this section; or
(2) 90 days after the written request referred to in paragraph
(c)(1)(ix)(B) of this section is made;
(F) The notice required by paragraph (c)(1)(ix)(C) of this section
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; and
(G) If the covered service provider fails to comply with the
written request referred to in paragraph (c)(1)(ix)(C) of this section
within 90 days of such request, the responsible plan fiduciary shall
determine whether to terminate or continue the contract or arrangement
consistent with its duty of prudence under section 404 of the Act. If
the requested information relates to future services and is not
disclosed promptly after the end of the 90-day period, then the
responsible plan fiduciary shall terminate the contract or arrangement
as expeditiously as possible, consistent with such duty of prudence.
(x) Preemption of State law. Nothing in this section shall be
construed to supersede any provision of State law that governs
disclosures by parties that provide the services described in this
section, except to the extent that such law prevents the application of
a requirement of this section.
(xi) Internal Revenue Code. Section 4975(d)(2) of the Code contains
provisions parallel to section 408(b)(2) of the Act. Effective December
31, 1978, section 102 of the Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 214 (2000 ed.), transferred the authority of the Secretary
of the Treasury to promulgate regulations of the type published herein
to the Secretary of Labor. All references herein to section 408(b)(2)
of the Act and the regulations thereunder should be read to include
reference to the parallel provisions of section 4975(d)(2) of the Code
and regulations thereunder at 26 CFR 54.4975-6.
(xii) Effective date. Paragraph (c) of this section shall be
effective on July 1, 2012. Paragraph (c)(1) of this section shall apply
to contracts or arrangements between covered plans and covered service
providers as of the effective date, without regard to whether the
contract or arrangement was entered into prior to such date; for
contracts or arrangements entered into prior to the effective date, the
information required to be disclosed pursuant to paragraph (c)(1)(iv)
of this section must be furnished no later than the effective date.
(2) Welfare plan disclosure. [Reserved]
(3) Termination of contract or arrangement. No contract or
arrangement is reasonable within the meaning of section 408(b)(2) of
the Act and paragraph (a)(2) of this section if it does not permit
termination by the plan without penalty to the plan on reasonably short
notice under the circumstances to prevent the plan from becoming locked
into an arrangement that has become disadvantageous. A long-term lease
which may be terminated prior to its expiration (without penalty to the
plan) on reasonably short notice under the circumstances is not
generally an unreasonable arrangement merely because of its long term.
A provision in a contract or other arrangement which reasonably
compensates the service provider or lessor for loss upon early
termination of the contract, arrangement, or lease is not a penalty.
For example, a minimal fee in a service contract which is charged to
allow recoupment of reasonable start-up costs is not a penalty.
Similarly, a provision in a lease for a termination fee that covers
reasonably foreseeable expenses related to the vacancy and reletting of
the office space upon early termination of the lease is not a penalty.
Such a provision does not reasonably compensate for loss if it provides
for payment in excess of actual loss or if it fails to require
mitigation of damages.
* * * * *
Signed at Washington, DC, this 25th day of January 2012.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix--Sample Guide to Initial Disclosures
ABC Service Provider, Inc. (ABC)
Guide to Services and Compensation
Prepared for the XYZ 401(k) Plan
The following is a guide to important information that you
should consider in connection with the services to be provided by
ABC to the XYZ 401(k) Plan.
Should you have any questions concerning this guide or the
information provided to you
[[Page 5659]]
concerning our services or compensation, please do not hesitate to
contact [enter name of person and/or office] at [enter phone number
and/or email address].
BILLING CODE 4510-29-P
[GRAPHIC] [TIFF OMITTED] TR03FE12.000
[FR Doc. 2012-2262 Filed 2-2-12; 8:45 am]
BILLING CODE 4510-29-C
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