EBSA Final Rules

Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure   [7/16/2010]
[PDF]
FR Doc 2010-16768
[Federal Register: July 16, 2010 (Volume 75, Number 136)]
[Rules and Regulations]               
[Page 41599-41638]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy10-11]                         


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Part III





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; Interim Final Rule


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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: Interim final rule with request for comments.

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SUMMARY: This document contains an interim final regulation under the 
Employee Retirement Income Security Act of 1974 (ERISA or the Act) 
requiring that certain service providers to employee pension benefit 
plans disclose information to assist plan fiduciaries in assessing the 
reasonableness of contracts or arrangements, including the 
reasonableness of the service providers' compensation and potential 
conflicts of interest that may affect the service providers' 
performance. These disclosure requirements are established as part of a 
statutory exemption from ERISA's prohibited transaction provisions. 
This regulation will affect employee pension benefit plan sponsors and 
fiduciaries and certain service providers to such plans. Interested 
persons are invited to submit comments on the interim final regulation 
for consideration by the Department of Labor.

DATES: Effective date. This interim final rule is effective on July 16, 
2011.
    Comment date. Written comments on the interim final rule must be 
received by August 30, 2010.

ADDRESSES: To facilitate the receipt and processing of comments, EBSA 
encourages interested persons to submit their comments electronically 
to e-ORI@dol.gov, or by using the Federal eRulemaking portal http://
www.regulations.gov (following instructions for submission of 
comments). Persons submitting comments electronically are encouraged 
not to submit paper copies. Persons interested in submitting comments 
on paper should send or deliver their comments (preferably three 
copies) to: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attention: 
408(b)(2) Interim Final Rule. All comments will be available to the 
public, without charge, online at http://www.regulations.gov and http:/
/www.dol.gov/ebsa, and at the Public Disclosure Room, Employee Benefits 
Security Administration, U.S. Department of Labor, Room N-1513, 200 
Constitution Avenue, NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: For further information on the interim 
final regulation, contact Allison Wielobob or Fil Williams, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

1. General

    In recent years, there have been a number of changes in the way 
services are provided to employee benefit plans and in the way service 
providers are compensated. Many of these changes may have improved 
efficiency and reduced the costs of administrative services and 
benefits for plans and their participants. However, the complexity 
resulting from these changes also has made it more difficult for plan 
sponsors and fiduciaries to understand what service providers actually 
are paid for the specific services rendered.
    Despite these complexities, section 404(a)(1) of ERISA requires 
plan fiduciaries, when selecting or monitoring service providers and 
plan investments, 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. Fundamental to a plan fiduciary's ability to discharge these 
obligations is the availability of information sufficient to enable the 
plan fiduciary to make informed decisions about the services, the 
costs, and the service provider. Although the Department of Labor 
(Department) has issued technical guidance and compliance assistance 
materials relating to the obligations of plan fiduciaries in selecting 
and monitoring service providers,\1\ the Department continues to 
believe that, given plan fiduciaries' need for complete and accurate 
information about compensation and revenue sharing, both plan 
fiduciaries and service providers would benefit from regulatory 
guidance in this area. For this reason, the Department published a 
notice of proposed rulemaking in the Federal Register (72 FR 70988) on 
December 13, 2007. On the same day, the Department also published a 
proposed class exemption from the restrictions of section 406(a)(1)(C) 
of ERISA in the Federal Register (72 FR 70893). The Department proposed 
the exemption on its own motion pursuant to section 408(a) of the Act, 
and in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (55 FR 32836, August 10, 1990).
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    \1\ See, e.g., Field Assistance Bulletin 2002-3 (November 5, 
2002), Advisory Opinions 97-16A (May 22, 1997) and 97-15A (May 22, 
1997),  http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html, 
and http://www.dol.gov/ebsa/newsroom/fs053105.html.
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2. Public Comments on Proposed Regulation and Class Exemption

    The Department's proposal required that reasonable contracts and 
arrangements between employee 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 proposal also was designed to 
assist plan fiduciaries and administrators in obtaining the information 
they need from service providers to satisfy their reporting and 
disclosure obligations.\2\ Interested persons were invited to submit 
comments on the proposal. In response to this invitation, the 
Department received over 100 written comments on the proposed 
regulation and class exemption from a variety of parties, including 
plan sponsors and fiduciaries, plan service providers, financial 
institutions, and employee benefit plan and participant industry 
representatives. These comments are available for review under ``Public 
Comments'' on the ``Laws & Regulations'' page of the Department's 
Employee Benefits Security Administration Web site at http://
www.dol.gov/ebsa.
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    \2\ The Department also implemented changes to the information 
required to be reported concerning service provider compensation as 
part of the Form 5500 Annual Report. These changes to Schedule C of 
the Form 5500 complement the interim final rule under ERISA section 
408(b)(2) in assuring that plan fiduciaries have the information 
they need to monitor their service providers consistent with their 
duties under ERISA section 404(a)(1). See 72 FR 64731; see also 
frequently asked questions on Schedule C, at http://www.dol.gov/
ebsa/faqs/faq-sch-C-supplement.html and http://www.dol.gov/ebsa/
faqs/faq_scheduleC.html.
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    Due to the large number of public comments received, the importance 
of this regulatory initiative, and its potentially significant effects 
on the provision of services to employee benefit plans, the Department 
held a public hearing on March 31 and April 1, 2008, in order to 
further develop the public record and the Department's understanding of 
the issues raised in the

[[Page 41601]]

public comments. As a result of the public hearing, the Department 
received a significant number of additional comments to supplement the 
public record for this regulatory initiative. These supplemental 
materials also are available for review on the Department's Web site.
    Set forth below is an overview of the interim final regulation and 
the public comments received on the proposal and during the 
Department's public hearing.

B. Overview of Interim Final Regulation Under ERISA Section 408(b)(2) 
and Public Comments

    The Department's interim final regulation (for simplicity, the 
interim final regulation also is referred to herein as the final 
regulation) retains the basic structure of the proposal 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.\3\
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    \3\ See 29 CFR 2550.408b-2.
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    This rule amends the regulation under ERISA section 408(b)(2) to 
clarify the meaning of a ``reasonable'' contract or arrangement for 
covered plans. Currently, the regulation at 29 CFR 2550.408b-2(c) 
states only that a contract or arrangement is not reasonable unless it 
permits the plan to terminate without penalty on reasonably short 
notice. The final regulation establishes a requirement under section 
408(b)(2) 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 fiduciary, defined 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 specific disclosure requirements are described in more detail 
below.
    The final regulation differs from the proposal in a number of 
significant respects, each discussed in this rule. First, unlike the 
proposal, the final rule does not require a formal written contract or 
arrangement delineating the disclosure obligations, even though the 
disclosures must be made in writing. The final rule focuses instead on 
the substance of the disclosure that must be provided. Second, the 
final rule treats separately pension and welfare plans. Paragraph 
(c)(1) of the rule published today provides disclosure requirements 
applicable to contracts or arrangements with pension plans. The 
Department reserves paragraph (c)(2) of the rule for future guidance on 
disclosure with respect to welfare plans.
    Third, the final rule modifies the categories of service providers 
that must comply with the disclosure requirements, including 
fiduciaries, investment advisers, and recordkeepers or brokers who make 
investment alternatives available to a plan. It also applies to 
providers of other specified services who receive either ``indirect 
compensation'' (generally from sources other than the plan or plan 
sponsor) or certain types of payments from affiliates and 
subcontractors. The final rule includes in its definition of ``covered 
service providers'' fiduciaries to investment vehicles that hold plan 
assets and in which a covered plan has a direct equity investment. 
However, the definition makes clear that furnishing non-fiduciary 
services to such vehicles, or services to vehicles that do not hold 
plan assets will not cause a person to be a covered service provider. 
In addition, the regulation requires fiduciaries to plan asset 
investment vehicles in which plans make direct equity investments, as 
well as parties that offer designated investment alternatives to a 
participant-directed individual account plan as part of a platform, to 
furnish investment-related compensation information.
    Fourth, the final rule, unlike the proposal, does not contain 
specific narrative conflict of interest disclosure provisions, but 
rather relies on full disclosure of the circumstances under which the 
covered service provider will be receiving compensation from parties 
other than the plan (or plan sponsor), the identification of such 
parties, and the compensation that is expected to be received. As 
discussed below, the Department is persuaded that plan fiduciaries will 
be in a better position to assess potential conflicts of interest by 
reviewing these specific parties and the actual or expected 
compensation to be received from such parties. Fifth, the final rule 
includes a new provision requiring that certain providers of multiple 
services disclose separately the cost to the covered plan of 
recordkeeping services. Sixth, the final rule specifically addresses 
the application of the requirements of the regulation to section 4975 
of the Internal Revenue Code (the Code). And, lastly, the exemptive 
relief for plan sponsors or other responsible plan fiduciaries, 
originally proposed as a separate exemption, is now incorporated into 
the final rule for ease of reference and consideration by interested 
parties. A more detailed discussion of the final rule, including these 
changes, is set forth below.
    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 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,\4\ Table 1 below depicts an 
accounting statement showing the Department's assessment of the 
benefits and costs associated with this regulatory action.
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    \4\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-
4.pdf.

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                                            Table 1--Accounting Table
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                                                      Primary                                         Period
                    Category                         estimate       Year dollar    Discount rate      covered
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Benefits
                                                 ---------------------------------------------------------------
Annualized Monetized ($millions/year)...........  Not Quantified.
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Qualitative: The final regulation will increase the amount of information that service providers disclose to
 plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
 interest, service value improvements through improved decisions and value, better enforcement tools to redress
 abuse, and harmonization with other EBSA rules and programs.
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Costs
Annualized Monetized ($millions/year)...........            58.7            2010              7%       2011-2020
                                                            54.3            2010              3%       2011-2020
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Qualitative: 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 DOL if the service provider fails to comply with the request.
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Transfers.......................................  Not Applicable.
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    A more detailed discussion of the need for this regulatory action, 
consideration of regulatory alternatives, and assessment of benefits 
and costs are included in Section K--``Regulatory Impact Analysis'' 
below.

1. General

    The final regulation, like the proposal, amends paragraph (c) of 
Sec.  2550.408b-2 by moving, without change, the current provisions of 
paragraph (c) to a newly designated paragraph (c)(3) and adding new 
paragraphs (c)(1) and (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) has been reserved for future guidance concerning the 
disclosure requirements for welfare plans.
    The general paragraph of the final rule, paragraph (c)(1)(i), 
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 general paragraph 
also provides that the regulation's disclosure requirements are 
independent of a fiduciary's obligations under section 404 of ERISA.

2. Scope--Covered Plans

    Paragraph (c)(1)(ii) defines a ``covered plan'' to mean 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)), except that 
such term shall not include a ``simplified employee pension'' described 
in section 408(k) of 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.
    Under the proposal, all employee benefit plans subject to Title I 
of ERISA, including employee pension benefit plans and welfare benefit 
plans, were subject to the regulation's disclosure requirements. The 
Department received many comments and heard testimony from parties 
concerned about the implications of subjecting defined benefit plans, 
welfare benefit plans, and individual retirement accounts (IRAs) to the 
regulation.\5\
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    \5\ A few commenters suggested that the Department not extend 
the final rule to small plans (for example, those with less than 100 
participants). The Department was not persuaded that any policy 
rationale exists for excluding small plans.
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    Commenters questioned the proposal's application to defined benefit 
plans for a variety of reasons, suggesting that the Department consider 
separate guidance for defined benefit plans. Commenters argued that 
sponsors of defined benefit plans and their service providers have only 
recently joined the public policy discussion regarding fee disclosure 
for retirement plans. They believe that a thorough examination of the 
issues that affect defined benefit plans is warranted before disclosure 
rules apply with respect to their service providers.
    In advocating for separate rules for defined benefit plans, some 
commenters focused on the differences in the legal structures of 
defined benefit plans and defined contribution plans. In addition, 
commenters noted that services are provided to defined benefit plans in 
ways that are materially different than they are for defined 
contribution plans. Other commenters noted that employers have 
incentives to monitor and negotiate service provider fees and expenses 
for defined benefit plans, because these plans primarily rely on 
employer contributions; excessive fees and expenses would make it more 
expensive for the employer to fund promised benefits. In contrast, 
defined contribution plans are funded primarily by employee 
contributions, and employers may pass on up to 100 percent of plan 
costs to employees.
    After careful review of the comments, the Department is not 
persuaded that the information fiduciaries of defined benefit plans 
need to make informed decisions about their service providers is 
fundamentally different from the information fiduciaries of defined 
contribution plans need to make informed decisions. Nor is the 
Department persuaded that the service provider relationships between 
the two types of plans are so different as to justify exclusion of 
defined benefit plans from the regulation's disclosure requirements. 
Moreover, the Department does not believe that compliance with the 
disclosure requirements, particularly as modified from the proposal, 
will present any unreasonable compliance burdens for service providers 
to defined benefit plans. For these reasons, the final rule, like the 
proposal, applies to contracts and arrangements with covered service 
providers to both defined contribution and defined benefit plans.
    The Department also received many comments concerning the 
applicability of the proposal to welfare benefit plans. Many commenters 
recommended their exclusion from the scope of the final

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rule. Some commenters believe that the Department's rationales for the 
proposed rule apply to pension plans but not to welfare benefit plans. 
Other commenters maintain that, if the Department creates a disclosure 
regime for welfare benefit plan service providers, it should be 
promulgated separately.
    Commenters articulated specific concerns relating to welfare 
benefit plans, including the potential for negative effects on the 
insurance industry, which, they argue, is highly regulated by State 
laws. Many commenters asserted that, considering the high level of 
State regulation, subjecting welfare benefit plans to the disclosure 
regulation would be unnecessary and redundant because the disclosures 
contemplated in the regulation are already made available to plan 
fiduciaries through State regulatory processes. Other commenters 
pointed out that most State insurance laws do not require the types of 
disclosures addressed under the proposed rule and even where such State 
laws exist, they are loosely enforced. Still others asserted that there 
are ``transparency problems'' in general in the health and welfare 
industry.
    Some commenters expressed views relating to prohibited transaction 
exemption (PTE) 84-24,\6\ which they indicated is often misinterpreted 
and improperly utilized by service providers to suit their purposes. 
Those in favor of subjecting welfare benefit plans to the regulation 
said that it would eliminate the limitations of PTE 84-24. Other 
commenters asserted that PTE 84-24 has worked well and that welfare 
benefit plans should be allowed to continue without the impact of new 
disclosure obligations under the proposal.
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    \6\ 49 FR 13208 (Apr. 3, 1984); amended at 71 FR 5887 (Feb. 3, 
2006) (providing prohibited transaction relief for service 
arrangements and related plan transactions involving insurance 
agents and brokers, pension consultants, insurance and investment 
companies, and investment company principal underwriters; for 
example, PTE 84-24 permits these parties to place insurance products 
with plans when they are fiduciaries, or affiliated with 
fiduciaries, to the plans if certain conditions are met).
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    Still other commenters addressed specific concerns of pharmacy 
benefit managers (PBMs), which are intermediaries between drug 
manufacturers and health insurance plans. They believe that the reasons 
for disclosure discussed in the preamble to the proposed rule are 
inapplicable to PBMs. According to some commenters, the Federal Trade 
Commission has thoroughly evaluated the industry, finding that market 
forces provide sufficient information to plan fiduciaries and that 
excessive mandatory disclosure could weaken competition, such that the 
proposed regulation would negatively affect the delivery of 
prescription drugs to plan beneficiaries. Other commenters disputed the 
idea that PBMs should not be subject to the regulation, arguing that 
the discounts and rebates they received from drug companies were 
examples of undisclosed indirect compensation. Commenters offering this 
point of view did not present any further official comment or testimony 
at the public hearing.
    In spite of these arguments, 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 plans and defined benefit plans. However, 
the Department is persuaded, based on the public comment and hearing 
testimony, 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, and more 
specifically tailored, disclosure requirements under ERISA section 
408(b)(2) for welfare benefit plans. Accordingly, the interim final 
rule published today includes a new paragraph (c)(2), which has been 
reserved for a comprehensive disclosure framework applicable to 
``reasonable'' contracts or arrangements for services to welfare plans 
to be developed by the Department. The Department notes, however, that 
in the meantime, ERISA section 404(a) continues to obligate fiduciaries 
to obtain and consider information relating to the cost of plan 
services and potential conflicts of interest presented by such service 
arrangements.
    Several commenters requested clarification regarding the 
regulation's application to IRAs or similar accounts. In some cases, 
commenters argued that the Department should exclude such accounts, as 
well as other plans that are not subject to Title I of ERISA, from the 
scope of the final regulation. The commenters observed that there are 
significant categories of arrangements that are subject to the 
prohibited transaction provisions of section 4975 of the Code, but not 
those of ERISA, and that do not have a fiduciary overseeing the plan. 
The comments asserted that owners of IRAs and other individual 
arrangements are more like individual plan participants than plan 
fiduciaries and that it would be inappropriate to impose the service 
provider-to-plan disclosure requirements in the context of non-ERISA 
arrangements. In contrast to participant-directed individual account 
plans, which typically offer a limited number of investment options, 
many IRAs offer a large number of investment options, such as brokerage 
accounts with essentially unlimited choices. Providing the disclosures 
set forth in the proposal could be quite burdensome and costly as a 
result. These costs, commenters argue, may drive service providers to 
limit the number of investment choices available in IRAs. In addition, 
some commenters pointed out that, under securities laws, the IRA 
accountholder is treated as the actual owner of the securities held in 
his or her IRA and is entitled to all securities law disclosures in the 
same manner as if the accountholder owned those securities directly. In 
contrast, with ERISA-covered plans, disclosure obligations under the 
securities laws extend only to the plan itself, not to individual plan 
participants.
    The Department does not believe that IRAs should be subject to the 
final rule, which is designed with fiduciaries of employee benefit 
plans in mind. An IRA account-holder is responsible only for his or her 
own plan's security and asset accumulation. They should not be held to 
the same fiduciary duties to scrutinize and monitor plan service 
providers and their total compensation as are plan sponsors and other 
fiduciaries of pension plans under Title I of ERISA, who are 
responsible for protecting the retirement security of greater numbers 
of plan participants. Moreover, IRAs generally are marketed alongside 
other personal investment vehicles. Imposing the regulation's 
disclosure regime on IRAs could increase the costs associated with IRAs 
relative to similar vehicles that are not covered by the regulation. 
Therefore, although the final rule cross references the parallel 
provisions of section 4975 of the Code, paragraph (c)(1)(ii) provides 
explicitly that IRAs and certain other accounts and plans are not 
covered plans for purposes of the rule.

3. Scope--Covered Service Providers

    The categories of service providers covered by the final rule, in 
paragraph (c)(1)(iii), vary slightly from those described in the 
proposal. The proposed regulation generally included service providers 
falling into one of the following categories: (1) Fiduciary service 
providers, whether under ERISA or under the Investment Advisers Act of 
1940; (2) service providers that will perform banking, consulting, 
custodial, insurance, investment advisory, investment management, 
recordkeeping,

[[Page 41604]]

or third party administration services for the plan; or (3) service 
providers that will receive indirect compensation in connection with 
providing accounting, actuarial, appraisal, auditing, legal, or 
valuation services to the plan. The Department believed that these 
service arrangements, and their associated compensation structures, 
were the most likely to give rise to conflicts of interest.
    The Department received a number of comments requesting 
clarification as to which entities were intended to be ``service 
providers'' for purposes of the proposal, both in terms of which 
service providers are responsible for complying with the proposal's 
written contract requirement, and who is considered a service provider 
such that their compensation and conflict of interest information must 
be disclosed to the responsible plan fiduciary. Some commenters argued 
that the proposal's disclosure requirements should be limited to 
service providers that deal directly with employee benefit plans, or 
that customarily are in contractual privity with the plan, and 
questioned the application of the rule to indirect service providers. 
These commenters were concerned that the proposed rule appears to 
apply, potentially without limit, to ``indirect'' service providers, 
for example a service provider to a direct service provider, or a 
service provider to an investment provider or mutual fund company; in 
some cases, they argue, the services provided by these indirect 
providers bear little or no relation to the particular plan service 
arrangement in question. For example, commenters questioned whether the 
proposed disclosure requirements would apply to a copy service, if a 
plan recordkeeper subcontracts with that copy service to perform 
administrative functions for both the recordkeeper and its plan 
clients, or to legal counsel to a registered investment company, when 
counsel's role is limited to ensuring that the company complies 
generally with applicable securities laws.
    In connection with their request that the Department clarify 
whether providers of services to a plan service provider, or to an 
investment provider, are themselves service providers to the plan for 
purposes of the disclosure requirements of the proposed rule, some 
commenters note that confusion on this issue may stem from language of 
the proposed rule that adopted the view taken by the Department as to 
who is a ``service provider'' for purposes of reporting service 
provider compensation on the recent Form 5500, Schedule C, revisions. 
The new Schedule C reporting requirements are not limited to 
information concerning the compensation of persons with direct service 
provider relationships to a plan but also include compensation 
information regarding persons who provide services to investment 
vehicles in which plans invest. Commenters questioned whether a similar 
position is appropriate in the context of a prohibited transaction for 
which relief is obtained under section 408(b)(2).
    Other commenters raised concerns about the proposal insofar as it 
was interpreted as raising technical issues under the Department's plan 
asset guidance.\7\ For example, several commenters questioned whether 
and how the proposed disclosure requirements would apply to service 
providers to ``non-plan asset'' vehicles, an issue that often arises in 
the context of plan investments. For instance, commenters observed that 
mutual funds, real estate operating companies, venture capital 
operating companies, and private equity funds that do not have 
significant equity participation by ``benefit plan investors'' (i.e., 
25% or more of any class of equity interest held by such investors) are 
not plan asset vehicles, and thus managers of these entities are not 
ERISA fiduciaries. These commenters argued that the proposed disclosure 
requirements also should not apply to any person who is providing 
services to a non-plan asset vehicle.
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    \7\ See 29 CFR 2510.3-101.
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    The Department believes that the definition of covered service 
provider contained in the final rule addresses the ambiguities raised 
by the commenters and reflects the Department's intent to focus on 
contracts or arrangements between covered plans and fiduciaries, 
platform providers and other specified service providers dealing 
directly with covered plans who may receive indirect compensation or 
certain compensation from related parties. The Department notes that 
the parties that must be reported as service providers for Schedule C 
purposes will not necessarily be the same as the parties that will be 
covered service providers for purposes of this rule.
    The Department continues to believe that requiring every service 
provider to a plan to satisfy the disclosure requirements of this 
regulation may not be appropriate or yield helpful information to plan 
fiduciaries. The Department also believes that certain service 
providers, because of the nature of the services that they provide to 
pension plans, the potential influence they have on plan fiduciaries' 
decisions and on the plan services that they ultimately will provide, 
or the complexity of their compensation arrangements, must provide 
comprehensive information to plan fiduciaries about the compensation 
that they will be paid for their services. The Department is sensitive 
to the technical and practical issues raised by commenters about how 
the scope of this rule will be applied to various parties in the 
employee benefit plan industry. The Department also agrees with 
commenters that service providers and plan fiduciaries would benefit 
from more certainty as to whether any particular service contract or 
arrangement will be required to comply with this rule. The Department 
believes that the interim final rule, in terms of defining the service 
providers covered by the rule, responds to the concerns of these 
commenters. However, the Department welcomes comments from interested 
persons who continue to have concerns about the scope of service 
providers covered by the interim final rule.
    Paragraph (c)(1)(iii) of the final rule defines the term ``covered 
service provider.'' Among other changes, the final rule establishes a 
$1,000 threshold for service providers otherwise coming within the 
definition of a covered service provider (regardless of whether the 
threshold is met by compensation received by the covered service 
provider, 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). A ``covered service provider'' is a service 
provider that enters into a contract or arrangement with the covered 
plan and reasonably expects to receive $1,000 or more in compensation, 
direct or indirect, to be received in connection with providing one or 
more specified services. The Department included the $1,000 threshold 
in response to commenters' request that the final rule exclude 
contracts or arrangements that involve de minimis amounts of 
compensation. In these circumstances, the Department is persuaded that 
the parties to these relatively small service contracts or arrangements 
may not need to provide the detailed disclosures required under this 
rule in order to ensure that plan fiduciaries have the information they 
need to make informed decisions about the services and cost of the 
services to be provided. Commenters did not suggest a particular 
minimum amount for such contracts or arrangements, but the Department 
believes that $1,000 is a reasonable threshold amount to address their 
concerns. As this is an interim final rule, the Department welcomes

[[Page 41605]]

additional input from commenters on our decision.
    The types of service providers covered by the final regulation fall 
into three categories, and each category is discussed below. A service 
provider may be a covered service provider under the final rule even if 
some or all of the services provided pursuant to the contract or 
arrangement are performed by affiliates of the covered service provider 
or subcontractors. Further, as noted in paragraph (c)(1)(iii)(D)(1), 
service providers do not 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.
    The first category of covered service providers, 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. Subparagraph (1) includes ERISA 
fiduciaries providing services directly to the covered plan.
    Subparagraph (2) includes ERISA fiduciaries providing services to 
an investment contract, product, or entity that holds plan assets and 
in which the covered plan has a direct equity investment. These service 
providers are ERISA fiduciaries by virtue of providing services to a 
plan asset investment vehicle, rather than providing services directly 
to the covered plan. The Department placed these fiduciaries of plan 
asset vehicles in a separate subcategory because, under the final rule, 
these fiduciaries have an additional obligation to disclose 
compensation information about the investment vehicle for which they 
serve as a fiduciary.
    This subcategory includes fiduciaries to the initial-level 
investment vehicle in which the covered plan makes a direct equity 
investment and which holds plan assets. However, it does not include 
fiduciaries to that initial vehicle's underlying investments, even 
though such down-level investment vehicles also may hold ``plan 
assets.'' The determination of whether an investment contract, product, 
or entity holds ``plan assets'' is made under sections 3(42) and 401 of 
ERISA and the regulation at 29 CFR 2510.3-101. The regulation uses the 
term ``direct equity investment'' to distinguish the covered plan's 
initial-level investment in an investment contract, product, or entity 
from investments made by such initial-level contract, product or entity 
in which the plan invests, without regard to whether the underlying, 
second-tier investment vehicles hold plans assets. Specifically, the 
regulation provides that a direct equity investment does not include 
investments made by the investment contract, product, or entity in 
which the covered plan invests.
    Subparagraph (3) includes investment advisers providing services 
directly to the covered plan. This provision has been modified from the 
proposal to require disclosure from an investment adviser 
``registered'' under either the Advisers Act or State law, rather than 
a ``fiduciary'' under the Advisers Act.
    The Department received a number of comments concerning the 
requirement to identify services as ``fiduciary'' services under ERISA 
or the Advisers Act. In general, commenters argued that whether such 
services will be provided may be unclear, given the facts-and-
circumstances nature of fiduciary status under section 3(21) of ERISA, 
creating an unnecessary level of uncertainty for both plan fiduciaries 
and service providers in terms of compliance with the regulation. 
Commenters also argued that by including fiduciaries under the Advisers 
Act, the proposal included advisers that may not be registered under 
the Advisers Act, thereby adding a degree of uncertainty as to which 
service providers might be covered by the rule. Other commenters argued 
that plan sponsors may be confused as to whether a particular service 
provider is acting as a fiduciary under ERISA or as a fiduciary under 
the Advisers Act. The Department believes that the modifications 
reflected in paragraph (c)(1)(iii)(A) of the final rule respond to 
these concerns. The Department continues to believe, however, that it 
is important for plan fiduciaries to know whether a party will be 
providing or reasonably expects to provide services to the plan as an 
ERISA fiduciary or as a registered investment adviser.\8\ See paragraph 
(c)(1)(iv)(B) relating to the requirement that this status be disclosed 
to the responsible plan fiduciary.
---------------------------------------------------------------------------

    \8\ To the extent a service provider is a ``dual registrant'' 
(i.e., an investment adviser registered under the Advisers Act and a 
broker-dealer registered under the Securities Exchange Act of 1934, 
as amended), the service provider would be a covered service 
provider under paragraph (c)(1)(iii)(A)(3) only when acting as an 
investment adviser to a covered plan, and not when acting merely as 
a broker-dealer to such plan. However, broker-dealers to covered 
plans may be covered service providers under paragraph 
(c)(1)(iii)(B) or (C), as discussed further below.
---------------------------------------------------------------------------

    The second category of covered service providers, in paragraph 
(c)(1)(iii)(B), includes providers of recordkeeping services or 
brokerage services to a covered plan that is an individual account plan 
(under ERISA section 3(34)) and 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. This category encompasses 
recordkeepers and brokers that offer, as part of their contract or 
arrangement, a platform of investment options, or a similar mechanism, 
to a participant-directed individual account plan. This category also 
encompasses service providers who provide recordkeeping or brokerage 
services that include designated investment alternatives independently 
selected by the responsible plan fiduciary and which are later added to 
the covered plan's platform. Under the proposal, these service 
providers had no disclosure obligations beyond those directly relating 
to the services they were providing as recordkeepers or brokers for the 
plan. Under the interim final rule, however, covered service providers 
in this category, as discussed later, must disclose to the responsible 
plan fiduciary compensation information regarding each of the 
designated investment alternatives for which they provide recordkeeping 
or brokerage services. See paragraphs (c)(1)(iii)(B) and (c)(1)(iv)(G). 
The term ``designated investment alternative'' is defined in paragraph 
(c)(1)(viii)(C), discussed below.
    The third category of covered service providers, in paragraph 
(c)(1)(iii)(C), includes those providing specified services to the 
covered plan when the covered service provider (or an affiliate or a 
subcontractor) reasonably expects to receive ``indirect'' compensation 
or certain payments from related parties. As discussed below, the terms 
``affiliate'', ``indirect compensation,'' and ``subcontractor'' are 
defined in paragraph (c)(1)(viii) of the final regulation. The services 
included in this category 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, investment advisory (for plan or participants), 
legal, recordkeeping, securities or other investment brokerage, third 
party administration, or valuation services provided to the covered 
plan.
    The services in the final rule's third category generally are the 
same as those in the proposal. However, whether or not these services 
will cause a service provider to be a covered service

[[Page 41606]]

provider under the rule depends upon the expectation by the covered 
service provider, its affiliate, or a subcontractor of receiving 
certain types of compensation, namely indirect compensation or 
compensation paid by related parties. A few commenters asked the 
Department to define the types of services referenced in the proposal. 
Although the Department understands that there may be, in some 
instances, subtle differences in how employee benefits services are 
described and, therefore, some clarification may be helpful, the 
Department also is concerned that too much specificity may have the 
undesirable effect of narrowing the application of the regulation 
solely on the basis of an overly technical definition. The Department 
believes that the financial industry and employee benefits community 
have a reasonable understanding of the services referenced in the 
regulation and that any remaining ambiguity will not result in undue 
burdens attendant to compliance with the final rule.
    Nonetheless, the Department, in response to commenters, has 
attempted to narrow the scope of the term ``consulting'' by adding a 
parenthetical clarifying that ``consulting'' as used in the final 
regulation is consulting related to the development or implementation 
of investment policies or objectives, or the selection or monitoring of 
service providers or plan investments. Also, it should be noted that 
investment advisory services are included in both the first and third 
categories of covered service providers, but the investment advisers 
who are covered in each category may be different. The first category 
includes only registered investment advisers, even if they receive only 
direct compensation from the covered plan. The third category includes 
investment advisers that reasonably expect to receive compensation that 
is indirect or paid from related parties, whether or not they are 
registered investment advisers.
    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)). In other words, 
paragraph (c)(1)(iii)(D)(1) clarifies that the concept of a ``covered 
service provider'' captures only the party directly responsible to the 
covered plan for the provision of services under the contract or 
arrangement, even though some or all of such services may be performed 
by an affiliate or subcontractor. In the view of the Department, the 
service provider directly responsible to the plan for the provision of 
services is the appropriate party to ensure that the required 
disclosures under the regulation are made. Paragraph (c)(1)(iii)(D) 
addresses the possibility of multiple disclosure obligations with 
respect to the same services.
    Paragraph (c)(1)(iii)(D)(2) further clarifies that, other than 
providers of fiduciary services to an investment contract, product, or 
entity holding plan assets with respect to which the covered plan has a 
direct equity investment (described above), the term ``covered service 
provider'' does not include a mere provider of services to an 
investment contract, product, or entity (regardless of whether or not 
the investment contract, product, or entity holds assets of the covered 
plan).
    The Department believes that these clarifications resolve much of 
the uncertainty raised by commenters about the intended application of 
the proposal in the context of plan investments. Other than a fiduciary 
described in paragraph (c)(1)(iii)(A)(2), service providers that only 
provide non-fiduciary administrative, legal or other services to an 
investment vehicle, even one holding plan assets, are not covered 
service providers. For example, a recordkeeper servicing a collective 
investment fund is not a covered service provider to a plan investing 
in the fund merely because the fund holds plan assets. On the other 
hand, if that same recordkeeper provides services directly to a covered 
plan and receives indirect compensation or certain compensation from 
related parties, then it would be a covered service provider. Its 
covered status, however, would derive from the services it provides 
directly to the plan, not to the collective investment fund. A similar 
analysis would apply to an investment vehicle that does not hold plan 
assets, such as a registered investment company.

4. Contracts or Arrangements Not Covered by Interim Final Regulation

    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 fees and expenses being paid for 
such services, and potential conflicts of interest that might affect 
the quality of the provided services.\9\
---------------------------------------------------------------------------

    \9\ See, e.g., Field Assistance Bulletin 2002-3 (November 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.)
---------------------------------------------------------------------------

5. Initial Disclosure Requirements

a. Overview of Initial Disclosure Requirements; Request for Comments on 
Format Requirement for Initial Disclosures
    The proposed regulation would have required that the terms of the 
contract or arrangement for services between the covered plan and the 
covered service provider be in writing and that the writing delineate 
the specific disclosure obligations of the covered service provider 
under the regulation. The Department received a number of comments on 
the requirement that contracts and arrangements, as well as the 
disclosure obligations thereunder, must be in writing. Many commenters 
argued that such written documents are not used with respect to the 
provision of many services and that requiring formal written contracts 
adds complexity and costs, as well as potentially raising concerns 
under State contract law, without affecting the quality of such 
services. For example, these points were made by providers of insurance 
products and services, who explained that any amendments to their 
contracts, which are approved and regulated by State insurance 
agencies, would have to be submitted to such agencies; this would be a 
lengthy and burdensome process with an outcome that is not within the 
service providers' control.
    While the interim final rule continues to require that the 
responsible plan fiduciary be furnished the required disclosures in 
writing, the rule does not require that a formal contract or 
arrangement itself be in writing or that any representations concerning 
the

[[Page 41607]]

specific obligations of the service provider be included in such 
written contract or arrangement. The Department is persuaded that, 
given the varying relationships between plans and their service 
providers, requiring such a formal contract or arrangement in every 
instance may result in unnecessary burdens, complexity, and costs. The 
Department continues to believe, however, that setting forth a covered 
service provider's disclosure obligations under the regulation in 
writing generally will help ensure that both the responsible plan 
fiduciary and the service provider clearly understand their respective 
responsibilities for purposes of compliance with the statutory 
exemption.
    As discussed above, neither the proposal nor the interim final rule 
requires the covered service provider to make disclosures in any 
particular manner or format. Further, the preamble to the proposal 
specifically noted that the covered service provider could disclose 
using different documents from separate sources as long as the 
documents, collectively, contained all of the required information. 
Commenters on the proposal disagreed as to whether or not this would 
lead to an effective presentation to responsible plan fiduciaries, 
especially those for small plans. Commenters also disagreed as to the 
anticipated costs and burdens associated with more stringent format 
requirements and the extent to which those costs would be absorbed by 
service providers or passed through to plans, and therefore potentially 
to participants and beneficiaries. Some commenters encouraged the 
Department to retain its flexible approach, arguing that it is best 
left to the parties to service contracts or arrangements to determine 
the optimal way to fulfill the substantive disclosure requirements. 
Other commenters encouraged the Department to adopt a model form for 
disclosure or to otherwise mandate that the required information be 
conveyed in a summary or consolidated fashion, arguing that this would 
lead to more consistency in the way that information is disclosed and 
make it easier for responsible plan fiduciaries to review and analyze 
information received from plan service providers.
    At this time, the Department has not determined whether it is 
feasible, as part of this regulation, to provide specific and 
meaningful standards for the format in which the required information 
must be disclosed, given the large variety of plan service arrangements 
that are covered by the interim final regulation and the variation in 
the way service providers currently disclose information to plan 
fiduciaries. The Department is persuaded that plan fiduciaries may 
benefit from increased uniformity in the way that information is 
presented to them. However, the Department does not want to 
unnecessarily increase the cost and burden for service providers to 
furnish required information, especially to the extent such cost may be 
passed along to plan participants and beneficiaries, unless it is clear 
that the benefit to plan fiduciaries outweighs such cost and burden. If 
the Department is convinced that the benefits would outweigh the costs, 
the final regulation may be revised. Specifically, the Department is 
considering adding a requirement that covered service providers furnish 
a ``summary'' disclosure statement, for example limited to one or two 
pages, that would include key information intended to provide an 
overview for the responsible plan fiduciary of the information required 
to be disclosed. The summary also would be required to include a 
roadmap for the plan fiduciary describing where to find the more 
detailed elements of the disclosures required by the regulation.
    To assist the Department in its decision whether to include such a 
requirement in the final rule, interested persons are encouraged to 
submit comments on three issues: first, the likely cost and burden to 
covered service providers, and to any other parties, of complying with 
such a requirement; second, the anticipated benefits to responsible 
plan fiduciaries, whether due to time savings, cost savings, or other 
factors, of including a summary disclosure statement; and third, how to 
most effectively construct the requirement for a summary disclosure 
statement to ensure both its feasibility and its usefulness in helping 
the Department achieve its objectives.
    As to the substance of the information required to be disclosed, 
the proposal generally required the disclosure of information intended 
to assist plan fiduciaries in understanding the services that will be 
furnished and in assessing the reasonableness of the compensation, 
direct and indirect, that the service provider would receive in 
connection with the provision of such services. The proposal also 
required the disclosure of specific information intended to assist plan 
fiduciaries in assessing any real or potential conflicts of interest 
that may affect the quality of the services to be provided. As 
discussed above, the proposal did not require that the information be 
furnished in any particular format. While the proposal did require that 
the required disclosures be furnished in advance of entering into a 
contract or arrangement, along with a representation that all of the 
required disclosures had been furnished to the responsible fiduciary, 
the proposal did not designate any specific time period for making such 
advance disclosure.
    The proposal broadly defined compensation or fees \10\ to include 
money and any other thing of monetary value received by the service 
provider or its affiliates in connection with the services provided to 
the plan or the financial products in which assets are invested. As 
noted, the proposal required the disclosure of both direct and indirect 
compensation, the latter including fees that the service provider 
receives from parties other than the plan, the plan sponsor, or the 
service provider. Service providers also would have been required to 
disclose compensation received by their affiliates from third parties. 
The proposal also addressed the manner in which compensation could be 
disclosed, permitting the use of formulas, references to a percentage 
of the plan's assets, or per capita charges.
---------------------------------------------------------------------------

    \10\ For ease of reference, the interim final regulation refers 
only to ``compensation'' and not ``compensation or fees'' or 
``compensation and fees.'' Given the broad definition of 
``compensation'' contained in the final regulation, the Department 
does not intend any substantive distinction by changing from the 
phrase ``compensation or fees'' or ``compensation and fees'' to the 
term ``compensation.''
---------------------------------------------------------------------------

    With regard to the disclosure of compensation generally, the 
proposal contained a special rule for providers of multiple services 
(commonly referred to as ``bundles'' of services). In the case of 
bundled service arrangements, the proposal required only that the 
provider of the bundle make the prescribed disclosures. In such 
instances, the bundled service provider would be required to disclose 
information concerning all of the services to be provided in the 
bundle, regardless of who actually performs the service. Further, the 
bundled provider would be required to disclose the aggregate direct 
compensation that will be paid for the bundle, as well as all indirect 
compensation that will be received by the service provider, or its 
affiliates or subcontractors within the bundle, from third parties. The 
preamble explained that generally the bundled provider would be 
required to break down the aggregate compensation among the individual 
services comprising the bundle only when the compensation was 
separately charged against the plan's investment (such as management 
fees and 12b-1 fees) or was set on a

[[Page 41608]]

transaction basis (such as finder's fees and brokerage commissions).
    While the Department retained many of the disclosure concepts of 
the proposal, the interim final rule contains a number of changes made 
in response to issues raised by commenters. Paragraph (c)(1)(iv) of the 
final rule describes the initial disclosure requirements that must be 
satisfied, in writing, by the covered service provider; paragraph 
(c)(1)(v) describes the timing requirements applicable to the initial 
disclosures and when changes to the initial disclosures must be 
furnished; paragraph (c)(1)(vi) describes the requirement that a 
covered service provider disclose information requested by the 
responsible plan fiduciary or covered plan administrator to comply with 
ERISA's reporting and disclosure requirements; and paragraph 
(c)(1)(vii) addresses inadvertent errors and omissions in disclosing 
the required information.
b. Description of Services
    Paragraph (c)(1)(iv)(A) requires a description of the services to 
be provided to the covered plan pursuant to the contract or 
arrangement, but not including non-fiduciary services described in 
paragraph (c)(1)(iii)(D)(2). In other words, for purposes of this 
disclosure, ``services'' to the covered plan do not include services 
described in paragraph (c)(1)(iii)(D)(2), e.g., services provided by 
non-fiduciary service providers to investment vehicles holding plan 
assets. Thus, in the case of a person that is a covered service 
provider by reason of paragraph (c)(1)(iii)(A)(2), paragraph (c)(1)(iv) 
would require a description of services provided as a fiduciary to the 
investment vehicle that holds plan assets and in which the covered plan 
has a direct equity investment.
    Some commenters requested guidance as to the level of detail 
necessary when describing the services. For example, commenters asked 
whether general descriptions of the services would be acceptable, or 
whether detailed and itemized descriptions must be provided. It is the 
view of the Department that the level of detail required to adequately 
describe the services to be provided pursuant to a contract or 
arrangement will vary depending on the needs of the responsible plan 
fiduciary.
    In certain instances, it may be well understood that a particular 
service necessarily encompasses, among other things, a variety of sub-
services such that a description of the sub-services is unnecessary. 
For example, plan fiduciaries may understand that the execution of 
securities transactions includes, but is not limited to, valuation, 
safekeeping, posting of income, clearing and settling transactions, and 
reporting transactions, thereby eliminating the need to describe such 
sub-services. In an effort to clarify the flexibility inherent in this 
disclosure requirement, the final rule omits the word ``all'' from the 
required description of services.
    Ultimately, though, the responsible plan fiduciary must, under 
sections 404 and 408(b)(2) of ERISA, decide whether it has enough 
information about the services to be provided pursuant to the contract 
or arrangement to determine whether the cost of such services to the 
plan is reasonable. Accordingly, if a particular description of 
services provided by a covered service provider lacks sufficient detail 
to enable the responsible plan fiduciary to determine whether the 
compensation to be received for such services is reasonable, the 
responsible plan fiduciary must request additional information 
concerning those services.
    There is one provision of the interim final rule that includes a 
more specific standard for the level of detail that must be furnished 
when describing the provision of recordkeeping services in specified 
circumstances. See section (c)(1)(iv)(D)(2), discussed below.
c. Status of Covered Service Providers, Affiliates, and Subcontractors
    Paragraph (c)(1)(iv)(B) of the regulation 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; 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. Thus, if a service provider will, or 
reasonably expects to, provide services as both a fiduciary and a 
registered investment adviser, the statement must reflect both of these 
roles. While the proposal contained a similar disclosure requirement, 
the requirement contained in the final rule reflects changes that are 
intended to address concerns raised by commenters.
    Commenters on the proposal expressed concern that, given the 
factual nature of fiduciary status under ERISA, this requirement added 
a level of uncertainty to the statutory exemption. Commenters also 
expressed concern that disclosing fiduciary status by virtue of being 
an investment adviser involved similar uncertainties and, in addition, 
would only serve to confuse plan fiduciaries regarding the nature of 
the services that the plan would receive. As discussed above, the 
Department continues to believe that plan fiduciaries should understand 
whether a service provider will provide, or reasonably expects to 
provide, services as an ERISA fiduciary or services as a registered 
investment adviser in light of their heightened level of responsibility 
under ERISA and the Advisers Act, respectively. The Department, 
however, believes that the final disclosure provision addresses the 
concerns of the commenters. First, the final provision only requires 
disclosure if the provider will or reasonably expects to be providing 
services as a fiduciary or registered investment adviser. Service 
providers do not have to indicate that they will not be providing such 
services. Second, the disclosure with respect to services as an 
investment adviser is required only for investment advisers who are 
registered under the Advisers Act or any State law, thereby providing a 
degree of certainty as to who must make the required disclosure. The 
final provision does not require investment advisers to identify their 
services as ``fiduciary services.''
d. Disclosure of Compensation
    The Department received a number of comments on the compensation 
disclosure requirements of the proposal. Many of the commenters 
expressed concern about the parties for whom compensation might have to 
be reported under the proposal, such as providers of services to mutual 
funds and other investment products in which a plan might invest, and 
the increased level of complexity attendant to more detailed levels of 
disclosure generally. The Department believes that many of the issues 
raised by commenters in this area have been addressed in the final 
regulation by more specifically defining the parties that would be 
treated as ``covered service providers'' for purposes of the disclosure 
requirements.
    The compensation disclosure requirements of the final rule are set 
forth at paragraph (c)(1)(iv)(C). While structured differently than the 
proposal, the final rule retains many of the same concepts of the 
proposal with respect to what types of compensation have to be 
disclosed for purposes of a reasonable contract or arrangement. The 
compensation disclosure requirement of

[[Page 41609]]

the final rule is divided into four subparagraphs to more clearly 
describe the compensation information that must be disclosed.
    Paragraph (c)(1)(iv)(C)(1) requires a description of all direct 
compensation, as defined in paragraph (c)(1)(viii)(B)(1), 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 regulation, ``direct'' compensation is compensation 
received directly from the covered plan.\11\
---------------------------------------------------------------------------

    \11\ This definition, therefore, excludes from the term 
``direct'' compensation any compensation received from a plan asset 
vehicle in which the covered plan has a direct equity investment.
---------------------------------------------------------------------------

    This requirement to disclose direct compensation generally follows 
the requirement of the proposal, with a clarifying change. A number of 
commenters on the proposal questioned whether the proposal's definition 
of compensation, which referred to payments received ``directly from 
the plan or plan sponsor'' was intended to subject to ERISA section 
408(b)(2) payments for services made solely by the plan sponsor and not 
out of plan assets,. The proposal's reference to payments received from 
plan sponsors was intended to distinguish direct compensation from 
indirect compensation. As reflected above, the final regulation omits 
the reference to the plan sponsor, so as to avoid the confusion raised 
by commenters. The final rule also clarifies that a covered service 
provider generally may disclose the direct compensation received from 
the plan either as a total for all services (i.e., in the aggregate) or 
on an itemized, service-by-service basis. The Department continues to 
believe as a general matter that a fiduciary who understands the 
services the covered service provider is providing pursuant to the 
contract or arrangement and their aggregate cost is in a position to 
compare services and costs consistent with its obligations under 
sections 404 and 408(b)(2) of ERISA, and to determine the 
reasonableness of compensation paid for such services in the aggregate. 
There is one exception to this rule, discussed below, for the 
disclosure of certain compensation received in connection with 
recordkeeping services. See section (c)(1)(iv)(D) of the final rule.
    Finally, in response to the concerns of some commenters about 
whether a failure to disclose unexpected compensation would result in a 
prohibited transaction by reason of losing relief under section 
408(b)(2), the final rule requires disclosure only of compensation that 
the service provider, an affiliate, or a subcontractor ``reasonably 
expects'' to receive in connection with the services.
    Paragraph (c)(1)(iv)(C)(2) of the final regulation provides for the 
disclosure of indirect compensation. Specifically, it requires a 
description of all indirect compensation (as defined in paragraph 
(c)(1)(viii)(B)(2)) that the covered service provider (or an affiliate 
or a subcontractor) reasonably expects to receive in connection with 
the services to be provided pursuant to the contract or arrangement. 
The rule also requires the covered service provider to identify the 
services for which the indirect compensation will be received and the 
payer of the indirect compensation. For purposes of the final 
regulation, ``indirect'' compensation is 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 with the 
covered service provider). See section (c)(1)(viii)(B)(2) of the final 
rule.
    The proposal defined compensation or fees as ``indirect'' if 
received from any source other than the plan, the plan sponsor, or the 
covered service provider. The substance of the final rule with regard 
to disclosure of indirect compensation is similar to the proposed rule, 
but has been expanded to require disclosure of not only the indirect 
compensation that a covered service provider expects to receive, as 
proposed, but also identification of the services for which the 
indirect compensation will be received and identification of the payer 
of the indirect compensation.
    Paragraph (c)(1)(iv)(C)(3) of the final rule provides specific 
guidance for when compensation paid among related parties, i.e., among 
the covered service provider, its affiliates, and subcontractors, must 
be disclosed. The covered service provider must separately disclose 
such compensation 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 final rule also 
requires the covered service provider to identify the services for 
which such compensation will be paid, the payers and recipients of such 
compensation, and the status of each payer or recipient as an affiliate 
or a subcontractor. Under this paragraph (c)(1)(iv)(C)(3) of the final 
rule, compensation must be disclosed regardless of whether such 
compensation also is disclosed under paragraph (c)(1)(iv)(C)(1) or (2) 
(direct and indirect compensation) or (c)(1)(iv)(F) or (G) (investment 
disclosures). This provision does not apply to compensation received by 
an employee from his or her employer on account of work performed by 
the employee. Unless described in paragraph (c)(1)(iv)(C)(3) or 
elsewhere in the final rule, compensation paid among these related 
parties need not be disclosed. Such payments affect only how 
compensation is allocated among the parties and generally do not affect 
the total costs of services to the plan. Thus, the final rule responds 
to commenters' concerns that when services are provided by multiple 
parties and priced as a package, the covered service provider is not 
required to create an artificial allocation of compensation for 
services among the parties. However, if compensation is paid among 
related parties in the specific circumstances described in this 
paragraph (c)(1)(iv)(C)(3), the Department does not consider such 
compensation to be based on artificial methods, such as would be the 
case when allocations are driven by bookkeeping, tax, or other 
considerations of the related parties.
    The disclosure of indirect compensation and certain compensation 
paid among related parties serves two purposes. First, the disclosures 
are intended to enable plan fiduciaries to better assess the 
reasonableness of the compensation paid for services to the plan by 
taking into account all of the compensation being received in 
connection with such services. Second, the disclosures are intended to 
enable plan fiduciaries to assess actual or potential conflicts of 
interest that may impact the quality of services provided to the plan.
    The proposed rule required the covered service provider to furnish 
to plan fiduciaries specific information relating to conflicts of 
interest (see Sec.  2550.408b-2(c)(1)(iii)(C) through (F), at 72 FR 
71005). These provisions would have required disclosure of, among other 
things, information concerning: whether the service provider expects to 
participate in any transactions entered into with the plan; material 
financial relationships with certain parties related to the provision 
of services to the plan; whether the service provider will be able to 
unilaterally affect its own compensation

[[Page 41610]]

in connection with its provision of services; whether the service 
provider has policies or procedures that address actual or potential 
conflicts and, if so, an explanation of such policies and procedures.
    A number of commenters expressed concern about the scope of the 
proposal's conflict of interest disclosures and the ultimate usefulness 
of the information to responsible plan fiduciaries in evaluating 
potential conflicts. Specifically, commenters asserted that the 
requirements, as proposed, were too broad, pointing out that having to 
disclose, in addition to actual conflicts, all potential conflicts, 
would create a potentially limitless, and therefore extraordinarily 
burdensome, requirement for service providers. Without a clear 
definition of what kinds of relationships may constitute a conflict and 
without knowing what other parties a covered plan may be engaging for 
other services, commenters argued such disclosure would be nearly 
impossible. Further, commenters pointed out that service providers 
likely would over-disclose in order to avoid a prohibited transaction, 
thus inundating plan fiduciaries with excessive, potentially confusing, 
and ultimately meaningless information. Commenters also requested 
additional guidance as to what would be a ``material'' relationship and 
argued that ambiguity surrounding this term would lead to inconsistent 
disclosures among various service providers.
    Finally, the proposal required a covered service provider to 
disclose its ability to affect its own compensation. Commenters pointed 
out that ERISA's prohibited transaction rules preclude fiduciary 
service providers from engaging in such activity. They also noted that, 
to the extent that a service provider is not a fiduciary, exercising 
such discretion over its compensation likely would constitute a 
fiduciary act resulting in a separate prohibited transaction.
    As an alternative to the disclosure regime of the proposed 
regulation, some commenters suggested that a better indicator of the 
existence and significance of a conflict of interest is information 
about the amounts and sources of compensation that service providers 
expect to receive in connection with the services provided to the plan. 
After careful consideration of the comments regarding the proposed 
requirement for narrative descriptions of conflicts of interest, the 
Department agrees that the final regulation's more detailed disclosure 
of compensation arrangements, particularly the additional information 
concerning the receipt of indirect compensation and compensation paid 
among related parties, will provide clearer and more meaningful 
information to the responsible plan fiduciaries about potential 
conflicts of interest than the narrative description of such conflicts 
required by the proposal. Accordingly, the final rule does not require 
the narrative disclosures about potential conflicts that were contained 
in the proposed regulation. Rather, the final rule requires that in 
conjunction with the description of the indirect compensation being 
received by the covered service provider (or an affiliate or 
subcontractor) in connection with the services provided to the plan, 
the covered service provider must disclose the services to which the 
indirect compensation relates and the payer of the compensation. 
Covered service providers similarly must identify the source and 
recipient of certain compensation paid among related parties, and the 
services to which such compensation relates. The Department believes 
that compliance with these disclosure requirements will ensure that 
fiduciaries have meaningful information with which to assess potential 
conflicts of interest on the part of their service providers.
    Paragraph (c)(1)(iv)(C)(4), also consistent with the proposal, 
requires the covered service provider to describe 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. This provision, however, has been 
modified slightly from the proposal in an effort to clarify the 
requirement. Some commenters on the proposal expressed a general 
concern that fees and charges associated with contract terminations are 
not currently disclosed, as well as a specific concern that the 
proposed regulation was not clear as to whether disclosure of these 
fees and charges was required. In an effort to eliminate any ambiguity 
concerning the requirement to disclose such information, the 
requirement has been set forth in a separate paragraph of the final 
regulation.
e. Disclosures Regarding Recordkeeping Services
    The final rule also includes a requirement concerning specific 
disclosures for recordkeeping services, which was not included in the 
proposal. Paragraph (c)(1)(iv)(D) provides that, if recordkeeping 
services will be provided to the covered plan, the covered service 
provider must furnish 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. In addition, 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. The covered service provider must 
explain the methodology and assumptions used to prepare the estimate 
and describe in detail 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.
    The addition of this provision to the final rule reflects 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 availability of 
information sufficient to enable the plan fiduciary to make informed 
decisions about the costs of recordkeeping is fundamental to a 
responsible plan fiduciary's ability to satisfy its ERISA obligations. 
Especially in complicated service arrangements when a variety of 
services, including recordkeeping services, are provided to the covered 
plan and may be paid for through charges at the plan investment level 
or through revenue sharing, it is sometimes difficult for a plan 
fiduciary to determine the portion of aggregate charges that will be 
applied to recordkeeping services. The Department believes that 
requiring such information to be separately disclosed will better 
enable fiduciaries to make informed evaluations of a covered plan's 
recordkeeping costs. To the extent recordkeeping costs will not be 
covered by relatively straightforward direct or indirect compensation 
received by plan service providers, and to accommodate industry 
variation in how recordkeeping costs are otherwise absorbed by plan

[[Page 41611]]

service providers and investment-level charges, the Department included 
a standard for estimating recordkeeping costs in paragraph 
(c)(1)(iv)(D)(2). A covered service provider cannot avoid providing an 
estimate required by paragraph (c)(1)(iv)(D)(2) merely by disclosing a 
de minimis amount of direct or indirect compensation for recordkeeping 
under paragraph (c)(1)(iv)(D)(1) when such amount has no relationship 
to the cost of such services. In such instances, a covered service 
provider would be required under the final rule to provide an estimate 
pursuant to paragraph (c)(1)(iv)(D)(2) to reasonably reflect the cost 
to the covered plan of recordkeeping services. The Department believes 
these estimates, which must be reasonable and made in good faith by the 
covered service provider, will help responsible plan fiduciaries 
compare recordkeeping costs among a variety of service providers and 
service arrangements.
f. Manner of Receipt of Compensation
    Paragraph (c)(1)(iv)(E) of the final rule, consistent with the 
proposal, requires a description of the manner in which the 
compensation described in paragraphs (c)(1)(iv)(C) and (D) 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.
g. Investment Disclosure--Fiduciary Services and Recordkeeping and 
Brokerage Services
    The definition of compensation under the proposal was very broad 
and encompassed not only the compensation and fees received by service 
providers, but also compensation attendant to plan investments and 
investment options. Disclosures concerning investment-related 
compensation (i.e., investment management and similar fees charged 
against investment returns) are particularly significant in that they 
typically constitute a large portion of the total expenses incurred by 
a plan and its participants. These disclosures may directly impact the 
cost of plan services as a result of revenue sharing and similar 
arrangements between the issuer of a particular investment product and 
plan service providers. Understanding the fees and expenses attendant 
to plan investments is particularly significant for fiduciaries of 
individual account plans that permit participant and beneficiaries to 
direct their own investments, because it is those fiduciaries who 
ultimately select the plan's investment options and upon whom the 
participants and beneficiaries depend to make informed choices 
concerning their investments. Because investment-related fees and 
expenses can dramatically reduce the retirement savings of participants 
and beneficiaries, plan fiduciaries must carefully assess investment 
fees and expenses, among other factors, in selecting investment options 
to be made available in participant-directed individual account plans.
    The Department received a number of comments concerning the 
disclosure of investment-related compensation. Most of the comments 
focused on what information should be disclosed and by whom it should 
be disclosed. The final regulation addresses the major issues raised by 
commenters through changes to the scope of the term ``covered service 
provider.'' For example, the concerns relating to uncertainty as to 
whether issuers of investment products, and certain service providers 
to those issuers or products, are themselves covered service providers 
for purposes of the regulation have been addressed by clarifying who 
does not constitute a ``covered service provider'' in the final rule. 
See above discussion relating to paragraph (c)(1)(iii)(D) of the final 
rule. Other comments expressed concern about some of the terminology 
used in the proposal. For example, one commenter expressed the view 
that the proposal left unclear whether a component of a charge called 
an ``investment management fee'' that actually pays recordkeeping or 
other non-management costs is required to be separately disclosed. The 
commenter explained that some service providers construe ``revenue 
sharing'' which would be required to be disclosed to include only the 
items specified in the preamble to the proposal, notwithstanding that 
there may be components of an expense ratio that actually pay for non-
investment management services. Other commenters favorably 
characterized the proposal's definition of fees and expenses as 
comprehensive. Again, many of these commenters' concerns are addressed 
by the revisions reflected in the final rule concerning who does (and 
who does not) constitute a ``covered service provider.'' The Department 
also believes that the final rule's requirements, discussed below, 
establish clear standards as to what information concerning plan 
investments must be disclosed and by whom such information must be 
disclosed.
    As discussed above, the final rule defines the term ``covered 
service provider'' to include fiduciaries to certain investment 
vehicles holding plan assets (paragraph (c)(1)(iii)(A)(2)) and 
providers of recordkeeping and brokerage services to a participant-
directed individual account plan if they make available one or more 
designated investment alternatives for the covered plan (paragraph 
(c)(1)(iii)(B)). In addition to imposing an obligation to disclose 
compensation information concerning the services they provide (i.e., as 
a fiduciary or as a recordkeeper or broker), the final rule requires 
these covered service providers to disclose compensation information 
concerning the investments with respect to which they are a fiduciary 
or provide recordkeeping or brokerage services pursuant to the contract 
or arrangement with the covered plan. After careful consideration of 
all of the comments, the Department concluded that these service 
providers, because they have a relationship with both the investment 
vehicles and the covered plan, are in the best position to ensure that 
responsible plan fiduciaries have the information they need about the 
investments represented by the covered service provider. These 
investment-related disclosures are described in paragraphs 
(c)(1)(iv)(F) and (G) of the final rule and are not limited as to who 
will receive such investment-related compensation. The Department also 
notes that ERISA section 404(a) obligates plan fiduciaries who invest 
in vehicles holding plan assets (paragraph (c)(1)(iii)(A)(2)) to 
consider the effect on the plan's rate of return of fees and expenses 
associated with that vehicle's underlying investments, including any 
lower tiered entity in which the plan asset vehicle invests.
    Paragraph (c)(1)(iv)(F) sets forth the investment-related 
disclosure obligations of fiduciaries to investment vehicles holding 
plan assets. These covered service providers (as described in paragraph 
(c)(1)(iii)(A)(2)) must provide, with respect to each investment 
contract, product, or entity that holds plan assets and in which the 
covered plan has a direct equity investment, the following information, 
unless such information is disclosed to the responsible plan fiduciary 
by a covered service provider described in paragraph (c)(1)(iii)(B) 
(recordkeeping and brokerage services): (i) 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

[[Page 41612]]

charges, redemption fees, surrender charges, exchange fees, account 
fees, and purchase fees); (ii) a description of the annual operating 
expenses (e.g., expense ratio) if the return is not fixed; and (iii) a 
description of any ongoing expenses in addition to annual operating 
expenses (e.g., wrap fees, mortality and expense fees).
    Paragraph (c)(1)(iv)(G) requires disclosure of the same investment-
related compensation information described above from recordkeepers and 
brokers that make available investment alternatives for participant-
directed individual account plans. This information must be provided 
with respect to each designated investment alternative for which 
recordkeeping or brokerage services will be provided pursuant to the 
contract or arrangement with the covered plan. Paragraph 
(c)(1)(viii)(C), discussed below, defines the term ``designated 
investment alternative'' for purposes of the final rule.
    The Department recognizes 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 they represent, but rather, merely serve as intermediaries 
between plans and the issuers of these investment vehicles for purposes 
of furnishing such information; the final rule limits their liability 
under the regulation for the completeness and accuracy of the disclosed 
information. Specifically, paragraph (c)(1)(iv)(G)(2) of the final rule 
provides that a covered service provider may comply with this 
investment-related disclosure requirement if the covered service 
provider provides to the responsible plan fiduciary current disclosure 
materials of the issuer of the designated investment alternative that 
include the information described in this paragraph, provided that such 
issuer is not an affiliate, the disclosure materials are regulated by a 
State or federal agency, and the covered service provider does not know 
that the materials are incomplete or inaccurate.
h. Timing of Initial Disclosure Requirements; Changes
    With regard to the timing of the required disclosures, the proposed 
regulation required that service contracts or arrangements include a 
representation by the service provider that all required information 
was provided to the responsible plan fiduciary before the contract or 
arrangement was entered into. This requirement was intended to ensure 
that the responsible plan fiduciary had the opportunity to consider all 
required disclosures before entering into a contract or arrangement 
with a service provider. The Department did not specify any time frame 
for this disclosure, believing it was best left to the responsible plan 
fiduciary and its potential service providers to work out the amount of 
time, prior to entering into the contract or arrangement, that the 
responsible plan fiduciary would need to review the disclosures. Some 
commenters suggested that the final regulation provide a more specific 
timeframe for the disclosures. However, the Department continues to 
believe that the flexibility described in the proposed regulation is 
appropriate and that the parties to the contract or arrangement can 
determine what is reasonable; accordingly, the Department did not adopt 
the suggestion.
    Consistent with the proposal, the final rule, at paragraph 
(c)(1)(v), requires that a covered service provider provide the initial 
disclosures required by paragraph (c)(1)(iv), discussed above, to the 
responsible plan fiduciary reasonably in advance of the date the 
contract or arrangement is entered into, extended or renewed. The final 
rule, however, contains an exception for certain persons who become 
covered service providers within the meaning of paragraph 
(c)(1)(iii)(A)(2) of the final rule subsequent to a plan's investment 
in an investment vehicle. This situation would arise when a plan 
invests in an investment vehicle that, at the time of the plan's 
investment, does not hold plan assets, but that subsequently, for 
reasons such as another plan's investment in the vehicle, is determined 
to hold plan assets, thereby causing a fiduciary to such vehicle to be 
a covered service provider pursuant to paragraph (c)(1)(iii)(A)(2). To 
accommodate such instances, the final rule provides that such a 
fiduciary service provider must disclose the information required by 
paragraph (c)(1)(iv) as soon as practicable, but not later than 30 days 
from the date on which the service provider knows that such investment 
contract, product or entity holds plan assets.
    The final rule also includes a special timing provision for 
disclosure related to recordkeeping and brokerage services pursuant to 
paragraph (c)(1)(iv)(G). Information described in paragraph 
(c)(1)(iv)(G) 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 on 
which the investment alternative is designated by the responsible plan 
fiduciary.
    In addition to requiring that certain information be disclosed to 
responsible plan fiduciaries before the parties enter into, or extend 
or renew, a contract or arrangement, the proposal included an ongoing 
obligation for the service provider to disclose to the responsible plan 
fiduciary any material change to the required information not later 
than 30 days from the date on which the service provider acquired 
knowledge of the change. A number of commenters requested additional 
guidance on what would be considered a ``material'' change. Some of the 
commenters' concerns related to the potential breadth of disclosures 
required by the proposal, with commenters expressing concern as to 
whether 30 days would provide sufficient time to identify material 
changes, especially in the context of packaged or bundled services that 
may involve parties other than the contracting service provider. Some 
commenters, especially large institutions with multiple affiliations, 
argued that 30 days was not enough time to discover changes to 
information relating to all of their business units or affiliates. 
Commenters also asserted that this requirement would result in 
voluminous, costly, and inefficient monitoring of disclosures, as well 
as potential ``over-disclosure'' of all changes to the extent it is not 
clear whether a particular change is material. Finally, commenters 
argued that disputes may result between various parties as to the 
beginning date for the 30-day compliance period, which may be 
subjective. Commenters suggested alternative approaches, for example 
defining materiality for this purpose, extending the 30-day period, or 
requiring an annual updating of all information in lieu of periodic 
disclosure of material changes. In response to these comments, the 
Department has made a number of changes.
    Specifically, paragraph (c)(1)(v)(B) of the final rule requires 
that a covered service provider disclose a change (as opposed to a 
``material'' change) to the initial information required to be 
disclosed pursuant to paragraphs (c)(1)(iv) 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. The Department was persuaded by commenters' 
concerns that it may take

[[Page 41613]]

more than 30 days to accurately identify and disclose changes to 
information that previously was disclosed, especially in the context of 
large institutions with multiple affiliates. However, the Department 
does not believe that a covered service provider should have an 
unlimited period of time to disclose changes to the responsible plan 
fiduciary; a certain level of timeliness and efficiency is expected in 
the marketplace, and covered service providers should be in a position 
to ensure that the information they disclose to responsible plan 
fiduciaries about the services they are providing and the compensation 
they are receiving continues to be accurate. Therefore, disclosure of 
changes must be made as soon as practicable, but not later than 60 days 
from the date on which the covered service provider knows 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.
    The Department also eliminated the concept of materiality, 
persuaded by commenters that, without more specific definition, this 
standard would not add to a covered service provider's understanding of 
what types of changes must be disclosed. Accordingly, if information 
previously disclosed to a responsible plan fiduciary changes, the 
responsible plan fiduciary must be notified. The Department believes 
that a responsible plan fiduciary should be made aware if any change 
occurs, for example, in the services that the covered service provider 
will be providing for the plan, the fiduciary status of the service 
provider, or the compensation that the service provider will be 
paid.\12\
---------------------------------------------------------------------------

    \12\ Nothing in the final rule or this preamble relieves a 
service provider from other obligations or limitations under ERISA, 
for example other prohibited transactions or, in the case of service 
providers that are ERISA fiduciaries, the restrictions of ERISA 
sections 404 or 406(b). See, e.g., Advisory Opinion 97-16A (May 22, 
1997) (the Department stated that, in the context of a service 
provider who retains some authority over the investment options 
selected by plans by deleting or substituting, in its own 
discretion, certain unrelated mutual funds, a plan fiduciary must be 
provided advance notice of the change, including disclosure of fee 
information, and must be afforded a reasonable amount of time in 
which to accept or reject the change).
---------------------------------------------------------------------------

i. Reporting and Disclosure Information; Timing
    Paragraph (c)(1)(vi) of the final rule addresses the obligations of 
the covered service provider to provide, upon request of the 
responsible plan fiduciary or plan administrator, 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 ERISA and the 
regulations, forms and schedules issued thereunder. This provision is 
very similar to the proposal. A few commenters asked the Department to 
provide that only ``reasonable'' requests from the responsible plan 
fiduciary or plan administrator must be accommodated under this 
provision. The Department did not include this concept in the final 
rule, because it did not want to create issues as to the 
``reasonableness'' of a particular request. The Department believes 
that the final rule minimizes the potential for abuse by restricting 
covered service provider's disclosure obligation to information that is 
``required'' for the covered plan to comply with its reporting and 
disclosure obligations. Commenters also requested guidance from the 
Department that the responsible plan fiduciary or plan administrator 
may not request that this information be disclosed or presented in any 
particular format. The Department expects that the covered service 
provider will furnish the information in a manner that enables 
effective use of the information to satisfy ERISA's Title I reporting 
and disclosure requirements; no further obligation should be inferred 
from this requirement.
    Finally, a few commenters asked that the Department clarify that 
this disclosure obligation was limited to information specifically 
required by a responsible plan fiduciary or plan administrator to 
complete a Form 5500 annual report. The Department declined to accept 
this suggestion; the Department expects that this provision will 
require service providers to disclose information that is necessary in 
order to comply with ERISA's reporting and disclosure obligations in 
circumstances other than the Form 5500 annual report, for example in 
making required disclosures concerning plan and investment fees and 
expenses to participants and beneficiaries. The Department notes that 
this is not a limitless obligation; the rule limits this provision to 
information relating to the contract or arrangement, and the 
compensation received thereunder, that is ``required'' for the covered 
plan to comply with the reporting and disclosure obligations of Title 
I.
    The proposal required that the service provider disclose 
information requested by the responsible plan fiduciary or plan 
administrator in order to comply with ERISA's reporting and disclosure 
obligations, but did not specify any time frame for the service 
provider to respond to such a request. Some commenters requested 
additional guidance concerning when the covered service provider would 
be obligated to provide such information. In response, the Department 
added a new timing requirement in paragraph (c)(1)(vi)(B) of the final 
rule. A covered service provider must disclose the requested 
information 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. The 
Department believes that this provision will provide more specificity 
to the parties in complying with this disclosure requirement, but also 
accommodate the practical reality that a covered service provider may, 
because of extraordinary matters beyond its control, be unable to 
satisfy the general standard.
j. Disclosure Errors
    The proposed regulation did not provide specific relief for 
disclosure errors or omissions by service providers. As a result, many 
commenters argued that the final regulation should be revised to 
include such relief for service providers in certain circumstances. 
Many commenters argued that inadvertent mistakes are inevitable, in 
spite of the best efforts of all involved, and that it would be 
inappropriate for a service provider to be subject to a prohibited 
transaction in these circumstances. These commenters believed that, 
under the proposal, a prohibited transaction would result if any error, 
no matter how small, existed in the detailed disclosures required by 
the rule. Commenters felt this risk was especially significant in the 
case of a package of services involving multiple service providers. 
These commenters asserted that, with required information coming from 
different, and in some cases unrelated, parties, the likelihood of 
``innocent'' mistakes increases. Commenters were not comforted by the 
proposal's limitation that information must be provided ``to the best 
of the service provider's knowledge,'' because in some cases, such as a 
typographical error, the service provider may ``know'' that the 
information is inaccurate. Further, commenters argued that these errors 
would not be covered by the material change provision in the proposal, 
because many minor errors would not be material. Finally, commenters 
noted that the material

[[Page 41614]]

change provision focused on disclosing information when changes occur 
during the term of the contract and not on information that was 
incorrect at the time the contract was entered into. Commenters 
proposed various solutions, such as providing a cure period to allow 
for correction of minor or inadvertent errors or, alternatively, 
revising the rule to require only ``reasonable'' or ``good faith'' 
compliance with its disclosure obligations. Other commenters suggested 
that a correction mechanism could be permitted through the Department's 
Voluntary Fiduciary Correction (VFC) Program \13\ or that relief could 
be provided through an expansion of the proposed class exemption.
---------------------------------------------------------------------------

    \13\ See Voluntary Fiduciary Correction Program Under the 
Employee Retirement Income Security Act of 1974, Adoption of Updated 
Program, 71 FR 20262 (April 19, 2006).
---------------------------------------------------------------------------

    The Department was persuaded by commenters that relief should be 
provided so that certain inadvertent errors and omissions do not result 
in a prohibited transaction. Accordingly, paragraph (c)(1)(vii) of the 
final rule provides that no contract or arrangement will fail to be 
reasonable under the regulation 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 
regulation. However, the covered service provider must disclose the 
correct information 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.
    The Department notes that the class exemption, included as part of 
this regulation (paragraph (c)(1)(ix)), is meant to address 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, discussed below.

6. Definitions

    Paragraph (c)(1)(viii) of the final rule defines the terms 
``affiliate,'' ``compensation,'' ``designated investment alternative,'' 
``recordkeeping services,'' ``responsible plan fiduciary,'' and 
``subcontractor.''
    Specifically, paragraph (c)(1)(viii)(A) provides that 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. The rule also provides that 
unless otherwise specified, an ``affiliate'' in paragraph (c)(1) refers 
to an affiliate of the covered service provider. This definition 
essentially is unchanged from the proposal, except that the definition 
no longer includes the concept of an ``agent'' of the covered service 
provider. The Department was persuaded by commenters that the notion of 
an ``agent'' of the covered service provider is unclear, overly broad, 
and not consistent with commonly understood ``affiliate'' arrangements. 
To the extent some commenters were concerned that this term might pull 
subcontractors of a covered service provider into affiliated status, 
the Department notes that the final rule specifically addresses the 
role of a covered service provider's subcontractors elsewhere.
    Paragraph (c)(1)(viii)(B) defines ``compensation'' for purposes of 
the final rule as anything of monetary value (such as 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. This is slightly different from the proposal, 
which did not include the $250 de minimis rule. The Department added 
this provision in response to suggestions from a number of comments 
concerning the cost and burden of tracking insignificant non-monetary 
gifts.
    The definition of ``compensation'' includes descriptions of both 
``direct'' and ``indirect'' compensation. Subparagraph (1) defines 
``direct'' compensation as compensation received directly from the 
covered plan. Subparagraph (2) defines ``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 the definition of subcontractor contained 
in paragraph (c)(1)(viii)(F).
    Subparagraph (3) provides that, for purposes of the regulation, a 
description or an estimate of compensation 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 cannot reasonably be expressed in such terms, by any other 
reasonable method.\14\ In this regard, any description or estimate must 
contain sufficient information to permit evaluation of the 
reasonableness of the compensation. This provision is slightly modified 
from the proposal, because the final rule also provides that when 
compensation cannot reasonably be expressed in terms of amounts, 
formulae or percentages, any other reasonable method may be used 
(subject to the general requirement that the description of 
compensation must contain sufficient information to permit evaluation 
of the reasonableness of such compensation). This standard was modified 
in part in response to commenters' concern that some types of 
compensation could not necessarily be expressed in a monetary amount, 
formula, percentage of the plan's assets, or a per capita charge. The 
Department continues to prefer disclosure in terms of a monetary 
amount, formula, percentage of the plan's assets, or a per capita 
charge; however, the Department is persuaded that in situations when it 
is not feasible to disclose compensation in such terms, covered service 
providers should be able to use another reasonable method to do so.
---------------------------------------------------------------------------

    \14\ Some commenters raised concerns with language in the 
preamble to the proposed regulation which seemed to imply that 
formulas, percentages, or per capita charges could be used only if 
it was not possible to disclose in terms of a monetary amount. The 
Department did not intend this interpretation; as stated in the 
final rule, there are alternatively acceptable formats for 
disclosing compensation to a responsible plan fiduciary, so long as 
the description sufficiently permits evaluation of the 
reasonableness of such compensation.
---------------------------------------------------------------------------

    Paragraph (c)(1)(viii)(C) defines a ``designated investment 
alternative'' as any investment alternative designated by a fiduciary 
into which participants and beneficiaries may direct the investment of 
assets held in, or contributed to, their individual accounts. The term 
``designated investment alternative'' does not include brokerage 
windows, self-directed brokerage accounts, or similar plan arrangements 
that enable participants and beneficiaries to select investments beyond 
those specifically designated. This definition is consistent with the 
definition used by the Department for purposes of defining ``designated 
investment alternative'' in its proposed participant-level fee 
disclosure regulation (see proposed Sec.  2550.404a-5(h)(1), 73 FR 
43041).
    Paragraph (c)(1)(viii)(D) defines ``recordkeeping services'' as 
including services related to plan administration and monitoring of 
plan and participant and beneficiary transactions such as enrollment, 
payroll deductions and

[[Page 41615]]

contributions, offering designated investment alternatives and other 
covered plan investments, loans, withdrawals and distributions. It also 
provides that ``recordkeeping services'' includes the maintenance of 
covered plan and participant and beneficiary accounts, records, and 
statements. This broad definition of recordkeeping is intended to 
provide basic parameters to ensure that providers of recordkeeping 
services understand when they will be covered by paragraph 
(c)(1)(iii)(B) when they also make designated investment alternatives 
available to the covered plan.
    Paragraph (c)(1)(viii)(E) defines a ``responsible plan fiduciary'' 
as a fiduciary with authority to cause the covered plan to enter into, 
or extend or renew, the contact or arrangement. This is consistent with 
use of the phrase ``responsible plan fiduciary'' in the Department's 
proposal, except that for ease of reference it has been separately 
included in the definitions section.
    Paragraph (c)(1)(viii)(F) defines a ``subcontractor'' as 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 in paragraph 
(c)(1)(iii)(A) through (C) of the regulation provided for by the 
contract or arrangement with the covered plan. The Department added 
this concept to the final rule in order to clarify that, in certain 
instances, a covered service provider will be required to report 
compensation received by a subcontractor to the covered service 
provider or an affiliate. For example, if a ``covered service 
provider'' that contracts with a plan to provide recordkeeping in turn 
subcontracts to outsource all or part of those services to another 
party, then that party is a ``subcontractor,'' because it is carrying 
out some or all of the covered service provider's obligations under the 
contract or arrangement with the covered plan. In certain cases, the 
covered service provider may have to disclose compensation received by 
this subcontractor.

C. Class Exemption

    The class exemption from the restrictions of ERISA section 
406(a)(1)(C) was proposed by the Department separately from the 
proposed regulation. It was intended to relieve a responsible plan 
fiduciary from engaging in a prohibited transaction under certain 
circumstances when the requirements of the regulation have not been 
met. The Department received five separate public comments in response 
to the invitation for comments contained in the notice of pendency 
relating to the proposed class exemption, in addition to comments that 
were made as part of information received from the public on the 
proposed regulation. This section discusses these comments and 
modifications that have been made to the final class exemption, which 
now is being granted and included as section (c)(1)(ix) of the final 
rule.

1. Comments on Proposed Class Exemption

    A few commenters requested that the proposed class exemption be 
expanded to protect service providers from potential excise taxes under 
the Code. Specifically, these commenters wanted the class exemption to 
cover service providers that are responsible for making the rule's 
required disclosures in certain circumstances: For example, when 
disclosure is made on behalf of a third party, and the service 
provider, acting as a conduit, either does not receive the requested 
information from the third party, or it is later discovered that the 
information received from the third party was erroneous; when an 
inadvertent error is made in providing the responsible plan fiduciary 
with the detailed information required by the proposal, for example, 
some of the narrative information about conflicts of interest, 
commenters argued, was vaguely described or overly broad; or when a 
responsible plan fiduciary fails to execute a service contract or 
arrangement. The Department has determined not to extend specific 
prohibited transaction exemption relief from the prohibitions of 
section 406(a) to covered service providers in the same way that the 
final class exemption covers responsible plan fiduciaries who attempt 
to address a service provider's disclosure failure. However, the 
Department notes that the final rule clarifies that execution of a 
formal ``contract'' is not required, and gives covered service 
providers more opportunities to address disclosure failures, such as 
errors and omissions. The final rule also provides covered service 
providers with relief for ``passing through'' certain regulated 
disclosure materials that include information concerning plan-
designated investment alternatives.
    One commenter suggested that the proposed class exemption be 
expanded to cover prohibited transactions described under section 
406(a)(1)(D) of ERISA. Section 406(a)(1)(D) prohibits the transfer to, 
or use by or for the benefit of, a party in interest, of any assets of 
the plan. The commenter stated that if the statutory exemption under 
section 408(b)(2) is temporarily unavailable for a particular service 
arrangement, but the covered service provider continues to be engaged 
by the plan to provide necessary services and receives payments, 
section 406(a)(1)(D) would be violated if plan assets are used to 
compensate the covered service provider during such time. The 
Department modified the operative language of the final class exemption 
to provide relief from section 406(a)(1)(D) to cover, among other 
things, situations when a responsible plan fiduciary decides to 
continue a service arrangement with a covered service provider, and to 
continue paying such covered service provider's fees, during periods 
when the parties are attempting to cure a disclosure failure by the 
covered service provider pursuant to the conditions of this exemption.
    Other commenters observed that the proposed class exemption would 
apply if the responsible plan fiduciary unknowingly enters into a 
service contract that does not satisfy the disclosure obligations of 
the regulation, provided that certain conditions are met. The proposal 
required the responsible plan fiduciary to request the missing 
information, in writing, from the service provider, and the covered 
service provider would have been deemed to have failed to satisfy its 
disclosure obligations if it did not provide the information requested 
by the responsible plan fiduciary within 90 days. In this regard, the 
commenters requested that a satisfactory and timely service provider 
response to the 90-day request be deemed to satisfy the disclosure 
requirements and that the proposed class exemption be revised to 
provide relief in such instances. One commenter stated that a service 
provider should not be treated as failing to comply with a responsible 
plan fiduciary's request for information, for purposes of the 
exemption, merely because the covered service provider is unable to 
complete a response within 90 days of the request, despite good faith 
efforts on the part of the service provider to obtain such information.
    The Department has determined that, under the exemption, a 
responsible plan fiduciary should not be permitted to give a covered 
service provider an unlimited amount of time to address a disclosure 
failure. Like the proposal, the final exemption requires that 
disclosure failures be addressed by the parties within specific 
timeframes. Under the final exemption, if the covered service

[[Page 41616]]

provider fails to comply with a responsible plan fiduciary's written 
request within 90 days of the date of that request, the fiduciary must 
notify the Department of the service provider's disclosure failure 
within a specified time period (i.e., 30 days). At such time, the 
responsible plan fiduciary will be covered by the exemption. The 
covered service provider will continue to be engaging in a non-exempt 
prohibited transaction until such time as the service arrangement is 
terminated or the disclosure failure is cured. Once a service 
provider's disclosure failure has been cured and the contract or 
arrangement complies with all of the other conditions of the 
Department's regulations at 29 CFR 2550.408b-2, or the contract or 
arrangement is terminated, it is the view of the Department that the 
prohibited transaction will cease. Thus, covered service providers will 
not be liable for excise taxes under Code section 4975 for any period 
following the date on which the disclosure failure is cured or the 
contract or arrangement is terminated.
    Further, some commenters requested that the Department extend the 
proposed 30-day time period for a responsible plan fiduciary to notify 
the Department of a covered service provider's failure to disclose. One 
commenter argued that many plan fiduciary committees do not meet on a 
monthly basis, and it may be difficult for responsible plan fiduciaries 
to make final determinations about retention of covered service 
providers within a 30-day period. The Department did not extend this 
time period in the final class exemption, which continues to require 
that notice to the Department be made not later than 30 days following 
the earlier of the covered service provider's refusal to furnish the 
requested information or end of the 90-day period following the 
responsible plan fiduciary's written request.
    Finally, one commenter suggested that the exemption should only 
require responsible plan fiduciaries to notify the Department of a 
disclosure failure in specific instances, such as when a disclosure 
failure is made by plan service providers who are ERISA fiduciaries, or 
when the disclosure failure relates specifically to information about a 
service provider's fees or other compensation. This approach has not 
been adopted. The Department believes that all disclosures required 
under the final regulation by all covered service providers are 
relevant for purposes of a responsible plan fiduciary's duty to provide 
notice to the Department of a service provider's failure to correct or 
address such failures in a timely fashion.

2. Description of the Final Class Exemption

    The class exemption is set forth in the final regulation in 
paragraph (c)(1)(ix). The Department incorporated the exemptive relief 
into the final regulation in order to facilitate reference by 
interested persons. The specific conditions applicable to covered 
transactions are described in this paragraph. 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. These conditions 
also set forth the timing, content and other requirements applicable to 
the notice required to be filed with the Department by the responsible 
plan fiduciary.\15\
---------------------------------------------------------------------------

    \15\ As with any exemption from ERISA's prohibited transaction 
provisions, the party seeking to avail itself of the relief provided 
by the exemption has the burden of demonstrating compliance with the 
conditions of the exemption.
---------------------------------------------------------------------------

    The exemption provides relief from the restrictions of section 
406(a)(1)(C) and (D) of ERISA 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 failures.
    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.\16\
---------------------------------------------------------------------------

    \16\ 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 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 may also be sent 
electronically to: OE-DelinquentSPnotice@dol.gov. The Department has 
developed a sample

[[Page 41617]]

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 regulation provides that, 
following the responsible plan fiduciary's discovery that the covered 
service provider failed to disclose required information, the fiduciary 
shall determine whether to terminate or continue the contract or 
arrangement with such service provider. In making such a determination, 
the responsible plan fiduciary shall evaluate the nature of the 
failure, the availability, qualifications and costs of potential 
replacement service providers, and the covered service provider's 
response to notification of the failure. However, the provisions 
contained in paragraph (c)(1)(ix)(G) do not abrogate or supersede the 
duties imposed upon a responsible plan fiduciary by section 404(a) of 
ERISA, which would also require the fiduciary to consider what steps to 
take in response to the covered service provider's nondisclosure.

D. Preemption of State Law

    Paragraph (c)(1)(x) of the regulation 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 
a variety of State laws, such as contract, tax, consumer protection, 
and other laws. The Department's regulation is not intended to 
supersede any of these State laws, which may require disclosures by 
parties that provide services described in the regulation, 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.
    Paragraph (c)(1)(x) of the regulation 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 disclosures in 
connection with services or service provider contract 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.

E. 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). Several commenters questioned the interplay of 
the proposal and section 4975 of the Code. These commenters explained 
that this interplay was unclear, because the proposal did not 
explicitly include corresponding amendments to the regulations under 
Code section 4975. Commenters generally sought clarification in this 
regard, asserting their belief that the Department has authority to 
issue guidance under Code section 4975(d)(2) and should confirm that 
compliance with the regulation will be required for a covered service 
provider to avoid the excise taxes imposed by Code section 4975.
    The Department added paragraph (c)(1)(xi) of the interim final 
regulation to clarify this issue. This paragraph 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 the ERISA and the regulations thereunder should be 
read to include reference to the parallel provisions of section 
4975(d)(2) of the Code and the regulations thereunder.
    If a covered service provider to a covered plan fails to disclose 
the information required by the final rule, then the contract or 
arrangement will not be ``reasonable.'' Therefore, 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 service provider. The responsible plan 
fiduciary, by causing the transaction, will have violated ERISA section 
406(a)(1)(C) and (D). The 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.\17\
---------------------------------------------------------------------------

    \17\ The Code also includes rules relating to statutory relief 
applicable to transactions between a plan and a service provider. 
See generally Code section 4975.
---------------------------------------------------------------------------

    The Department continues to believe that the application of an 
excise tax will provide incentives for all parties to service contracts 
or arrangements to cooperate in exchanging the disclosures required by 
the final regulation. However, as noted above, the Department does not 
believe that an otherwise diligent plan fiduciary should be penalized 
as a result of a failure on the part of service provider to make the 
required disclosure, thus the final regulation includes the exemptive 
relief described above (see paragraph (c)(1)(ix) of the interim final 
rule).

F. Effective Date

    Many commenters expressed concern with the Department's proposal 
that the final regulation and class exemption would be effective 90 
days after their publication in the Federal Register. Commenters 
suggested that these effective dates should be extended to as much as 
12 months or longer following publication to allow service providers 
sufficient time re-negotiate with their clients, to make appropriate 
amendments to their service contracts and disclosure materials, and to 
make other necessary changes to their business practices, for example, 
revising any recordkeeping or other systems to ensure that the 
appropriate information is captured. Otherwise, commenters stated, 
there may be many compliance failures in the first year following the 
effective date of the regulation and class exemption. Commenters also 
suggested that the Department clarify whether the rule's disclosure 
obligations will apply only to contracts entered into (or extended or 
renewed) after the effective date of the final regulation.
    In response to these concerns, the Department revised the date by 
which the interim final rule will apply to the disclosures required for 
a compliant contract or arrangement. Specifically, the rule will be 
effective one year after the date of its publication in the Federal 
Register. This modification is intended to accommodate concerns raised 
by commenters as to the cost and burden associated with transitioning 
current and future service contracts or arrangements to satisfy the 
requirements of the interim final rule. As of the effective date, all 
contracts or arrangements for services that fall within the scope of 
the interim final rule must comply with the interim final rule. Thus, 
the disclosures for new contracts or arrangements that are entered into 
on or after the effective date must satisfy the rule. In addition, 
contracts or arrangements that were entered into prior to that date 
must comply with the rule as of the effective date. The Department 
believes that interested persons will have sufficient

[[Page 41618]]

time to address the requirements of the interim final rule and 
establish procedures to ensure compliance with both the regulation and, 
if necessary, the class exemption.

G. Welfare Plan Disclosure--Reserved

    As explained above in the section entitled ``Scope--Covered 
Plans,'' the Department is reserving paragraph (c)(2) of the interim 
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 plans and defined benefit plans. However, 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, and more specifically tailored, disclosure requirements under 
ERISA section 408(b)(2) for welfare benefit plans.

H. Existing Requirement Concerning Termination of Contract or 
Arrangement

    The Department did not propose any changes to the existing 
requirements addressing termination of contracts or arrangements for 
purposes of section 408(b)(2) (see 29 CFR 2550.408b-2(c)); however, the 
Department did invite comments from the public as to any issues 
relating to this requirement. In response to this invitation, one 
commenter suggested that the Department more definitively delineate 
time frames for service contracts or notice provisions, for example, by 
requiring that contracts be no more than one year in length or 
requiring at least 60 days notice for termination. The Department did 
not accept this suggestion, because the Department believes that such 
specific judgments are best left to the responsible plan fiduciaries 
contracting for services to ascertain the most appropriate term for 
their contracts and an appropriate notice period for termination. An 
acceptable time frame in one set of circumstances would not necessarily 
work in another, and the Department does not believe a mandate in this 
context is appropriate.
    Other commenters raised questions as to whether certain fees and 
market value adjustments, generally associated with insurance or 
insurance-type services and investments, constitute ``penalties'' for 
purposes of this paragraph of the regulation. The regulation provides 
specifically that ``a minimal fee in a service contract which is 
charged to allow recoupment of reasonable start-up costs is not a 
penalty.'' The Department believes that questions as to whether, for 
any particular contract, the charges for contract termination are in 
fact ``penalties,'' rather than a service provider's recoupment of 
reasonable start-up costs, are inherently factual questions; 
accordingly, the Department did not amend the rule in response to these 
comments. After consideration of all of the comments on paragraph 
(c)(2) of the proposal, the Department has determined to adopt that 
paragraph, without change, in the interim final rule, except that this 
provision has been moved to a new paragraph (c)(3) of the interim final 
rule.

I. Effect on Other Statutory and Administrative Exemptions

    A number of commenters requested clarification of the effect of the 
Department's proposed regulation on statutory and administrative 
exemptions that already are in place. Comments on these issues were 
received from industry groups that represent banks, insurance companies 
and broker-dealers for securities and other financial instruments, as 
well as from financial institutions. According to the commenters, the 
affected financial firms provide services to all types of plans, 
including many large plans, and that prohibited transaction issues are 
raised not only with service arrangements but with specific financial 
transactions occurring in the ordinary course of their business. These 
transactions often require reliance upon one or more prohibited 
transaction exemptions, some of which are periodically amended to 
reflect current industry practices. Commenters generally did not 
address how the proposal would affect plan service arrangements that 
rely on existing statutory exemptions. However, a few commenters 
asserted that they would not be subject to the disclosure requirements 
under the regulation because they are relying on other statutory 
exemptions to avoid prohibited transactions under ERISA section 406.
    The Department is expressing no view at this time on the 
relationship of this interim final rule to existing statutory and 
administrative exemptions. The Department will, however, be reviewing 
these issues in the future on a case-by-case and exemption-by-exemption 
basis.

J. Justification for Interim Final Rulemaking; Request for Comments

    Following the Department's careful review of the extensive public 
record on this regulatory initiative, including over 100 comments on 
the proposal and many supplemental materials furnished in connection 
with the Department's public hearing on this initiative, the regulation 
published today in this Notice contains a number of provisions that 
differ significantly from the proposal. The Department believes that 
this regulation addresses the many technical concerns raised with 
respect to the proposal and clarifies with sufficient specificity the 
nature of the required disclosure obligations and the parties that must 
comply with such obligations. However, in view of the importance of 
this initiative, and the potentially significant effects that the final 
regulation and class exemption may have on plan fiduciaries and service 
providers, the Department decided to publish this regulation as an 
interim final regulation.
    The Department invites comments from interested persons on all 
aspects of the interim final regulation, in accordance with the 
instructions for submitting comments described above in the ADDRESSES 
section of this Notice.

K. Regulatory Impact Analysis

1. Background

    Compensation arrangements in the market for retirement plan 
services are complex. Payments from third parties and among service 
providers can create conflicts of interest between providers and their 
clients. For example, a 401(k) plan vendor may receive ``revenue 
sharing'' from a mutual fund that it makes available to clients. A 
consultant may receive a ``finder's fee'' from an investment adviser it 
recommends to clients. Such compensation arrangements and the conflicts 
they create are myriad and largely hidden from view. Their opacity 
obscures the true cost of plan services and allows harmful conflicts to 
persist in the market. Plans may pay more than they realize for 
products and services that unbeknownst to them are tainted by 
conflicts. Meanwhile service providers may reap excess profits.
    Under ERISA, fiduciaries have a duty to consider a service 
provider's compensation from all sources, but service providers are not 
obligated to disclose compensation from other sources. This interim 
final rule would require service providers to proactively disclose such 
arrangements to plan clients.

[[Page 41619]]

2. The Need for Regulatory Action

    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. The 
market for retirement plan services is characterized by acute 
information asymmetry. The information costs of plan service providers 
are far lower than their clients'. Vendors are specialists in the 
design of their products, services, and compensation arrangements, and 
are continually engaged in marketing to plan sponsors. Plan sponsors 
often lack this degree of specialization. Even very large, relatively 
sophisticated plan sponsors shop for services only periodically, 
generally once every three to five years. Smaller, less sophisticated 
plan sponsors face still higher information costs. As a result, vendors 
are able to maintain an information advantage over their plan sponsor 
clients.
    Vendors have a strong incentive to use their information advantage 
to distort market outcomes in their own favor. Current ERISA rules hold 
plan sponsors rather than vendors accountable for evaluating the cost 
and quality of plan services. And vendors can reap excess profit by 
concealing indirect compensation (and attendant conflicts of interest) 
from clients, thereby making their prices appear lower and their 
product quality higher. Consider one typical arrangement: A pension 
consultant receives a finder's fee from an investment adviser when he 
recommends that adviser to a plan sponsor. The plan sponsor does not 
know that the consultant is receiving the finder's fee--an expense the 
plan bears indirectly. The plan sponsor relies on the consultant to 
evaluate the quality of the adviser's services, but does not know that 
the consultant's recommendation and evaluation are subject to a 
conflict of interest.
    The Department has identified evidence that information gaps exist 
in certain circumstances and that these gaps may distort market 
results. For example:
     An Advisory Council established under ERISA to advise the 
Secretary of Labor found that ``the lack of transparency in this area 
has led to an inefficient market where it is extremely difficult for 
the plan sponsor to determine either the absolute level of fees, or the 
flow of fees, i.e., who is getting paid what.'' \18\
---------------------------------------------------------------------------

    \18\ See e.g., ERISA Advisory Council on Employee Welfare and 
Pension Benefit Plans, Report of The Working Group on Plan Fees and 
Reporting on Form 5500 (Nov. 10, 2004), at http://www.dol.gov/ebsa/
publications/AC_111804_report.html.
---------------------------------------------------------------------------

     The Securities and Exchange Commission found that pension 
consultants ``typically'' do not disclose to clients that they receive 
compensation from the same money managers that they may recommend, and 
recommended that pension consultants adopt ``policies and procedures to 
ensure that all disclosures required to fulfill fiduciary obligations 
are provided to prospective and existing advisory clients, particularly 
regarding material conflicts of interest [which should] ensure adequate 
disclosure regarding the consultant's compensation.'' \19\
---------------------------------------------------------------------------

    \19\ See e.g., U.S. Securities and Exchange Commission, Office 
of Compliance Inspections and Examinations, Staff Report Concerning 
Examinations of Select Pension Consultants (May 2005).
---------------------------------------------------------------------------

     According to GAO, ``[s]pecific fees that are `hidden' may 
mask the existence of a conflict of interest * * * If the plan sponsors 
do not know that a third party is receiving these fees, they cannot 
monitor them, evaluate the worthiness of the compensation in view of 
services rendered, and take action as needed.'' \20\ GAO found that 
defined benefit (DB) pension plans using consultants with SEC-
identified undisclosed conflicts earned returns 130 basis points lower 
than the others.\21\ GAO recommended that Congress ``consider amending 
ERISA to explicitly require that 401(k) service providers disclose to 
plan sponsors the compensation that providers receive from other 
service providers.'' \22\
---------------------------------------------------------------------------

    \20\ See e.g., GAO, Increased Reliance on 401(k) Plans Calls for 
Better Information on Fees, Private Pensions Report (March 6, 2007), 
at http://www.gao.gov/new.items/d07530t.pdf.
    \21\ See e.g., GAO, Conflicts of Interest Involving High Risk of 
Terminated Plans Pose Enforcement Challenges, Defined Benefit 
Pension Report (June 2007), at http://www.gao.gov/new.items/
d07703.pdf.
    \22\ See e.g., GAO, Changes Needed to Provide 401(k) Plan 
Participants and the Department of Labor Better Information on Fees, 
Private Pensions Report (Nov. 2006), at http://www.gao.gov/
new.items/d0721.pdf.
---------------------------------------------------------------------------

     Many DC retirement plan sponsors have ``difficulty'' 
obtaining a clear understanding of total administrative fees charged 
(13 percent), a clear explanation of the normal fund operating expenses 
of the funds in the plan (9 percent), a clear description of all the 
revenue sharing arrangements that the recordkeeper has with the mutual 
funds included in the plan (13 percent), and what it costs the provider 
to administer the plan (20 percent).\23\ Many are ``dissatisfied'' with 
the degree to which fees are transparent (18 percent) and the degree to 
which revenue sharing is disclosed (22 percent); 23 percent feel that 
their retirement plan provider(s)' current level of fee disclosure does 
not meet their needs as a plan sponsor.\24\ While most fiduciaries may 
think they have all the information they need, there could be 
information they are lacking and are not aware of. This disclosure will 
make sure fiduciaries are receiving the information the Department 
believes they need to fulfill their fiduciary duty under ERISA.
---------------------------------------------------------------------------

    \23\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008 
Edition.
    \24\ See e.g., Chatham Partners, Looking Beneath the Surface: 
Plan Sponsor Perspectives on Fee Disclosure (February 2008).
---------------------------------------------------------------------------

     One comment \25\ received by DOL on the proposed 408(b)(2) 
regulation notes ``the difficulty that plan sponsors encounter in the 
defined contribution plan marketplace in obtaining comparable 
information on the charges to be incurred for the same or similar 
services.'' Another commented that ``Sponsors * * * must expend 
significant time and effort comparing fees among providers because of 
varying formats and service models as well as unique fee structures 
associated with different investment vehicles. By moving toward a more 
uniform standard of fee disclosure, the Department's initiative * * * 
will reduce the time and effort spent by plan sponsors assembling and 
comparing price information, and * * * will help facilitate apples-to-
apples comparisons of different service models and investment 
products.'' A third commenter stated that ``plan expense and fee 
information is often scattered, difficult to access, or nonexistent * * 
* Plan fiduciaries should know whether their plan's service providers 
have potential conflicts of interest.''
---------------------------------------------------------------------------

    \25\ Public comments on the proposed rule may be found at: 
http://www.dol.gov/ebsa/regs/cmt-408(b)(2)-combined.html.
---------------------------------------------------------------------------

    Under current rules, a large, sophisticated plan sponsor may be 
able to uncover adequate information to optimize his purchase, if the 
value he expects to reap is sufficient to offset his information cost. 
The sophisticated plan sponsor's cost to uncover the information is 
likely to be far higher than would be the vendor's cost to disclose it. 
A smaller or less sophisticated plan sponsor cannot economically 
uncover such information--the value he stands to gain will not offset 
his information cost. A regulatory action to mandate proactive 
disclosure will lower information costs for plan sponsors who currently 
actively seek this information. In addition, to the extent the 
information provided is

[[Page 41620]]

readily usable the disclosure will help facilitate more informed, 
optimal purchases.

3. Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and, therefore, subject to the 
requirements of the Executive Order and review by the Office of 
Management and Budget (OMB). Under section 3(f) of the Executive Order, 
a ``significant regulatory action'' is an action that is likely to 
result in a rule (1) Having an effect on the economy of $100 million or 
more in any one year, or adversely and materially affecting a sector of 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. The 
Department has determined that this action is ``economically 
significant'' under section 3(f)(1) because it is likely to have an 
effect on the economy of $100 million or more in any one year.

4. Regulatory Alternatives

    Executive Order 12866 requires an economically significant 
regulation to include an assessment of the costs and benefits of 
potentially effective and reasonably feasible alternatives to a planned 
regulation, and an explanation of why the planned regulatory action is 
preferable to the identified potential alternatives. The Department 
considered but rejected a number of alternative approaches to correct 
the market failure and redress abuses.
    Covering Welfare Benefit Plans: The Department considered applying 
the interim final rule to welfare benefit plans, because it believes 
fiduciaries and service providers to such plans would benefit from 
regulatory guidance in this area. However, the Department is persuaded, 
based on the public comment and hearing testimony, 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, and more specifically tailored, 
disclosure requirements under ERISA section 408(b)(2) for welfare 
benefit plans. Accordingly, the interim final rule includes a new 
paragraph (c)(2), which has been reserved for a comprehensive 
disclosure framework applicable to ``reasonable'' contracts or 
arrangements for welfare plans to be developed by the Department.
    Covering IRAs: The IRA and employment-based retirement plan markets 
are very different from one another. In the IRA market, decisions are 
made by consumers rather than plan sponsors acting in a fiduciary 
capacity, and the disclosures appropriate for the latter may not be 
appropriate for the former.
    More Extensive Disclosure: Applying disclosure requirements to 
arrangements where compensation is less than $1,000, requiring a 
comprehensive line-item breakdown of the price of bundled services, or 
requiring disclosures to be part of formal written contracts might not 
produce benefits that would justify the associated cost.
    Directing Mandate at Fiduciaries: A mandate directed solely at 
fiduciaries would diverge little from current law. Such a mandate would 
merely create a brighter line of obligation for the fiduciary without 
empowering him to satisfy that obligation; perpetuate the information 
asymmetry, therefore not correcting the market failure; and would not 
equip the Department to redress service provider abuses.
    Requiring Disclosure only on Demand: Requiring disclosure only on 
demand rather than proactively might correct the current market failure 
and equip the Department to redress abuse. However, disclosure-on-
demand would have serious unintended adverse consequences, particularly 
for plan fiduciaries:
     Once fiduciaries are legally empowered to obtain full 
disclosure of indirect compensation arrangements, failure to do so 
would almost certainly constitute a fiduciary breach. This sets a trap 
for the unwary fiduciary. The unsophisticated fiduciary is better 
served by a proactive disclosure that serves as both a notice of his 
duty and a means to discharge his obligation.
     The cost of disclosure-on-demand could turn out to be 
higher than the cost of proactive disclosure. For example, it would now 
include the cost to plan sponsors of making the requests--as well as 
their cost of determining what to ask. Also the number of disclosures 
might be higher under a disclosure-on-demand system than under a 
proactive disclosure system. All fiduciaries would have a duty to 
request disclosure, so perhaps nearly all would, and many fiduciaries 
might ask in increments for information that would have been 
consolidated into a single proactive disclosure under a proactive 
disclosure system, therefore multiplying the total number of 
disclosures. The Department has not developed a cost estimate for 
disclosure-on-demand, but it is likely that such an estimate would be 
as high as, or higher than, the Department's estimate for proactive 
disclosure.
     Disclosure-on-demand would also fail to educate 
unsophisticated fiduciaries who might not request full disclosure. 
Proactive disclosure might raise awareness for some unsophisticated 
fiduciaries.
    Requiring a Summary Disclosure: The Department is persuaded that 
plan fiduciaries may benefit from increased uniformity in the way that 
information is presented to them. The Department considered adding a 
requirement that covered service providers furnish a ``summary'' 
disclosure statement, for example limited to one or two pages, that 
would include key information intended to provide an overview for the 
responsible plan fiduciary of the information required to be disclosed. 
The summary also would be required to include a roadmap for the plan 
fiduciary describing where to find the more detailed elements of the 
disclosures required by the regulation. However, the Department did not 
implement this requirement as part of the interim final rule, because 
it did not want to unnecessarily increase the cost and burden for 
service providers to furnish required information, especially to the 
extent such cost may be passed along to plan participants and 
beneficiaries, unless it is clear that the benefit to plan fiduciaries 
outweighs such cost and burden.
    As stated earlier in this preamble, the Department is considering 
amending the rule in the future to include a summary disclosure 
requirement. To assist the Department in its decision regarding whether 
to include such a requirement in the final rule, interested persons are 
encouraged to submit comments regarding the potential costs and time 
burden necessary for covered service providers, and any other parties, 
to comply with such a requirement, the anticipated benefits to 
responsible plan fiduciaries of including a summary disclosure 
requirement (such as time and cost savings), and how to most 
effectively design a summary disclosure statement to ensure both its 
feasibility and usefulness in helping the Department achieve its 
objectives. If the Department is convinced that the benefits would 
outweigh the costs, the final regulation may be revised.

[[Page 41621]]

    Chosen Alternative: The Department considered, and ultimately has 
adopted, a rule requiring that, in order for a contract or arrangement 
to be reasonable, certain categories of service providers must disclose 
specified information to responsible plan fiduciaries. The rule 
generally covers typical plan service providers including fiduciary 
service providers and providers furnishing accounting, actuarial, 
appraisal, auditing, banking, consulting, custodial, insurance, 
investment advisory, legal, recordkeeping, securities or other 
investment brokerage, third party administration, or valuation 
services. The Department believes this framework will yield the 
information that plan fiduciaries need in order to assess the 
reasonableness of compensation paid for services from these service 
providers and their potential conflicts of interest. Absent the 
regulation, such information may be difficult to obtain. The Department 
believes that the interim final rule provides the largest benefit among 
the alternatives, while also limiting costs.

5. Affected Entities and Other Assumptions

    According to 2006 Form 5500 filings, there exist nearly 49,000 
defined benefit pension plans with over 42 million participants and 
almost 646,000 defined contribution pension plans with approximately 80 
million participants. Out of these pension plans, about 37,000 are 
small defined benefit plans and 576,000 small individual account 
plans.\26\ Most of the pension plans, approximately 462,000, are 
participant directed individual account plans.
---------------------------------------------------------------------------

    \26\ Small pension plans are plans with generally less than 100 
participants, as specified in the Form 5500 instructions.
---------------------------------------------------------------------------

    The interim final regulation applies to contracts or arrangements 
between plan fiduciaries and service providers as fully discussed in 
Section B., 1., above.\27\ 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 2006 submissions of the 
Form 5500 and its Schedule C.
---------------------------------------------------------------------------

    \27\ Plan sponsors and/or plan participants may also be 
indirectly affected.
---------------------------------------------------------------------------

    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 covered 
services.\28\ In total, there were nearly 9,900 unique covered service 
providers reported in the Form 5500 Schedule C data, almost 1,000 of 
which reported receiving $1 million or more in compensation.
---------------------------------------------------------------------------

    \28\ 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 provide covered services.
---------------------------------------------------------------------------

    The Department acknowledges that this estimate may be imprecise. On 
the one hand, some of these service providers may not be covered 
service providers if they do not meet all the above specified 
requirements, but with the limited Schedule C data it is not possible 
to further refine this group. On the other hand, small plans generally 
do not have to fill out Schedule C which would underestimate the number 
of covered service providers 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 and therefore the 
estimate based on the Schedule C filings by large plans is 
acceptable.\29\
---------------------------------------------------------------------------

    \29\ 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 119,000 arrangements with covered service providers, 
while defined contribution plans have over 780,000 arrangements.
    A substantial part of the cost of the final regulation depends on 
the means of disclosures between covered service providers and plan 
fiduciaries. Paper disclosures involve much higher costs than 
electronic disclosures. Thus, as at least one trade group commented, 
the industry is interested in taking advantage of electronic 
disclosure, if at all possible.\30\ This conclusion seems plausible as 
most covered service providers are sophisticated entities and by the 
nature of their services are electronically savvy, as are most plan 
fiduciaries. Unaware of any contrary comments, the Department assumes 
that about 50 percent of disclosures between service providers and plan 
fiduciaries are delivered only in electronic format.
---------------------------------------------------------------------------

    \30\ See http://www.dol.gov/ebsa/regs/cmt-408(b)(2)-
combined.html.
---------------------------------------------------------------------------

6. Benefits

    Mandatory proactive disclosure will reduce 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. In accordance 
with OMB Circular A-4,\31\ Table 2 below depicts an accounting 
statement showing the Department's assessment of the benefits and costs 
associated with this regulatory action.
---------------------------------------------------------------------------

    \31\ Available at http://www.whitehouse.gov/omb/circulars/a004/
a-4.pdf.

                                            Table 2--Accounting Table
----------------------------------------------------------------------------------------------------------------
                                                      Primary                                         Period
                    Category                         estimate       Year dollar    Discount rate      covered
----------------------------------------------------------------------------------------------------------------
Benefits
                                                 ---------------------------------------------------------------
Annualized Monetized ($millions/year)...........  Not Quantified.
----------------------------------------------------------------------------------------------------------------
Qualitative: The final regulation will increase the amount of information that service providers disclose to
 plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
 interest, service value improvements through improved decisions and value, better enforcement tools to redress
 abuse, and harmonization with other EBSA rules and programs.
----------------------------------------------------------------------------------------------------------------
Costs
Annualized Monetized ($millions/year)...........            58.7            2010              7%       2011-2020

[[Page 41622]]


                                                            54.3            2010              3%       2011-2020
----------------------------------------------------------------------------------------------------------------
Qualitative: 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 DOL if the service provider fails to comply with the request.
----------------------------------------------------------------------------------------------------------------
Transfers.......................................  Not Applicable.
----------------------------------------------------------------------------------------------------------------

a. Information Cost Savings
    The record establishing the need for this regulatory action (see 
above) documents that plan sponsors' information cost is higher than 
vendors', and that many sponsors now expend substantial resources to 
acquire information. Mandatory proactive disclosure will make the 
information fiduciaries need available to them at lower acquisition 
cost.
    For sponsors in these circumstances, mandatory, proactive, 
comprehensive disclosure will reduce the difficulty in obtaining the 
needed information. These sponsors will have the same information as 
before but will acquire it less expensively. For example, if 13 percent 
\32\ of estimated 695,000 pension plans had a plan fiduciary that 
experienced a one hour drop in the time needed to obtain the needed 
information at an hourly labor rate \33\ of $107 the value of time 
saved annually could be $9.7 million.
---------------------------------------------------------------------------

    \32\ As discussed above, many surveyed DC retirement plan 
sponsors (13%) have ``difficulty'' obtaining key information. This 
percent is used as a proxy for the percent of plan fiduciaries that 
would experience time savings from mandatory disclosure. We do not 
have concrete data regarding whether the plan sponsors obtained the 
information or the time/resources expended, because the survey did 
not collect this information. However, ERISA requires fiduciaries to 
obtain the information.
    \33\ This estimate uses the average labor rate of a financial 
manager as a proxy for a plan fiduciary's labor rate.
---------------------------------------------------------------------------

b. Acquisition of Critical Information
    As discussed above, many surveyed DC retirement plan sponsors are 
``dissatisfied'' with the level of transparency--23 percent flatly say 
the current level of fee disclosure does not meet their needs. These 
sponsors will now acquire critical information that was previously 
inaccessible or too costly to obtain. Currently, some plan sponsors may 
simply fail to seek critical information. Mandatory, proactive 
disclosure will help these sponsors understand and satisfy their 
fiduciary obligations. For those who otherwise would not know what 
questions to ask, or what information to consider, the disclosure 
provides the map. This additional information will help facilitate 
better decisions as discussed in the next two sections.
c. Discouraging Harmful Conflicts
    Indirect compensation arrangements can be either harmful or 
beneficial. Transparency will help drive harmful conflicts from the 
marketplace while sustaining arrangements that are beneficial for 
plans.
    Harmful arrangements generally are those that are tainted by 
unmitigated conflicts. A plan's service providers may strike deals that 
profit one another at the plan's expense. Such arrangements may thrive 
in the shadows, but tend to wither in sunlight. These arrangements 
exist today in the market for plan services precisely because 
information asymmetries obscure them. Mandatory proactive disclosure 
will reduce the asymmetry, creating a sunnier climate that is less 
friendly to harmful arrangements.
    Beneficial arrangements generally are those in which a plan's 
service providers, in competition to provide the best value to the 
plan, enter into transactions among themselves that leverage their 
respective comparative advantages to deliver higher quality or lower 
cost for the plan. Such arrangements are now evident in the segment of 
the plan services that works best--namely, the very large plan segment. 
There are numerous examples where large plan sponsors, after thoroughly 
evaluating the quality and compensation structures of competing 
vendors, choose service arrangements that involve indirect 
compensation. Transparency is a bedrock of such arrangements. For 
example, some arrangements establish formulas whereby the fees the 
sponsor pays to a service provider will be reduced as a function of the 
indirect compensation the provider receives. Mandatory, proactive 
disclosure will be friendly to such arrangements because sunlight will 
reveal their superiority to harmful arrangements.
d. Service Value Improvements
    Fiduciaries armed with more complete information can make informed 
purchases and thereby derive better value for plans. More complete 
information is a benefit of mandatory disclosure that will depend 
sequentially on three variables: The extent of gaps in critical 
information, the extent to which closing these gaps will improve 
fiduciary decisions, and the degree to which improved decisions will 
improve value.
    Information Gaps: Plan sponsors need comprehensive information on 
service provider compensation in order to discharge their fiduciary 
duty and secure good value for their plans and participants. However, 
only 57 percent of sponsors report that their service provider 
discloses revenue sharing agreements and investment offsets with both 
alliances and their own proprietary funds.\34\ About one-quarter of 
sponsors are not familiar with revenue sharing arrangements between 
their investment managers and retirement plan providers (26 percent) 
and compensation arrangements between retirement plan providers and the 
intermediary involved in the plan (25 percent) (familiarity was lower 
among sponsors of smaller plans).\35\ These findings suggest that gaps 
in critical information are large and widespread. Some sponsors who 
lack critical information are aware of the problem and poised to use 
the information effectively once it is more accessible. Others are less 
aware, but proactive disclosure will raise awareness for some of these 
sponsors.
---------------------------------------------------------------------------

    \34\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008 
Edition.
    \35\ See e.g., Chatham Partners, Looking Beneath the Surface: 
Plan Sponsor Perspectives on Fee Disclosure (2008).
---------------------------------------------------------------------------

    Improved Decisions: To secure better value, fiduciaries must factor 
newly available critical information appropriately into their 
purchasing decisions. Eighty-four percent of sponsors say they will use 
fee related information supplied by their retirement plan provider(s) 
to fulfill their fiduciary responsibilities. Sixty-four percent say

[[Page 41623]]

they will use it to examine their existing fee structure. Commonly 
cited top concerns regarding fee disclosures include that a lack of 
disclosure causes higher plan expenses (45 percent) and may lead to 
legal action by participants (46 percent).\36\ Eighty-two percent of 
sponsors are very (55 percent) or somewhat (27 percent) likely to 
review DC fund expenses and revenue sharing in 2008.\37\ These findings 
suggest that many fiduciaries are prepared to factor newly available 
information on service provider compensation into their decisions.
---------------------------------------------------------------------------

    \36\ See id.
    \37\ See e.g., Hewitt, Hot Topics in Retirement, 2008.
---------------------------------------------------------------------------

    Improved Value: The value of decisions fiduciaries make can improve 
only if the current decisions made produce value that is less than 
optimal. Research literature provides evidence that the current value 
of decisions fiduciaries make is often less than optimal, and that the 
suboptimal value is associated with undisclosed compensation 
arrangements that may pose conflicts. As noted above, a recent GAO 
study links undisclosed conflicts with 130 basis points of 
underperformance in DB plans. Seventeen percent of DC plan sponsors 
negotiate and receive fee credits for revenue sharing or investment 
offsets that exceed their service providers' costs.\38\ Many others may 
use this information to negotiate lower direct fee payments. A variety 
of academic studies further support the hypothesis that conflicts often 
erode the value provided to DC plans by mutual funds and their 
distribution channels.\39\
---------------------------------------------------------------------------

    \38\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008 
Edition.
    \39\ Examples include: Daniel B. Bergstresser et al., Assessing 
the Costs and Benefits of Brokers in the Mutual Fund Industry, 
Social Science Research Network Abstract 616981 (Sept. 2007). Mercer 
Bullard et al., Investor Timing and Fund Distribution Channels, 
Social Science Research Network Abstract 1070545 (Dec. 2007). Xinge 
Zhao, The Role of Brokers and Financial Advisors Behind Investment 
Into Load Funds, China Europe International Business School Working 
Paper (Dec. 2005), at http://www.ceibs.edu/faculty/zxinge/
brokerrole-zhao.pdf.
---------------------------------------------------------------------------

    Overall, the evidence suggests that the value of fiduciary 
decision-making will improve once fiduciaries are apprised of and 
consider service providers' indirect compensation sources.
    While the improvement in the value of fiduciary decision-making is 
difficult to quantify, the Department believes that it has the 
potential to be very large. If just 16 percent of all plan assets 
realize a fall of just 0.6 basis point (0.006 percent of plan assets), 
the savings would exceed the costs of the rule, which is estimated at 
$408 million over 10 years.\40\ As noted above, substantially more than 
10 percent of fiduciaries report difficulty or dissatisfaction with 
current fee disclosure. At the same time, one basis point is a very 
small fraction of a typical plan's expenses--for example, according to 
the Investment Company Institute, more than one-half of 401(k) stock 
mutual fund assets are in funds with expense ratios between 50 and 100 
basis points, nearly one-fourth are in funds with higher expenses.\41\ 
In addition, GAO's study linking undisclosed conflicts with 130 basis 
points of underperformance suggests that value can be improved via 
service quality as well as price.\42\ Viewed in this context, the 
Department is confident that the potential for improved value of 
fiduciary decision-making from mandatory proactive disclosure is 
substantial.
---------------------------------------------------------------------------

    \40\ For a more detailed explanation see the discussion in 
Section 9 ``Uncertainty''.
    \41\ Investment Company Institute. Research Fundamentals, Vol. 
16, No. 4, September 2007.
    \42\ GAO report, ``Private Pensions: Conflicts of Interest Can 
Affect Defined Benefit and Defined Contribution Plans'', GAO-090-
503T, March 24, 2009.
---------------------------------------------------------------------------

e. Preventing and Redressing Abuse
    As previously stated, the Department believes that the application 
of an excise tax will provide incentives for all parties to service 
contracts or arrangements to cooperate in exchanging the disclosures 
required by the final regulation. However, if there continues to be 
abusive conduct by rogue service providers such as misrepresentation of 
compensation arrangements and attendant conflicts, this rule mandating 
disclosure will equip the Department to better redress such abuse. 
Enhanced enforcement will deter abuse, thereby directly benefiting 
potential victims, and will promote confidence and thereby encourage 
sponsors to offer plans.
    The regulation requiring proactive disclosure encourages compliance 
in three related ways:
     If the service provider fails to provide the specific 
information required by the regulation, it is subject to the imposition 
of an excise tax by the Internal Revenue Service. Thus, there is a 
direct sanction against the service provider for giving false, 
misleading, or insufficient statements to plan fiduciaries.
     The regulation specifies the disclosure that fiduciaries 
must obtain to avoid a prohibited transaction, and ensures that they 
will receive the information because of the consequences to the service 
provider of non-disclosure (imposition of the excise tax).
     Because the regulation creates a roadmap for disclosure, 
it will be much easier for the courts, the Department, and regulated 
parties to determine whether they have complied with the law. In the 
event of non-compliance, there are clear enforcement consequences for 
both the plan fiduciary and the service provider.

7. Harmonization With Other Rules and Programs

    The Department pursues a comprehensive program of enforcement and 
compliance assistance (including outreach and education) to ensure that 
fiduciaries understand and properly discharge their duties under ERISA, 
at reasonable cost.
     The Department educates plan fiduciaries about their 
obligations under ERISA by conducting numerous educational and outreach 
activities, such as a nationwide series of 33 seminars presented to 
date as part of the Department's campaign entitled ``Getting It Right--
Know Your Fiduciary Responsibilities,'' which includes a discussion of 
the importance of selecting plan service providers and the role of fee 
and compensation considerations.
     The Department also makes a variety of materials available 
on its Web site to educate plan fiduciaries about service provider fees 
and relationships, including its 401(k) Plan Fee Disclosure worksheet, 
a publication entitled ``Understanding Retirement Plan Fees and 
Expenses,'' and, in coordination with the Securities and Exchange 
Commission, a series of tips concerning fees and conflicts of interest 
for plan fiduciaries to use when selecting pension consultants.
    ERISA's standards of fiduciary conduct already obligate fiduciaries 
to obtain and consider adequate information. They are liable for any 
plan losses attributable to their failure to do so. This rule 
harmonizes the prohibited transaction rules with the fiduciary rules, 
so fiduciaries, in addition to being obligated to obtain and consider 
such information, are also equipped to do so at minimum cost.

8. Costs

    The Department estimated costs for the rule over the ten-year time 
frame for purposes of this analysis and used information from the 
quantitative characterization of the service provider market presented 
above as a basis for these cost estimates. This characterization did 
not account for all service providers, but it does provide

[[Page 41624]]

information on the segments of the service provider industry that are 
likely to be most affected by the rule (i.e., those who service pension 
plans). In addition to the costs to service providers, the Department 
also considered, and discusses below, the potential costs to plans.
a. Costs for Service Providers
    Compliance Review and Implementation: Most of the cost of the rule 
will be imposed on plan service providers. Covered service providers 
will need to review the rule, evaluate whether their current disclosure 
practices comply with its requirements, and, if not, determine how 
their disclosure practices must be changed to be compliant. The 
Department projected this as a cost incurred in 2011, the year in which 
the rule takes effect.
    Although all affected service providers are assumed to incur these 
initial costs, it is likely that service providers with complex fee 
arrangements and conflicts of interest would require more time to 
comply. The Department assumes that the number of service providers 
with more complex arrangements can be approximated by the number of 
unique service providers who are reported on the Schedule C as having 
received $1 million or more in compensation (nearly 1,000 service 
providers).
    The Department assumes that covered service providers with complex 
arrangements will require on average 24 hours of legal professional 
time at a cost of approximately $119 per hour and on average 80 hours 
of financial professional time at a cost of almost $63 per hour to 
comply with the rule. Non-complex service providers would require only 
three hours of legal professional time and 13 hours of financial 
professional time. Using the number of unique service providers 
identified in the quantitative analysis presented above (nearly 10,000 
service providers), this cost is estimated to be about $17.9 million.
    The Department also has estimated the initial compliance review and 
implementation costs for service providers newly entering the market 
(``new service providers'') to provide services to plans (either for 
the first time or by re-entry) beginning in 2012 and each year 
thereafter. Based on data from the 2005 and 2006 Form 5500, the 
Department assumes that about eight percent of all service providers 
will be new in each year subsequent to 2011, and that these service 
providers will incur the same compliance review and implementation 
costs as existing service providers. Based on the foregoing, the 
Department estimates that new service providers will incur costs of 
approximately $1.5 million in 2012 and thereafter. Estimates are 
reported in Table 3.

                                                      Table 3--Compliance Review and Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Hourly labor
                                                                                           Hourly labor                      cost for
                                                             Number of         Legal      cost for legal     Financial       financial        Yearly
              Year                                           entities      professional    professional    professional    professional    undiscounted
                                                                          hours required     (in 2010     hours required     (in 2010          costs
                                                                                             dollars)                        dollars)
                                                                     (A)             (B)             (C)             (D)             (E)     A*(B*C+D*E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2011............................  Plans.................         695,000  ..............            $119               1             $63     $43,625,000
                                  Non-Complex Service              9,000               3             119              13              63      10,403,000
                                   Providers.
                                  Complex Service                  1,000              24             119              80              63       7,511,000
                                   Providers.
2012............................  Plans.................          94,000  ..............             119               1              63       5,911,000
                                  Non-Complex Service                700               3             119              13              63         867,000
                                   Providers.
                                  Complex Service                    100              24             119              80              63         626,000
                                   Providers.
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Total for 2011.....................................................................................................................      61,539,000
    Total for 2012......................................................................................................................       7,404,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

    Initial Disclosure: As discussed above, covered service providers 
also must develop or update their current disclosure materials to 
comply with the regulatory requirements. Paragraph (c)(1)(iv)(A) 
through (E) of the rule requires service providers to provide an 
initial disclosure to a responsible plan fiduciary. Generally, under 
paragraph (c)(1)(v)(A) of the rule, this disclosure must be made 
reasonably in advance of when a contract is entered into, extended, or 
renewed. The Department assumes that service providers will create an 
initial disclosure that can be used for all plans and customize this 
document by adding individualized information for each plan. This 
activity includes developing formulae and algorithms to present or 
estimate direct and indirect compensation that will be applied in a pro 
forma projection for each plan with which the provider will contract. 
It also includes making a reasonable and good faith estimate of the 
cost to provide recordkeeping services to a covered plan if the covered 
service provider reasonably expects to provide recordkeeping services 
without explicit compensation or when compensation for recordkeeping is 
subject to an offset or rebate for such services as required by 
paragraph (c)(1)(iv)(D)(2). The Department assumes that the majority of 
this cost would be incurred by service providers in 2011 and that one 
hour of a legal professional's time and 45 minutes of a financial 
professional's time will be required to prepare the general disclosure 
for each plan. Based on the foregoing, the Department estimates that 
the cost to develop the general disclosure in 2011 will be almost $75 
million.
    In 2012 and subsequent years, the regulation will cause additional 
disclosures to be made between covered

[[Page 41625]]

plans and service providers for any new contracts and arrangements. The 
Department does not have information on the number of new arrangements 
in a year; therefore, the Department used the percentage of plans that 
are new plans, about 14 percent, as a proxy for the percentage of new 
arrangements in a year. This results in almost 122,000 new arrangements 
every year. The Department assumes that half of the responsible plan 
fiduciaries in these arrangements would receive the required 
information even without the regulation enacted. The Department 
estimates that preparing the disclosures for new arrangements will 
require one hour of a legal professional's time and 45 minutes of a 
financial profession's time. Based on the foregoing, the cost of 
preparing these disclosures in year 2012 and thereafter will be almost 
$23 million.
    Paragraph (c)(1)(vi) requires service providers to provide any 
other information relating to 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 
ERISA and the regulations, forms, and schedules issued thereunder upon 
the request of responsible plan fiduciaries or plan administrators of 
covered plans. The Department is not aware of a basis for determining 
the number of requests that responsible plan fiduciaries or plan 
administrators will make; therefore, it assumes that approximately ten 
percent (almost 45,000) of responsible plan fiduciaries will request 
additional information annually. The Department further assumes that 
service providers will already have this information available, as it 
is required to comply with other legal requirements. Therefore, the 
Department estimates that it will take clerical staff two minutes per 
request at an hourly labor cost of approximately $26 to prepare the 
information. Based on the foregoing, the Department estimates that the 
annual cost to disclose information upon request will total almost 
$39,000 as shown in Table 3.
    Paragraph (c)(1)(v)(B) generally requires service providers to 
disclose any changes to the general information as soon as practicable, 
but no later than 60 days from the date the covered service provider is 
informed of such change. The Department assumes that one-half hour of 
legal professional time and one-third hour of a financial professional 
time will be required to update the disclosures. The Department also 
assumes that changes in plan disclosures will occur at least once every 
three years, because plans normally conduct requests for proposal 
(RFPs) from service providers at least once every three to five years. 
If it is assumed that an equal number of plans conduct an RFP in any 
given year, then approximately 35 percent of arrangements will require 
an updated disclosure every year. In addition, half of these plans 
would already have updated the information without the regulation for a 
total of approximately 157,000 updates to the general information. 
Based on the foregoing, the Department estimates that the cost of 
updating the disclosure of general information will total about $13 
million a year as shown in Table 4.
    In total, the cost of the disclosure of the general information 
will be almost $75 million in 2011 and almost $23 million in each 
subsequent year as shown in Table 4.

                                   Table 4--Disclosure of General Information
----------------------------------------------------------------------------------------------------------------
                                                                   Professional
              Year                   Number of     Professional    hourly labor    Professional    Total yearly
                                   arrangements        hours           cost            hours           cost
                                             (A)             (B)             (C)             (D)           A*B*C
----------------------------------------------------------------------------------------------------------------
2011:
    Initial Disclosure: Legal...         450,000               1            $119         450,000     $53,539,000
    Initial Disclosure:                  450,000            0.75              63         337,000      21,189,000
     Financial..................
2012:
    Initial Disclosure: Legal...          61,000            1.00             119          61,000       7,254,000
    Initial Disclosure:                   61,000            0.75              63          46,000       2,871,000
     Financial..................
    Disclosure of Changes: Legal         157,000            0.50             119          79,000       9,369,000
    Disclosure of Changes:               157,000            0.33              63          52,000       3,296,000
     Financial..................
All Years:
    Information Upon Request....          45,000            0.03              26           1,500          39,000
----------------------------------------------------------------------------------------------------------------
    Total for 2011..............                                                                      74,767,000
    Total for 2012..............                                                                     22,830,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

    Investment Disclosure: As discussed in section B.,5.,g., above, 
paragraphs (c)(1)(iv)(F) and (G) generally require fiduciaries of 
certain investment vehicles holding plan assets (described in paragraph 
(c)(1)(iii)(A)(2)) and providers of recordkeeping and brokerage 
services to a participant-directed individual account plan (without 
regard to whether they expect to receive indirect compensation), if 
they make available one or more designated investment alternatives for 
the covered plan (described in paragraph (c)(1)(iii)(B) (``platform 
providers'')), to disclose investment-related fee and expense 
information. This information generally must be disclosed to the 
responsible plan fiduciary reasonably in advance of the date the 
contract or arrangement is entered into, extended or renewed.\43\ 
Paragraph (c)(1)(iv)(G)(2) allows covered platform providers to satisfy 
this disclosure requirement by providing current disclosure materials 
of the issuer of the designated investment alternative to the 
responsible plan fiduciary that include the required information, 
provided that the issuer is not an affiliate of the platform provider, 
the disclosure materials are regulated by a State or Federal agency, 
and the covered service provider does not know that the materials are 
incomplete or inaccurate.
---------------------------------------------------------------------------

    \43\ Generally, service providers are required to disclose any 
change to investment-related 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.
---------------------------------------------------------------------------

    The cost of disclosing investment-related compensation information 
will be attributable primarily to time spent gathering the required 
information.

[[Page 41626]]

However, much of this cost will be reduced because, as discussed above, 
the rule allows platform providers to satisfy this requirement by 
passing through information to the responsible plan fiduciary. Based on 
the foregoing, the Department assumes that preparation of investment-
related compensation and fee information will require one-half hour of 
financial professional time for each of the individual account plans. 
As mentioned above, it is assumed that 50 percent of these disclosures 
already occur; therefore, the costs for approximately 231,000 
disclosures are calculated, resulting in costs of approximately $7.3 
million (see Table 5).
    In addition, service providers must disclose changes to investment 
information. The Department assumes that service providers will have to 
disclose investment information changes to each responsible plan 
fiduciary at least once per year due to the regulation, resulting in 
about 200,000 disclosures. This notification is expected to require 
one-half hour of financial professional time to prepare. Further, it is 
assumed that 14 percent (over 31,000) of arrangements will be new in a 
year and require the initial investment disclosure. Based on the 
foregoing, the Department estimates that reporting the required 
investment related information in years 2012 and later will cost 
approximately $7.3 million annually as shown in Table 5.

                          Table 5--Preparation of Disclosure of Investment Information
----------------------------------------------------------------------------------------------------------------
                                                                   Professional        Total
                                     Number of     Professional    hourly labor    professional    Total yearly
                                       plans           hours           cost            hours           cost
                                             (A)             (B)             (C)             (D)           A*B*C
----------------------------------------------------------------------------------------------------------------
2011 Initial Disclosure.........         231,000             0.5             $63         116,000      $7,255,000
2012 Initial Disclosure.........          31,000             0.5              63         116,000         983,000
Disclosure of Changes...........         200,000             0.5              63         100,000       6,272,000
    Total for 2011..............  ..............  ..............  ..............  ..............       7,255,000
    Total for 2012..............  ..............  ..............  ..............  ..............       7,255,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

b. Costs to Plans
    ERISA requires plan fiduciaries, when selecting or monitoring 
service providers, 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. Fundamental to a fiduciary's ability to discharge these 
obligations is the availability of information sufficient to enable the 
plan fiduciary to make informed decisions about the services, the 
costs, and the service provider. The rule will assist plan fiduciaries 
in this area by requiring service providers to make specified complete 
and accurate disclosures in order to benefit from the section 408(b)(2) 
statutory exemption.
    The Department estimates the responsible plan fiduciaries will need 
one hour to ensure compliance with the rule; therefore, the cost of the 
review is expected to be approximately $43.6 million in 2011 as 
reported in Table 3.
    Starting in 2012 and each year thereafter, responsible plan 
fiduciaries of new plans will have to familiarize themselves with the 
rule to ensure their compliance . Based on data from the 2005 and 2006 
Form 5500, the Department estimates that 14 percent of plans will be 
new each year. The Department assumes that responsible plan fiduciaries 
of new plans will have the same costs as fiduciaries of existing plans. 
Therefore, the cost of the review for fiduciaries of new plans is 
estimated to be $5.9 million annually for years 2012 and thereafter as 
shown in Table 2.
c. Cost of Exemption for Responsible Plan Fiduciary
    The final class exemption contained in paragraph of (c)(1)(ix) of 
the rule provides relief from the restrictions of ERISA section 
406(a)(1)(C) and (D) for plan fiduciaries that enter into a contract 
with service providers upon a mistaken belief that they have received 
all of the disclosures required by the interim final rule. Upon 
discovering that a covered service provider failed to disclose all of 
the required information, the responsible plan fiduciary must take 
reasonable steps to obtain such information, including requesting in 
writing that the covered service provider furnish the information in 
order to rely on the exemption and notify the Department if the service 
provider fails to comply with the written request within 90 days.
    While the Department has no basis for estimating the percentage of 
arrangements where a responsible plan fiduciary will not receive all of 
the required disclosures from a covered service provider, the 
Department assumes that 10 percent of arrangements (approximately 
69,000) may experience a failure that will require the responsible plan 
fiduciary to send a notice to the service provider in 2011. In 2012 and 
thereafter, the number of requests for missing information is expected 
to decrease to 5 percent of arrangements (about 35,000). The Department 
estimates that one-half hour of a financial professional's time will be 
required to prepare the request for the undisclosed information. Table 
6 reports the cost of preparing the disclosure to be almost $2.2 
million in 2011 and approximately $1.1 million annually in the 
subsequent years.

                                      Table 6--Notice to Service Providers
----------------------------------------------------------------------------------------------------------------
                                   Requests for
              Year                  additional       Hours per     Hourly labor     Total hours     Total cost
                                    information       request          cost
                                             (A)             (B)             (C)             (D)           A*B*C
----------------------------------------------------------------------------------------------------------------
2011............................          69,000             0.5             $63          35,000      $2,181,000
2012............................          35,000             0.5              63          17,000       1,091,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.


[[Page 41627]]

    The Department further assumes that service providers may not 
respond to 10 percent of the requests for undisclosed information 
within 90 days, which will result in the responsible plan fiduciary 
preparing and sending a notice to the Department. The Department 
estimates that one-half hour of a financial professional's time will be 
required to prepare the notice. As shown in Table 7 below, almost 7,000 
notices will be sent in 2011 at a cost of approximately $218,000, and 
in the subsequent years, over 3,400 notices will be sent annually at a 
cost of approximately $109,000.

                                             Table 7--Notice to DOL
----------------------------------------------------------------------------------------------------------------
                                  Number of                        Hourly labor
            Year               notices to DOL   Hours per notice       cost         Total hours     Total cost
                                           (A)               (B)             (C)             (D)           A*B*C
----------------------------------------------------------------------------------------------------------------
2011........................             7,000               0.5             $63           3,500        $218,000
2012........................             3,500               0.5              63           1,700         109,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

d. Paper and Mailing Costs
    The Department assumes that clerical staff will prepare all of the 
required notices and disclosures for distribution and that 50 percent 
of the disclosures will be sent electronically at no cost. Table 8 
displays for each type of disclosure the number of notices that will be 
sent, the required amount of clerical time, and the annual cost of 
preparation.

                                           Table 8--Preparation Costs
----------------------------------------------------------------------------------------------------------------
                                                                                     Clerical
                                   Number of    Percent not sent  Clerical hours   hourly labor     Total cost
                                    notices      electronically                        cost
                                           (A)               (B)             (C)             (D)         A*B*C*D
----------------------------------------------------------------------------------------------------------------
Initial Disclosure: 2011......         450,000                50            1/30             $26        $196,000
Initial Disclosure: 2012......          61,000                50            1/30              26          27,000
Information Upon Request......          45,000                50            1/30              26          20,000
Disclosure of Changes to               157,000                50            1/30              26          69,000
 Initial Disclosure...........
Investment Disclosure: 2011 *.         231,000                50           17/30              26       1,711,000
Investment Disclosure: 2012 *.          31,000                50           17/30              26         232,000
Disclosure of Changes to               200,000                50            1/30              26          87,000
 Investment Disclosure........
Request for Additional                  69,000                50            1/60              26          15,000
 Information for Exemption:
 2011.........................
Request for Additional                  35,000                50            1/60              26           8,000
 Information for Exemption:
 2012.........................
Prepare Notice to DOL: 2011...           7,000                50            1/60              26           1,500
Prepare Notice to DOL: 2012...           3,500                50            1/60              26             800
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
* The estimate assumes 2 minutes per investment to prepare the disclosure. Plans have on average 17 investments.

    Table 9 reports the printing and postage costs associated with each 
required notice and disclosure. 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 is 
5 cents per page.

                                                                 Table 9--Mailing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Percent not sent
                                                           Number of     electronically        Pages       Cost per page      Postage       Total costs
                                                            notices         (percent)
                                                                   (A)               (B)             (C)             (D)             (E)     A*B*(C*D+E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Disclosure: 2011..............................         450,000                50               8           $0.05            0.44        $189,000
Initial Disclosure: 2012..............................          61,000                50               8            0.05            0.44          26,000
Information Upon Request..............................          45,000                50              10            0.05            0.44          21,000
Disclosure of Changes to Initial Disclosure...........         157,000                50               4            0.05            0.44          50,000
Investment Disclosure: 2011*..........................         231,000                50             510            0.05           10.35       4,141,000
Investment Disclosure: 2012*..........................          31,000                50             510            0.05           10.35         561,000
Disclosure of Changes to Investment Disclosure........         200,000                50               2            0.05            0.44          54,000
Request for Additional Information for Exemption: 2011          69,000                50               2            0.05            0.44          19,000
Request for Additional Information for Exemption: 2012          35,000                50               2            0.05            0.44           9,000
Prepare Notice to DOL: 2011...........................           7,000                50               2            0.05            0.44           2,000
Prepare Notice to DOL: 2012...........................           3,000                50               2            0.05            0.44           1,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
* The number of pages is 17*30, which is the average number of investments in a plan times 30 pages per investment disclosure.


[[Page 41628]]

    As shown in Table 10, total costs for service providers and plan 
sponsors add up to about $152.5 million for the year 2011.

                                  Table 10--Total Discounted Costs of Proposal
----------------------------------------------------------------------------------------------------------------
                                                      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
----------------------------------------------------------------------------------------------------------------
2011............................     $61,539,000     $75,312,000     $13,248,000      $2,437,000    $152,535,000
2012............................       6,919,000      21,534,000       7,653,000       1,139,000      37,245,000
2013............................       6,467,000      20,125,000       7,152,000       1,064,000      34,808,000
2014............................       6,044,000      18,809,000       6,685,000         995,000      32,531,000
2015............................       5,648,000      17,578,000       6,247,000         929,000      30,403,000
2016............................       5,279,000      16,428,000       5,839,000         869,000      28,414,000
2017............................       4,933,000      15,354,000       5,457,000         812,000      26,555,000
2018............................       4,611,000      14,349,000       5,100,000         759,000      24,818,000
2019............................       4,309,000      13,410,000       4,766,000         709,000      23,194,000
2020............................       4,027,000      12,533,000       4,454,000         663,000      21,677,000
----------------------------------------------------------------------------------------------------------------
Total with 7% Discounting.......................................................................     412,183,000
Total with 3% Discounting.......................................................................     462,827,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

e. Comments and Revisions
    The Department received several comments suggesting that it had 
underestimated the costs of the proposal and questioning various 
assumptions on which the estimates were based. In response to these 
comments, the Department increased its estimate of the amount of legal 
and financial professionals' time service providers would require to 
become compliant with the regulation. It also reevaluated its estimates 
of the number of affected service providers. (The Department also 
revised some of the proposal's provisions in light of these comments to 
ease compliance burdens, as explained earlier in this preamble.)
    In addition to revisions made in response to comments, the 
Department updated its estimates of service providers, plans, 
participants, assets and labor costs, as well as its estimates of the 
preparation, distribution and mailing costs of the required 
disclosures, to reflect more current data.
f. Summary
    In summary, the Department has calculated total costs of 
approximately $412 million for the ten-year period 2011 to 2020.

9. Uncertainty

    The Department's estimates of the effects of this regulation are 
subject to uncertainty. While the Department is confident that improved 
fee disclosures can reduce the time fiduciaries spend searching for 
needed information, discourage harmful conflicts of interest, reduce 
gaps in information received by plan fiduciaries, improve fiduciary 
decisions relating to purchases of plan services leading to reduced 
plan fees and provide better enforcement tools to redress abuses by 
service providers, it is uncertain about the magnitude of these 
effects. The uncertainty is attributable to gaps in available data and 
empirical evidence. Some key areas of uncertainty are elaborated below.
    Reduction in fees--By making information more readily available, 
this regulation may increase the amount of information that is 
considered, along with the effort devoted to and efficiency of such 
consideration. This in turn could reduce fees paid to service providers 
relative to value derived for participants in either or both of two 
ways. First, fiduciaries might more accurately optimize the levels and 
types of services purchased, for example by downgrading from a premium 
service level, whose price exceeds the benefit to participants, to an 
economy service level whose price is smaller than the benefit. This 
would represent a gain in welfare equal to the cost savings reduced by 
any diminishment in benefits attendant to the service downgrade. 
Second, fiduciaries might identify and take advantage of opportunities 
to purchase equivalent services at a lower price (or superior services 
at the same price) from a different vendor. If this savings is 
attributable to the service being produced more efficiently by the 
competing vendor it would reflect a welfare gain; if it is attributable 
to a shifting of existing surplus from the service producers to 
consumers with no improvement in production efficiency, it would 
reflect a transfer.
    The Department attempted to consider the potential amount by which 
fees might be reduced. A review of literature on dispersion of mutual 
fund fee levels and the value of services purchased with such fees 
suggests that at least some fiduciaries and participants of individual 
account plans, by making different and more optimal choices about which 
services to purchase or what vendors to purchase from, might reduce 
fees by perhaps 11 basis points per year on average.\44\ There is 
evidence for potential savings to defined benefit plans as well. A 
recent GAO report found that defined benefit plans whose consultants 
have undisclosed conflicts of interest have between 1.2 and 1.3 
percentage points lower rates of return. The report acknowledges that 
this finding does not

[[Page 41629]]

necessarily imply a causal arrangement, but it references ``expert'' 
opinions that such undisclosed conflicts of interest could result in 
lower returns.\45\
---------------------------------------------------------------------------

    \44\ This assumption was developed in light of evidence 
presented in Brad M. Barber et al., Out of Sight, Out of Mind, The 
Effects of Expenses on Mutual Fund Flows, Journal of Business, 
Volume 79, Number 6 2095, 2095-2119 (2005); James J. Choi et al., 
Why Does the Law of One Price Fail? An Experiment on Index Mutual 
Funds, National Bureau of Economic Research Working Paper W12261 
(May 2006); Deloitte Financial Advisory Services LLP, Fees and 
Revenue Sharing in Defined Contribution Retirement Plans (Dec. 6, 
2007) (unpublished, on file with the Department of Labor); Edwin J. 
Elton et al., Are Investors Rational? Choices Among Index Funds, 
Social Science Research Network Abstract 340482 (June 2002); and 
Sarah Holden & Michael Hadley, The Economics of Providing 401(k) 
Plans: Services, Fees and Expenses 2006, Investment Company 
Institute Research Fundamentals, Volume 16, Number 4 (Sept. 2007). 
This estimate of excess expense does not take into account less 
visible expenses such as mutual funds' internal transaction costs 
(including explicit brokerage commissions and implicit trading 
costs), which are sometimes larger than funds' expense ratios. See, 
e.g., Jason Karceski et al., Portfolio Transactions Costs at U.S. 
Equity Mutual Funds, University of Florida Working Paper (2004), at 
http://thefloat.typepad.com/the_float/files/2004_zag_study_on_
mutual_fund_trading_costs.pdf.
    \45\ See Conflicts of Interest Involving High Risk or Terminated 
Plans Pose Enforcement Challenges, U.S. Government Accountability 
Office (June 2007).
---------------------------------------------------------------------------

    In light of the foregoing evidence, the Department believes it is 
highly possible that this regulation could fill gaps in critical 
information, thus improving fiduciary decisions, and will reduce 
service costs relative to value derived to yield benefits that exceed 
costs. Table 11 below provides a break-even analysis to illustrate this 
point. Previously cited studies suggest that perhaps a quarter of 
sponsors currently lack critical information \46\ and as many as 65 
percent would use additional information to change existing fee 
structures. \47\ Given the total amount of assets in plans, if the 
sponsors are able to reduce fees by 0.6 basis point per year on 
average, the benefits of the mandatory disclosure requirements would 
exceed the costs. Due to uncertainty about the size of the reduction in 
fees, and uncertainty about what fraction of the fee reduction would 
reflect welfare gains, the Department did not include the reduction in 
fees in its calculation of the benefits of the regulation.
---------------------------------------------------------------------------

    \46\ See e.g., Chatham Partners, Looking Beneath the Surface: 
Plan Sponsor Perspectives on Fee Disclosure (2008).
    \47\ See e.g., Hewitt, Hot Topics in Retirement, 2008.

                    Table 11--Reduction in Fees Necessary for Benefits To Exceed Costs (2011)
----------------------------------------------------------------------------------------------------------------
                                                Percent of sponsor       Total 10-Year       Percent correction
   Total amount of      Percent of sponsors      who will use the       compliance costs      due to disclosure
 assets in plans (in     currently lacking    information to change   annualized at 7% (in      necessary for
   millions of 2010     critical information       existing fee         millions of 2010     benefits to exceed
       dollars)                                     structures              dollars)                costs
(A)                                  (B)                      (C)                  (D)                D/(A*B*C)
----------------------------------------------------------------------------------------------------------------
       $6,390,000                    25%                    65%                  $58.7                 0.006%
----------------------------------------------------------------------------------------------------------------

    Other areas of uncertainty--Also subject to substantial uncertainty 
are the Department's estimates of: The fraction of plan fiduciaries 
already receiving the required disclosure information (both benefits 
and costs would vary negatively); the time required for legal 
professionals, financial professionals and clerical professionals to 
perform compliance tasks pursuant to the regulation (costs would vary 
positively); and the extent to which disclosures will be made 
electronically rather than on paper (costs would vary negatively). In 
developing its assumptions regarding these and other variables, the 
Department took into account both relevant comments received on the 
proposed regulation and differences between the requirements of the 
proposed and those of the final regulations. The Department believes 
its assumptions are reasonable and that the uncertainty attendant to 
them does not cast serious doubt on the Department's conclusion that 
the regulation's benefits justify its costs.

10. 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 a significant economic impact on a substantial number of 
small entities, 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. As supported by public commenters on the proposal and 
witnesses at the Department's hearing, this rule is necessary to help 
such fiduciaries get the information they need to negotiate with and 
select service providers who offer high quality services at reasonable 
rates.
b. Public Comments
    Public comments on the proposed rule raised a number of issues with 
respect to its application to and impact on small entities. Several 
commenters affirmed the Department's view, articulated in the preamble 
to the proposed rule, that the number of small service providers to 
plans is large and that the cost of complying with the proposed rule 
might be proportionately higher for smaller service providers. However, 
some comments suggested that the Department had underestimated the cost 
to small service providers to comply with the proposed rule.
    Many of the comments expressed uncertainty about the scope of the 
proposed rule's application, attributing complexity and cost to that 
uncertainty and to the possibility that the scope might be very broad 
(for example, that it might encompass a broad array of indirect service 
providers). The Department has refined the proposed rule to clarify 
that the interim final rule encompasses only those service providers 
and compensation arrangements that are likely to require close 
consideration by plan fiduciaries. Small service providers generally 
fall within the scope of the interim final rule only if they are plan 
fiduciaries, provide plan services as a registered investment adviser, 
provide certain other services directly to a plan and receive indirect 
compensation in connection with such services, or provide an investment 
platform through which investment options are made available to 
participants and beneficiaries in participant-directed individual 
account plans. A potentially large number of small, indirect service 
providers will not be subject to the interim final rule, even if they 
perform services for a plan under subcontract to another (direct) 
service provider. The Department lacks data on how many such indirect 
service arrangements exist, because such arrangements are not required 
to be identified in plans' annual reports.
    Some comments suggested that the cost of rigorous disclosure is not

[[Page 41630]]

justified in the case of very small service arrangements. The interim 
final rule generally excepts from its requirements contracts or 
arrangements where compensation or fees are less than $1,000. It is 
likely that a large number of small service provider arrangements fall 
into this category. Some portion of compliance costs, including the 
most recurring costs (as opposed to start-up costs), are variable: they 
grow with the number of covered arrangements the service provider 
maintains. Therefore, this exception will be especially helpful to 
small service providers whose business consists of a large number of 
small contracts or arrangements, which will be excepted from coverage 
if they result in less than $1,000 in compensation or fees.
    Some comments stated that many arrangements are not established 
under a formal contract and that requiring all arrangements to be so 
established would be costly. The Department believes such a requirement 
might be disproportionately costly for small service providers, whose 
arrangements might be small relative to the partially fixed cost of 
entering into a contract and who might lack in-house expertise in 
contract law. The interim final rule includes no such requirement, but 
instead allows all required disclosures to be provided by other means 
so long as they are provided in writing.
c. Affected Small Entities
    The Department estimates that the interim final rule will apply to 
approximately 9,600 small service providers (generally, those with 
revenue less than $6.5 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, 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.
d. Compliance Requirements
    The classes of small service providers subject to the interim final 
rule includes service providers who are plan fiduciaries (for example 
who manage plan investments), who provide services as registered 
investment advisers to plans, who receive indirect compensation in 
connection with provision of certain 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 an investment platform through 
which investment options are made available to participants and 
beneficiaries in participant-directed individual account plans.
    These small service providers will, in connection with covered 
service arrangements, be required to disclose to plan fiduciaries 
certain information. Such information will include what services will 
be included in the arrangement and what direct and indirect 
compensation the service will receive in connection with the 
arrangement. Certain service providers whose arrangements make certain 
investment products available to plans also will be required to 
disclose to fiduciaries certain information relating to expenses 
associated with such products. Certain specified information generally 
must be disclosed before the arrangement is entered into or renewed, on 
request from a fiduciary, and when the information changes.
    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. Generally, small service providers will be 
responsible for disclosing only those types of compensation 
arrangements to which they (or their affiliate or subcontractor 
performing the services) are a party.
e. Agency Steps To Minimize Negative Impacts
    As explained in (b) above in connection with public comments, the 
Department took a number of steps to minimize any negative impact of 
this interim final rule on small service providers. These include 
clarifying the scope of the rule's application to include only those 
service providers and compensation arrangements that are likely to 
require close consideration by plan fiduciaries, excepting from the 
rule's requirements contracts or arrangements where compensation or 
fees are less than $1,000, and omitting from the rule a requirement 
that all arrangements be maintained under formal contracts. The 
disclosure requirements included in the interim 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 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.
    Major alternatives considered by the Department fell short of the 
approach adopted in the interim final rule of achieving policy goals at 
reasonable and justified cost. As discussed, the Department rejected as 
unnecessarily costly approaches that would have applied disclosure 
requirements to arrangements involving compensation or fees of less 
than $1,000, to indirect service arrangements where the service 
provider is not a plan fiduciary, or that would have required a formal, 
written contract or arrangement to delineate the disclosure 
obligations. The Department also rejected these approaches as 
inadequate to achieve a central policy and legal goal--namely, enabling 
plan fiduciaries, including especially small plan fiduciaries, to 
efficiently and effectively carry out their duties in connection with 
the purchase of plan services by easing their access to necessary 
information.
    An alternative approach advocated by some public commenters would 
not have expressly conditioned the section 408(b)(2) prohibited 
transaction exemption on the service provider's production of such 
information. That approach, however, would perpetuate the information 
asymmetry and therefore would not allow small plan fiduciaries to 
efficiently and effectively carry out their fiduciary obligations when 
purchasing plan services and equip them to redress service provider 
abuses.

11. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the proposed regulation solicited 
comments on the information collections included therein. The 
Department also submitted an information collection request (ICR) to 
OMB in accordance with 44 U.S.C.

[[Page 41631]]

3507(d), contemporaneously with the publication of the proposed 
regulation, for OMB's review.\48\ Although no public comments were 
received that specifically addressed the paperwork burden analysis of 
the information collections, the comments that were submitted, and 
which are 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 proposal, analyzing the economic 
impact of the proposals, and developing the revised paperwork burden 
analysis summarized below.
---------------------------------------------------------------------------

    \48\ On Dec. 3, 2007, OMB issued a notice (ICR Reference No. 
200710-1210-001) that it would not approve the Department's request 
for approval of the information collection provisions until after 
consideration of public comment on the proposed regulation and 
promulgation of a final rule, describing any changes. OMB issued 
Control Number 1210-0133 for the collection once it approved the 
information collection provisions of the final rule.
---------------------------------------------------------------------------

    In connection with publication of this interim final rule, the 
Department submitted an ICR to OMB for its request of a new information 
collection. OMB approved the ICR on May 20, 2010, under OMB Control 
Number 1210-0133, which will expire on May 31, 2013.
    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 interim 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 interim final rule, the Department estimated the 
number of service providers, plans, and arrangements covered by the 
rule. Based on information from the 2006 Form 5500, the Department 
estimates that approximately 49,000 defined benefit pension plans (DB 
plans) covering more than 42 million participants and approximately 
646,000 defined contribution plans (DC plans) covering almost 80 
million participants are covered by the rule.\49\
---------------------------------------------------------------------------

    \49\ Out of these pension plans, about 37,000 are small DB plans 
and 576,000 small DC plans. Small plans generally are those with 
less than 100 participants.
---------------------------------------------------------------------------

    The Department also estimates that based on data from the 2006 Form 
5500 Annual Return/Report and Schedule C that there are almost 10,000 
covered service providers. The 2006 Form 5500 Schedule C data was also 
used to count the number of covered plan-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 119,000 arrangements with covered service providers, 
while DC plans have an estimated 780,000 arrangements. For purposes of 
this analysis, the Department assumes that about 50 percent of 
disclosures between service providers and plan fiduciaries are made 
only electronically.
    Compliance Review and Implementation: Most of the hour burden under 
the interim final rule will be imposed on service providers. Covered 
service providers will need to review the rule, evaluate whether their 
current disclosure practices comply with its requirements, and, if not, 
determine how their disclosure practices must be changed to be 
compliant. The Department projected this as an hour burden incurred in 
2011, the year in which the rule takes effect.
    Although all covered service providers are assumed to incur these 
initial costs, it is likely that service providers with complex fee 
arrangements and conflicts of interest will require more time to 
comply. The Department assumes that the number of service providers 
with more complex arrangements can be approximated by the number of 
unique service providers who are reported on the Schedule C as having 
received $1 million or more in compensation (approximately 1,000 
service providers).
    The Department assumes that covered service providers with complex 
arrangements will require 24 hours of legal professional time and 80 
hours of financial professional time.\50\ The non-complex service 
providers (approximately 9,000 service providers based on the 
quantitative analysis above) would require only three hours of legal 
professional time and 13 hours of financial professional time. Based on 
the foregoing, the Department estimates that in the first year service 
providers will incur an hour burden of approximately 241,000 hours with 
an equivalent cost of approximately $17.9 million.
---------------------------------------------------------------------------

    \50\ EBSA wage estimates for 2010 are based on the National 
Occupational Employment Survey (May 2008, Bureau of Labor 
Statistics) and the Employment Cost Index (June 2009, Bureau of 
Labor Statistics), unless otherwise noted. Total labor costs (wages 
plus benefits plus overhead) were estimated to average $119.03 per 
hour over the period for legal professional, $62.81 for financial 
professionals, and $26.14 per hour for clerical staff.
---------------------------------------------------------------------------

    The Department also has estimated the initial compliance review and 
implementation costs for service providers newly entering the market 
(``new service providers'') to provide service to plans (either for the 
first time or by re-entry) beginning in 2012 and each year thereafter. 
Based on data from the 2005 and 2006 Form 5500, the Department assumes 
that about eight percent of all service providers will be new in each 
year subsequent to 2011, and that these service providers will incur 
the same compliance review and implementation costs as existing service 
providers. Based on the foregoing, the Department estimates that new 
service providers will incur an hour burden of approximately 20,000 
hours with an equivalent cost of approximately $1.5 million.
    Based on the foregoing, the Department estimates that the three-
year average total hour burden associated with compliance review and 
implementation is almost 94,000 hours. The equivalent cost of these 
hours is $7.0 million.
    Initial Disclosure: As discussed above, covered service providers 
also must develop or update their current disclosure materials to 
comply with the regulatory requirements. Paragraph (c)(1)(iv) of the 
rule requires service providers to disclose general information to a 
responsible plan fiduciary when a contract is entered into, renewed, or 
extended. The Department assumes that service providers will create a 
general disclosure that can be used for all plans and customize this 
document by adding individualized information for each plan. This 
activity includes developing formulae and algorithms to present or 
estimate direct and indirect compensation that will be applied in a pro 
forma projection for each plan with which the provider will contract. 
The Department assumes that the majority of

[[Page 41632]]

this cost would be incurred by service providers in 2011 and that one 
hour of a legal professional's and 45 minutes of a financial 
professional's time will be required to prepare the general disclosure 
for each plan. Based on the foregoing, the total hour burden to prepare 
these disclosures in year 2011 will be approximately 1.6 million hours 
and the equivalent cost of these hours will be approximately $150 
million.
    In 2012 and subsequent years, the regulation will cause additional 
disclosures to be made between covered plans and service providers for 
any new contracts and arrangements. The Department does not have 
information on the number of new arrangements in a year; therefore, the 
Department used the percentage of plans that are new plans, about 14 
percent, as a proxy for the percentage of new arrangements in a year. 
This results in approximately 122,000 new arrangements every year. The 
Department assumes that half of the responsible plan fiduciaries in 
these arrangements would receive the required information even without 
the regulation enacted. The Department estimates that preparing the 
disclosures for new arrangements will require one hour of a legal 
professional's time at an equivalent cost of approximately $119 and 45 
minutes of a financial professional's time at an equivalent cost of 
almost $63. Based on the foregoing, the total hour burden to prepare 
these disclosures in year 2012 and thereafter will be approximately 
215,000 hours and the equivalent cost of these hours will be $20.3 
million. The resulting three-year average burden hours is 673,000 hours 
with an equivalent cost of $63.5 million.
    Paragraph (c)(1)(vi) requires service providers to provide any 
other information relating to 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 
ERISA and the regulations, forms, and schedules issued thereunder upon 
the request of responsible plans fiduciaries or plan administrators of 
covered plans. The Department is not aware of a basis for determining 
the number of requests that responsible plan fiduciaries or plan 
administrators will make; therefore, it assumes that approximately ten 
percent (approximately 90,000) of responsible plan fiduciaries will 
request additional information annually. The Department further assumes 
that service providers already will have this information available, 
because it is required to comply with other legal requirements. 
Therefore, the Department estimates that it will take clerical staff 
two minutes per request to prepare the information with an hourly rate 
of approximately $26. Based on the foregoing, the Department estimates 
that the yearly and three-year average total hour burden to disclose 
information upon request will total 4,500 hours at an equivalent cost 
of $118,000.
    Paragraph (c)(1)(v)(B) generally requires service providers to 
disclose any changes to the general information as soon as reasonably 
practicable, but no later than 60 days from the date the covered 
service provider knows of such change. The Department assumes that one-
half hour of legal professional time and one-third hour of a financial 
professional time will be required to update the disclosures. The 
Department also assumes that changes in plan disclosures will occur at 
least once every three years, because plans normally conduct requests 
for proposal (RFPs) from service providers at least once every three to 
five years. If it is assumed that an equal number of plans conduct an 
RFP in any given year, then approximately 35 percent of arrangements 
will require an updated disclosure every year and half of these would 
already have updated the information without the regulation for a total 
of approximately 315,000 updates to the general information. Based on 
the foregoing, the Department estimates that the annual hour burden to 
update the disclosure of general information will be approximately 
268,000 hours with an equivalent cost of approximately $25.5 million.
    In summary, the hour burden to disclose the required general 
information in 2011 will be almost 1.6 million hours with an equivalent 
cost of approximately $150 million. The hour burden in subsequent years 
will be approximately 483,000 hours with an equivalent cost of 
approximately $45.8 million. The average total hour burden to disclose 
general information over the three year period 2011-2013 will be 
852,000 hours, and the equivalent cost of these hours will be $80.5 
million.
    Investment Disclosure: Paragraphs (c)(1)(iv)(F) and (G) generally 
require fiduciaries to certain investment vehicles holding plan assets 
(described in paragraph (c)(1)(iii)(A)(2)) and providers of 
recordkeeping and brokerage services to a participant-directed 
individual account plan (without regard to whether they expect to 
receive indirect compensation), if they provide access to one or more 
designated investment alternatives for the covered plan (described in 
paragraph (c)(1)(iii)(B) (``platform providers'')), to disclose 
investment-related compensation information. This information generally 
must be disclosed to the responsible plan fiduciary reasonably in 
advance of the date the contract or arrangement is entered into, 
extended or renewed.\51\ Paragraph (c)(1)(iv)(G)(2) allows covered 
platform providers to satisfy this disclosure requirement by passing 
through to the responsible plan fiduciary copies of any state or 
federally regulated disclosure materials (e.g., prospectuses) of the 
issuer of the designated investment alternative, so long as such issuer 
is not affiliated with the platform provider, and the platform provider 
does not know that any of the information contained in such materials 
is incomplete or inaccurate.
---------------------------------------------------------------------------

    \51\ Generally, service providers must disclose any change to 
investment-related 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.
---------------------------------------------------------------------------

    The hour burden associated with disclosing investment-related 
compensation and fee information will be attributable primarily to the 
time spent gathering the required information. However, much of this 
cost will be reduced, because, as discussed above, the rule allows 
platform providers to satisfy this requirement by passing through 
information to the responsible plan fiduciary. Based on the foregoing, 
the Department assumes that preparation of investment-related 
compensation and fee information will require one-half hour of 
financial professional time for each of the individual account plans. 
There will be approximately 462,000 plan fiduciaries receiving this 
information in 2011. Further, it is assumed that 14 percent 
(approximately 63,000) of arrangements will be new in each subsequent 
year and require the initial investment disclosure. The Department 
estimates that the hour burden to disclose the required investment 
information will be approximately 362,000 hours with an equivalent cost 
of $17.9 million in 2011. In the subsequent years, the burden hours 
will be approximately 249,000 hours with an equivalent cost of $2.4 
million. The three-year average hour burden associated with disclosing 
investment related information 462,000 disclosures are 286,000 hours at 
an equivalent cost of $7.6 million.
    In addition, service providers must disclose changes to investment 
information. The Department assumes that service providers will have to 
disclose investment information changes to each responsible plan 
fiduciary at least once per year due to the regulation, resulting in 
approximately 399,000 disclosures. This

[[Page 41633]]

notification is expected to require one-half hour of financial 
professional time to prepare. Based on the foregoing, the cost to 
update investment information in subsequent years is estimated to be 
approximately 206,000 hours with an equivalent cost of $12.7 million. 
The Department estimates that the three-year average burden hours 
associated with reporting changes to the required investment related 
information will be 138,000 hours at an equivalent cost of $8.5 
million.
    In summary, the hour burden to disclose all investment information 
in 2011 is estimated to be 362,000 hours with an equivalent cost of 
$17.9 million. The burden to disclose the required investment 
information in subsequent years is 455,000 hours with an equivalent 
cost of $15.1 million. The total three-year hour burden for service 
providers to disclose the required investment information is estimate 
to be 424,000 hours with an equivalent cost of $16.1 million.
    Hour Burden Imposed on Plans: The main hour burden of the 
regulation that is imposed on plans is additional time spent reviewing 
the regulation and ensuring that the plan has received all of the 
required disclosures. The Department estimates the responsible plan 
fiduciaries will need one hour of time to review new requirements. The 
hour burden is estimated to be 695,000 with an equivalent cost of 
approximately $43.6 million in 2011.
    Starting in 2012 and each year thereafter, responsible plan 
fiduciaries of new plans will have to review the new requirements. 
Based on data from the 2005 and 2006 Form 5500, the Department 
estimates that 14 percent of plans will be new each year. The 
Department assumes that responsible plan fiduciaries of new plans will 
have the same costs as fiduciaries of existing plans. Therefore, the 
hour burden associated with the review for fiduciaries of new plans is 
estimated to be approximately 94,000 hours at an equivalent cost of 
$5.9 million for years 2012 and thereafter.
    Based on the foregoing, the hour burden imposed on plans to review 
the regulation is estimated to be 695,000 hours in 2011 with an 
equivalent cost of $43.6 million. The three-year average burden on 
plans to review the regulation is estimated to be 294,000 hours with an 
equivalent cost of $18.5 million.
    Exemption for Responsible Plan Fiduciary: The final prohibited 
transaction class exemption contained in paragraph (c)(1)(ix) of the 
rule provides relief from the restrictions of sections 406(a)(1)(C) and 
(D) for plan fiduciaries that enter into contracts or arrangements with 
service providers upon a mistaken belief that they have received all of 
the disclosures required by the interim final rule. Upon discovering 
that a covered service provider failed to disclose all of the required 
information, the responsible plan fiduciary must take reasonable steps 
to obtain such information, including requesting in writing that the 
covered service provider furnish the information in order to rely on 
the exemption and notify the Department if the service provider fails 
to comply with the written request within 90 days.
    While the Department has no basis for estimating the percentage of 
arrangements where a responsible plan fiduciary will not receive all of 
the required disclosures from a covered service provider, the 
Department assumes that 10 percent of arrangements (approximately 
69,000) may experience a failure that will require the responsible plan 
fiduciary to send a notice to the service provider in 2011. In 2012 and 
thereafter, the number of requests for missing information is expected 
to decrease to 5 percent of arrangements (approximately 35,000). The 
Department estimates that one-half hour of a financial professional's 
time will be required to prepare the request for the undisclosed 
information.
    The Department estimates that the burden for plans to send notice 
to service providers of missing information will be approximately 
35,000 hours with an equivalent cost of over $2.2 million in 2011. The 
hour burden for subsequent years is estimated to be over 18,000 hours 
with an equivalent cost of $1.1 million. The three-year average burden 
hours for requesting missing information is estimated to be 24,000 
hours with an equivalent cost of $1.5 million.
    The Department further assumes that service providers may not 
respond to 10 percent of the requests for undisclosed information 
within 90 days, which will result in the responsible plan fiduciary 
preparing and sending a notice to the Department. The Department 
estimates that one-half hour of a financial professional's time will be 
required to prepare the notice. The Department estimates that the 
burden for plans to send notice to the Department of Labor will be 
approximately 3,500 hours with an equivalent cost of $219,600 in 2011. 
The hour burden for subsequent years is estimated to be approximately 
1,800 hours with an equivalent cost of $110,000. The three-year average 
burden hours to prepare the notice to be sent to the Department are 
estimated to be 2,400 hours with an equivalent cost of $146,000.
Summary
    Table 12 shows the total hour burden of the information collection 
and Table 13 shows the total equivalent cost. The total three year 
average hour burden for service providers and plans is estimated to be 
1.4 million hours with an equivalent cost of $104 million. The total 
three-year average hour burden for plans is estimated to be 320,000 
hours with an equivalent cost of $20.1 million. The total three-year 
average hour burden of the regulation is estimated to be 1.7 million 
hours with an equivalent cost of $124 million.

                                              Table 12--Hour Burden
----------------------------------------------------------------------------------------------------------------
                                            Year 1             Year 2             Year 3            Average
----------------------------------------------------------------------------------------------------------------
Service Providers...................          2,197,000            963,000            963,000          1,374,000
Plans...............................            733,000            114,000            114,000            320,000
                                     ---------------------------------------------------------------------------
    Total...........................          2,930,000          1,076,000          1,076,000          1,694,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.


                                            Table 13--Equivalent Cost
----------------------------------------------------------------------------------------------------------------
                                            Year 1             Year 2             Year 3            Average
----------------------------------------------------------------------------------------------------------------
Service Providers...................       $185,811,000        $62,529,000        $62,039,000       $103,623,000

[[Page 41634]]


Plans...............................         46,041,000          7,119,000          7,119,000         20,093,000
                                     ---------------------------------------------------------------------------
    Total...........................        231,852,000         69,648,577         69,158,577        123,716,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

Annual Cost Burden
    Table 14 reports the estimated printing and postage costs 
associated with each required notice and disclosure. 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% of documents will be 5 cents per page. The Department estimates 
that the total cost burden of the rule in 2010 will be $8,830,000 
(approximately $8,810.000 for service providers and $21,000 for plans), 
and $1,435,000 (approximately $1,424,000 for service providers and 
$10,000 for plans in subsequent years. The three-year average cost 
burden is estimated to be almost $3.9 million.

                                              Table 14--Cost Burden
----------------------------------------------------------------------------------------------------------------
                                                      Year 1          Year 2          Year 3          Average
----------------------------------------------------------------------------------------------------------------
Initial Disclosure..............................        $378,000         $51,000         $51,000        $160,000
Update Initial Disclosure.......................               0         101,000         101,000          67,000
Information Upon Request........................          42,000          42,000          42,000          42,000
                                                 ---------------------------------------------------------------
    General Information Total...................         420,000         194,000         194,000         270,000
                                                 ---------------------------------------------------------------
Investment Disclosure...........................       8,290,000       1,122,000       1,122,000       3,509,000
Update Investment Disclosure....................         108,000         108,000         108,000         108,000
                                                 ---------------------------------------------------------------
    Investment Disclosure Total.................       8,390,000       1,230,000       1,230,000       3,617,000
                                                 ---------------------------------------------------------------
Request for Additional Information for Exemption          19,000           9,000           9,000          13,000
Notice to DOL...................................            2000             900             900           1,000
                                                 ---------------------------------------------------------------
    Total.......................................       8,830,000       1,435,000       1,435,000       3,900,000
----------------------------------------------------------------------------------------------------------------
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: New collection (Request for new OMB control 
number).
    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: 79,000 (first year); 56,000 
(three-year average).
    Estimated Number of Responses: 1,528,000 (first year); 1,194,000 
(three-year average).
    Frequency of Response: Annually; occasionally.
    Estimated Annual Burden Hours: 2,930,000 (first year); 1,694,000 
(three-year average).
    Estimated Annual Burden Cost: $8,830,000 (first year); $3,900,000 
(three-year average).
Congressional Review Act
    The interim 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 interim 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 interim 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 interim final rule does not have federalism 
implications because it has no substantial direct 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 interim 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.

[[Page 41635]]

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Exemptions, Fiduciaries, Investments, 
Pensions, Prohibited transactions, Reporting and recordkeeping 
requirements, and Securities.

0
For the reasons set forth in the preamble, the Department amends 
chapter XXV, subchapter F, part 2550 of title 29 of the Code of Federal 
Regulations as follows:

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

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. 
1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b-1 also issued 
under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 
17, 1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR 
1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c-1 also 
issued under 29 U.S.C. 1101. Sec. 2550.404c-1 also issued under 29 
U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 1107. Sec. 
2550.404a-2 also issued under 26 U.S.C. 401 note (sec. 657, Pub. L. 
107-16, 115 Stat. 38). Sec. 2550.408b-1 also issued under 29 U.S.C. 
1108(b) (1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 
1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 
1978), and 3 CFR, 1978 Comp. 332. Sec. 2550.408b-2 also issued under 
sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 
1978 Comp. 332. 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, 
or an individual retirement annuity described in section 408(b) of the 
Code.
    (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 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; 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)

[[Page 41636]]

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 and identification of the payer of the 
indirect compensation.
    (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), (F) or (G) 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), (F), or (G) 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) Manner of receipt. A description of the manner in which the 
compensation described in paragraph (c)(1)(iv)(C) and (D) of this 
section 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.
    (F) 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 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).
    (G) 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)(F)(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)(G) by providing current disclosure materials of the issuer 
of the designated investment alternative that include the information 
described in such paragraph, provided that such issuer is not an 
affiliate, the disclosure materials are regulated by a State or federal 
agency, and the covered service provider does not know that the 
materials are incomplete or inaccurate.
    (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)(G) 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 responsible plan fiduciary.
    (B) A covered service provider must disclose a change to the 
information required by paragraph (c)(1)(iv) of this

[[Page 41637]]

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.
    (vi) Reporting and disclosure information; timing.
    (A) Upon 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 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.
    (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) or (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, 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).
    (3) A description or an estimate of compensation 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 cannot reasonably be expressed in such terms, by any other 
reasonable method. Any description or estimate must contain sufficient 
information to permit evaluation of the reasonableness of the 
compensation.
    (C) Designated investment alternative. A ``designated investment 
alternative'' is any investment alternative designated by a fiduciary 
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 specifically designated.
    (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 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;

[[Page 41638]]

    (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) The responsible plan fiduciary, following discovery of a 
failure to disclose required information, shall determine whether to 
terminate or continue the contract or arrangement. In making such a 
determination, the responsible plan fiduciary shall evaluate the nature 
of the failure, the availability, qualifications, and cost of 
replacement service providers, and the covered service provider's 
response to notification of the failure.
    (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 16, 2011. 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 arrangement 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 6th day of July, 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2010-16768 Filed 7-15-10; 8:45 am]
BILLING CODE 4510-29-P