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EBSA Final Rules

Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans   [10/20/2010]
[PDF]
FR Doc 2010-25725
[Federal Register: October 20, 2010 (Volume 75, Number 202)]
[Rules and Regulations]               
[Page 64909-64946]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc10-15]                         


[[Page 64909]]

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Part IV





Department of Labor





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Employee Benefits Security Administration



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29 CFR Part 2550



Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans; Final Rule


[[Page 64910]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB07

 
Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains a final regulation under the Employee 
Retirement Income Security Act of 1974 (ERISA) that requires the 
disclosure of certain plan and investment-related information, 
including fee and expense information, to participants and 
beneficiaries in participant-directed individual account plans (e.g., 
401(k) plans). This regulation is intended to ensure that all 
participants and beneficiaries in participant-directed individual 
account plans have the information they need to make informed decisions 
about the management of their individual accounts and the investment of 
their retirement savings. This document also contains conforming 
changes to another regulation relating to plans that allow participants 
to direct the investments of their individual accounts. These 
regulations will affect plan sponsors, fiduciaries, participants and 
beneficiaries of participant-directed individual account plans, as well 
as providers of services to such plans.

DATES: Effective Date. December 20, 2010.
    Applicability Date. Notwithstanding the effective date, the final 
rule and amendments will apply to individual account plans for plan 
years beginning on or after November 1, 2011.

FOR FURTHER INFORMATION CONTACT: Michael Del Conte, 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

    According to the Department of Labor's (Department) most recent 
data, there are an estimated 483,000 participant-directed individual 
account plans, covering an estimated 72 million participants, and 
holding almost $3 trillion in assets.\1\ With the proliferation of 
these plans, which afford participants and beneficiaries the 
opportunity to direct the investment of all or a portion of the assets 
held in their individual plan accounts, participants and beneficiaries 
are increasingly responsible for making their own retirement savings 
decisions. This increased responsibility has led to a growing concern 
that participants and beneficiaries may not have access to or, if 
accessible, may not be considering, information critical to making 
informed decisions about the management of their accounts, particularly 
information on investment choices, including attendant fees and 
expenses.
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    \1\ 2007 Form 5500 Data, U.S. Department of Labor. The estimated 
483,000 plans include plans that permit participants to direct the 
investment of all or a portion of their individual accounts.
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    Under ERISA, the investment of plan assets is a fiduciary act 
governed by the fiduciary standards in ERISA section 404(a)(1)(A) and 
(B), which require plan fiduciaries to act prudently and solely in the 
interest of the plan's participants and beneficiaries. When a plan 
assigns investment responsibilities to the plan's participants and 
beneficiaries, it is the view of the Department that plan fiduciaries 
must take steps to ensure that participants and beneficiaries are made 
aware of their rights and responsibilities with respect to managing 
their individual plan accounts and are provided sufficient information 
regarding the plan, including its fees and expenses and designated 
investment alternatives, to make informed decisions about the 
management of their individual accounts. To some extent, disclosure of 
such information already is required by plans that elect to comply with 
the requirements of ERISA section 404(c) (see section 2550.404c-
1(b)(2)(i)(B)). However, compliance with section 404(c)'s disclosure 
requirements is voluntary and does not extend to participants and 
beneficiaries in all participant-directed individual account plans.
    The Department believes that all participants and beneficiaries 
with the right to direct the investment of assets held in their 
individual plan accounts should have access to basic plan and 
investment information. For this reason, the Department is issuing this 
regulation under ERISA section 404(a), with conforming amendments to 
regulations under section 404(c). This regulation under ERISA section 
404(a) establishes uniform, basic disclosures for such participants and 
beneficiaries, without regard to whether the plan in which they 
participate is a section 404(c) plan. In addition, the regulation 
requires participants and beneficiaries to be provided investment-
related information in a form that encourages and facilitates a 
comparative review among a plan's investment alternatives.

2. Request for Information and Proposed Regulation

    To facilitate development of the regulation, the Department first 
published, on April 25, 2007, a Request for Information (RFI) in the 
Federal Register \2\ requesting suggestions, comments and views from 
interested persons on a variety of issues relating to the disclosure of 
plan and investment-related fee and expense and other information to 
participants and beneficiaries in participant-directed individual 
account plans. Following its review of over 100 public comment letters 
submitted in response to the RFI, the Department next published a 
notice of proposed rulemaking in the Federal Register on July 23, 
2008.\3\ Interested persons were again invited to submit comments on 
the proposal, and, in response to this invitation, the Department 
received over 90 written comments from a variety of parties, including 
plan sponsors and fiduciaries, plan service providers, financial 
institutions, and employee benefit plan and participant 
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\ 72 FR 20457 (April 25, 2007).
    \3\ 73 FR 43014 (July 23, 2008).
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    In addition to publishing an RFI and a proposed regulation, the 
Department engaged ICF International (ICF) to conduct a series of focus 
group studies concerning how participants generally make choices among 
their employee benefit plan's investment alternatives, and, 
specifically, how participants would react to the Model Comparative 
Chart for plan investment alternatives that was published as an 
appendix to proposed section 2550.404a-5. ICF issued a report to the 
Department concerning the results of these focus group studies, and 
these results, where appropriate, have been incorporated below in the 
Department's discussion of comments on the proposed regulation and 
Model Comparative Chart.
    Set forth below is an overview of the final regulations and a 
discussion of the public comments received on the proposal.

[[Page 64911]]

B. Final Rule Sec.  2550.404a-5 Concerning Fiduciary Requirements for 
Disclosure

    In general, the final regulation retains the basic structure of the 
proposal. Paragraph (a) of Sec.  2550.404a-5 sets forth the general 
principle that, where documents and instruments governing an individual 
account plan provide for the allocation of investment responsibilities 
to participants and beneficiaries, a plan fiduciary, consistent with 
ERISA section 404(a)(1)(A) and (B), must take steps to ensure that such 
participants and beneficiaries, on a regular and periodic basis, are 
made aware of their rights and responsibilities with respect to the 
investment of assets held in, or contributed to, their accounts and are 
provided sufficient information regarding the plan, including plan fees 
and expenses, and regarding the designated investment alternatives 
available under the plan, including fees and expenses attendant 
thereto, to make informed decisions with regard to the management of 
their individual accounts. Paragraph (b) addresses the disclosure 
requirements that must be met by plan fiduciaries for plan years 
beginning on or after the applicability date. Under this paragraph, 
plan fiduciaries must comply with the requirements of paragraph (c), 
dealing with plan-related information, and paragraph (d), dealing with 
investment-related information. Paragraph (e) describes the form in 
which the required information may be disclosed, such as via the plan's 
summary plan description, a quarterly benefit statement, or the use of 
the provided model, depending on the specific information. Paragraph 
(e) recognizes the various acceptable means of disclosure; it does not 
preclude other means for satisfying the disclosure duties under this 
final regulation. Fiduciaries that meet the requirements of paragraphs 
(c) and (d) will have satisfied the duty to make the regular and 
periodic disclosures described in paragraph (a) of this section. As 
indicated in the preamble to the proposal, the Department believes, as 
an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose 
on fiduciaries of all participant-directed individual account plans a 
duty to furnish participants and beneficiaries information necessary to 
carry out their account management and investment responsibilities in 
an informed manner. In the case of plans that elected to comply with 
section 404(c) before the applicability of this final rule, the 
requirements of section 404(a)(1)(A) and (B) typically would have been 
satisfied by compliance with the disclosure requirements set forth at 
29 CFR Sec. 2550.404c-1(b)(2)(i)(B). However, the Department expresses 
no view with respect to plans that did not comply with section 404(c) 
and the regulations thereunder as to the specific information that 
should have been furnished to participants and beneficiaries at any 
time before this regulation is finalized and applicable.
    Pursuant to Executive Order 12866, the Department evaluated the 
benefits and costs of the final regulation, and concludes that the net 
present value of the rule's benefits is estimated at nearly $12.3 
billion. The Department estimates that the regulation will affect 72 
million participants in 483,000 participant-directed individual account 
plans containing assets valued at nearly $3.0 trillion.\4\ Over the 
ten-year period 2012-2021, the Department estimates that the present 
value of the benefits provided by the final rule will be approximately 
$14.9 billion and the present value of the costs will be approximately 
$2.7 billion.\5\ A significant benefit of this regulation is that it 
will reduce the amount of time participants spend collecting fee and 
expense information and organizing the information in a format that 
allows key information to be compared; this time savings is estimated 
to total nearly 54 million hours valued at nearly $2 billion in 2010 
(2010 dollars). The anticipated cost of the regulation is $425 million 
in 2012 (2010 dollars), arising from legal compliance review, time 
spent consolidating information for participants, creating and updating 
Web sites, preparing and distributing annual and quarterly disclosures, 
and material and postage costs to distribute the disclosures. A more 
detailed discussion of the need for this regulatory action, 
consideration of regulatory alternatives, and assessment of benefits 
and costs is included in Section E of this preamble, entitled 
``Regulatory Impact Analysis.''
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    \4\ This estimate is based on 2007 Form 5500 data, which is the 
latest available data.
    \5\ This calculation uses a seven percent discount rate. The 
$14.9 billion of benefits and $2.7 billion of costs are valued in 
2010 dollars.
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1. General; Satisfaction of Duty To Disclose

    As proposed, the obligation to disclose the required information 
was imposed generally on a plan fiduciary (paragraph (a) of proposed 
Sec.  2550.404a-5). Commenters, however, requested guidance as to which 
fiduciary is responsible for satisfying the duty to disclose. The 
proposal described the party responsible for providing disclosures as 
``a fiduciary (or a person or persons designated by the fiduciary to 
act on its behalf)[.]'' Commenters explained that any given plan might 
have many fiduciaries involved in its operation and requested 
clarification as to which fiduciary must provide the rule's required 
disclosures. Accordingly, consistent with other disclosure obligations 
under ERISA, the Department has clarified in paragraph (a) of the final 
rule that the plan administrator, as defined in ERISA section 3(16), is 
responsible for complying with the rule's disclosure requirements.
    Paragraph (b) of the final rule, consistent with the proposal, 
addresses the disclosure requirements plan administrators must satisfy. 
Paragraph (b) has been modified from the proposal to clarify, at 
paragraph (b)(1), that a plan administrator will not be liable for the 
completeness and accuracy of information used to satisfy these 
disclosure requirements when the plan administrator reasonably and in 
good faith relies on information received from or provided by a plan 
service provider or the issuer of a designated investment alternative. 
A footnote to the proposal included the following statement: 
``[F]iduciaries shall not be liable for their reasonable and good faith 
reliance on information furnished by their service providers with 
respect to those disclosures required by paragraph (d)(1).'' \6\ 
Although commenters generally were supportive of this reliance relief 
for plan administrators required to comply with the rule's disclosure 
requirements, many comments asked the Department to make this relief 
more prominent by including it in the text of the final rule, rather 
than as a mere footnote to the Department's preamble. The Department 
was persuaded that this relief should be more prominent, and the 
provision therefore has been added to the text of the final rule. 
Further, this provision has been expanded to enable reliance on 
information received from or provided by both service providers to the 
plan and, as applicable, issuers of plan designated investment 
alternatives (e.g., mutual funds).
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    \6\ 73 FR 43014 at 43018, n. 7 (July 23, 2008).
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    Some commenters requested that the final rule clarify whether IRA-
based plans are subject to the disclosure rule. Commenters argued that 
IRA-based plans under the Internal Revenue Code of 1986 (Code) such as 
Code sections 408(k) simplified employee pensions (SEPs) and 408(p) 
simple retirement accounts (SIMPLEs) are already subject to disclosure 
regimes under the Code

[[Page 64912]]

and relevant securities laws. It also was argued that application of 
the disclosure rules would add administrative complexity to 
arrangements that, by their very nature, were intended to be simple and 
that complicating administration of such plans may serve to discourage 
employers from establishing or continuing such arrangement for their 
employees. Taking into account the foregoing arguments, as well as the 
fact that participants in IRA-based plans generally have considerable 
flexibility in the choice of their IRA provider or the ability to roll 
over their balances to an IRA provider of their choice, the Department 
has determined not to extend the application of this rule to such 
plans. To clarify the scope of the final rule, a new paragraph (b)(2) 
has been added defining the types of arrangements that constitute a 
``covered individual account plan'' for purposes of the rule. In this 
regard, paragraph (b)(2) provides that a ``covered individual account 
plan'' is any participant-directed individual account plan, as defined 
in section 3(34) of ERISA, except that such term shall not include 
plans involving individual retirement accounts or individual retirement 
annuities described in sections 408(k) (``simplified employee 
pension'') or 408(p) (``simple retirement account'') of the Internal 
Revenue Code of 1986 (Code).
    A few commenters suggested the rule be expanded to cover defined 
contribution plans that do not allow for participant direction. The 
Department did not adopt this suggestion. While it may be appropriate 
to review the disclosure rules applicable to such plans, the Department 
does not believe it has sufficient information at this time to fully 
evaluate and address potential disclosure gaps in the context of this 
rulemaking.
    One commenter suggested that the Department exclude small plans 
(for example those with fewer than 100 participants) from the scope of 
the final rule. The Department did not adopt this suggestion. The 
Department believes that participants in smaller plans face the same 
challenges as participants in larger plans when it comes to 
understanding the operations of their plans and the investment options 
offered thereunder. For this reason, the Department has determined that 
the final rule should apply to covered participant-directed individual 
account plans without regard to size.
    Several commenters suggested that the Department clarify, and in 
some cases modify, the scope of the proposal as to the specific 
participants and beneficiaries of covered plans to which the rule 
applies. The proposed rule required disclosures to each participant and 
beneficiary of the plan that ``pursuant to the terms of the plan, has 
the right to direct the investment of assets held in, or contributed to 
his or her individual account.'' The question presented by the 
commenters was whether disclosures must be furnished to all eligible 
employees or only those who actually participate in the plan. 
Consistent with the definition of ``participant'' under section 3(7) of 
ERISA, disclosures must be made to all employees that are eligible to 
participate under the terms of the plan, without regard to whether the 
participant has actually become enrolled in the plan. One commenter 
recommended that the proposal be modified to require initial 
disclosures to all eligible employees, but limit annual disclosures 
only to those that actually enroll, make contributions, and direct 
their investments. The Department has not adopted this recommendation. 
The Department believes that, with regard to employees that have not 
enrolled in their plan, the annual notice will serve as an important 
reminder of their eligibility to participate in the plan. With regard 
to notification of beneficiaries, however, the obligation to disclose 
extends only to those beneficiaries that, in accordance with the terms 
of the plan, have the right to direct the investment of assets held in, 
or contributed to, their accounts. Such rights might arise as a result 
of the death of a participant or pursuant to a qualified domestic 
relations order.

2. Plan-Related Information

    As noted above, paragraph (c) of the final rule addresses plan-
related information that must be disclosed to participants and 
beneficiaries. Like the proposal, paragraph (c) sets forth three 
general categories of plan-related information that must be disclosed 
to participants and beneficiaries--general operational and 
identification information (paragraph (c)(1)), administrative expenses 
(paragraph (c)(2)), and individual expenses (paragraph (c)(3)). The 
required disclosures must be based on the latest information available 
to the plan.
a. General Operational and Identification Information
    Paragraph (c)(1)(i), like the proposal, requires that certain 
operational and identification information be disclosed to participants 
and beneficiaries. Specifically, this paragraph requires that 
participants and beneficiaries be provided: (A) An explanation of the 
circumstances under which participants and beneficiaries may give 
investment instructions; (B) An explanation of any specified 
limitations on such instructions under the terms of the plan, including 
any restrictions on transfer to or from a designated investment 
alternative; \7\ (C) A description of or reference to plan provisions 
relating to the exercise of voting, tender and similar rights 
appurtenant to an investment in a designated investment alternative as 
well as any restrictions on such rights; (D) An identification of any 
designated investment alternatives offered under the plan; (E) An 
identification of any designated investment managers; and (F) A 
description of any ``brokerage windows,'' ``self-directed brokerage 
accounts,'' or similar plan arrangements that enable participants and 
beneficiaries to select investments beyond those designated by the 
plan. Subparagraph (F) was added to the final rule in response to 
comments requesting a clarification as to what, if anything, has to be 
disclosed about brokerage windows and similar arrangements that permit 
participants to invest their assets in other than designated investment 
alternatives offered by the plan. It should be noted that in addition 
to the general brokerage window information required by paragraph (F), 
other provisions of this rule require disclosure of any fees and 
expenses that participants will be expected to pay when utilizing the 
brokerage window or similar arrangement (see paragraph (c)(3)(i)(A)).
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    \7\ Some commenters asked whether this requirement included 
limitations that are imposed at the investment or fund level. The 
Department intends that the disclosure pursuant to this paragraph 
would include only plan-based limitations and restrictions on a 
participant's ability to direct investments or transfer to or from 
designated investment alternatives. To the extent any limitations or 
restrictions are imposed at the investment, fund or portfolio level, 
those limitations or restrictions must be described as part of the 
investment-related information required by the final rule. See 
paragraph (d)(1)(iv) of the final regulation.
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    A number of commenters expressed concern about the requirement(s) 
that information be furnished to participants and beneficiaries ``on or 
before the date of plan eligibility and at least annually thereafter.'' 
Specifically, the concerns focused on the compliance challenges posed 
by this disclosure requirement on plans that provide for plan 
eligibility as of the first day of employment, noting that employers 
may not be able to furnish the required disclosure in advance of 
employment and, therefore, may be required to modify their eligibility 
rules to avoid noncompliance with this disclosure obligation. 
Commenters suggested various

[[Page 64913]]

alternatives, such as requiring disclosure on or before enrollment in 
the plan or the first investment. The Department believes that the 
commenters make a valid point and, accordingly, has modified the rule 
to provide more flexibility. The final rule provides in this regard 
that participants and beneficiaries must be furnished the required 
information on or before the date on which they can first direct their 
investments. While not requiring disclosures as early as the date of 
plan eligibility, the provision does operate to ensure that 
participants are furnished the information either before or in 
connection with their first investment direction under the plan. The 
same timing issues exists with respect to those plan-related 
disclosures required by paragraphs (c)(2)(i)(A), (c)(3)(i)(A) and 
(d)(1) and, therefore, the Department has made identical changes to the 
timing requirements of those paragraphs in the final rule.
b. Changes to General Information
    The proposal required in paragraph (c)(1)(ii) that participants or 
beneficiaries be furnished, not later than 30 days after the date of 
adoption of any material change to the general plan information 
described in paragraph (c)(1)(i), a description of such change. The 
Department received several comments requesting that the timing for 
furnishing a description of such a material change be determined with 
reference to the effective date of the change, rather than the date of 
its adoption. Commenters noted that the adoption date of a change 
sometimes precedes its effective date by as much as a year or more, and 
also that in some instances the date of adoption may be unclear. 
Several commenters also suggested that the required description of the 
change be furnished at least 30 days, but not more than 90 days, before 
the effective date of the material change, in order to apprise 
participants and beneficiaries of the change close to the time that it 
will be useful to them. In addition, questions were raised concerning 
what constitutes a ``material'' change in the required information.
    With regard to the question as to what constitutes a ``material'' 
change, the Department is now of the view that, given the significance 
of the information that has to be disclosed under paragraph (c)(1)(i), 
virtually any change in the information would be a ``material'' change 
because of its importance to participants and beneficiaries. 
Accordingly, the Department has decided to drop the concept of 
``material'' from the requirement to update plan participants and 
beneficiaries of changes in the required disclosures.
    The Department also decided to amend the timing requirements in 
response to comments on the proposal. In this regard, the Department 
agrees with commenters that suggested that participants and 
beneficiaries should be notified of plan changes on the earliest 
possible date and, where practical, in advance of the effective date of 
the changes. In this regard, paragraph (c)(1)(ii) of the final rule 
provides that if there is a change to the information described in 
paragraph (c)(1)(i)(A) through (F), a description of such change(s) 
must be furnished to participants and beneficiaries at least 30 days, 
but not more than 90 days, in advance of the effective date of the 
change(s). The final rule, however, also recognizes that there may be 
circumstances when changes must be made within a time frame that 
precludes compliance with the 30-day advance notice requirement, such 
as the immediate elimination of an investment option when it is 
determined to be no longer a prudent investment alternative. In such 
cases, the rule requires that information be furnished as soon as 
reasonably practicable.
    In connection with the development of the final rule, the 
Department also reviewed the information required to be disclosed under 
paragraph (c)(2)(i)(A) (relating to administrative expenses) and 
paragraph (c)(3)(i)(A) (relating to individual expenses) and concluded 
that an updating rule should apply to those disclosures as well, given 
the importance of the required information to participants and 
beneficiaries. These new updating requirements appear at paragraphs 
(c)(2)(i)(B) and (c)(3)(i)(B) of the final rule.
c. Administrative Expenses
    Paragraph (c)(2)(i) of the final rule, like the proposal, requires 
that participants and beneficiaries be provided an explanation of any 
fees and expenses for general plan administrative services (e.g., 
legal, accounting, recordkeeping) that may be charged against their 
individual accounts (whether by liquidating shares or deducting 
dollars), and the basis on which such charges will be allocated (pro 
rata, per capita). The provision makes clear that such charges do not 
include charges that are included in the annual operating expenses of 
designated investment alternatives. As noted above, this paragraph 
(c)(2) has been modified to establish disclosure timing and update 
requirements that conform with the requirements of paragraph (c)(1). 
See paragraph (c)(2)(i)(A) and (B).
    Paragraph (c)(2)(ii), also like the proposal, requires that 
expenses described in paragraph (c)(2)(i) that are actually charged 
against a participant's or beneficiary's account be disclosed to 
participants and beneficiaries at least quarterly, along with a 
description of the service(s) to which the charge or charges relate.\8\ 
However, in response to commenters' requests for specificity as to 
which services and charges are covered by this quarterly disclosure 
requirement, paragraph (c)(2)(ii)(A) both includes an explicit cross 
reference to the fees and expenses for administrative services 
described in paragraph (c)(2)(i) and a parenthetical noting that the 
disclosed charges arise from either the liquidation of shares or the 
deduction of dollars from individual accounts in compliance with 
paragraph (c)(2)(i)'s requirement that such charges are not included in 
the total annual operating expense of any designated investment 
alternative.
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    \8\ Some commenters requested that the Department reiterate its 
position, discussed in the preamble to the proposed rule, that 
administrative charges do not need to be broken out into service-by-
service detail on the quarterly statement. The Department continues 
to agree with commenters on the proposal and the RFI who believe 
that such a breakdown is not necessary, or particularly useful, to 
participants and beneficiaries; the final rule therefore also allows 
for ``aggregate'' disclosure of administrative expenses, as 
proposed. See 73 FR 43014, 43016 (July 23, 2008).
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    In a further effort to bring clarity to the disclosures provided to 
participants and beneficiaries, the Department has added a new 
subparagraph (C) to paragraph (c)(2)(ii) of the final rule. This new 
subparagraph is intended to provide those participants in plans with 
revenue sharing arrangements that serve to reduce plan administrative 
costs with a better picture as to how those costs are underwritten, at 
least in part, by fees and expenses attendant with investment 
alternatives offered under their plans. Specifically, paragraph 
(c)(2)(ii)(C) provides that, if applicable, the statement required to 
be furnished pursuant to paragraph (c)(2)(ii), must include an 
explanation that, in addition to the expenses reported on the 
statement, some of the plan's administrative expenses for the preceding 
quarter were paid from the annual operating expenses of one or more of 
the plan's designated investment alternatives (e.g., through revenue 
sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees). This 
required statement has been included in the final rule in response to 
many comments received by the Department on the provision in the 
proposal that administrative expenses must be disclosed pursuant to 
this paragraph

[[Page 64914]]

only ``to the extent not otherwise included in investment-related fees 
and expenses[.]'' Some commenters expressed concern that participants 
and beneficiaries may be misled into believing that there is little or 
no administrative expense associated with their participation in the 
plan when a significant portion of the cost of administrative services 
is actually paid out of investment-related charges. Other commenters 
disagreed and believed that, because any such administrative services 
would be paid for from the total annual operating expenses of the 
designated investment alternatives in which participants invest and 
because such annual operating expenses are required to be separately 
disclosed, participants and beneficiaries will receive comprehensive 
information about the total charges, for administration and investment, 
that will be assessed against their accounts. These commenters also 
argue that the burden associated with attempting to attribute some 
portion of total annual operating expenses to plan administrative 
services would be significant and vastly outweigh any potential benefit 
to participants and beneficiaries of such attribution. Most commenters, 
however, agreed that it is appropriate to inform participants, when 
applicable, that administrative expenses are paid from investment-
related fees and are not reflected in the reported administrative 
expense amount. The Department was persuaded that some information, 
even if general, would help participants to better understand the fees 
and expenses attendant to operating their plan and of the fact that 
some fees and expenses might be underwritten by the investment 
alternatives offered by their plans.
    Some commenters argued that administrative expenses charged to 
participant accounts should be reported on an annual, rather than a 
quarterly, basis. These commenters argued that the amounts reported as 
deducted during any given quarter have the potential to both mislead 
and confuse participants because such amounts are often subsequently 
reduced or restored by offsets or credits from revenue sharing and 
similar arrangements as part of year-end or periodic reconciliations. 
The commenters further argue that eliminating this information from 
quarterly disclosures will not affect the information available to 
participants because participants typically have access to Web sites 
where they can review the status of their account, including charges to 
their accounts, on a daily basis. Other commenters supported the 
quarterly disclosure requirement, noting that there is no other formal 
requirement for the disclosure of such information to participants and 
beneficiaries on a regular basis. After careful consideration of the 
various views on this requirement, the Department has decided to retain 
the requirement for quarterly disclosures of plan administrative 
expenses. While the Department recognizes that some participants may 
have questions concerning the debiting of charges and crediting of 
offsets to their accounts during the plan year, the Department is not 
persuaded that the potential for confusion and questions that might 
result from the requirement outweighs the benefits of participants and 
beneficiaries being informed on a regular basis of the actual amounts 
taken from (or credited to) their account during the quarter and the 
identification of services, albeit general, to which those amounts 
relate.
d. Individual Expenses
    As noted above, paragraph (c)(3) requires the disclosure of those 
expenses charged against a participant's or beneficiary's account on an 
individual, rather than plan-wide basis. Examples of such charges 
include: Fees attendant to the processing of plan loans or qualified 
domestic relations orders; fees for investment advice; front or back-
end loads or sales charges; redemption fees; and investment management 
fees attendant to a participant's or beneficiary's investment that are 
charged directly against the individual account of the participant or 
beneficiary, rather than included in the annual operating expenses of 
the investment (as might be the case, for example, with certain 
unregistered designated investment alternatives, such as bank 
collective investment funds). In addition to clarifying changes, 
paragraph (c)(3), like paragraphs (c)(1) and (c)(2), incorporates new 
disclosure timing and update requirements, which are discussed in 
detail above.
    A few commenters requested clarification about the quarterly 
disclosure requirement for individual expenses. These commenters 
explained that some individual expenses currently are disclosed by a 
confirmation statement or other similar notice that is provided at the 
time the charge actually is assessed to the individual participant's or 
beneficiary's account; these commenters argued that the Department 
should avoid duplication, and potential confusion to participants and 
beneficiaries, that would result from requiring that these expenses 
also be disclosed on a quarterly statement. The Department does not 
intend such duplicative disclosure; the rule requires that this 
information be provided ``at least quarterly,'' and the Department 
anticipates that actual charges may be disclosed more frequently than 
quarterly. To the extent such a charge is otherwise disclosed during a 
particular quarter, for example by a confirmation statement after a 
charge is deducted from an account, that charge would not have to be 
disclosed again on the subsequent quarterly statement. No quarterly 
statement in compliance with this paragraph (or with paragraph 
(c)(2)(ii) concerning quarterly disclosure of administrative expenses) 
must be furnished if there were no charges to a participant's or 
beneficiary's account during the preceding quarter.
e. Disclosures On or Before First Investment
    In an effort to clarify the scope of the updating requirements and 
ensure that new participants were provided at least the same 
information that had been provided to existing participants prior to 
their participation, paragraph (d)(1)(v) of the proposal provided, for 
purposes of the disclosure of investment-related information to new 
participants, plan administrators could satisfy their obligation by 
furnishing the most recent annual disclosure along with any required 
updates furnished to participants and beneficiaries. The Department 
received no objections to this provision and, accordingly, is adopting 
it as proposed, with the exception of a paragraph re-designation and 
changes necessary to conform to the new timing requirements applicable 
to the annual disclosures. See paragraph (d)(1)(viii) of Sec.  
2550.404a-5. A question was raised, however, whether a similar 
clarification was needed for the plan-level disclosures required to be 
furnished to new participants and beneficiaries under the regulation. 
The Department found no basis for not providing similar guidance in the 
context of the required plan-level disclosures and, therefore, has 
added to the final rule a new paragraph (c)(4). Paragraph (c)(4) 
provides that for purposes of the requirements under paragraphs 
(c)(1)(i), (c)(2)(i)(A), and (c)(3)(i)(A) that plan administrators 
furnish information on or before the date on which a participant or 
beneficiary can first direct his or her investments, plan 
administrators may satisfy their obligations by furnishing to the 
participant or beneficiary the most recent annual disclosure furnished 
to participants and beneficiaries pursuant

[[Page 64915]]

those paragraphs and any changes to the information furnished to 
participants and beneficiaries pursuant to paragraphs (c)(1)(ii), 
(c)(2)(i)(B) and (c)(3)(i)(B) of the final rule.

3. Investment-Related Information

    The Department received a number of comments relating to the 
disclosure of investment-related information pursuant to paragraph (d) 
of the proposal, and the related definitional section in paragraph (h). 
Many of the comments raised questions concerning the proposed 
application of mutual fund-type disclosures to non-registered 
investment vehicles. The Department has made a number of changes to 
this section of the final rule (and the related definitional section in 
paragraph (h)), in an effort to address the problems raised by the 
commenters, while, at the same time, attempting to maintain a 
reasonably uniform regime for the disclosure of investment-related 
information, a disclosure regime that would enable participants to 
compare competing mutual fund, insurance and banking products on a 
reasonably consistent and uniform basis. In considering these issues, 
the Department, in addition to considering comments and input from 
financial industry representatives, consulted with other appropriate 
regulators, including the Securities and Exchange Commission 
(Commission), the Office of the Comptroller of the Currency, and the 
Financial Industry Regulatory Authority (FINRA). The Department also 
employed focus groups, as discussed above, to learn more about how 
participants make investment decisions and whether the Department's 
proposed Model Comparative Chart would in fact assist such decisions. 
The Department believes that the investment-related disclosure 
requirements of the final rule, discussed below, strike an appropriate 
balance between accommodating, on one hand, the increasing innovation 
and complexity of the types of investments that are available to plan 
participants and beneficiaries and, on the other hand, participants' 
and beneficiaries' need for complete, but concise and user-friendly, 
information about their plan investment alternatives.
a. Information To Be Provided Automatically
    Paragraph (d)(1) of the final rule, consistent with the proposal, 
describes the investment-related information that must be provided 
automatically, with respect to each designated investment alternative, 
to participants and beneficiaries on or before the date they first have 
the ability to direct their investments and at least annually 
thereafter. The specific information that must be disclosed pursuant to 
this paragraph is set forth below, as well as a discussion of how this 
required information has been modified in response to commenters' 
concerns. Additionally, paragraph (i) of the final rule provides 
special disclosure requirements for certain types of designated 
investment alternatives, which modify the requirements of paragraph 
(d)(1) of the final.
b. Identifying Information
    The proposed regulation, in paragraph (d)(1)(i), required that 
certain identifying information be furnished with respect to each 
designated investment alternative offered under the plan. The first 
required piece of information, in subparagraph (A), is the name of the 
designated investment alternative. This straight-forward requirement 
did not generate any public comment and has been retained in the final 
rule.
    Subparagraph (B) of paragraph (d)(1)(i) of the proposal required 
the furnishing of an Internet Web site address relating to each 
designated investment alternative. The Web site requirements of the 
final rule, as well as related comments on the proposal, are discussed 
below in this preamble under the heading ``f. Internet Web site 
address.''
    Like the proposal, the final rule, at paragraph (d)(1)(i)(B), 
requires identification of the type or category of the investment 
(e.g., money market fund, balanced fund (stocks and bonds), large-cap 
stock fund, employer stock fund, employer securities). This requirement 
is unchanged from the proposal, although the examples of types or 
categories in the parenthetical, which are set forth for illustrative 
purposes, have been expanded in response to questions from commenters 
about investment alternatives that did not clearly fall within the list 
of examples included in the proposal. One commenter suggested that 
fiduciaries should be permitted to utilize various commercial services 
to classify the type or category of a plan's designated investment 
alternatives. While the Department has not modified the proposal in 
response to this suggestion, the Department anticipates that plan 
administrators typically will rely on the investment issuer's 
classification of the type or category of an investment alternative.
    Finally, paragraph (d)(1)(i)(D) of the proposal, which required 
disclosure of the type of management utilized by the investment (e.g., 
actively managed, passively managed), has been eliminated from the 
final rule. Many commenters requested that this requirement be 
eliminated, arguing that they do not believe this information will be 
useful to most participants and beneficiaries; that some funds may not 
clearly fall within either one of these two categories, either because 
they have features of both or because neither category applies (for 
example, an employer stock fund); and, that it may even mislead 
participants and beneficiaries about the risks of a particular 
designated investment alternative. Other commenters argued that this 
requirement may be redundant; for example, a fund that lists its ``type 
or category'' as an index fund is by definition passively managed. 
Finally, the results of the Department's focus groups support the 
notion that this information is not necessarily helpful, and is 
potentially confusing, to participants. One focus group participant, 
for example, stated that without knowing what is meant by active or 
passive management, she would choose active management because it 
``sounds'' better. The Department was persuaded by commenters that 
providing this information, especially as required in a comparative 
format, may not be meaningful to participants and beneficiaries. 
Accordingly, the final rule no longer requires plan administrators to 
furnish, as a separate piece of identifying information, the type of 
management utilized with respect to a designated investment 
alternative. The Department notes that, for participants who wish to 
obtain more information about the management of a designated investment 
alternative, the narrative description of an investment's objectives or 
goals, and of the investment's principal strategies and principal 
risks, is likely to convey more meaningful and contextual information 
concerning the style of management used with respect to a designated 
investment alternative.
c. Performance Data
    The proposed rule, in paragraph (d)(1)(ii), required that 
performance data be disclosed for designated investment alternatives 
with respect to which the return is not fixed. Specifically, this 
paragraph required disclosure of the average annual total return 
(percentage) of the investment for the following periods, if available: 
1-year, 5-years, and 10-years, measured as of the end of the applicable 
calendar year, as well as a statement indicating that an investment's 
past performance is not

[[Page 64916]]

necessarily an indication of how the investment will perform in the 
future.
    This provision, paragraph (d)(1)(ii), is being adopted generally as 
proposed. Several commenters raised issues regarding the ``if 
available'' language, suggesting that participants and beneficiaries 
could be deprived of as much as nearly five years of valuable return 
information in situations where the designated investment alternative 
has been in existence for a period of time just shy of the 5- or 10-
year marks. These commenters noted that Commission rules require 
performance for the ``life of the fund'' to address this issue. In 
order to avoid the information gap identified by the commenters, and to 
maintain appropriate consistency with Commission requirements, the 
final regulation, at (d)(1)(ii)(A), requires disclosure of the average 
annual total return of the investment for 1-, 5-, and 10-calendar year 
periods ending on the date of the most recently completed calendar year 
(or for the life of the designated investment alternative, if shorter).
    In the case of designated investment alternatives with respect to 
which the return is fixed for the term of the investment, paragraph 
(d)(1)(ii) of the proposal required disclosure of both the fixed rate 
of return and the term of the investment. While no commenters opposed 
the proposed requirement, some commenters did request a clarification 
as to how the disclosure requirement applied to contracts with respect 
to which there is no ``term of investment.'' The commenters explain 
that certain contracts, while often having a minimum guaranteed rate 
for the life of the contract, permit the fixed rate to change upon 
notice, but never below the minimum guaranteed rate. One commenter 
suggested that, for such contracts, the pertinent information for 
participants and beneficiaries is the most recent rate of return, the 
minimum rate guaranteed under the contract, if any, and an explanation 
that the insurer may adjust the rate of return prospectively. The 
Department agrees. The most essential information for participants who 
choose to invest in fixed investment alternatives is the contractual 
interest rate paid to their accounts and the term of the investment 
during which their monies are shielded from market price fluctuations 
and reinvestment risks. The Department believes that, with respect to 
such contracts, it is particularly important that participants and 
beneficiaries be clearly advised of the issuer's ability to modify the 
rate of return and be able to readily determine the most current rate 
of return applicable to such investment. In this regard, the Department 
has modified the proposal, at paragraph (d)(1)(ii)(B) of the final, to 
require the disclosure of the current rate of return, the minimum rate 
guaranteed under the contract or agreement, if any, and a statement 
advising participants and beneficiaries that the issuer may adjust the 
rate of return prospectively and how to obtain (e.g., telephone or Web 
site) the most recent rate of return information available.
    One commenter asked whether designated investment alternatives such 
as stable value funds and money market mutual funds are to be treated 
as fixed return or variable return investments for purposes of the 
regulation. The fixed return provisions of the regulation are limited 
to designated investment alternatives that provide a fixed or stated 
rate of return to the participant, for a stated duration, and with 
respect to which investment risks are borne by an entity other than the 
participant (e.g., insurance company). Examples of fixed return 
investments include certificates of deposit, guaranteed insurance 
contracts, variable annuity fixed accounts, and other similar interest-
bearing contracts from banks or insurance companies. While money market 
mutual funds and stable value funds generally aim to preserve 
principal, they are not free of investment risk to the investor. 
Accordingly, such investments are subject to the variable return 
provisions of the regulation, even though they routinely hold fixed-
return investments.
    Several commenters requested clarification on the relationship, if 
any, between the disclosure requirements in the proposal and the 
Securities and Exchange Commission's and FINRA's advertising rules. The 
primary concern of commenters seemed to be in connection with the 
requirement to disclose annually the performance data specified in 
paragraph (d)(1)(ii) of the proposal and the timeliness requirements in 
the Commission's advertising rules. The Department has consulted with 
the staff of the Commission and FINRA on this issue. The Commission's 
staff has advised that it expects to communicate its position to the 
Department in a staff no-action letter, which will be issued before the 
applicability date of this final rule. FINRA staff has stated that it 
will apply the Commission's advertising rules in a manner that is 
consistent with the Commission's staff position published in the no-
action letter. The Department and the Commission will, in turn, make 
the letter available to the public on their respective Web sites.
d. Benchmarks
    Paragraph (d)(1)(iii) of the proposal required, for each designated 
investment alternative with respect to which the return is not fixed, 
the disclosure of ``the name and returns of an appropriate broad-based 
securities market index over the 1-year, 5-year, and 10-year periods * 
* *'' for which performance data must be disclosed. The proposal also 
provided that the benchmark could not be administered by an affiliate 
of the investment provider, its investment adviser, or a principal 
underwriter, unless the index is widely recognized and used.
    Some commenters suggested that the Department eliminate this 
requirement, while others called for permitting or requiring multiple 
benchmarks for each designated investment alternative. Some commenters 
suggested permitting composite or customized benchmarks. Those 
commenters who favored an ability to include multiple benchmarks for 
each designated investment option noted the existence of such 
flexibility under SEC rules, specifically Item 22(b)(7) of Form N-
1A.\9\ (See, e.g., Instruction 6 to Item 22(b)(7), encouraging, in 
addition to a required broad-based securities market index, narrowly 
based indexes that reflect the market sectors in which a fund invests.) 
Commenters who advocated composite benchmarks stated that a fund that 
invests in both stocks and bonds (e.g., lifecycle fund or balanced 
fund) should be permitted to compare itself to a benchmark consisting 
of a weighted average of both an equities index and a bond index. The 
commenters who favored eliminating the benchmark requirement stated 
that certain investment strategies are not managed to a benchmark, and 
therefore, providing benchmark information could be misleading. 
Supporters of the proposal, however, maintained that participants would 
benefit more from having a single recognizable benchmark for each 
designated investment alternative under the plan, rather than multiple 
or blended indices for each.
---------------------------------------------------------------------------

    \9\ Now Item 27 of Form N-1A, as revised February 2010.
---------------------------------------------------------------------------

    The Department continues to believe that appropriate benchmarks may 
be helpful tools for participants to use in assessing the various 
investment options available under their plans and, therefore, has 
retained this requirement in the final rule. However, benchmarks are 
more likely to be helpful when they are not subject to manipulation and 
are recognizable and understandable to the average plan participant, as 
is the case with broad-based indices contemplated

[[Page 64917]]

by Instruction 5 to Item 27(b)(7) of Form N-1A. For this reason, the 
final rule retains the proposed requirement that a benchmark must be a 
broad-based securities market index and it may not be administered by 
an affiliate of the investment issuer, its investment adviser, or a 
principal underwriter, unless the index is widely recognized and used. 
The Department, however, notes that paragraph (d)(2)(ii) of the final 
regulation permits the disclosure of information that is in addition to 
that which is required by this final regulation, so long as the 
additional information is not inaccurate or misleading. Thus, in the 
case of designated investment alternatives that have a mix of equity 
and fixed income exposure (e.g., balanced funds or target date funds), 
a plan administrator may, pursuant to paragraph (d)(2)(ii) of the final 
rule, blend the returns of more than one appropriate broad-based index 
and present the blended returns along with the returns of the required 
benchmark, provided that the blended returns proportionally reflect the 
actual equity and fixed-income holdings of the designated investment 
alternative. For example, where a balanced fund's equity-to-bond ratio 
is 60:40, the returns of an appropriate bond index and an appropriate 
equity index may be blended in the same ratio and presented along with 
the benchmark returns mandated by paragraph (d)(1)(iii) of the final 
rule. Presenting blended returns that do not proportionally reflect the 
holdings of the designated investment alternative would, in the view of 
the Department, be misleading and, therefore, not permitted pursuant to 
paragraph (d)(2)(ii) of the final regulation.
e. Fee and Expense Information
    Paragraph (d)(1)(iv) of the proposal required disclosure of fee and 
expense information for designated investment alternatives. This 
requirement has been retained in the final rule, with a few 
modifications in response to public comments. Paragraph (d)(1)(iv) also 
has been restructured so that subparagraph (A) addresses the fee and 
expense disclosure requirements for designated investment alternatives 
with respect to which the return is not fixed, and subparagraph (B) 
addresses such requirements for designated investment alternatives with 
respect to which the return is fixed for the term of the investment.
    Consistent with the proposal, paragraph (d)(1)(iv)(A)(1) requires 
disclosure of the amount and a description of each shareholder-type fee 
(fees charged directly against a participant's or beneficiary's 
investment, such as commissions, sales loads, sales charges, deferred 
sales charges, redemption fees, surrender charges, exchange fees, 
account fees, and purchase fees). No substantive changes were made to 
this provision from that which was proposed. Clarifying language, 
however, was added to the existing parenthetical language in order to 
distinguish shareholder-type fees from other investment-related fees 
and expenses. The new language provides that a fee or expense is a 
shareholder-type fee to the extent it is ``not included in the total 
annual operating expenses of any designated investment alternative.'' 
Thus, the key distinction is how the fee is ultimately being paid by 
the participant or beneficiary. If the fee or expense is charged 
directly against participant's or beneficiary's individual investment 
or account, as is typically the case with sales loads, account fees, 
and the other items delineated in the parenthetical, then the fee or 
expense is to be disclosed as a shareholder-type fee. If, on the other 
hand, the fee or expense is paid from the operating expenses of a 
designated investment alternative, then the fee or expense is to be 
included in the total annual operating expenses of a designated 
investment alternative. The requirement to disclose the total annual 
operating expenses of each designated investment alternative is 
discussed below.
    The Department recognizes that in some instances there will be an 
overlap in disclosures between shareholder type fees described in 
paragraph (d)(1)(iv)(A)(1), and individual expenses described in 
paragraph (c)(3) of the final rule, which are discussed in detail above 
under the heading ``d. Individual expenses.'' For example, a front-end 
sales load imposed in connection with investing in a specific 
designated investment alternative that is charged (either by share or 
dollar deduction) directly against a participant's or beneficiary's 
individual account would properly be covered by and require disclosures 
under both paragraphs. The consequence of this overlap is that 
participants and beneficiaries will not only receive general 
information regarding the sales load before investing, but pursuant to 
paragraph (c)(3)(ii) of the final rule, will also receive a statement 
after investing showing the dollar amount actually charged against 
their individual accounts.
    Some commenters asked whether only fees and expenses must be 
disclosed, or whether plan administrators also should notify 
participants and beneficiaries of other limitations or restrictions 
concerning the designated investment alternative, such as trading 
restrictions or limitations on how amounts liquidated from the 
designated investment alternative may be reinvested. In the 
Department's view, it is appropriate in this context to inform 
participants and beneficiaries of these restrictions and limitations so 
that they are fully aware of the consequences of their investment 
decisions. Accordingly, paragraph (d)(1)(iv)(A)(1) of the final rule 
has been expanded from the proposal to require a description of any 
restriction or limitation that may be applicable to a purchase, 
transfer, or withdrawal of the investment in whole or in part (such as 
round trip, equity wash, or other restrictions).
    Paragraph (d)(1)(iv)(A)(2) requires disclosure of the total annual 
operating expenses of the investment expressed as a percentage (e.g., 
expense ratio), calculated in accordance with paragraph (h)(5) of the 
final rule. This requirement is unchanged from the proposal, although, 
as discussed below, the definition of ``total annual operating 
expenses'' has been revised in the final rule.
    Paragraph (d)(1)(iv)(A)(3) of the final rule includes a new 
requirement for an example illustrating the effect in dollars of each 
designated investment alternative's total annual operating expenses. 
Specifically, this paragraph requires disclosure of the total annual 
operating expenses of the investment for a one-year period expressed as 
a dollar amount for a $1,000 investment (assuming no returns and based 
on the total annual operating expenses percentage disclosed for 
paragraph (d)(1)(iv)(A)(2)). A significant number of commenters felt 
that a dollar-based disclosure would be more useful to participants, 
who cannot always convert operating expense ratios into dollars, which 
commenters argue is a more helpful way for participants to understand 
the significance of fees. The results of the Department's focus group 
studies also support the notion that examples in dollars will help 
participants to better understand how fees impact retirement savings. 
The Department was persuaded by the large number of commenters 
supporting inclusion of dollar-based disclosure in the context of 
investment fees and, accordingly, expanded the requirements of the 
final rule to provide for the disclosure of a designated investment 
alternative's total annual operating expenses in dollars.
    Paragraph (d)(1)(iv)(A)(4) of the final rule requires a statement 
indicating that

[[Page 64918]]

fees and expenses are only one of several factors that participants and 
beneficiaries should consider when making investment decisions. The 
Department did not receive any comments opposing this requirement; in 
fact, this required statement is consistent with the concern raised by 
commenters that participants and beneficiaries should not be encouraged 
to focus ``only'' on fees and expenses, since fee and expense 
information must be considered in context with other information about 
a plan's designated investment alternatives. This required statement 
has been retained, unchanged from the proposal.
    Paragraph (d)(1)(iv)(A)(5) of the final rule includes a new 
required statement that the cumulative effect of fees and expenses can 
substantially reduce the growth of a participant's or beneficiary's 
retirement account and that participants and beneficiaries can visit 
the Internet Web site of the Employee Benefits Security Administration 
for information and an example demonstrating the long-term effect of 
fees and expenses. This statement has been added in response to the 
suggestion of commenters that participants and beneficiaries would 
benefit from an understanding that, over time, fees and expenses may 
substantially reduce the growth of their retirement accounts.
    Finally, paragraph (d)(1)(iv)(B) of the final rule provides the fee 
and expense information that must be disclosed for designated 
investment alternatives with respect to which the return is fixed for 
the term of the investment. Consistent with the proposal, plan 
administrators must disclose the amount and a description of any 
shareholder-type fees, and a description of any restrictions or 
limitations that may be applicable to a purchase, transfer or 
withdrawal of the investment in whole or in part. For examples of 
fixed-return investments, see the discussion above in this preamble 
under the heading ``c. Performance data.''
f. Internet Web Site Address
    The proposed rule contained a requirement that plan fiduciaries 
provide an ``Internet Web site address that is sufficiently specific to 
lead participants and beneficiaries to supplemental information 
regarding the designated investment alternative, including the name of 
the investment's issuer or provider, the investment's principal 
strategies and attendant risks, the assets comprising the investment's 
portfolio, the investment's portfolio turnover, the investment's 
performance and related fees and expenses[.]''
    The Department received a number of comments concerning this Web 
site requirement. Some commenters supported the requirement, but 
requested clarifications such as who would be responsible for 
maintaining the Web site address and whether participants and 
beneficiaries could be referred to the Web site of a service provider 
or investment issuer. Other commenters argued that the requirement 
should be eliminated because Web site information is not currently 
provided for all designated investment alternatives in the participant-
directed plan marketplace; for example, Web site information often is 
not provided for bank collective investment funds, certain insurance 
products, and employer stock.
    After careful consideration of these comments, the Department has 
decided to retain the Web site approach to disclosing investment-
related information. See paragraph (d)(1)(v) of the final rule. The 
Department believes, in this regard, that the availability of 
information via a Web site reduces the amount of information required 
to be directly provided to participants and beneficiaries, without 
compromising a participant's or beneficiary's access to the additional 
information. While a critical objective of this rulemaking is to ensure 
that all participants and beneficiaries in participant-directed 
individual account plans are furnished the information they need to 
make informed investment decisions, the Department remains sensitive to 
the possibility that too much information may only serve to overwhelm, 
rather than inform, participants and beneficiaries. The Department 
believes that the Web site approach to disclosure strikes an 
appropriate balance in this context, accommodating different levels of 
participant interest in more detailed investment-related disclosures. 
While the Department recognizes, based on the comments, that the 
required Web sites may not currently be available for all investment 
vehicles offered by individual account plans in today's marketplace, 
the Department is not persuaded that the costs and burdens attendant to 
establishing and maintaining a Web site that will satisfy the 
disclosure requirements of this final rule will outweigh the benefits 
of improved disclosure and ready access to more detailed and current 
information by participants and beneficiaries.
    Under the final rule, the responsibility for ensuring the 
availability of a Web site address falls upon the plan administrator. 
However, whether, and to what extent, the plan administrator is 
responsible for establishing and maintaining the Web site itself will 
depend on the responsibilities assumed by either the issuer of the 
designated investment alternative(s) or a service provider to the plan. 
That is, as provided in paragraph (b)(1) of the final rule, a plan 
administrator will not be liable for the completeness and accuracy of 
information used to satisfy the disclosure requirements of this 
regulation when the plan administrator reasonably and in good faith 
relies on information received from or provided by a plan service 
provider or the issuer of a designated investment alternative.
    In addition to the general comments discussed above, some 
commenters expressed concern about the specific items of information 
required to be made available on the Web site. Several commenters, for 
example, asked whether the list of items in the proposed rule was 
intended to be exclusive, or whether plans may be required, or be 
permitted, to provide additional information.\10\ The final rule, at 
paragraph (d)(1)(v), has been revised to make clear that the 
supplemental information identified in the regulation is the only 
information that is required to be contained on the Web site; this 
clarification was accomplished by deleting the word ``including'' which 
had been used in the proposed regulation before the list of content 
items. Nonetheless, there is nothing in this final rule that precludes 
a plan administrator, service provider or the issuer of a designated 
investment alternative from including on the Web site additional 
information that may assist participants and beneficiaries in assessing 
the appropriateness of the designated investment alternative for their 
plan accounts.
---------------------------------------------------------------------------

    \10\ Paragraph (d)(1)(i)(B) of the proposal required disclosure 
of ``supplemental information regarding the designated investment 
alternative, including * * *'' (emphasis added). Some commenters 
argued that use of the word ``including'' could be read as 
``including, but not limited to.'' In that case, plans would be 
uncertain as to whether additional information must be provided and, 
if so, what information must be provided.
---------------------------------------------------------------------------

    Paragraph (d)(1)(v)(A) of the final retains the requirement from 
the proposal that the Web site include the name of the investment's 
issuer. The Department did not receive any comments on this provision.
    Paragraph (d)(1)(v)(B) contains a new content requirement for 
supplemental information that is required to be contained on the Web 
site. Several commenters requested that the Department add, as another 
item of supplemental information available at a designated investment 
alternative's Web

[[Page 64919]]

site, a description of the designated investment alternative's 
objectives or goals. These commenters felt that merely disclosing the 
``type or category'' of investment, as required by subparagraph 
(d)(1)(i)(C) of the proposal, was not sufficient and that participants 
or beneficiaries would benefit from a narrative statement of the 
alternative's basic objectives or goals. The Department agrees with 
these commenters that participants and beneficiaries should be apprised 
of a designated investment alternative's objectives or goals and that 
this information will be helpful in understanding how the alternative's 
principal strategies are intended to achieve those objectives or goals. 
Commenters did not demonstrate that requiring this information would be 
problematic or burdensome; rather, it seems clear that investment 
issuers generally already disclose this information. The final rule has 
been modified from the proposal to explicitly require, in paragraph 
(d)(1)(v)(B), disclosure of the investment's objectives or goals in a 
manner consistent with Securities and Exchange Commission Form N-1A or 
N-3, as appropriate.
    Although commenters generally were not opposed to the requirement 
in the proposal that the Web site for a designated investment 
alternative include information about the investment's ``principal 
strategies and attendant risks,'' some commenters requested 
clarification as to the nature of the information that must be 
disclosed in order to satisfy this requirement. For example, some 
commenters asked if the Department intended to model this requirement 
after the requirement in securities laws that investment companies 
disclose their ``principal investment strategies'' and ``principal 
risks.'' \11\ The Department believes that the ``strategies'' and 
``risks'' associated with an investment alternative should be well-
understood concepts in the plan investment marketplace, and the 
Department does not anticipate that plan administrators or the parties 
providing the Web sites will have difficulty in satisfying this 
requirement. In response to the commenters, the Department has 
clarified that paragraph (d)(1)(v)(C) of the final rule requires 
disclosure of the investment's ``principal strategies (including a 
general description of the types of assets held by the investment) and 
principal risks in a manner consistent with Securities and Exchange 
Commission Form N-1A or N-3, as appropriate'' of the designated 
investment alternative. The Department believes that the standards for 
narrative disclosure contained in the Commission's requirements are 
general enough that this information can be furnished with respect to 
all designated investment alternatives.\12\
---------------------------------------------------------------------------

    \11\ See Item 4(a) and (b) of Securities and Exchange Commission 
Form N-1A or Item 5(c) and (e) of Securities and Exchange Commission 
Form N-3.
    \12\ See, e.g., Securities and Exchange Commission Form N-1A 
Item 4(a) (requiring a summary of how the mutual fund intends to 
achieve its investment objectives by identifying the fund's 
principal investment strategies, including the type or types of 
securities in which the fund will principally invest and any policy 
to concentrate in securities issuers in a particular industry or 
group of industries) and Item 4(b)(1) (requiring a summary of the 
principal risks of investing in the fund, including risks to which 
the fund's portfolio as a whole is subject and the circumstances 
reasonably likely to affect adversely the fund's net asset value, 
yield, or total return; Item 4(b)(1) also requires special 
disclosure for money market-type funds, investments sold through 
insured depository institutions, and non-diversified investments).
---------------------------------------------------------------------------

    Several commenters requested clarification of the requirement in 
paragraph (d)(1)(i)(B) of the proposal to disclose the ``assets 
comprising the investment's portfolio.'' Specifically, commenters asked 
whether this requirement mandates disclosure of every individual asset 
or security held by the investment alternative, which commenters argue 
will not be helpful to most participants, or, more simply, disclosure 
of the type or types of assets or securities held by the investment 
alternative. Some commenters also recommended eliminating this 
requirement, since investment alternatives that are not subject to 
Commission registration do not currently compile and disclose this 
information, and because the burden of compiling this information, 
especially for complex investments, would not justify its benefit. The 
Department did not intend that the Web site include a detailed list of 
all assets and securities that comprise the investment alternative's 
portfolio. The reference to ``assets comprising the investment's 
portfolio'' has not been included in the final rule. In addition, 
paragraph (d)(1)(v)(C) of the final rule, inside the parenthetical, now 
clarifies that a discussion of the investment's principal strategies 
includes ``a general description of the types of assets held'' by the 
investment.\13\ This narrative description is supplemented by more 
specific information that is available on request to participants under 
paragraph (d)(4) of the final rule.
---------------------------------------------------------------------------

    \13\ This clarification is consistent with a requirement in the 
Department's 404(c) regulation, prior to its amendment herein, to 
disclose ``information relating to the type and diversification of 
assets comprising the portfolio''). See 29 CFR 2550.404c-
1(b)(2)(i)(B)(1)(ii).
---------------------------------------------------------------------------

    Some commenters raised concerns with the proposal's requirement 
that the Web site include information concerning a designated 
investment alternative's portfolio turnover. These commenters 
questioned what exactly must be disclosed about an investment's 
portfolio turnover; for example, whether a ratio or turnover rate would 
suffice. Other commenters recommended elimination of the requirement, 
because investment alternatives that are not subject to Commission 
registration are not currently required to disclose portfolio turnover 
information. The Department was not persuaded that this requirement 
should be eliminated for all designated investment alternatives. An 
investment alternative's portfolio turnover indicates the frequency 
with which the investment alternative is buying and selling securities. 
An investment that is frequently buying and selling securities may be 
generating higher trading costs. Trading costs are not included in an 
alternative's expense ratio, yet the cost of trading on a portfolio 
level does have an effect, in some cases a large effect, on the 
alternative's rate of return. The Department, therefore, believes that 
such information may be helpful to participants and beneficiaries in 
assessing the appropriateness of their investment options.
    While the Department recognizes that not all designated investment 
alternatives available to plan participants and beneficiaries calculate 
portfolio turnover rates, the Department understands that such 
investment alternatives should be able to do so without significant 
difficulty or costs. The final rule, at paragraph (d)(1)(v)(D), 
therefore, has been revised to require that, unless expressly exempted 
elsewhere in the rule, the information on the Web site must include the 
investment's portfolio turnover rate in a manner consistent with 
Securities and Exchange Commission Form N-1A or N-3, as 
appropriate.\14\ The Department has exempted certain designated 
investment alternatives, such as fixed-return and employer stock 
alternatives, from the portfolio turnover requirement where the 
Department has concluded that turnover rates are irrelevant to the 
participants and beneficiaries. See paragraph (i) of the final rule for 
special

[[Page 64920]]

rules for certain designated investment alternatives and annuity 
options.
---------------------------------------------------------------------------

    \14\ Consistent with Instruction 4(c) to Item 13(a) of Form N-1A 
and Instruction 11(e) to Item 4 of Form N-3, money market funds (and 
other investment products with similar investment objectives) may 
omit a portfolio turnover rate.
---------------------------------------------------------------------------

    A few commenters requested clarification about what information 
must be disclosed on the Web site concerning ``the investment's 
performance and related fees and expenses'' as required by paragraph 
(d)(1)(i)(B) of the proposal. Specifically, these commenters ask to 
what extent this requirement is redundant given the performance and fee 
and expense information that is otherwise required to be disclosed on 
the annual disclosure document; if it is not redundant, commenters 
question what additional performance and fee and expense information 
must be provided on the Web site. The intent of this provision was to 
make available more recent information than what was provided to 
participants on an annual basis. In responses to these comments, the 
Department has modified the proposal to split this requirement into two 
separate provisions and has clarified the updating obligation for all 
supplemental information. Paragraph (d)(1)(v)(E) of the final rule 
addresses the performance data that must be displayed by reference to 
the return information specified in paragraph (d)(1)(ii) and requires 
that such information be updated on at least a quarterly basis (as 
defined in paragraph (h)(2) of the final rule), or more frequently if 
required by other applicable law. Other than providing the revised 
performance information on the Web site in compliance with this 
updating requirement, plan administrators are not obligated to provide 
any additional or different information concerning an investment's 
performance. Paragraph (d)(1)(v)(F) of the final rule addresses the fee 
and expense information that must be displayed by reference to the fee 
and expense information specified in paragraph (d)(1)(iv). This 
information must be updated in accordance with the general updating 
requirement for supplemental information discussed below. Corresponding 
to the content parameters for updating performance information, plan 
administrators are not obligated to provide any additional or different 
information concerning an investment's fees and expenses than that 
required by paragraph (d)(1)(iv) of the final rule.
    Commenters also requested guidance as to how often the Web site 
supplemental information must be updated; the proposal did not provide 
an updating requirement. In view of the fact that participants will 
have continuing access to Web sites, it is the expectation that the 
information made available via the Web site will be accurate and 
updated by the plan administrator, service provider or the issuer of a 
designated investment alternative as soon as reasonably possible 
following a change, or notification thereof.
    Recognizing that some participants may not have ready access to the 
information required to be made available on an Internet Web site, the 
final rule, at paragraph (d)(2)(i)(C), requires that participants and 
beneficiaries be furnished, as part of the required comparative format 
disclosure document, information about how to request, and obtain free 
of charge, a paper copy of the information required to be maintained on 
a Web site pursuant to paragraph (d)(1)(v) or paragraph (i), as 
applicable.
g. Glossary
    Although not part of the proposed rule, a number of commenters 
suggested that participants and beneficiaries would benefit from a 
glossary of investment and financial terms relevant to the designated 
investment alternatives under the plan. Indeed, the lack of a glossary 
of investment terminology in the proposed regulation was perceived as a 
key weakness of the proposal by some of these commenters. One of these 
commenters, for example, commissioned a nationally representative 
online survey of 2,106 participants in 401(k) plans to gather feedback 
on the proposal's model comparative chart. A conclusion of that survey 
is that providing clear definitions of financial terminology and using 
vocabulary that is not perceived as complicated may help to improve 
participants' understanding of the disclosure. ICF's report to the 
Department following their focus group studies further supported the 
commenters and the conclusion of the online survey. The Department was 
persuaded that the furnishing of a glossary or access to a glossary of 
terms relevant to plan investments would be helpful to participants 
and, accordingly, has included such a requirement in the final rule. 
See paragraph (d)(1)(vi). Specifically, paragraph (d)(1)(vi) provides 
for the furnishing of a general glossary of terms to assist 
participants and beneficiaries in understanding the designated 
investment alternatives, or an Internet Web site address that is 
sufficiently specific to provide access to such a glossary along with a 
general explanation of the purpose of the address. The Department 
anticipates a number of ways to satisfy this furnishing requirement. 
For example, a plan administrator could satisfy this furnishing 
requirement either by including an appropriate glossary in the 
comparative disclosure document or, in lieu thereof, by including an 
Internet Web site address at which such a glossary may be accessed. 
Alternatively, the Web site address for each designated investment 
alternative, required pursuant paragraphs (d)(1)(v) and (i) of the 
final rule, may contain its own glossary of terms relevant to that 
specific alternative, or link to such a glossary.
    Some commenters suggested that the Department prepare or make 
available such a glossary. At this juncture, the Department believes 
that plan administrators, in conjunction with their service providers 
and issuers of investment alternatives, are in the best position to 
determine the glossary (or glossaries) appropriate for their 
participants, taking into consideration the investment options made 
available under the plan. Nonetheless, the Department is interested in 
further exploring whether the Department should develop or identify 
general investment glossaries that could be utilized by plan 
administrators in satisfying their obligations under the final rule. 
Specifically, the Department invites interested persons to share their 
views as to what terminology should be addressed in a general 
investment glossary and whether, or to what extent, such glossaries 
currently exist that could serve as a resource for relatively 
unsophisticated participant-investors. Suggestions and views on the 
development and availability of one or more such glossaries should be 
addressed to e-ORI@dol.gov, subject: Participant Investment Glossary.
h. Annuity Options
    The Department received a number of comments relating to the 
disclosure of information with respect to investment products that 
consist, in whole or in part, of annuities or annuitization guarantees. 
These commenters maintain that core concepts in the proposal, such as 
``average annual total return,'' ``benchmarks,'' and ``total annual 
operating expenses,'' while entirely appropriate for designated 
investment alternatives with respect to which returns can and do vary, 
such as mutual funds, collective investment funds, and portfolio 
operating companies within variable annuity contracts, are irrelevant 
to annuities or annuitization guarantees. The commenters, therefore, 
requested that the Department revise the proposal to require disclosure 
of information more appropriate to annuity contracts, funds or 
products. Some of the commenters emphasized that plan administrators 
need the flexibility to

[[Page 64921]]

explain the benefits of these products which may provide annuities or 
annuitization guarantees along with exposure to the equities market and 
requested that the final rule allow for such explanations in the 
disclosure.
    In response to these comments, the Department has added two new 
provisions to the final rule. The first new provision, at paragraph 
(d)(1)(vii) of the final rule, is intended to address commenters' 
concerns with annuity features that are contained within variable 
annuity contracts, under which participants and beneficiaries have a 
right to purchase an annuity with their accumulated plan savings at a 
rate specified in the contract (``variable annuity''). The information 
that must be disclosed pursuant to this paragraph (d)(1)(vii) for the 
variable annuity complements the investment-related information 
disclosed pursuant to paragraph (d)(1) for the related portfolio 
operating companies. Paragraph (d)(1)(vii) is applicable to any 
designated investment alternative consisting in part of a contract, 
fund or product that affords participants or beneficiaries the option 
to allocate contributions toward the future purchase of a stream of 
retirement income payments guaranteed by an insurance company. When 
applicable, paragraph (d)(1)(vii) of the final rule incorporates by 
cross reference the requirements of the second new provision, a special 
rule, at paragraph (i)(2)(i) through (vii) of the final regulation. 
This provision requires the disclosure of information relating to the 
variable annuity itself to the extent that the information is not 
otherwise disclosed pursuant to paragraph (d)(1)(iv). Through the 
combination of these two provisions, the Department intends for 
participants and beneficiaries to receive comprehensive disclosure of 
investment and annuity information pertaining to both portfolio 
operating companies within a variable annuity contract and the variable 
annuity itself. The special rule at paragraph (i)(2)(i) through (vii) 
of the final regulation is discussed more fully below.
i. Disclosures On or Before First Investment
    As discussed above, paragraph (d)(1)(v) of the proposal provided, 
for purposes of the disclosure of investment-related information to new 
participants, that plan administrators could satisfy this obligation by 
furnishing the most recent annual disclosure along with any required 
updates furnished to participants and beneficiaries. The Department 
received no objections to this provision and, accordingly, is adopting 
it as proposed, except that it has been re-designated as paragraph 
(d)(viii) in the final rule and modified to conform with the new timing 
requirements (i.e., to reflect the change from ``on or before the date 
of plan eligibility'' to ``on or before the date on which the 
participant or beneficiary can first direct his or her investment'').
j. Comparative Format Requirement
    Paragraph (d)(2) of the proposed regulation provided that the 
investment-related information required pursuant to paragraph (d)(1) 
must be furnished in a chart or similar format that is designed to 
facilitate comparison of such information for each designated 
investment alternative offered under the plan. The Department also 
included as an Appendix to the proposal a Model Comparative Chart that 
could be used to satisfy this requirement. Several commenters on the 
proposal specifically noted their support for the requirement that 
investment-related information be disclosed in a comparative format. 
Further, participants in the Department's focus group studies believe 
that the Model Comparative Chart would make it easier to choose among a 
plan's designated investment alternatives; these individuals felt that 
the Chart is an improvement over the manner in which plan investment 
information currently is made available to them and that the Chart 
would encourage them, in some cases, to obtain additional information 
about plan designated investment alternatives.
    The Department has retained this requirement in paragraph (d)(2) of 
the final rule, subject to a few minor modifications, and has also 
published with the final rule a revised Model Comparative Chart which 
reflects conforming changes to the final rule's disclosure 
requirements. Paragraph (d)(2)(i) of the final rule requires that the 
information described in paragraph (d)(1) and, if applicable, paragraph 
(i), must be furnished in a chart or similar format that is designed to 
facilitate a comparison of such information for each designated 
investment alternative available under the plan. This paragraph of the 
final rule also requires that the date of the chart be prominently 
displayed. As proposed, the final rule requires in paragraphs 
(d)(2)(i)(A) and (B) a statement indicating the name, address, and 
telephone number of the plan administrator (or the plan administrator's 
designee) to contact for the provision of the information that must be 
made available upon request pursuant to paragraph (d)(4) of the final 
rule and a statement that additional investment-related information 
(including more current performance information) is available at the 
listed Internet Web site addresses.
    As noted above, a new subparagraph (C) has been added to paragraph 
(d)(2)(i) of the final rule. This new subparagraph requires that the 
comparative disclosure include information about how participants and 
beneficiaries can request, and obtain, free of charge, paper copies of 
the information required to be maintained on a Web site pursuant to 
paragraph (d)(1)(v) of the final rule. This new disclosure requirement 
will help to ensure that participants and beneficiaries who do not have 
access to the Internet, nonetheless, can, if they so choose, obtain 
supplemental information contained on the Web sites, in order to 
facilitate a comprehensive consideration of the available investment 
choices under the plan. Because the final rule includes special Web 
site disclosure rules for certain designated investment alternatives 
and annuity options (paragraph (i)(2) for annuity options and paragraph 
(i)(3) for fixed-return alternatives), the new the subparagraph (C) 
includes explicit references to these special rules in order to 
eliminate any ambiguity as to whether the rights provided by new 
subparagraph (C) extend to such investment choices. In this regard, the 
Department notes that although paragraph (i)(1) contains a special rule 
for qualifying employer securities, certain requirements of paragraph 
(d)(1)(v) are not modified by the special rule and remain applicable to 
qualifying employer securities; consequently, the rights provided by 
new subparagraph (C) extend to qualifying employer securities via the 
reference to paragraph (d)(1)(v) in subparagraph (C).
    Paragraph (d)(2)(ii), like the proposal, provides that nothing in 
the final rule precludes a plan administrator from including additional 
information that the plan administrator determines appropriate for such 
comparisons, provided such information is not inaccurate or misleading. 
The Department believes that the technical concerns raised by 
commenters on the Model Comparative Chart have been addressed in 
revisions to the operative provisions of the final rule.
    One procedural question raised by commenters, for example on behalf 
of Code section 403(b) plans, was whether each issuer of designated 
investment alternatives could prepare its own comparative chart for 
distribution and send it directly to participants and beneficiaries, 
such that, for example, a participant in a plan with three investment 
issuers would receive three

[[Page 64922]]

charts, stating that this would greatly simplify the plan 
administrator's task in meeting the comparative format requirement. It 
is the view of the Department that nothing in the final regulation 
precludes plan administrators from combining multiple documents for 
purposes of satisfying their obligation to provide the information 
required by this rule in a comparative form. For example, a chart could 
be divided such that one part presented stock funds while another part 
presented bond funds, as in the Department's model format. Similarly, a 
chart could group investment alternatives by issuer. On the other hand, 
the Department also is of the view that permitting individual 
investment issuers, or others, to separately distribute comparative 
charts reflecting their particular investment alternatives would not be 
furnishing information in a form that would facilitate a comparison of 
the required investment information and, therefore, would not comply 
with the requirements of paragraph (d)(2).
k. Information To Be Provided Subsequent to Investment
    Paragraph (d)(3) of the final rule requires that, when a plan 
provides for the pass-through of voting, tender, and similar rights, 
the plan administrator must furnish participants and beneficiaries who 
have invested in a designated investment alternative with these 
features any materials about such rights that have been provided to the 
plan. This provision, which is unchanged from the proposal, is similar 
to the requirement currently applicable to ERISA section 404(c) 
plans.\15\
---------------------------------------------------------------------------

    \15\ See 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(ix).
---------------------------------------------------------------------------

l. Information To Be Provided Upon Request
    Paragraph (d)(4) of the final rule requires a plan administrator to 
furnish certain identified information either automatically or upon 
request by participants and beneficiaries, based on the latest 
information available to the plan. This provision, which also is 
unchanged from the proposal, is modeled on the requirements currently 
applicable to ERISA section 404(c) plans with respect to information to 
be furnished upon request.\16\
---------------------------------------------------------------------------

    \16\ See 29 CFR 2550.404c-1(b)(2)(i)(B)(2).
---------------------------------------------------------------------------

4. Form of Disclosure

    Paragraph (e) of the final rule, like the proposal, specifically 
addresses the form in which the required disclosures may be made. 
Commenters on the proposal generally supported the ability of plan 
administrators to coordinate the requirements of this rule with other 
disclosure materials. The Department notes that, like the proposal, 
paragraph (e) merely recognizes various acceptable means of disclosure; 
it does not preclude other means for satisfying disclosure obligations 
under the final rule.
    Specifically, paragraph (e)(1) makes clear that plan-related 
information required to be disclosed pursuant to paragraphs (c)(1)(i), 
(c)(2)(i)(A) and (c)(3)(i)(A) of this section may be provided as part 
of the plan's summary plan description furnished pursuant to ERISA 
section 102 or as part of a pension benefit statement furnished 
pursuant to ERISA section 105(a)(1)(A)(i), if such summary plan 
description or pension benefit statement is furnished at a frequency 
that comports with the time frames prescribed by paragraph (c) of this 
section. Paragraph (e)(2) of the final rule, like the proposal, makes 
clear that the information required to be disclosed pursuant to 
paragraphs (c)(2)(ii) and (c)(3)(ii) may be included as part of a 
pension benefit statement furnished pursuant to ERISA section 
105(a)(1)(A)(i).
    Paragraph (e)(3) provides that a plan administrator that uses and 
accurately completes the model in the Appendix, taking into account 
each plan's specific provisions and each designated investment 
alternative offered under the plan, will be deemed to have satisfied 
the requirements of paragraph (d)(2) of this section.
    Paragraph (e)(4) further clarifies that, except as otherwise 
explicitly required herein, fees and expenses may be expressed in terms 
of a monetary amount, formula, percentage of assets, or per capita 
charge. Finally, paragraph (e)(5) generally requires that the 
information required to be prepared by the plan administrator for 
disclosure under the regulation must be written in a manner calculated 
to be understood by the average plan participant.

5. Selection and Monitoring

    Paragraph (f) of the final rule continues to make clear that 
nothing in the regulation would relieve a fiduciary of its 
responsibilities to prudently select and monitor providers of services 
to the plan or designated investment alternatives offered under the 
plan.\17\ This paragraph is unchanged from the proposal.
---------------------------------------------------------------------------

    \17\ Also, with regard to ERISA's general fiduciary standards, 
as noted in the preamble to the proposal, 73 FR 43014 at 43018, n. 
8, it should be noted that there may be extraordinary situations 
when fiduciaries will have a disclosure obligation beyond those 
addressed by the final rule. For example, if a fiduciary knew that, 
due to a fraud, information contained in a public financial report 
would mislead investors concerning the value of a designated 
investment alternative, the fiduciary would have an obligation to 
take appropriate steps to protect the plan's participants, such as 
disclosing the information or preventing additional investments in 
that alternative by plan participants until the relevant information 
is made public. See also Varity Corp. v. Howe, 516 U.S. 489 (1996) 
(plan fiduciary has a duty not to misrepresent to participants and 
beneficiaries material information relating to a plan).
---------------------------------------------------------------------------

6. Manner of Furnishing

    Paragraph (g) of the proposal addressed the ``manner of 
furnishing'' the disclosures required by the regulation. Specifically, 
paragraph (g) of the proposal provided that the required disclosure 
shall be furnished in any manner consistent with the requirements of 29 
CFR 2520.104b-1, including paragraph (c) of that section relating to 
the use of electronic media.
    This proposal produced significant comments. A number of commenters 
recommended that the Department expand the permissibility of electronic 
disclosure beyond that currently addressed in the Department's safe 
harbor regulation, at Sec.  2520.104b-1(c). They argued that such forms 
of disclosure would be more efficient, less burdensome, and less costly 
for plans and, therefore, participants. Other commenters cautioned 
against broadening the electronic disclosure standards, arguing that 
many workers do not have Internet access or prefer paper over 
electronically disclosed materials. Important questions involve the 
extent of the cost savings from expanded use of electronic disclosure 
and the number of workers who would be disadvantaged from such an 
expansion (which could itself take various forms, perhaps including 
``opt out'' electronic disclosure).
    In light of these differing views and the significance of the 
issues surrounding the use of electronic disclosure, the Department has 
decided to reserve paragraph (g) of the regulation while further 
exploring whether, and possibly how, to expand or modify the standards 
applicable to the electronic distribution of required plan disclosures. 
To ensure a full review of the issue, the Department will, in the near 
future, be publishing a Federal Register notice requesting public 
comments, views, and data relating to the electronic distribution of 
plan information to plan participants and beneficiaries. Pending the 
completion of this review and the issuance of further guidance, the 
Department notes that the general disclosure regulation at 29 CFR

[[Page 64923]]

Sec.  2520.104b-1 applies to material furnished under this regulation, 
including the safe harbor for electronic disclosures at paragraph (c) 
of that regulation. It is anticipated, however, that resolution of this 
issue will occur in advance of the compliance date for this regulation, 
so as to ensure for appropriate notice for plans.

7. Definitions

    The proposed rule contained, in section (h), a series of 
definitions for some of the terms used in the rule. These definitions 
of technical terms were intended to assist plan administrators, their 
service providers, and issuers of designated investment alternatives in 
complying with the requirements of the rule. In response to comments 
and clarifications requested by commenters, the Department made some 
additions and modifications to the definitions contained in section 
(h), which are discussed below in this section. One commenter suggested 
that the Department should address potential changes to the cross-
references contained in the rule's definitions, which refer to rules 
under the Securities and Exchange Commission's jurisdiction, for 
example by referencing the Commission's Form N-1A. Absent further 
guidance, it is the Department's intention that these cross-references 
will refer, as appropriate, to successor rules and instructions.
    The Department also received comments requesting that the rule 
define some of the terms used in the Model Comparative Chart, but these 
commenters appeared to focus on defining terms for the benefit of 
participants and beneficiaries, for example suggesting that a glossary 
or other index of terms, with ``plain English'' definitions, be 
provided. In response to these commenters, and in response to 
participants in the Department's focus group studies, who similarly 
supported the inclusion of definitions for investment and financial 
terms, the Department, at paragraph (d)(1)(vi) of the final rule, now 
requires the furnishing of or access to a general glossary of terms 
appropriate to assist participants and beneficiaries in understanding 
their designated investment alternatives. This glossary requirement is 
discussed above with the other investment-related information 
requirements.
    The Department did not receive any comments or questions concerning 
the definitions of ``at least annually thereafter'' or ``at least 
quarterly;'' accordingly, those phrases continue to be defined, as 
proposed, in the final rule.
a. Average Annual Total Return
    The proposal, in paragraph (h)(2), defined ``average annual total 
return'' to mean the average annual profit or loss realized by a 
designated investment alternative at the end of a specified period, 
calculated in the same manner as average annual total return is 
calculated under Item 21 of Securities and Exchange Commission Form N-
1A \18\ with respect to an open-end management investment company 
registered under the Investment Company Act of 1940 (1940 Act). In 
general, the commenters strongly supported the concept of providing 
participants with this type of performance data. However, in response 
to several technical comments as to how this definition would be 
applied to products other than those that register using the Form N-1A, 
the final rule, in paragraph (h)(3), contains a revised definition. As 
revised, the term ``average annual total return'' means the ``average 
annual compounded rate of return that would equate an initial 
investment in a designated investment alternative to the ending 
redeemable value of that investment calculated with the before tax 
methods of computation prescribed in Securities and Exchange Commission 
Form N-1A, N-3, or N-4, as appropriate, except that such method of 
computation may exclude any front-end, deferred or other sales loads 
that are waived for the participants and beneficiaries of the covered 
individual account plan.'' The new references to Form N-3 and N-4 are 
to provide additional guidance with respect to designated investment 
alternatives that consist of separate accounts offering variable 
annuity contracts which are registered under the 1940 Act. The sales 
loads exception responds to commenters' concerns that the proposed 
definition, specifically the reference to Item 21 of the Form N-1A (now 
Item 26 in Form N-1A, as revised), might result in participants and 
beneficiaries receiving inaccurate information about actual returns in 
cases where the designated investment alternative waives sales loads; 
under this exception, plan administrators may disregard any requirement 
under Commission Forms to assume sales loads if they are not actually 
charged to plan participants and beneficiaries. The use of this 
definition is intended to assure that all participants and 
beneficiaries will, taking into account the variety of investments 
available through ERISA plans, receive the most uniform and comparable 
performance information available for their investment options, without 
regard to whether the designated investment alternative is a product 
registered under the 1940 Act.
---------------------------------------------------------------------------

    \18\ Now item 26 of Form N-1A, as revised, February 2010.
---------------------------------------------------------------------------

b. Designated Investment Alternatives
    Several commenters expressed concern with the Department's 
definition of ``designated investment alternatives'' in paragraph 
(h)(1) of the proposal. Specifically, commenters questioned the 
definition's exclusion of ``brokerage windows,'' ``self-directed 
brokerage accounts,'' or similar plan arrangements that enable 
participants and beneficiaries to select investments beyond those 
designated by the plan. Commenters argued that the proposal was not 
clear as to what information would in fact have to be disclosed 
concerning participants' and beneficiaries' investments through such an 
arrangement. The final rule retains the proposed definition of 
``designated investment alternatives,'' although re-designated as 
paragraph (h)(4) in the final, and therefore continues to exclude 
brokerage windows and similar arrangements from the definition. 
However, as discussed earlier, it is important that participants and 
beneficiaries understand how brokerage windows operate and the expenses 
attendant thereto when they are offered as part of the investment 
platform of a plan. For this reason, the final rule includes more 
specific requirements than the proposal concerning the information that 
must be disclosed about brokerage windows or similar arrangements. See 
paragraph (c)(1)(i)(F) of the final rule.
c. Total Annual Operating Expenses
    The proposed regulation defined the term ``total annual operating 
expenses'' as ``annual operating expenses of the designated investment 
alternative (e.g., investment management fees, distribution, service, 
and administrative expenses) that reduce the rate of return to 
participants and beneficiaries, expressed as a percentage, calculated 
in the same manner as total annual operating expenses is calculated 
under Instruction 3 to Item 3 of the Commission's Form N-1A with 
respect to an open-end management investment company registered under 
the Investment Company Act of 1940.'' The Department invited comments 
on what, if any, problems the proposed definition presented for 
investment funds and products that are not subject to the 1940 Act and, 
any suggestions for alternative definitions or approaches.

[[Page 64924]]

    Some commenters questioned whether it is appropriate for the 
Department to model its disclosure requirement for calculating expenses 
for all designated investment alternatives in ERISA plans on a mutual 
fund methodology. These commenters suggested the Department might 
instead consider developing multiple methodologies that take into 
account the unique characteristics of the many different types of 
investment options in participant-directed individual account plans, 
particularly those that are not registered under the 1940 Act. The 
Department considered this suggestion and has accordingly modified the 
expense calculation as discussed more fully below. A core objective of 
the regulation is to ensure that participants receive uniform and 
reliable information about their plan's investment options whether or 
not such options are registered or unregistered under Commission 
requirements. The Department believes that the final rule's revised 
definition will achieve this result and produce a comparable expense 
calculation across the different types of investment options offered 
under ERISA plans.
    Specifically, one commenter, representing the insurance industry, 
noted that certain insurance products are required to be registered 
under the Securities Act of 1933, 1940 Act, or both and that such 
registrants must file their registration statements on the Commission's 
Forms N-3 or N-4. The commenter pointed out that both of these forms 
set forth a methodology for reporting the total annual expenses of the 
insurance product. This commenter suggested that the Department should 
consider utilizing these established methodologies with respect to 
designated investment alternatives offered through variable annuity 
contracts, rather than the methodology in the Commission's Form N-1A, 
where appropriate, in order to reduce direct and indirect compliance 
costs. The Department reviewed the methodologies in the Forms N-3 and 
N-4 and concluded that while they require substantially the same 
methodology as the Form N-1A, the suggested methodologies and language 
offer more precision with respect to certain annual expenses unique to 
variable annuity contracts (``mortality and expense risk fees''), which 
are not addressed in the Form N-1A. Therefore, paragraph (h)(5)(i) of 
the final rule has been revised to accommodate this commenter's 
request.
    Other commenters, representing the banking industry, were concerned 
that the proposed definition with its reliance on Commission standards 
may not work well when applied to a designated investment alternative 
that consists of a bank collective investment fund because these 
alternatives typically are not registered under the 1940 Act. These 
commenters stated that, unlike a mutual fund, a bank collective 
investment fund is not required to deduct all of its operating expenses 
from the fund's assets, and may instead charge some or all of its 
operating expenses directly to the plans investing in the fund. These 
commenters asserted that the proposed definition would not capture such 
expenses and emphasized their unfamiliarity with the required expense 
calculation as well as its impact on bank collective investment funds. 
The Department found these comments persuasive and, in the final rule, 
added paragraph (h)(5)(ii), a separate definition of total annual 
operating expenses for these unregistered alternatives. The Department 
believes that this new definition will produce an expense calculation 
that is substantially the same as the expense calculation for 
registered alternatives while capturing the different ways that 
unregistered alternatives charge plans.
    Paragraph (h)(5)(ii) of the final rule defines the term ``total 
annual operating expenses'' as ``the sum of the fees and expenses 
described in paragraphs (h)(5)(ii)(A) through (C) of this section 
before waivers and reimbursements, for the alternative's most recently 
completed fiscal year, expressed as a percentage of the alternative's 
average net asset value for that year.'' \19\ Paragraph (h)(5)(ii)(A) 
requires the inclusion of all ``management fees as described in the 
Securities and Exchange Commission Form N-1A that reduce the 
alternative's rate of return.'' Paragraph (h)(5)(ii)(B) requires the 
inclusion of any ``distribution and/or servicing fees as described in 
the Securities and Exchange Commission Form N-1A that reduce the 
alternative's rate of return.'' Paragraph (h)(5)(ii)(C) requires the 
inclusion of any ``other fees or expenses not included in subparagraph 
(A) or (B) that reduce the alternative's rate of return'' such as 
externally negotiated investment management fees charged by bank 
collective investment funds, but excludes ``brokerage costs as 
described in Item 21 of Securities and Exchange Commission Form N-1A.'' 
\20\
---------------------------------------------------------------------------

    \19\ The Department intends to achieve as much symmetry between 
registered and unregistered designated investment alternatives as is 
possible. For that reason, consistent with Instructions 3(d)(i) and 
6(a) to Item 3 Form N-1A, paragraph (h)(5)(ii) of the final 
regulation directs the calculation of total annual operating 
expenses before any waivers or reimbursements.
    \20\ Brokerage costs are not included in a mutual fund's expense 
ratio because, under generally accepted accounting principles, they 
are either included as part of the cost basis of securities 
purchased or subtracted from the net proceeds of securities sold and 
ultimately are reflected as changes in the realized and unrealized 
gain or loss on portfolio securities in the fund's financial 
statements. See 68 FR 74820.
---------------------------------------------------------------------------

    The following example illustrates the requirements of paragraphs 
(h)(5)(ii) of the final rule. Plan A offers Designated Investment 
Alternative One (DIA 1) which invests $125 million in bank collective 
investment fund XYZ, an unregistered investment alternative, with 
assets of $1.2 billion. XYZ investment management fees of .22% are 
deducted directly from the fund's assets. Additional investment 
management fees of XYZ of .16% are invoiced directly to Plan A, which 
pays the expense and then proportionately reduces the value of the 
shares of Plan A participants and beneficiaries who are invested in DIA 
1. Recordkeeping expenses of XYZ of $15,000 are invoiced directly to 
Plan A which allocates this charge proportionally to the accounts of 
Plan A participants and beneficiaries that are invested in DIA 1. XYZ 
also charges a servicing fee of .10% for marketing materials it makes 
available to Plan A participants and beneficiaries. These fees are 
deducted directly from the fund's assets.
    The provisions of paragraph (h)(5)(ii) of the final rule require 
these four expenses to be included in the total annual operating 
expenses of DIA 1 because they reduce the alternative's rate of return 
to participants and beneficiaries. In other words, the sum of these 
expenses is subtracted from the alternative's gross returns, which 
indirectly reduces the value of a participant's investment in DIA 1. In 
this example, the total annual operating expenses of DIA 1 are the sum 
of these four expenses or .492% (represented as .49% after rounding to 
the nearest hundredth of a percent). The investment management fee of 
.22% and the servicing fee of .10% are included by virtue of paragraph 
(h)(5)(ii)(A) and paragraph (h)(5)(ii)(B), respectively. The additional 
investment management fee of .16% is included by virtue of paragraph 
(h)(5)(ii)(C), and so is the recordkeeping fee of .012% (calculated as: 
$15,000/$125,000,000). Thus, the annual cost to the participants and 
beneficiaries who invest in DIA 1 is $4.92 for every $1,000 invested.
    Under paragraph (h)(5)(ii) of the final rule, if a fee or expense 
does not reduce a designated investment alternative's

[[Page 64925]]

rate of return, the fee or expense is not to be included in the total 
annual operating expense of that alternative. Thus, if the 
recordkeeping expenses of $15,000 in the above example were paid from 
plan assets by liquidating shares of DIA 1 from participants' accounts, 
rather than reducing the value of their shares, the total annual 
operating expenses of DIA 1 would be .48% rather than .492%. In such 
circumstances, the recordkeeping fee would instead be covered by 
paragraph (c)(3) of the final regulation, not paragraph (h)(5)(ii), and 
would have to be disclosed on the statement required by paragraph 
(c)(3)(ii) of the final regulation.

8. Special Rules for Certain Designated Investment Alternatives

    Many commenters expressed concern that the framework of the 
proposed regulation as it related to investment-related information 
could not be meaningfully applied to certain types of investment 
options. Specifically, these commenters argued that many of the pieces 
of information that the proposal mandates must be disclosed do not 
apply to certain designated investment alternatives, such as employer 
securities or investments that include annuity or annuitization 
guarantee features, and that it would be difficult to disclose the 
unique characteristics of these investment alternatives within the 
framework of the proposal. Accordingly, the Department expanded the 
final rule to include special rules, described below, to address these 
concerns and require that plan administrators and their service 
providers disclose relevant information concerning these investment 
options.
a. Special Rules for Designated Investment Alternatives That Consist of 
Employer Securities
    Several commenters stated that investments in employer securities 
should warrant separate treatment from other designated investment 
alternatives under the final rule because many of the required 
investment-related disclosures fail to correspond with investment 
characteristics of company stock. Some commenters even argued that 
investments in employer securities should be completely excluded from 
the definition of designated investment alternatives. Another commenter 
claimed that the proposal would create a cause of action under ERISA 
section 502 for disclosure regulated by the securities laws, permitting 
litigants to evade the provisions of the Private Securities Litigation 
Reform Act of 1995 (``PSLRA'') and the Securities Litigation Uniform 
Standards Act of 1998 (``SLUSA''). However, in the Department's view, 
this rule does nothing to impair the disclosure requirements of the 
securities laws, which remain in full force and effect. Causes of 
action under ERISA section 502 are limited to remedying violations of 
ERISA and plan provisions. This section does not allow plaintiffs to 
bring suits for violations of securities law or with respect to 
securities not belonging to an ERISA plan. Plaintiffs bringing suit for 
violations of the securities laws continue to be subject to the PSLRA 
and SLUSA.
    The Department has been persuaded to modify several aspects of the 
proposal for investments in employer securities rather than creating a 
complete exclusion from the investment-related disclosures. The 
Department has rejected a complete exclusion under the final rule 
because, as stated by one commenter to the proposal, 20 million 
Americans invest in stock in their companies through 401(k) plans, 
based on the 2006 General Social Survey.\21\ The Department's 5500 data 
for 2007 indicates that there are approximately 72.2 million 
participants in individual account plans, of whom 17 million were 
participants in plans that offered employer securities. In terms of 
magnitude, this means approximately one fourth of all participants in 
individual account plans could have invested in company stock. The 
Department believes that these participants and beneficiaries are 
entitled to the investment-related information for employer securities 
required by paragraph (d) as modified under paragraph (i) of the final 
rule.
---------------------------------------------------------------------------

    \21\ Davis, James Allan; Smith, Tom W.; and Marsden, Peter V. 
General social surveys, 1972-2006: cumulative codebook/Principal 
Investigator, James A. Davis; Director and Co-Principal 
Investigator, Tom W. Smith; Co-Principal Investigator, Peter V. 
Marsden.--Chicago: National Opinion Research Center, 2007. 2,552 
pp., 28 cm.--(National Data Program for the Social Sciences Series, 
no. 18).
---------------------------------------------------------------------------

    Consequently, the Department has developed a special provision for 
investments in, or primarily in, employer securities as defined in 
section 407 of ERISA, and has also exempted these investments from 
certain aspects of the final rule. In making these modifications to the 
proposal, the Department recognized that while certain designated 
investment alternatives consist primarily of investments in employer 
securities that are held as shares, other alternatives that invest 
primarily in employer securities may also hold cash management 
investments for liquidity purposes, so that participants and 
beneficiaries acquire units of participation in a fund (i.e., a 
unitized fund) rather than actual shares when they allocate their 
contributions to this investment alternative.
    With regard to the supplemental information that must be provided 
to participants and beneficiaries through an Internet Web site address, 
the Department has modified the proposed rule to exempt these 
qualifying employer securities from the requirements of paragraph 
(d)(1)(v)(C) concerning the disclosure of an investment's principal 
strategies and risks, and instead is requiring an explanation under 
paragraph (i)(1)(i) of the final rule as to the importance of a well-
balanced and diversified investment portfolio. The Department expects 
that plan administrators will use the language provided in the 
Department's Field Assistance Bulletin 2006-03 (FAB 2006-03) to satisfy 
this requirement. The FAB language provides: ``To help achieve long-
term retirement security, you should give careful consideration to the 
benefits of a well-balanced and diversified investment portfolio. 
Spreading your assets among different types of investments can help you 
achieve a favorable rate of return, while minimizing your overall risk 
of losing money. This is because market or other economic conditions 
that cause one category of assets, or one particular security, to 
perform very well often cause another asset category, or another 
particular security to perform poorly. If you invest more than 20% of 
your retirement savings in any one company or industry, your savings 
may not be properly diversified. Although diversification is not a 
guarantee against loss, it is an effective strategy to help you manage 
investment risk.''
    As stated in paragraph (i)(1)(ii) of the final rule, the Department 
is also exempting these qualifying employer securities from the 
Internet Web site requirements relating to portfolio turnover required 
under paragraph (d)(1)(v)(D).
    Many commenters also pointed to the proposal's fee and expense 
information requirement, which is preserved in paragraph 
(d)(1)(iv)(A)(2) of the final rule, to disclose an investment's total 
annual operating expenses, expressed as a percentage, as problematic; 
essentially, these commenters maintained that an expense ratio is 
irrelevant or non-calculable for investments consisting primarily of 
employer securities. The Department has considered these comments and 
has exempted, in paragraph (i)(1)(iv) of the final rule, qualifying 
employer

[[Page 64926]]

securities from the requirement to disclose an expense ratio, provided 
such designated investment alternative is not a unitized fund. As a 
corollary to this exemption, these investments are also relieved, under 
paragraphs (i)(1)(iii) and (v), respectively, of the final rule, from 
the requirements of paragraph (d)(1)(iv)(A)(2) relating to fee and 
expense information and the requirements of paragraph (d)(1)(iv)(A)(3) 
relating to the expense ratio expressed as a dollar amount per $1,000 
invested.
    Some commenters expressed concern with the requirement that such 
investments disclose performance data expressed as average annual total 
return for specified periods. The Department has determined to modify 
the definition of average annual total return, which is otherwise 
applicable under paragraph (h)(3) of the final rule, for qualifying 
employer securities that are publicly traded on a national exchange or 
generally recognized market, provided such designated investment 
alternative is not a unitized fund, in paragraph (i)(1)(vi) of the 
final rule. For this purpose, average annual total return is defined in 
paragraph (i)(1)(vi)(B) to mean the change in value of an investment in 
one share of stock on an annualized basis over a 1, 5, or 10 year 
period, assuming dividend reinvestment; such a return measurement is 
commonly referred to as total shareholder return. This return is 
calculated by taking the sum of the dividends paid during the 
measurement period, plus the difference between a stock price 
(consistent with section 3(18) of ERISA) at the end and the beginning 
of the measurement period divided by the stock price at the beginning 
of the measurement period. For example, and ignoring the reinvestment 
of dividends for simplicity, if a share is $100 at the beginning of the 
measurement period and $115 at the close, and dividends paid totaled $5 
over the period, the disclosed return would be 20% (5 + 115 - 100/100).
    Similarly, in paragraph (i)(1)(vi)(C) of the final rule, the 
Department is modifying the definition of average annual total return 
for qualifying employer securities that are not publicly traded on a 
national exchange or generally recognized market, provided such 
designated investment alternative is not a unitized fund, to require 
disclosure of return information calculated using principles similar to 
those for the return calculation of publicly traded securities under 
paragraph (i)(1)(vi)(B). The Department anticipates that in many cases 
dividends will not have been paid on such securities and that the plan 
administrators will use Form 5500 plan valuation data in calculating 
this return. The new reference to ERISA section 3(18) expresses the 
Department's intent that the ``stock price'' used in these calculations 
be consistent with the fair market value methodologies that the plan 
administrator is already using under current law with respect to the 
value of employer stock held by the plan.
b. Special Rules for Annuities
    As discussed above, the Department, in response to comments, has 
made two changes to the final rule to better ensure the disclosure of 
both investment and annuity related information to plan participants 
and beneficiaries. These changes appear in the final rule at paragraphs 
(d)(1)(vii) and (i)(2). Paragraph (i)(2) of the final rule sets forth 
the information that must be disclosed about annuity options. Paragraph 
(i)(2) applies to any designated investment alternative consisting of a 
contract, fund or product that affords participants or beneficiaries 
the option to allocate contributions toward the current purchase of a 
stream of retirement income payments guaranteed by an insurance 
company. Paragraph (i)(2) addresses commenters' concerns with stand-
alone annuity options under which current participant contributions 
purchase a fixed-dollar stream of income commencing at a future point 
in time, typically at retirement age (``fixed-deferred annuity''). 
Paragraph (d)(1)(vii), as discussed more fully above, addresses 
commenters' concerns with annuity options that are contained within 
variable annuity contracts, under which participants and beneficiaries 
have a right to purchase an annuity with their accumulated plan savings 
at a rate specified in the contract (``variable annuity''). Moreover as 
noted above, the requirements in paragraph (i)(2) of the final rule 
explicitly apply to variable annuities as required by the cross 
reference in paragraph (d)(1)(vii) of the final rule.
    When applicable, the paragraph (i)(2) special rule provides that 
the plan administrator must, in lieu of the investment-related 
information described in paragraph (d)(1)(i) through (vi) of the final 
rule, provide each participant or beneficiary basic information about 
the benefits and costs of the annuity, as well as an Internet Web site 
address to lead participants and beneficiaries to additional 
information. Since both variable and fixed-deferred annuities are 
subject to the comparative format requirement in paragraph (d)(2) of 
the final rule, the plan administrator must furnish the content 
information described in paragraph (i)(2)(i) through (vi) of this 
special rule in a comparative chart or similar format. The Department 
believes that maintaining the comparative chart requirement will enable 
participants to undertake a comparison of annuity options when a plan 
includes two or more annuity options as designated investment 
alternatives.
c. Special Web Site Rules for Fixed-Return Investments
    As discussed above, the proposal, in paragraph (d)(1)(i)(B), 
required disclosure of an Internet Web site for each designated 
investment alternative offered under the plan. In response to concerns 
about this Web site requirement, which were discussed earlier in this 
preamble, the final rule, at paragraphs (d)(1)(v)(A) through (F), has 
been revised to clarify the specific items of information that must be 
made available at the required Web site address. In developing these 
revisions, however, the Department concluded that many of the revised 
content requirements in paragraphs (d)(1)(v)(A) through (F) simply do 
not apply to designated investment alternatives with respect to which 
the return is fixed for the term of the investment, e.g., portfolio 
turnover rate. The final rule, therefore, includes special rules that 
clarify and limit the information that that must be made available at 
the required Web site address for each designated investment 
alternative with respect to which the return is fixed for the term of 
the investment. These special rules, at paragraph (i)(3) of the final 
regulation, require disclosure of, among other things, name of the 
investment's issuer; objectives or goals (e.g., to provide stability of 
principal and guarantee a minimum rate of interest); performance data 
updated on at least a quarterly basis (or more frequently if required 
by other applicable law); and fee and expense information.
d. Special Rules for Target Date or Similar Funds
    The Department intends to publish a separate notice of proposed 
rulemaking that would supplement the otherwise applicable disclosures 
in this rule for designated investment alternatives that are target 
date-type funds. Accordingly, the Department has reserved paragraph 
(i)(4) for inclusion of such guidance.

[[Page 64927]]

C. Final Amendment to Sec.  2550.404c-1

    This notice also includes a final amendment to the regulation under 
section 404(c) of ERISA, 29 CFR 2550.404c-1. This amendment generally 
is unchanged from the proposal, except for the minor modification 
discussed below. This amendment to section 2550.404c-1(b), (c), and (f) 
integrates the disclosure requirements in the amended section 404(c) 
regulation with the disclosure requirements in the final regulation 
section 2550.404a-5 to avoid having different disclosure rules for 
plans intended to comply with the ERISA section 404(c) requirements. 
Similar to the proposal, this amendment eliminates references to 
disclosures that are now encompassed in section 2550.404a-5 and 
incorporates in paragraph (b)(2)(i)(B)(2) of the 404(c) regulation a 
cross-reference to the final rule, thereby establishing a uniform 
disclosure framework for all participant-directed individual account 
plans.
    The final 404(c) regulation has been modified in one respect from 
the proposal. Specifically, the Department eliminated the reference to 
``[i]dentification of any designated investment managers'' previously 
required in paragraph (b)(2)(i)(B)(2) of the proposed amendment. 
Commenters noted that identification of designated investment managers 
also was required pursuant to paragraph (c)(1)(i)(E) of proposed 
section 2550.404a-5. The Department did not intend to create a 
duplicative requirement and has therefore eliminated the requirement 
from the 404(c) regulation; identification of any designated investment 
managers will be continue to be required for 404(c) plans because 
(pursuant to paragraph (b)(2)(i)(B)(2) of the final 404(c) regulation, 
published herein) such plans must satisfy all of the disclosure 
requirements of the new regulation under section 404(a), which includes 
identification of any designated investment managers.
    Finally, as discussed further in the preamble to the proposal, at 
73 FR 43018, the Department reiterates its view that a fiduciary breach 
or an investment loss in connection with the plan's selection or 
monitoring of a designated investment alternative is not afforded 
relief under section 404(c) because it is not the result of a 
participant's or beneficiary's exercise of control.\22\ The Department 
has added, in paragraph (d)(2)(iv) of the final 404(c) amendment, a 
statement that ``paragraph (d)(2)(i) of this section does not serve to 
relieve a fiduciary from its duty to prudently select and monitor any 
designated investment manager or designated investment alternative 
offered under the plan.''
---------------------------------------------------------------------------

    \22\ See also 57 FR 46906, n. 27 (preamble to Sec.  2550.404c-1) 
(Oct. 13, 1992).
---------------------------------------------------------------------------

D. Effective and Applicability Dates; Transition Issues

    A significant number of commenters expressed concern about the 
establishment of an effective date that would not allow plans 
sufficient time to review and implement the new disclosure 
requirements. Commenters suggested that the Department should allow 
affected persons twelve to eighteen months to revise their 
recordkeeping and other systems to ensure that the required information 
is being captured and to prepare all of the necessary disclosure 
materials, including any coordination of these new requirements with 
existing disclosures. In an effort to balance the importance of the 
required information to plan participants with the practical burdens 
and costs attendant to compliance with a new disclosure regime, the 
Department is adopting these final rules with a 60-day effective date, 
but deferring the application of the new rules for at least 12 months. 
In this regard, the final rule will be applicable as of the beginning 
of the first plan year which starts on or after the first day of the 
thirteenth month following the date of publication. The Department 
believes that the delayed applicability date will afford plans 
sufficient time to ensure an efficient and effective implementation of 
the new rules. See paragraph (j)(1) and (2).
    The Department also provided transition relief, in paragraph (j)(3) 
of the final rule, to assist parties in complying with the final rule. 
Specifically, paragraph (j)(3)(i) provides that notwithstanding the 
effective and applicability dates for the final rule, the initial 
disclosures required on or before the date on which a participant or 
beneficiary can first direct his or her investment must be furnished no 
later than 60 days after the rule's applicability date to participants 
and beneficiaries who had the right to direct the investment of assets 
held in, or contributed to, their individual accounts, on the 
applicability date.
    Representatives of the banking industry indicated that transitional 
relief from the requirement to disclose 5- and 10-year performance may 
be needed for some plans that contain unregistered bank products as 
designated investment alternatives, if the final regulation were to 
adopt the ``total annual operating expenses'' and ``average annual 
total return'' definitions set forth in paragraph (h) of the proposed 
regulation. This is because the methodologies behind these definitions 
depend on certain data that neither plans nor bank funds were compelled 
to maintain before this final rule.
    Since the final rule contains definitions similar to those in the 
proposal, the Department was persuaded that transitional relief is 
necessary. The final regulation, at paragraph (j)(3)(ii), therefore, 
provides that for plan years beginning before October 2021, if a plan 
administrator reasonably determines that it does not have the 
information on expenses attributable to the plan that is necessary to 
calculate, in accordance with paragraph (h)(3), the 5-year and 10-year 
average annual total returns for a designated investment alternative 
that is not registered under the Investment Company Act of 1940, the 
plan administrator may use a reasonable estimate of such expenses. For 
this purpose, the plan administrator may use the most recently reported 
total annual operating expenses of the designated investment 
alternative as a substitute for the actual annual expenses during the 
5-year and 10-year periods if the plan administrator reasonably 
determines that doing so will result in a reasonably accurate estimate 
of the average annual total returns. Nothing in this paragraph 
(j)(3)(ii) requires disclosure of returns for periods before the 
commencement of the alternative.

E. Regulatory Impact Analysis

    As discussed earlier in this preamble, this final rule establishes 
a uniform basic disclosure regime for participant-directed individual 
account plans. Many of the disclosures required by the final rule are 
similar to those required for participant-directed individual account 
plans that currently comply with ERISA section 404(c) and the 
Department's regulations issued thereunder. The Department is uncertain 
regarding the information that is provided to participants in plans 
that are not ERISA section 404(c) compliant. Therefore, for purposes of 
this regulatory impact analysis (RIA), the Department assumes that the 
final rule's requirements are new for plans that are not ERISA section 
404(c) compliant.
    Based on the foregoing assumptions, the Department estimates that 
the average incremental costs and benefits for participants in ERISA 
section 404(c) compliant plans will be smaller than for those plans 
that are not. Also, participants in ERISA section 404(c) compliant 
plans or plans providing similar information only will receive an 
incremental benefit from the rule's new disclosure requirements, 
because they

[[Page 64928]]

already receive some of the information required to be disclosed under 
the final rule.

1. 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 subject to review by the Office 
of Management and Budget (OMB). Under section 3(f) of the Executive 
Order, a ``significant regulatory action'' is an action that 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 more than $100 million in any one year.
    Accordingly, the Department has undertaken, as described below, an 
analysis of the costs and benefits of the final regulation. The 
Department continues to believe that the final regulation's benefits 
justify its costs. The present value of the benefits over the ten-year 
period 2012-2021 is expected to be about $14.9 billion, with a low 
estimate of $7.2 billion and a high estimate of $29.9 billion. The 
present value of the costs over the same time period is expected to be 
$2.7 billion, with a low estimate of $2.0 billion and a high estimate 
of $3.3 billion. Overall, the Department estimates that the final 
regulation will generate a net present value (or net present benefit) 
of almost $12.3 billion. Table 1 shows the annualized monetized 
benefits and cost of the regulations and also provides a summary of the 
benefits and costs. The Department also expects the regulation to 
produce substantial additional benefits, in the form of improved 
investment decisions, but the Department was not able to quantify this 
effect.

                                            Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
                                      Primary        Low          High                    Discount      Period
                                      estimate     estimate     estimate   Year dollar      rate       covered
----------------------------------------------------------------------------------------------------------------
Benefits:
    Annualized....................      1,986.1        952.3      3,973.9         2010           7%    2012-2021
    Monetized ($millions/year)....      1,986.1        952.3      3,973.9         2010            3    2012-2021
                                   -----------------------------------------------------------------------------
    Explanation of Monetized
     Benefits.....................  The regulation's disclosure requirements are expected to reduce
                                    participants' time otherwise used for searching for fee and other investment
                                    information.
    Qualitative...................  The Department expects the regulation to produce substantial additional
                                    benefits, in the form of improved investment decisions, but the Department
                                    was not able to quantify this effect.
                                   -----------------------------------------------------------------------------
Costs:
    Annualized....................        353.8        265.5        442.2         2010            7    2012-2021
    Monetized ($millions/year)....        352.3        264.9        439.7         2010            3    2012-2021
                                   -----------------------------------------------------------------------------
    Explanation of Monetized Costs     Plans are likely to incur administrative burdens and costs in order to
                                    comply with the requirements of the regulation. The quantified cost estimate
                                     includes costs due to legal review of the regulation, consolidation of fee
                                        information, creation and maintenance of a Web site, record keeping,
                                     production and distribution of disclosures, and material and postage costs.
----------------------------------------------------------------------------------------------------------------

2. Need for Regulatory Action

    Understanding and comparing investment options available in a 
401(k) plan can be complicated and confusing for many participants. The 
magnitude of complexity and confusion may be defined by reference to 
the number of available investment options and the materials utilized 
for communicating investment-related information. Moreover, the process 
of gathering and comparing information may itself be time consuming. 
For example, the U.S. Government Accountability Office noted in a 
recent report that ``it is hard for participants to make comparisons 
across investment options because they have to piece together the fees 
that they pay, and assessing fees across investment options can be 
difficult because data are not typically presented in a single document 
that facilitates comparison.'' \23\
---------------------------------------------------------------------------

    \23\ U.S. General Accounting Office, Private Pensions: 
Information That Sponsors and Participants Need to Understand 401(k) 
Plan Fees, p. 15, fn 20. This report may be accessed at http://
www.gao.gov/new.items/d08222t.pdf.
---------------------------------------------------------------------------

    The final rule's new disclosure requirements will help a large 
number of plan participants by placing investment-related information 
in a format that facilitates comparison of investment alternatives. 
This simplified format will make it easier and less time consuming for 
participants to find and compare investment-related information. As a 
result, plan participants should make better investment decisions which 
will enhance their retirement income security.
    Table 2 below shows the number of entities affected by the rule. 
According to the 2007 Form 5500 data, the latest complete data 
available, approximately 318,000 participant-directed individual 
account plans covering over 58.2 million participants reported 
compliance with ERISA 404(c). Approximately 165,000 participant-
directed individual account plans covering about 13.9 million 
participants reported that they are not ERISA section 404(c) compliant. 
In total, the rule will impact 483,000 participant-directed individual 
account plans covering 72 million participants.

[[Page 64929]]



                  Table 2--Number of Affected Entities
------------------------------------------------------------------------

------------------------------------------------------------------------
Plans:
  Number of 404(c) Compliant Plans......................         318,000
  Number of Non-404(c) Compliant Plans..................         165,000
                                                         ---------------
    Number of Participant-directed Plans................         483,000
Participants:
  404(c) Plans..........................................      58,195,000
  Non-404(c) Plans......................................      13,916,000
                                                         ---------------
    Number of Participants in Participant-directed Plans      72,111,000
------------------------------------------------------------------------
Note: The displayed numbers are rounded and therefore may not add up to
  the totals.

3. Benefits

    The Department believes the final rule will provide two primary 
benefits: (1) Reduced time for plan participants to collect investment-
related information and organize it into a format that allows the 
information to be compared; and (2) improved investment results for 
plan participants due to the enhanced disclosures available to them. 
Each benefit is discussed in further detail below; however, the 
Department only was able to quantify the search time reduction benefit.
a. Reduction in Participant Search Time
    As discussed above, the Department assumes that the final rule's 
new disclosure requirements will benefit plan participants by reducing 
the time they spend searching for and compiling fee and expense 
information into a comparative format. In the RIA of the proposal, the 
Department estimated that 29 percent of all participants would 
experience time savings due to the easier access to information and the 
unified format. However, a commenter pointed out that the Department 
significantly underestimated the number of participants that will 
experience time savings. The commenter suggested that all participants 
who believe that fee, expense and performance information is important 
for making investment decisions and read materials provided to them 
most likely will experience time savings. The commenter suggested using 
a result from the EBRI's 2007 Retirement Confidence Survey \24\ which 
indicates that 73 percent (plus or minus 3 percent) of workers saving 
for retirement used written materials received at work as a source of 
information when making retirement savings and investment 
decisions.\25\ The Department agrees with the commenter and has revised 
its estimates to reflect that out of the 72 million participants 
affected by the rule, 70 to 76 percent, or nearly 50 to 55 million 
participants, will benefit from reduced search costs.
---------------------------------------------------------------------------

    \24\ Employee Benefit Research Institute Issue Brief 
304, April 2007. The survey found that 73 percent of 
workers saving for retirement used written material received at work 
as a source of information when making retirement savings and 
investment decisions.
    \25\ The survey notes: ``In theory, each sample of 1,252 yields 
a statistical precision of plus or minus 3 percentage points (with 
95 percent certainty) of what the results would be if all Americans 
age 25 and older were surveyed with complete accuracy. There are 
other possible sources of error in all surveys, however, that may be 
more serious than theoretical calculations of sampling error. These 
include refusals to be interviewed and other forms of nonresponse, 
the effects of question wording and question order, and screening. 
While attempts are made to minimize these factors, it is impossible 
to quantify the errors that may result from them.''
---------------------------------------------------------------------------

    Although the Department sought to anchor its analysis on empirical 
evidence, there are a number of variables that are subject to 
uncertainty. In particular, although the Department is confident that 
the new disclosure format will reduce search costs, the Department does 
not have empirical evidence on the magnitude of these savings. Search 
time savings will vary widely depending on the type of investment 
options available through the plan, the completeness of baseline 
routine voluntary disclosures, the participant's sophistication, among 
other factors. To illustrate the potential benefits, the Department 
assumes that participants who are not receiving ERISA section 404(c) 
compliant disclosures, on average, will save one-and-a-half hours, 
while participants receiving such disclosures will save one hour on 
average. The Department also provides a range assuming half the time 
savings on the low and double the time savings on the high end.
    The benefits estimate uses an average wage of $37 for private 
sector workers participating in a pension plan to estimate how much the 
average participants would value the time saved. It is based on hourly 
wages from Panel 4 of the 2004 wave from the Survey of Income Program 
Participation (SIPP) and on wage growth data for private-sector workers 
that participate in a pension plan with individual accounts from the 
Bureau of Labor Statistics (BLS). In the proposal the Department had 
additionally adjusted the wage rate to account for the difference that 
plan participants attribute to leisure versus work time. The Department 
received a comment that the estimate used may not have been 
representative of participants' value of leisure time and suggested 
that the Department simply use the average wage rate. The Department 
agrees and for the purpose of estimating a dollar value of the time 
uses an average wage rate of about $37.
    These assumptions result in annual time savings of approximately 26 
to 112 million hours valued at $1.0 to $4.0 billion in 2012. The total 
present value of this benefit is $7.2 to $29.9 billion using a seven 
percent discount rate.
b. Reduction in Fees and Expenses
    By reducing participants' time required to collect information and 
organize fee and performance information, the final rule should 
increase the amount of investment-related information participants 
consider and the attention devoted to and efficiency of such 
consideration. This will help participants pick appropriate investment 
options that will provide the best value to them. Moreover, the 
increased transparency could strengthen competition between investment 
products and drive down fees.
    In its RIA of the proposal, the Department estimated that fees and 
expenses are higher than necessary by 11.3 basis points on average. 
Some commenters on the proposal, as well as some commenters on the 
Department's proposed exemptions relating to the provision of 
investment advice by a fiduciary advisor to participants and 
beneficiaries in participant-directed individual account plans and 
beneficiaries of individual retirement accounts,\26\ dispute this 
estimate. The commenters point to evidence that the pricing of 
investment products and related services is competitive and efficient, 
and contend that there is no credible evidence to the contrary.
---------------------------------------------------------------------------

    \26\ See 73 FR 49895 (August 22, 2008) and 73 FR 49924 (August 
22, 2008).
---------------------------------------------------------------------------

    The commenters raised several specific challenges to the 
Department's analysis. First, they contend that the Department's 
estimate relies inappropriately on dispersion in mutual fund expenses 
as evidence that such expenses are sometimes higher than necessary and 
as a basis for estimating the degree to which this is so. Dispersion in 
expenses reflects differences among the investment products or the 
services bundled with them, the commenters say, and therefore such 
dispersion is consistent with competitive, efficient pricing. Second, 
the commenters argue that the analysis draws incorrect inferences about 
fees and expenses in DC plans. The analysis overlooks the role of DC 
plan fiduciaries

[[Page 64930]]

in choosing reasonably priced investments and relies too much on 
research that examined retail rather than DC plan experience, they say. 
Third, the commenters highlight what they maintain are technical flaws 
in some of the research that the Department cited as supporting the 
conclusion that fees and expenses are sometimes higher than necessary, 
and they take issue with the Department's interpretation of this 
research.
    In response to these commenters, the Department undertook to refine 
and strengthen its analysis. First, the Department agrees that the RIA 
of the proposal relied too heavily on mere dispersion of fees and 
expenses as a basis for estimating whether and to what degree they 
might be higher than necessary. The estimate that they are on average 
11.3 basis points higher than necessary lacks adequate basis and should 
be disregarded. Second, the Department agrees that fees and expenses 
paid by DC plan participants can differ from those paid by retail 
investors. Any evidence of higher than necessary expenses in the retail 
sector might suggest similar circumstances in DC plans, but would not 
demonstrate it. Third, the Department reviewed available research 
literature in light of the commenters, and refined its analysis and 
conclusions accordingly, as summarized immediately below.
    Expense Sensitivity--Surveys and studies strongly suggest gaps in 
awareness of and sensitivity to expenses.\27\ Other studies consider 
whether investors with different levels of sophistication make 
different decisions about fees. If more sophisticated investors are 
more sensitive to fees, less sophisticated ones might be paying more 
than would be optimal. Alternatively, they might be paying more in 
order to obtain sophisticated help. Much literature suggests a negative 
relationship between sophistication and expenses paid,\28\ but some 
does not.\29\ Overall this literature leaves open the question of 
whether investment prices are sometimes inefficiently high, but 
suggests that even if prices are efficient investors may make poor 
purchasing decisions. The Department believes that many individual 
investors, including DC plan participants, historically have not 
factored expenses optimally into their investment choices.
---------------------------------------------------------------------------

    \27\ See e.g., 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); Jeff Dominitz et 
al., How Do Mutual Funds Fees Affect Investor Choices? Evidence from 
Survey Experiments (May 2008) (unpublished, on file with the 
Department of Labor); and John Turner & Sophie Korczyk, Pension 
Participant Knowledge About Plan Fees, AARP Pub ID: DD-105 (Nov. 
2004). Commenters point out that net flows are concentrated in 
mutual funds with low expenses. However it is unclear whether this 
reflects investor fee sensitivity or brand name recognition and 
successful marketing by large, established funds whose low fees are 
attributable to economies of scale.
    \28\ Sebastian M[uuml]ller & Martin Weber, Financial Literacy 
and Mutual Fund Investments: Who Buys Actively Managed Funds?, 
Social Science Research Network Abstract 1093305 (Feb. 14, 2008) 
find that more financially literate investors pay lower front-end 
loads but similar management fees, and suggest that investors who 
know about management fees appear not to care about them. Jeff 
Dominitz et al., How Do Mutual Funds Fees Affect Investor Choices? 
Evidence from Survey Experiments (May 2008) (unpublished, on file 
with the Department of Labor) find that financially literate 
individuals are better able to estimate fees, and better estimates 
are associated with more optimal investment choices. 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, 2095-2119 
(2005) find that repeat investors are more sensitive to load fees 
than expense ratios, but commenters point out that this finding may 
be an artifact of industry load setting practices.
    \29\ Mark Grinblatt et al., Are Mutual Fund Fees Competitive? 
What IQ-Related Behavior Tells Us, Social Science Research Network 
Abstract 1087120 (Nov. 2007) find that investors with different IQs 
pay similar fees, which ``suggests that fees are set 
competitively.''
---------------------------------------------------------------------------

    Sector Differences--Some studies lend insight to the question of 
whether investment prices are efficient by comparing prices paid or 
performance in different market segments.\30\ The Department believes 
that taken together, this literature suggests that there are 
unexplained differences in prices and performance across sectors but 
fails to demonstrate conclusively whether such differences are 
systematically attributable to inefficiently high investment prices.
---------------------------------------------------------------------------

    \30\ John P. Freeman & Stewart L. Brown, Mutual Fund Advisory 
Fees: The Cost of Conflicts of Interest, The Journal of Corporate 
Law, Volume 26, 609-673 (Spring 2001) found that the price paid by 
mutual funds for equity fund management is higher than that paid by 
pension funds. Based on this and other evidence they argue that 
mutual fund fees are often excessive. John C. Coates & R. Glenn 
Hubbard, Competition in the Mutual Fund Industry: Evidence and 
Implications for Policy, Social Science Research Network Abstract 
1005426 (Aug. 2007) challenge Freeman and Brown's methods and 
conclusions, arguing that these differences in prices are 
attributable to differences in services for which Freeman and Brown 
did not account. They offer evidence that fees are competitive. 
Alicia H. Munnell et al., Investment Returns: Defined Benefits vs. 
401(k) Plans, Center for Retirement Research Issue Brief Number 52 
(Sept. 2006) find higher returns in DB plans than in DC plans and 
offer that ``part of the explanation may rest with higher fees'' 
that are paid by DC plan participants. Rob Bauer & Rik G.P. Frehen, 
The Performance of U.S. Pension Funds, Social Science Research 
Network Abstract 965388 (Jan. 2008) find that DC and DB plans both 
perform close to benchmarks while mutual funds underperform, and 
point to hidden costs in mutual funds as the most likely reason. 
Diane Del Guercio & Paula A. Tkac, The Determinants of the Flow of 
Funds of Managed Portfolios: Mutual Funds vs. Pension Funds, The 
Journal of Financial and Quantitative Analysis, Volume 37, Number 4, 
523-557 (Dec. 2002) find that ``in contrast to mutual fund 
investors, pension clients punish poorly performing managers by 
withdrawing assets under management and do not flock 
disproportionately to recent winners.''
---------------------------------------------------------------------------

    Market Power--At least one study suggests that mutual funds may 
wield market power to mark up prices to inefficient levels.\31\
---------------------------------------------------------------------------

    \31\ Guo Ying Luo, Mutual Fund Fee-Setting, Market Structure and 
Mark-Ups, Economica, Volume 69, Number 274, 245-271 (May 2002) 
exploits differences in market concentration across different narrow 
mutual funds categories, and finds that mark-ups average 30 percent 
of fees across all categories of no load funds and more than 70 
percent across load funds (assuming a 5-year holding period).
---------------------------------------------------------------------------

    What Expenses Buy--A number of studies consider the degree to which 
expense dispersion is a function of product features and bundled 
services, and if it is, whether that dispersion is justified by 
differences in observable attendant financial benefits such as 
performance. Some of this literature also considers the degree to which 
investors choose investments where expenses are so justified. In the 
Department's view this literature taken together suggests that a 
substantial portion of expense dispersion is attributable to 
distribution expenses, including compensation of intermediaries and 
advertising.\32\ It casts doubt on whether such expenses are duly 
offset by observable financial benefits. Most studies are consistent 
with the possibility that such expenses are at least partly offset by 
unobserved benefits such as reduced search costs and other support for 
novice and unsophisticated investors, but most are also consistent with 
the possibility that some expenses are not so offset and that 
investors, especially unsophisticated ones, sometimes pay inefficiently 
high prices.\33\ The authors of some studies expressly interpret their 
failure to identify offsetting financial benefits as evidence that 
prices are inefficiently high. Some suggest that conflicted 
intermediaries may serve their own and

[[Page 64931]]

fund managers' interests, thereby generating inefficiently high profits 
for either or both. Others disagree, believing that investors 
efficiently derive a combination of financial and intangible benefits 
for their expense dollars.\34\
---------------------------------------------------------------------------

    \32\ The literature also attributes much expense dispersion to 
differences in the cost of managing different types of funds. For 
example, active equity management is more expensive than passive and 
management of foreign or small cap equity funds is more expensive 
than management of large cap domestic equity funds. Investors 
therefore might optimally diversify across funds with different 
levels of investment management expense. Some studies question 
whether active management delivers observable financial benefits 
commensurate to the associate expense. For example, Kenneth R. 
French, The Cost of Active Investing, Social Science Research 
Network Abstract 1105775 (Apr. 2008) finds that investors spend 0.67 
percent of aggregate U.S. stock market value each year searching for 
superior return, and characterizes this as society's cost of price 
discovery.
    \33\ Both of these hypotheses are also consistent with 
literature finding a negative link between sophistication and 
expenses.
    \34\ The following is a sampling of findings and interpretations 
reported in various studies that the Department reviewed. The 
Department observes that some of these studies have been published 
in peer-reviewed journals, while others have not. Some are working 
papers subject to later revision. Some research is visibly supported 
by industry or other interests, and some may be independent. Very 
little of this research separately examines DC plan investing. 
Nearly all of it examines mutual fund markets to the exclusion of 
certain competing insurance company or bank products. Some of it 
examines foreign experience. The Department believes it must be 
cautious in drawing inferences from this research as to whether 
investment prices paid by participants are efficient.
    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) find that investors who pay to 
purchase funds via intermediaries realize inferior returns, and say 
this result is consistent with either intangible benefits for 
investors or inefficiently high prices due to conflicts.
    Ralph Bluethgen et al., Financial Advice and Individual 
Investors' Portfolios, Social Science Research Network Abstract 
968197 (Mar. 2008) find that advisers (who are mostly compensated by 
commission) improve diversification and allocation across classes 
while increasing fees and turnover. They say these findings are 
consistent with ``honest advice.''
    Susan Christoffersen et al., The Economics of Mutual-Fund 
Brokerage: Evidence from the Cross Section of Investment Channels, 
Science Research Network Abstract 687522 (Dec. 2005) identify some 
financial benefits reaped by investors who pay to invest through 
intermediaries.
    Sean Collins, Fees and Expenses of Mutual Funds, 2006, 
Investment Company Institute Research Fundamentals, Volume 16, 
Number 2 (June 2007) reports that mutual fund fees and expenses are 
declining.
    Sean Collins, Are S&P 500 Index Mutual Funds Commodities?, 
Investment Company Institute Perspective, Volume 11, Number 3 (Aug. 
2005) argues that S&P 500 index funds are not uniform commodities. 
For example, they are distributed in different ways. He finds that 
91 percent of the variation in these funds' expense ratios can be 
explained by a combination of fund asset size, investor account 
size, fee waivers and separate fees, and investor advice that is 
bundled into expense ratios. He argues that these funds 
competitively pass economies of scale along to investors, and 
reports that assets and flows are concentrated in low-cost funds.
    Henrik Cronqvist, Advertising and Portfolio Choice, Social 
Science Research Network Abstract 920693 (July 26, 2006) finds that 
fund advertising steers investors toward ``portfolios with higher 
fees, more risk, more active management, more `hot' sectors, and 
more home bias.'' He suggests that ``with the use of advertising, 
funds can differentiate themselves and therefore charge investors 
higher fees than the lowest-cost supplier in the industry.''
    Daniel N. Deli, Mutual Fund Advisory Contracts: An Empirical 
Investigation, The Journal of Finance, Volume 57, Number 1, 109-133 
(Feb. 2002) finds that differences in investment advisers' marginal 
compensation reflect differences in their marginal product, 
difficulty in measuring adviser performance, control environments, 
and scale economies. Based on this finding, he suggests that 
investment prices are efficient and recommends caution in any 
regulatory effort to influence such prices.
    Edwin J. Elton et al., Are Investors Rational? Choices Among 
Index Funds, The Journal of Finance, Volume 59, Number 1, 261-288 
(Feb. 2004) find that flows into high expense (and therefore 
predictably low performance) S&P 500 index mutual funds are higher 
than would be expected in an efficient market. They conclude that 
because investors are not perfectly informed and rational, inferior 
products can prosper. Commenters, however, contend that because the 
authors scaled flows by fund size and smaller funds have higher 
expenses, these findings exaggerate the degree to which flows are 
directed to high expense funds.
    Javier Gil-Bazo & Pablo Ruiz-Verd[uacute], Yet Another Puzzle? 
Relation Between Price and Performance in the Mutual Fund Industry, 
Social Science Research Network Abstract 947448 (March 2007) find 
that ``funds with worse before-fee performance charge higher fees.'' 
They hypothesize that lower performing funds lose sophisticated 
investors to higher performing funds, then are left with relatively 
unsophisticated investors who are not as responsive to price.
    John A. Haslem et al., Performance and Characteristics of 
Actively Managed Retail Equity Mutual Funds with Diverse Expense 
Ratios, Financial Services Review, Volume 17, Number 1, 49-68 (2008) 
find that funds with lower expenses have superior returns. John A. 
Haslem et al., Identification and Performance of Equity Mutual Funds 
with High Management Fees and Expense Ratios, Journal of Investing, 
Volume 16, Number 2 (2007) find that certain performance measures 
vary negatively with fees and, on that basis, suggest that mutual 
funds do not compete strongly on price and that expenses are too 
high.
    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) 
report that 401(k) mutual fund investors tend to pay lower than 
average expenses and that 401(k) assets are concentrated in low cost 
funds.
    Ali Hortacsu & Chad Syverson, Product Differentiation, Search 
Costs, and Competition in the Mutual Fund Industry: A Case Study of 
S&P 500 Index Funds, Quarterly Journal of Economics, 403 (May 2004) 
document dispersion in S&P 500 Index Fund expense ratios, and report 
that low-cost funds have a dominant, but falling, market share. They 
conclude that an influx of novice investors who must defray search 
costs explains dispersion in expenses and flows to high expense 
funds.
    Todd Houge & Jay W. Wellman, The Use and Abuse of Mutual Fund 
Expenses, Social Science Research Network Abstract 880463 (Jan. 
2006) find that load funds charge higher 12b-1 and management fees. 
They attribute this to abusive market segmentation that extracts 
excessive fees from unsophisticated investors.
    Giuliano Iannotta & Marco Navone, Search Costs and Mutual Fund 
Fee Dispersion, Social Science Research Network Abstract 1231843 
(Aug. 2008) analyze the effect of search costs on mutual fund fees 
with data on broad U.S. domestic equity funds. They estimate the 
portion of the expense ratio that is not justified by the quality of 
service provided, by the cost structure of the investment company, 
or by the specificities of the clientele served by the fund and find 
that its dispersion is lower for highly visible funds and for funds 
that invest heavily in marketing. In the case of the U.S. mutual 
fund market, they argue, the dispersion of this residual 
demonstrates the extent to which some firms can charge a ``non-
marginal'' (that is higher than competitive) price.
    Marc M. Kramer, The Influence of Financial Advice on Individual 
Investor Portfolio Performance, Social Science Research Network 
Abstract 1144702 (Mar. 2008) finds that advised investors take less 
risk and thereby reap lower returns. Risk-adjusted performance is 
similar. Adjusting further for investor characteristics, advised 
investors perform slightly worse.
    Erik R. Sirri & Peter Tufano, Costly Search and Mutual Fund 
Flows, The Journal of Finance, Volume 53, Number 5, 1589-1622 (Oct. 
1998) find that investors are ``fee sensitive in that lower-fee 
funds and funds that reduce fees grow faster.'' Investors' fee 
sensitivity is not symmetric, however.
    Edward Tower & Wei Zheng, Ranking Mutual Fund Families: Minimum 
Expenses and Maximum Loads as Markers for Moral Turpitude, Social 
Science Research Network Abstract 1265103 (Sept. 2008) find a 
negative relationship between expense ratios and gross performance.
    The Division of Investment Management: Report on Mutual Fund 
Fees and Expenses, U.S. Securities and Exchange Commission (Dec. 
2000), at http://www.sec.gov/news/studies/feestudy.htm describes 
mutual fund fees and expenses and identifies major factors that 
influence fee levels but does not assess whether prices are 
efficient.
    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 finds that funds with higher loads 
receive higher flows, and suggests that conflicted intermediaries 
enrich themselves at investors' expense.
---------------------------------------------------------------------------

    In light of this literature and public commenters, the Department 
believes that the available research provides an insufficient basis to 
confidently determine whether or to what degree participants pay 
inefficiently high investment prices. Market conditions that may lead 
to inefficiently high prices--namely imperfect information, search 
costs and investor behavioral biases--certainly exist in the retail IRA 
market and likely exist to some degree in particular segments of the DC 
plan market. The Department believes there is a strong possibility that 
at least some participants pay inefficiently high investment prices. If 
so, the Department would expect these actions to reduce that 
inefficiency. This would increase participants' welfare by transferring 
surplus from producers of investment products and services to them and 
by reducing dead weight loss. The Department additionally believes that 
even where investment prices are efficient, participants often make bad 
investment decisions with respect to expenses--that is, they buy 
investment products and services whose marginal cost exceed the 
associated marginal benefit to them.\35\ The Department expects these 
actions to reduce such investment errors, improving participant and 
societal welfare. However, the Department has no basis

[[Page 64932]]

on which to quantify such errors or improvements.
---------------------------------------------------------------------------

    \35\ It is possible that the converse could sometimes occur: 
Participants might fail to buy efficiently priced products and 
services whose marginal cost lags the associated marginal benefit to 
them. In that case advice, by correcting this error, might lead to 
higher expenses, but would still improve welfare. Because research 
suggests that participants are insensitive to fees rather than 
excessively sensitive to them the Department believes that this 
converse situation is likely to be rare.
---------------------------------------------------------------------------

    In addition to the benefits that participants will derive from the 
disclosure of investment-related information in a comparative format, 
they also will benefit from a retrospective disclosure of plan 
administrative fees actually charged to their accounts in the prior 
quarter. Previous RFI comments from participant advocates, plan 
sponsors and service providers support such a disclosure 
requirement.\36\ However, one comment to the contrary on behalf of 
service providers was received by the Department in response to the 
proposal. The commenter expressed concern that ``the value of quarterly 
statements to the participant does not justify the cost of providing 
the data.'' \37\ The Department continues to believe, as it did in 
connection with the proposal, that participants who are trying to plan 
for retirement are entitled to a comprehensive disclosure that includes 
not only information about fee and expenses that may occur depending on 
investment options selected, but also information on other fees that 
were actually assessed against their accounts in the previous quarter. 
Information about actual charges to participants' accounts may, among 
other things, help participants understand their current reported 
account balance, detect errors in prior charges by the plan, handle 
general household budgeting and retirement planning, and insure that 
the charges are reasonable. In addition, this information already 
should be available in some form as part of ordinary plan recordkeeping 
that tracks participant account balances.
---------------------------------------------------------------------------

    \36\ These comments on the RFI can be found under http://
www.dol.gov/ebsa/regs/cmt-feedisclosures.html.
    \37\ Comments on the proposal can be found under http://
www.dol.gov/ebsa/regs/cmt-fiduciaryrequirements.html.
---------------------------------------------------------------------------

4. Costs

    The Department estimates that the regulation may result in the 
following additional administrative burdens and costs \38\ for plans 
(or plan sponsors).\39\
---------------------------------------------------------------------------

    \38\ The Department's estimate of these costs are highly 
uncertain, discussed in more detail in the Uncertainty section, 
reflecting especially uncertainty about the average time plans will 
spend on performing their task.
    \39\ For purposes of this analysis the Department assumes that 
these costs are borne by plans, even though they might be initially 
incurred by service providers.
---------------------------------------------------------------------------

a. Costs Due to Upfront Review and Updating of Plan Documents
    In the RIA of the proposal, the Department estimated costs of about 
$30.3 million for participant-directed individual accounts plans to 
review the regulation upfront and to prepare the disclosures. Using 
updated in-house labor rates for professional and clerical employees, 
the Department has increased the estimated costs to about $35.0 million 
in 2012. Costs to update plan documents to take into account plan 
changes, such as new investment alternatives, changes in general plan 
administrative expenses, and changes in individual expenses are 
estimated to be approximately $20.3 million in subsequent years.
b. Costs Due to Production of Quarterly Dollar Amount Disclosures
    The final regulation will require plan administrators to send out 
disclosures about administrative charges to participants' accounts and 
engage in recordkeeping on both a plan-wide as well as a participant-
specific basis. The Department estimates that the cost to produce the 
actual dollar disclosure is approximately $30.5 million for 2012 \40\ 
and $10.7 million in subsequent years.
---------------------------------------------------------------------------

    \40\ The Department did not account for additional paper costs, 
given that no additional pages need be added as long as this 
information is included as part of the quarterly benefit statement.
---------------------------------------------------------------------------

c. Costs Due to Assembling Required Information for Chart and Web Site
    Additional administrative burdens and costs are likely to arise 
because of the need for plans to consolidate information from more than 
one source to prepare the required comparative chart. In the proposal, 
the Department estimated that it takes a person with a financial 
background about one hour per plan to consolidate the information from 
multiple sources for the comparative chart. The Department acknowledges 
that some plans with non-mutual fund designated investment alternatives 
may require more time to prepare the required information for the chart 
and the Web site. Therefore, the Department has quintupled the time 
estimate to five hours per plan, on average, for the first year and 
quadrupled the time estimate to four hours per plan, on average, for 
subsequent years. This results in estimated costs for the consolidation 
of fee information from multiple sources of approximately $151.5 
million in 2012 and $121.2 million in subsequent years.\41\
---------------------------------------------------------------------------

    \41\ This number also includes a small update of the in-house 
wage rate for a financial professional.
---------------------------------------------------------------------------

d. Costs Due to the Web Site Requirement
    The regulation does not require plans to create and maintain a Web 
site. Rather, paragraph (d)(1)(v) of the rule requires plan 
administrators to disclose on the required comparative chart an 
Internet Web site address that is sufficiently specific to lead 
participants to supplemental information about each investment option 
offered under the plan. The Department received comments that many non-
mutual fund products may not presently maintain a Web site, therefore 
additional costs will be incurred. In response to these comments, the 
Department has quantified the cost of creating and maintaining a Web 
site, below as an upper bound.
    For purposes of quantifying the cost of creating and maintaining a 
Web site, the Department assumes that about 50 percent of plans, or 
employers sponsoring such plans, already maintain a Web site where plan 
information may be found.\42\ For these plans, some information will 
likely be required to be added to existing Web sites, which will have 
to be updated periodically. The Department assumes that 241,000 plans, 
or employers sponsoring such plans, already maintain Web sites with 
plan-related information and that for each such plan on average, an IT 
professional will spend one hour updating the Web site for the required 
information. In addition, the Department assumes that the plan will 
update the information about three additional times during the year, 
which will require one-half hour of an IT professional's time for each 
update. The estimated 241,000 plans that do not currently maintain a 
Web site with plan information will require, on average, two hours of 
an IT professional's time to create a basic Web site and one-half hour 
to update the information on the Web site three times in the first 
year.\43\ In addition, the 241,000 plans presently without Web sites 
will have to rent server space. This is estimated to cost plans, on 
average, $240 a year, resulting in an aggregate cost of $159.4 million 
in the first year to create and update Web sites.
---------------------------------------------------------------------------

    \42\ The Department lacks representative survey information on 
the number of plans that have a Web site, but believes that an 
average rate of 50 percent is reasonable. In estimating this rate, 
the Department has taken into account that plans that offer only 
non-mutual fund options might not have Web sites currently and that 
plans that offer a combination of mutual funds and non-mutual fund 
investment options are less likely to have Web sites than plans 
offering only mutual funds. In addition, commenters estimated that 
about half of plans use a third party administrator or independent 
record keeper. Due to this uncertainty, the Department's estimate of 
the resulting costs is also highly uncertain.
    \43\ The hourly labor cost of an IT professional is assumed to 
be $70.
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    In subsequent years, only new plans will incur the cost of 
developing a Web

[[Page 64933]]

site. Existing plans are assumed to update the information on the Web 
site four times per year requiring one-half hour of an IT 
professional's time for each update. Plans also will incur server space 
rental cost estimated at $240 per plan, resulting in a total cost in 
each subsequent year of $142.6 million.
e. Costs of Distribution and Materials for Disclosures
    The final rule's required disclosures, as well as any materials the 
plan receives regarding voting, tender or similar rights (``pass-
through materials''), are usually sent to plan participants on an 
annual or quarterly basis.\44\ Using updated in-house wage rates, this 
leads to an estimate of about $39.2 million in labor costs.\45\ Plans 
will also bear materials and postage costs of about $9.0 million in 
2012. The Department believes that plans have pass-through materials 
readily available for participants who must receive such disclosures; 
therefore, it has attributed no cost to gather this information.
---------------------------------------------------------------------------

    \44\ As in the RIA of the proposal, this section does not 
include distribution or material costs for the disclosures of 
administrative fees charged to participants' accounts as the 
Department assumes that this information can be included as part of 
the quarterly benefit statement.
    \45\ Some of this information is already required for 404(c) 
compliant plans and by the Department's Qualified Default Investment 
Alternative regulation. In addition, a large majority of plans 
voluntarily provide this information to its participants. As a 
result, the Department estimates that only 577,000 participants will 
receive this information for the first time because of the final 
regulation, and 38% percent of participants will receive the 
information electronically.
---------------------------------------------------------------------------

    In total, the Department estimates that in 2012, participant-
directed individual account plans will incur increased administrative 
costs of approximately $424.6 million.
f. Discouragement of Some Employers From Sponsoring a Retirement Plan
    Increased administrative burdens may discourage some employers, 
particularly small employers, from sponsoring a retirement plan. For 
small plan sponsors, the administrative burden is felt 
disproportionately because of their limited resources. Small business 
owners who do not have the resources to analyze plan fees or to hire an 
analyst may be discouraged from offering a plan at all.
    Regulatory burden is one among many reasons small businesses do not 
to sponsor a retirement plan. According to the 2000, 2001, and 2002 
Employee Benefit Research Institute (EBRI)'s Small Employer Retirement 
Surveys, about 2.7 percent of small employers cited ``too many 
government regulations'' as the most important reason they do not offer 
a retirement plan.\46\ A commenter on the proposed rule supported this 
assertion, but did not provide a specific estimate of its impact. Due 
to very limited data on this issue, the Department is not able to 
quantify its impact.\47\
---------------------------------------------------------------------------

    \46\ The survey defines small employers as those having up to 
100 full-time workers. Other reasons small employers do not offer a 
retirement plan are that workers prefer wages or other benefits, 
that a large portion of employees are seasonal, part-time, or high 
turnover, and that revenue is too low or uncertain. See http://
www.ebri.org/surveys/sers for more detail.
    \47\ It also is possible that rather than discouraging employers 
from sponsoring or continuing to sponsor a retirement plan, 
increased administrative burden could instead influence some 
employers to offer less investment options in their participant-
directed individual account plans.
---------------------------------------------------------------------------

g. Summary of Costs
    The quantified total costs are shown in Table 3 below. Column (A) 
reports the estimated costs of up-front review of the regulation, 
Column (B) reports the costs to update plan documents, and Column (C) 
reports the cost to produce quarterly dollar amounts for administrative 
fees charged to participant accounts. The cost to assemble the required 
information, create and update Web sites, and associated distribution 
and material costs are reported in columns (D), (E), (F) and (G). The 
total present value of these costs is estimated at $2.7 billion over 
the ten year period 2012 to 2021. As discussed in more detail in the 
uncertainty section below, a range of possible cost estimates was 
constructed by decreasing and increasing key cost assumptions by 50 
percent. This led to a range for the cost estimates of $2.0 to $3.3 
million.

                                         Table 3--Total Discounted Costs of Proposal Reported in $Millions/Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Production   Assembling
                                                                          of          the                                  Staff cost
                                             Up-front   Update plan   quarterly     required    Creation/   Distribution       to
                   Year                    review cost   documents      dollar     chart and   updating of    materials    distribute     Total costs
                                                                        amount      Web site     Web site       costs     disclosures
                                                                     disclosures  information
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   (A)          (B)          (C)          (D)          (E)           (F)          (G)      A+B+C+D+E+F+G
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012.....................................         35.0          0.0         30.5        151.5        159.4           9.0         39.2              424.6
2013.....................................          5.1         13.8         10.0        113.3        133.3           8.4         36.6              320.5
2014.....................................          4.8         12.9          9.3        105.9        124.6           7.9         34.2              299.6
2015.....................................          4.5         12.1          8.7         99.0        116.4           7.4         32.0              280.0
2016.....................................          4.2         11.3          8.1         92.5        108.8           6.9         29.9              261.7
2017.....................................          3.9         10.5          7.6         86.4        101.7           6.4         27.9              244.5
2018.....................................          3.7          9.8          7.1         80.8         95.0           6.0         26.1              228.5
2019.....................................          3.4          9.2          6.6         75.5         88.8           5.6         24.4              213.6
2020.....................................          3.2          8.6          6.2         70.6         83.0           5.2         22.8              199.6
2021.....................................          3.0          8.0          5.8         65.9         77.6           4.9         21.3              186.6
                                          --------------------------------------------------------------------------------------------------------------
    Total with 7% Discounting............  ...........  ...........  ...........  ...........  ...........  ............  ...........            2,659.2
    Total with 3% Discounting............  ...........  ...........  ...........  ...........  ...........  ............  ...........            3,095.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded and therefore may not add up to the totals.

h. Uncertainty in the Cost Estimates
    Although the Department made adjustments to the analysis in 
response to comments, the Department remains uncertain regarding the 
exact magnitude of the costs of these changes. The variables with the 
most uncertainty in the cost estimates are:

[[Page 64934]]

     The time required for legal professionals, clerical 
professionals \48\ and accountants to perform their tasks;
---------------------------------------------------------------------------

    \48\ The clerical time to distribute disclosures remains 
unchanged in this sensitivity analysis.
---------------------------------------------------------------------------

     The cost to obtain the actual dollar amounts of 
participant's administrative and individual expenses; and
     The labor cost to create and maintain Web sites.
    To estimate the influence of these variables on the analysis, the 
Department re-estimated the costs of the final regulation under 
different assumptions for these uncertain variables. Increasing the 
variables of concern by 25 percent resulted in a present value of $3.0 
billion. Increasing the variables by 50 percent resulted in a present 
value of $3.3 billion. Increasing the key variables by 75 percent 
results in a $3.6 billion present value for the final regulation.

5. Net Benefits

    As the analysis above shows, our low end benefit estimate of $7.2 
billion exceeds our high end cost estimate of $3.3 billion. Thus, the 
Department remains highly confident in its conclusion expressed in the 
RIA for the proposal that increased fee disclosure can induce changes 
in participant behavior and reductions in plan fees. Several public 
comments on the proposal reinforce these conclusions.

6. Comments and Revisions

    The Department received several comments questioning various 
assumptions on which its estimates of the benefits were based and 
suggesting that it had underestimated the costs of the proposal. In 
response to these comments, as discussed above, the Department 
reevaluated the quantified benefits resulting from a reduction of fees 
and increased its estimate of the costs to account for the creation and 
updating of Web sites and the complexity of retrieving the information 
needed to produce the comparative chart and obtain required 
supplemental information. In addition, the Department updated its 
estimates of labor costs.

7. Alternatives

    In formulating this final rule, the Department considered several 
alternative approaches, which are discussed in detail in the RIA of the 
proposal. The Department did not adopt any of the alternatives 
discussed in the RIA of the proposal, because it did not receive any 
sufficiently persuasive comments suggesting that it should. Some 
commenters suggested alternatives the Department had not considered. 
For example, a commenter suggested that plans should be allowed to 
provide supplemental information required to be disclosed by the rule 
in a written document rather than on a Web site, because many companies 
do not have access to a Web site. Another, commenter asked the 
Department to clarify whether the proposal applies to IRAs that provide 
for employer contributions--that is, ``Simplified Employee Pension 
Retirement Account'' (SEP) and ``Savings Incentive Match Plan for 
Employees'' (SIMPLE) plans. The Department did not adopt the first 
commenter's suggestion, but it did clarify in the final rule that SEP 
and SIMPLE IRAs are excluded from the rule. The Department's decisions 
regarding these regulatory alternatives are discussed earlier in this 
preamble.

8. 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. At the proposed rule stage, the Department prepared an 
initial RFA analysis, because it did not have enough information to 
certify that the rule would not have a significant effect on a 
substantial number of small entities, although the Department stated 
that it considered it unlikely that the proposed rule would 
significantly affect such entities.
    In connection with the final rule, the Department has prepared a 
final RFA in compliance with section 604 of the RFA. For purposes of 
this analysis, EBSA continues to consider a small entity to be an 
employee benefit plan with fewer than 100 participants. The basis of 
this definition is found in section 104(a)(2) of ERISA, which permits 
the Secretary to prescribe simplified annual reports for pension plans 
that cover fewer than 100 participants. The Department used this 
standard in the proposed rule and consulted with the Small Business 
Administration Office of Advocacy concerning its use of this standard 
for RFA purposes and requested public comments on this issue. The 
Department did not receive any comments that addressed its use of the 
participant count standard.
    The following subsections address specific requirements of the RFA.
a. Need for and Objectives of the Rule
    With the proliferation of participant-directed individual account 
plans, such as 401(k) plans, which afford participants and 
beneficiaries the opportunity to direct the investment of all or a 
portion of the assets held in their individual plan accounts, 
participants and beneficiaries are increasingly responsible for making 
their own retirement savings decisions. This increased responsibility 
has led to a growing concern that participants and beneficiaries may 
not have access to, or if accessible, may not be considering 
information critical to making informed decisions about the management 
of their accounts, particularly information on investment choices, 
including attendant fees and expenses. This rule requires participants 
and beneficiaries to be provided investment-related information in a 
form that encourages and facilitates a comparative review among 
investment options. The Department believes that the rule will provide 
beneficial information to participants and beneficiaries that will 
allow them to make informed decisions with regard to investing assets 
in their individual accounts.
    The reasons for and objectives of this final regulation are 
discussed in detail in Section A of this preamble, ``Background,'' and 
in section ``Need for Regulatory Action'' of the Regulatory Impact 
Analysis (RIA) above. The legal basis for the rule is set forth in the 
``Authority'' section of this preamble, below.
b. Public Comments
    A public comment on the proposed rule suggested that the Department 
underestimated the cost to small service providers to comply with the 
proposed rule. Specifically, the commenter stated that the Department 
underestimated the time required for an attorney or other legal 
professional to review the rule and the disclosures, and the hourly 
rate for an attorney to perform this service. In response to the first 
comment, the Department would like to clarify that the time estimate 
for legal review is an average estimate spread across all plans that 
must comply with the rule and is not the time estimate that is 
applicable only to small plans. With regard to the second issue, the 
Department would like to clarify that the estimated hourly wage rate is 
not a billable rate; it is an in-house wage rate that includes profit 
or overhead and is based on the National Occupational Employment Survey 
(May 2008, Bureau of Labor Statistics) and the Employment Cost Index 
(June, 2009, Bureau of Labor

[[Page 64935]]

Statistics), which is the most reliable data the Department has to 
support its cost estimates. The commenter also stated that the 
Department underestimated the time small plan sponsors will have to 
spend gathering information to comply with the disclosure requirements 
of the final rule. As further discussed under the Cost section of the 
RIA, the Department has increased its estimate of the hours it will to 
take to gather and consolidate information required for the disclosure 
from one hour to four hours.
    Finally, the commenter implored the Department to apply a delayed 
effective date for small plans of at least one year following the 
effective date for large plans in order to allow such plans to develop 
the systems necessary to comply with the disclosure requirements of the 
final rule. While the Department did not adopt the commenter's 
suggestion, as stated above in the preamble, the Department has set 
January 1, 2012, as the applicability date for calendar year plans to 
comply with the rule, which should provide plans with sufficient time 
to develop the necessary systems for compliance.
c. Affected Small Entities
    The Department estimates that the final rule will apply to 
approximately 419,000 small plans covering approximately 9.5 million 
participants.
d. Estimating Compliance Requirements for Small Entities/Plans
    The Department continues to believe that the effects of this final 
rule will be to increase retirement savings by providing participants 
and beneficiaries with enhanced information about their plans, which is 
expected to allow them to make more informed investment decisions. The 
Department also believes that small plans will benefit from the rule, 
because it will clarify the information that must be disclosed to plan 
participants in order for plan fiduciaries to meet their fiduciary duty 
under ERISA.
    While small and large plans will incur administrative costs due to 
the final rule, these costs are reasonable compared to the benefits and 
will probably be borne by the participants who will also receive the 
benefits under the rule. From industry comments, the Department 
inferred that participants in larger plans, more often than 
participants in smaller plans, have access to needed investment 
information. The Department continues to believe that participants in 
small plans need as much information about their plan investments as 
participants in larger plans.
    Assuming that the plan incurs the average costs for all disclosure 
activities that are considered in the RIA section above, the following 
calculation illustrates how large the costs of the disclosures would be 
for a very small plan (one-participant plan). As can be seen in Table 
4, the total cost of compliance for a one-participant plan amounts to 
less than $873 in the first year and less than that amount in the 
subsequent years. The costs in 2012 include a review cost of about $73 
per plan (one-half hour of a legal professional's time plus one-half 
hour of a clerical professional's time), labor costs of $314 for 
consolidating the information for the comparative chart (five hours), 
costs of, on average, $485 for the creation and maintenance of a Web 
site, $0.40 per participant for recordkeeping and disclosure of 
information, additional annual labor cost for distribution of $0.90 in 
section 404(c) compliant plans or plans that already provide similar 
information ($1.50 in plans that do not already provide section 404(c) 
compliant or similar information), and material and postage costs of 
$0.15 in 404(c) compliant plans or plans that already provide similar 
information ($2.40 in plans that do not already provide section 404(c) 
compliant or similar information).
    These cost estimates should be considered an estimate of the upper 
bound on plan expenses. To the extent that small plans rely on third 
party administrators or independent record keepers that have economies 
of scale, plan costs could be lower. To the extent that plans use 
record keepers that already provide plan Web sites changes by the 
record keeper to comply with the final rule will likely impose few, if 
any, additional costs for plans. In addition, if plans use investment 
alternatives like mutual funds that already provide much of the 
required information, Web site costs would be less, as would the cost 
to gather information for the Web site and the comparative chart.
    Small plans may be able to find lower cost options to comply with 
the rule. If, for example, server space for the Web site is provided by 
the service provider at almost no cost and the plan is not required to 
spend as much time gathering the required information because it chose 
plan options for which the information is more readily available, a 
one-participant plan could experience first year costs of $310 and $240 
in subsequent years.

                             Table 4--Costs For One-Participant Plan (Undiscounted)
----------------------------------------------------------------------------------------------------------------
                                                    404(c) plans and plans with      Non-404(c) plans without
                                                        similar information             similar information
                  Type of cost                   ---------------------------------------------------------------
                                                                    Subsequent                      Subsequent
                                                   Initial year        year        Initial year        year
----------------------------------------------------------------------------------------------------------------
Plan Review.....................................              73              36              73              36
Consolidation of Information....................             314             251             314             251
Cost of Web site................................             485             380             486             381
Actual Dollar Disclosure........................            0.40            0.15            0.40            0.15
Labor Cost for Distribution.....................            0.90            0.90            1.50            1.50
Material Cost...................................            0.15            0.15            2.40            2.40
                                                 ---------------------------------------------------------------
    Total.......................................            $873            $669            $876            $672
----------------------------------------------------------------------------------------------------------------
The displayed numbers are rounded and therefore may not add up to the totals.

e. Duplicative, Overlapping, and Conflicting Rules
    ERISA section 404(c) and the regulations thereunder contain 
disclosure requirements for plan fiduciaries of certain participant-
directed account plans that are to some extent similar to the ones that 
are contained in the proposed regulation. As explained in more detail 
in the Background section of this preamble, the Department amended the 
regulations under section 404(c) in order to establish a uniform set of 
basic disclosure requirements and to ensure

[[Page 64936]]

that all participants and beneficiaries in participant-directed 
individual account plans have access to the same investment-related 
information.
    In addition, the Department has consulted with the Securities and 
Exchange Commission to avoid duplicative, overlapping, or conflicting 
requirements. The Department is unaware of any additional relevant 
Federal rules for small plans that duplicate, overlap, or conflict with 
this final rule.

9. 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 rule 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. 3507(d), contemporaneously with the 
publication of the proposal for OMB's review. No public comments were 
received that specifically address the paperwork burden analysis of the 
information collections.
    The Department submitted an ICR to OMB for its request of a new 
information collection. OMB approved the ICR on October 5, 2010, under 
OMB Control Number 1210-0090, which will expire on October 31, 2013.
    The final rule requires plan- and investment-related fee and 
expense information to be disclosed to participants and beneficiaries 
in participant-directed individual account plans. This ICR pertains to 
two categories of information that are required to be disclosed: 
``Plan-related'' and ``investment-related'' information. The 
information collection provisions of the rule are intended to ensure 
that fiduciaries provide participants and beneficiaries with sufficient 
information regarding plan fees and expenses and designated investment 
alternatives to make informed decisions regarding the management of 
their individual accounts. The calculation of the estimated hour and 
cost burden of the ICR were discussed in detail in the proposed rule 
and are summarized below.
    The Department estimates that disclosing and distributing plan- and 
investment-related information to participants and beneficiaries as 
required by the rule will require approximately 6.6 million burden 
hours with an equivalent cost of approximately $347 million and a cost 
burden of approximately $221 million in the first year. In each 
subsequent year, the total labor burden hours are estimated to be 
approximately 5.5 million hours with an equivalent cost of 
approximately $275 million and the cost burden is estimated at 
approximately $201 million per year.
    The Department's estimate of the total burden in the final rule has 
increased from the proposal due to four factors: (1) Counts of plans 
and participants were updated to account for more recent data; (2) wage 
rates were updated to account for more recent data; (3) the hour and 
cost burden associated with creating and maintaining a Web site to 
comply with the regulatory requirements was added; and (4) the estimate 
of the average hour burden to gather information for the comparative 
chart and Web site was increased. The first two changes resulted only 
in a slightly higher burden, while the other two changes increased the 
burden significantly as discussed in more detail below.
    Increased burden due to Web site requirement: The estimated burden 
includes 1.4 million burden hours ($101 million in equivalent costs) in 
the first year, and 1.1 million burden hours ($76 million equivalent 
costs) in subsequent years for plans to engage an information 
technology professional to comply with the rule's requirement for plans 
to provide a Web site to disclose supplemental information to 
participants and beneficiaries. The estimated annual cost of the Web 
site is approximately $116 million. This hour and cost burden 
associated with providing a plan Web site was not estimated at the 
proposed rule stage.
    Increased burden due to increase in average hour burden estimate of 
gathering information for the comparative chart and Web site: The 
estimated burden reported above also includes 1.9 million in added 
burden hours in the first year ($121 million in added equivalent costs) 
to consolidate information from multiple sources for the comparative 
chart and Web site. In the proposal, the Department estimated that this 
requirement could take, on average, one hour per plan; in response to 
comments, the final RIA uses an estimate of five hours, on average, per 
plan in the first year, and four hours, on average in subsequent years.
    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.
    Titles: Fiduciary Requirements for Disclosure in Participant-
Directed Individual Account Plans.
    Affected Public: Business or other for-profit, not-for-profit 
institutions.
    Estimated Number of Respondents: 483,000.
    Estimated Number of Annual Responses: 738,207,000.
    Frequency of Response: Initially, Annually, Upon Request, Updating.
    Estimated Total Annual Burden Hours: 6,583,000 hours in the first 
year; 5,520,000 in each subsequent year.
    Estimated Total Annual Burden Cost: $221,040,000 for the first 
year; $201,225,000 for each subsequent year.

10. Congressional Review Act

    The final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the 
Comptroller General for review. The final rule is a ``major rule'' as 
that term is defined in 5 U.S.C. 804, because it is likely to result in 
an annual effect on the economy of $100 million or more.

11. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, the final rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or Tribal governments in the aggregate of more than $100 
million, adjusted for inflation, or increase expenditures by the 
private sector of more than $100 million, adjusted for inflation.

12. Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism, and requires the adherence to specific 
criteria by Federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. The final rule does not have federalism 
implications because it has no substantial direct 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.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Fiduciaries, Investments, Pensions, 
Disclosure,

[[Page 64937]]

Reporting and recordkeeping requirements, and Securities.

0
For the reasons set forth in the preamble, the Department is amending 
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; sec. 657, Pub. L. 107-16, 115 
Stat.38; 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. Sections 2550.404c-1 and 2550.404c-5 also issued under 
29 U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 1107. 
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. 2550.412-1 also issued under 29 U.S.C. 1112.


0
2. Add Sec.  2550.404a-5 to read as follows:


Sec.  2550.404a-5  Fiduciary requirements for disclosure in 
participant-directed individual account plans.

    (a) General. The investment of plan assets is a fiduciary act 
governed by the fiduciary standards of section 404(a)(1)(A) and (B) of 
the Employee Retirement Income Security Act of 1974, as amended 
(ERISA), 29 U.S.C. 1001 et seq. (all section references herein are 
references to ERISA unless otherwise indicated). Pursuant to section 
404(a)(1)(A) and (B), fiduciaries must discharge their duties with 
respect to the plan prudently and solely in the interest of 
participants and beneficiaries. When the documents and instruments 
governing an individual account plan, described in paragraph (b)(2) of 
this section, provide for the allocation of investment responsibilities 
to participants or beneficiaries, the plan administrator, as defined in 
section 3(16), must take steps to ensure, consistent with section 
404(a)(1)(A) and (B), that such participants and beneficiaries, on a 
regular and periodic basis, are made aware of their rights and 
responsibilities with respect to the investment of assets held in, or 
contributed to, their accounts and are provided sufficient information 
regarding the plan, including fees and expenses, and regarding 
designated investment alternatives, including fees and expenses 
attendant thereto, to make informed decisions with regard to the 
management of their individual accounts.
    (b) Satisfaction of duty to disclose. (1) In general. The plan 
administrator of a covered individual account plan must comply with the 
disclosure requirements set forth in paragraphs (c) and (d) of this 
section with respect to each participant or beneficiary that, pursuant 
to the terms of the plan, has the right to direct the investment of 
assets held in, or contributed to, his or her individual account. 
Compliance with paragraphs (c) and (d) of this section will satisfy the 
duty to make the regular and periodic disclosures described in 
paragraph (a) of this section, provided that the information contained 
in such disclosures is complete and accurate. A plan administrator will 
not be liable for the completeness and accuracy of information used to 
satisfy these disclosure requirements when the plan administrator 
reasonably and in good faith relies on information received from or 
provided by a plan service provider or the issuer of a designated 
investment alternative.
    (2) Covered individual account plan. For purposes of paragraph 
(b)(1) of this section, a ``covered individual account plan'' is any 
participant-directed individual account plan as defined in section 
3(34) of ERISA, except that such term shall not include plans involving 
individual retirement accounts or individual retirement annuities 
described in sections 408(k) (``simplified employee pension'') or 
408(p) (``simple retirement account'') of the Internal Revenue Code of 
1986.
    (c) Disclosure of plan-related information. A plan administrator 
(or person designated by the plan administrator to act on its behalf) 
shall provide to each participant or beneficiary the plan-related 
information described in paragraphs (c)(1) through (4) of this section, 
based on the latest information available to the plan.
    (1) General. (i) On or before the date on which a participant or 
beneficiary can first direct his or her investments and at least 
annually thereafter:
    (A) An explanation of the circumstances under which participants 
and beneficiaries may give investment instructions;
    (B) An explanation of any specified limitations on such 
instructions under the terms of the plan, including any restrictions on 
transfer to or from a designated investment alternative;
    (C) A description of or reference to plan provisions relating to 
the exercise of voting, tender and similar rights appurtenant to an 
investment in a designated investment alternative as well as any 
restrictions on such rights;
    (D) An identification of any designated investment alternatives 
offered under the plan;
    (E) An identification of any designated investment managers; and
    (F) A description of any ``brokerage windows,'' ``self-directed 
brokerage accounts,'' or similar plan arrangements that enable 
participants and beneficiaries to select investments beyond those 
designated by the plan.
    (ii) If there is a change to the information described in paragraph 
(c)(1)(i)(A) through (F) of this section, each participant and 
beneficiary must be furnished a description of such change at least 30 
days, but not more than 90 days, in advance of the effective date of 
such change, unless the inability to provide such advance notice is due 
to events that were unforeseeable or circumstances beyond the control 
of the plan administrator, in which case notice of such change must be 
furnished as soon as reasonably practicable.
    (2) Administrative expenses. (i)(A) On or before the date on which 
a participant or beneficiary can first direct his or her investments 
and at least annually thereafter, an explanation of any fees and 
expenses for general plan administrative services (e.g., legal, 
accounting, recordkeeping), which may be charged against the individual 
accounts of participants and beneficiaries and are not reflected in the 
total annual operating expenses of any designated investment 
alternative, as well as the basis on which such charges will be 
allocated (e.g., pro rata, per capita) to, or affect the balance of, 
each individual account.
    (B) If there is a change to the information described in paragraph 
(c)(2)(i)(A) of this section, each participant and beneficiary must be 
furnished a description of such change at least 30 days, but not more 
than 90 days, in advance of the effective date of such change, unless 
the inability to provide such advance notice is due to events that were 
unforeseeable or circumstances beyond the control of the plan 
administrator, in which case notice of such change must be furnished as 
soon as reasonably practicable.
    (ii) At least quarterly, a statement that includes:
    (A) The dollar amount of the fees and expenses described in 
paragraph (c)(2)(i)(A) of this section that are

[[Page 64938]]

actually charged (whether by liquidating shares or deducting dollars) 
during the preceding quarter to the participant's or beneficiary's 
account for such services;
    (B) A description of the services to which the charges relate 
(e.g., plan administration, including recordkeeping, legal, accounting 
services); and
    (C) If applicable, an explanation that, in addition to the fees and 
expenses disclosed pursuant to paragraph (c)(2)(ii) of this section, 
some of the plan's administrative expenses for the preceding quarter 
were paid from the total annual operating expenses of one or more of 
the plan's designated investment alternatives (e.g., through revenue 
sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees).
    (3) Individual expenses. (i)(A) On or before the date on which a 
participant or beneficiary can first direct his or her investments and 
at least annually thereafter, an explanation of any fees and expenses 
that may be charged against the individual account of a participant or 
beneficiary on an individual, rather than on a plan-wide, basis (e.g., 
fees attendant to processing plan loans or qualified domestic relations 
orders, fees for investment advice, fees for brokerage windows, 
commissions, front- or back-end loads or sales charges, redemption 
fees, transfer fees and similar expenses, and optional rider charges in 
annuity contracts) and which are not reflected in the total annual 
operating expenses of any designated investment alternative.
    (B) If there is a change to the information described in paragraph 
(c)(3)(i)(A) of this section, each participant and beneficiary must be 
furnished a description of such change at least 30 days, but not more 
than 90 days, in advance of the effective date of such change, unless 
the inability to provide such advance notice is due to events that were 
unforeseeable or circumstances beyond the control of the plan 
administrator, in which case notice of such change must be furnished as 
soon as reasonably practicable.
    (ii) At least quarterly, a statement that includes:
    (A) The dollar amount of the fees and expenses described in 
paragraph (c)(3)(i)(A) of this section that are actually charged 
(whether by liquidating shares or deducting dollars) during the 
preceding quarter to the participant's or beneficiary's account for 
individual services; and
    (B) A description of the services to which the charges relate 
(e.g., loan processing fee).
    (4) Disclosures on or before first investment. The requirements of 
paragraphs (c)(1)(i), (c)(2)(i)(A), (c)(3)(i)(A) of this section to 
furnish information on or before the date on which a participant or 
beneficiary can first direct his or her investments may be satisfied by 
furnishing to the participant or beneficiary the most recent annual 
disclosure furnished to participants and beneficiaries pursuant those 
paragraphs and any updates to the information furnished to participants 
and beneficiaries pursuant to paragraphs (c)(1)(ii), (c)(2)(i)(B) and 
(c)(3)(i)(B) of this section.
    (d) Disclosure of investment-related information. The plan 
administrator (or person designated by the plan administrator to act on 
its behalf), based on the latest information available to the plan, 
shall:
    (1) Information to be provided automatically. Except as provided in 
paragraph (i) of this section, furnish to each participant or 
beneficiary on or before the date on which he or she can first direct 
his or her investments and at least annually thereafter, the following 
information with respect to each designated investment alternative 
offered under the plan--
    (i) Identifying information. Such information shall include:
    (A) The name of each designated investment alternative; and
    (B) The type or category of the investment (e.g., money market 
fund, balanced fund (stocks and bonds), large-cap stock fund, employer 
stock fund, employer securities).
    (ii) Performance data. (A) For designated investment alternatives 
with respect to which the return is not fixed, the average annual total 
return of the investment for 1-, 5-, and 10-calendar year periods (or 
for the life of the alternative, if shorter) ending on the date of the 
most recently completed calendar year; as well as a statement 
indicating that an investment's past performance is not necessarily an 
indication of how the investment will perform in the future; and
    (B) For designated investment alternatives with respect to which 
the return is fixed or stated for the term of the investment, both the 
fixed or stated annual rate of return and the term of the investment. 
If, with respect to such a designated investment alternative, the 
issuer reserves the right to adjust the fixed or stated rate of return 
prospectively during the term of the contract or agreement, the current 
rate of return, the minimum rate guaranteed under the contract, if any, 
and a statement advising participants and beneficiaries that the issuer 
may adjust the rate of return prospectively and how to obtain (e.g., 
telephone or Web site) the most recent rate of return required under 
this section.
    (iii) Benchmarks. For designated investment alternatives with 
respect to which the return is not fixed, the name and returns of an 
appropriate broad-based securities market index over the 1-, 5-, and 
10-calendar year periods (or for the life of the alternative, if 
shorter) comparable to the performance data periods provided under 
paragraph (d)(1)(ii)(A) of this section, and which is not administered 
by an affiliate of the investment issuer, its investment adviser, or a 
principal underwriter, unless the index is widely recognized and used.
    (iv) Fee and expense information. (A) For designated investment 
alternatives with respect to which the return is not fixed:
    (1) The amount and a description of each shareholder-type fee (fees 
charged directly against a participant's or beneficiary's investment, 
such as commissions, sales loads, sales charges, deferred sales 
charges, redemption fees, surrender charges, exchange fees, account 
fees, and purchase fees, which are not included in the total annual 
operating expenses of any designated investment alternative) and a 
description of any restriction or limitation that may be applicable to 
a purchase, transfer, or withdrawal of the investment in whole or in 
part (such as round trip, equity wash, or other restrictions);
    (2) The total annual operating expenses of the investment expressed 
as a percentage (i.e., expense ratio), calculated in accordance with 
paragraph (h)(5) of this section;
    (3) The total annual operating expenses of the investment for a 
one-year period expressed as a dollar amount for a $1,000 investment 
(assuming no returns and based on the percentage described in paragraph 
(d)(1)(iv)(A)(2) of this section);
    (4) A statement indicating that fees and expenses are only one of 
several factors that participants and beneficiaries should consider 
when making investment decisions; and
    (5) A statement that the cumulative effect of fees and expenses can 
substantially reduce the growth of a participant's or beneficiary's 
retirement account and that participants and beneficiaries can visit 
the Employee Benefit Security Administration's Web site for an example 
demonstrating the long-term effect of fees and expenses.
    (B) For designated investment alternatives with respect to which 
the return is fixed for the term of the investment, the amount and a 
description of any shareholder-type fees

[[Page 64939]]

and a description of any restriction or limitation that may be 
applicable to a purchase, transfer or withdrawal of the investment in 
whole or in part.
    (v) Internet Web site address. An Internet Web site address that is 
sufficiently specific to provide participants and beneficiaries access 
to the following information regarding the designated investment 
alternative:
    (A) The name of the alternative's issuer;
    (B) The alternative's objectives or goals in a manner consistent 
with Securities and Exchange Commission Form N-1A or N-3, as 
appropriate;
    (C) The alternative's principal strategies (including a general 
description of the types of assets held by the investment) and 
principal risks in a manner consistent with Securities and Exchange 
Commission Form N-1A or N-3, as appropriate;
    (D) The alternative's portfolio turnover rate in a manner 
consistent with Securities and Exchange Commission Form N-1A or N-3, as 
appropriate;
    (E) The alternative's performance data described in paragraph 
(d)(1)(ii) of this section updated on at least a quarterly basis, or 
more frequently if required by other applicable law; and
    (F) The alternative's fee and expense information described in 
paragraph (d)(1)(iv) of this section.
    (vi) Glossary. A general glossary of terms to assist participants 
and beneficiaries in understanding the designated investment 
alternatives, or an Internet Web site address that is sufficiently 
specific to provide access to such a glossary along with a general 
explanation of the purpose of the address.
    (vii) Annuity options. If a designated investment alternative is 
part of a contract, fund or product that permits participants or 
beneficiaries to allocate contributions toward the future purchase of a 
stream of retirement income payments guaranteed by an insurance 
company, the information set forth in paragraph (i)(2)(i) through 
(i)(2)(vii) of this section with respect to the annuity option, to the 
extent such information is not otherwise included in investment-related 
fees and expenses described in paragraph (d)(1)(iv).
    (viii) Disclosures on or before first investment. The requirement 
in paragraph (d)(1) of this section to provide information to a 
participant or beneficiary on or before the date on which the 
participant or beneficiary can first direct his or her investments may 
be satisfied by furnishing to the participant or beneficiary the most 
recent annual disclosure furnished to participants and beneficiaries 
pursuant to paragraph (d)(1) of this section.
    (2) Comparative format. (i) Furnish the information described in 
paragraph (d)(1) and, if applicable, paragraph (i) of this section in a 
chart or similar format that is designed to facilitate a comparison of 
such information for each designated investment alternative available 
under the plan and prominently displays the date, and that includes:
    (A) A statement indicating the name, address, and telephone number 
of the plan administrator (or a person or persons designated by the 
plan administrator to act on its behalf) to contact for the provision 
of the information required by paragraph (d)(4) of this section;
    (B) A statement that additional investment-related information 
(including more current performance information) is available at the 
listed Internet Web site addresses (see paragraph (d)(1)(v) of this 
section); and
    (C) A statement explaining how to request and obtain, free of 
charge, paper copies of the information required to be made available 
on a Web site pursuant to paragraph (d)(1)(v), paragraph (i)(2)(vi), 
relating to annuity options, or paragraph (i)(3), relating to fixed-
return investments, of this section.
    (ii) Nothing in this section shall preclude a plan administrator 
from including additional information that the plan administrator 
determines appropriate for such comparisons, provided such information 
is not inaccurate or misleading.
    (3) Information to be provided subsequent to investment. Furnish to 
each investing participant or beneficiary, subsequent to an investment 
in a designated investment alternative, any materials provided to the 
plan relating to the exercise of voting, tender and similar rights 
appurtenant to the investment, to the extent that such rights are 
passed through to such participant or beneficiary under the terms of 
the plan.
    (4) Information to be provided upon request. Furnish to each 
participant or beneficiary, either at the times specified in paragraph 
(d)(1), or upon request, the following information relating to 
designated investment alternatives--
    (i) Copies of prospectuses (or, alternatively, any short-form or 
summary prospectus, the form of which has been approved by the 
Securities and Exchange Commission) for the disclosure of information 
to investors by entities registered under either the Securities Act of 
1933 or the Investment Company Act of 1940, or similar documents 
relating to designated investment alternatives that are provided by 
entities that are not registered under either of these Acts;
    (ii) Copies of any financial statements or reports, such as 
statements of additional information and shareholder reports, and of 
any other similar materials relating to the plan's designated 
investment alternatives, to the extent such materials are provided to 
the plan;
    (iii) A statement of the value of a share or unit of each 
designated investment alternative as well as the date of the valuation; 
and
    (iv) A list of the assets comprising the portfolio of each 
designated investment alternative which constitute plan assets within 
the meaning of 29 CFR 2510.3-101 and the value of each such asset (or 
the proportion of the investment which it comprises).
    (e) Form of disclosure. (1) The information required to be 
disclosed pursuant to paragraphs (c)(1)(i), (c)(2)(i)(A), and 
(c)(3)(i)(A) of this section may be provided as part of the plan's 
summary plan description furnished pursuant to ERISA section 102 or as 
part of a pension benefit statement furnished pursuant to ERISA section 
105(a)(1)(A)(i), if such summary plan description or pension benefit 
statement is furnished at a frequency that comports with paragraph 
(c)(1)(i) of this section.
    (2) The information required to be disclosed pursuant to paragraphs 
(c)(2)(ii) and (c)(3)(ii) of this section may be included as part of a 
pension benefit statement furnished pursuant to ERISA section 
105(a)(1)(A)(i).
    (3) A plan administrator that uses and accurately completes the 
model in the Appendix, taking into account each designated investment 
alternative offered under the plan, will be deemed to have satisfied 
the requirements of paragraph (d)(2) of this section.
    (4) Except as otherwise explicitly required herein, fees and 
expenses may be expressed in terms of a monetary amount, formula, 
percentage of assets, or per capita charge.
    (5) The information required to be prepared by the plan 
administrator for disclosure under this section shall be written in a 
manner calculated to be understood by the average plan participant.
    (f) Selection and monitoring. Nothing herein is intended to relieve 
a fiduciary from its duty to prudently select and monitor providers of 
services to the plan or designated investment alternatives offered 
under the plan.
    (g) Manner of furnishing. Reserved.
    (h) Definitions. For purposes of this section, the term--

[[Page 64940]]

    (1) At least annually thereafter means at least once in any 12-
month period, without regard to whether the plan operates on a calendar 
or fiscal year basis.
    (2) At least quarterly means at least once in any 3-month period, 
without regard to whether the plan operates on a calendar or fiscal 
year basis.
    (3) Average annual total return means the average annual compounded 
rate of return that would equate an initial investment in a designated 
investment alternative to the ending redeemable value of that 
investment calculated with the before tax methods of computation 
prescribed in Securities and Exchange Commission Form N-1A, N-3, or N-
4, as appropriate, except that such method of computation may exclude 
any front-end, deferred or other sales loads that are waived for the 
participants and beneficiaries of the covered individual account plan.
    (4) Designated investment alternative means any investment 
alternative designated by the plan into which participants and 
beneficiaries may direct the investment of assets held in, or 
contributed to, their individual accounts. The term ``designated 
investment alternative'' shall not include ``brokerage windows,'' 
``self-directed brokerage accounts,'' or similar plan arrangements that 
enable participants and beneficiaries to select investments beyond 
those designated by the plan.
    (5) Total annual operating expenses means:
    (i) In the case of a designated investment alternative that is 
registered under the Investment Company Act of 1940, the annual 
operating expenses and other asset-based charges before waivers and 
reimbursements (e.g., investment management fees, distribution fees, 
service fees, administrative expenses, separate account expenses, 
mortality and expense risk fees) that reduce the alternative's rate of 
return, expressed as a percentage, calculated in accordance with the 
required Securities and Exchange Commission form, e.g., Form N-1A 
(open-end management investment companies) or Form N-3 or N-4 (separate 
accounts offering variable annuity contracts); or
    (ii) In the case of a designated investment alternative that is not 
registered under the Investment Company Act of 1940, the sum of the 
fees and expenses described in paragraphs (h)(5)(ii)(A) through (C) of 
this section before waivers and reimbursements, for the alternative's 
most recently completed fiscal year, expressed as a percentage of the 
alternative's average net asset value for that year--
    (A) Management fees as described in the Securities and Exchange 
Commission Form N-1A that reduce the alternative's rate of return,
    (B) Distribution and/or servicing fees as described in the 
Securities and Exchange Commission Form N-1A that reduce the 
alternative's rate of return, and
    (C) Any other fees or expenses not included in paragraphs 
(h)(5)(ii)(A) or (B) of this section that reduce the alternative's rate 
of return (e.g., externally negotiated fees, custodial expenses, legal 
expenses, accounting expenses, transfer agent expenses, recordkeeping 
fees, administrative fees, separate account expenses, mortality and 
expense risk fees), excluding brokerage costs described in Item 21 of 
Securities and Exchange Commission Form N-1A.
    (i) Special rules. The rules set forth in this paragraph apply 
solely for purposes of paragraph (d)(1) of this section.
    (1) Qualifying employer securities. In the case of designated 
investment alternatives designed to invest in, or primarily in, 
qualifying employer securities, within the meaning of section 407 of 
ERISA, the following rules shall apply--
    (i) In lieu of the requirements of paragraph (d)(1)(v)(C) of this 
section (relating to principal strategies and principal risks), provide 
an explanation of the importance of a well-balanced and diversified 
investment portfolio.
    (ii) The requirements of paragraph (d)(1)(v)(D) of this section 
(relating to portfolio turnover rate) do not apply to such designated 
investment alternatives.
    (iii) The requirements of paragraph (d)(1)(v)(F) of this section 
(relating to fee and expense information) do not apply to such 
designated investment alternatives, unless the designated investment 
alternative is a fund with respect to which participants or 
beneficiaries acquire units of participation, rather than actual 
shares, in exchange for their investment.
    (iv) The requirements of paragraph (d)(1)(iv)(A)(2) of this section 
(relating to total annual operating expenses expressed as a percentage) 
do not apply to such designated investment alternatives, unless the 
designated investment alternative is a fund with respect to which 
participants or beneficiaries acquire units of participation, rather 
than actual shares, in exchange for their investment.
    (v) The requirements of paragraph (d)(1)(iv)(A)(3) of this section 
(relating to total annual operating expenses expressed as a dollar 
amount per $1,000 invested) do not apply to such designated investment 
alternatives, unless the designated investment alternative is a fund 
with respect to which participants or beneficiaries acquire units of 
participation, rather than actual shares, in exchange for their 
investment.
    (vi)(A) With respect to the requirement in paragraph (d)(1)(ii)(A) 
of this section (relating to performance data for 1-, 5-, and 10-year 
periods), the definition of ``average annual total return'' as defined 
in paragraph (i)(1)(vi)(B) of this section shall apply to such 
designated investment alternatives in lieu of the definition in 
paragraph (h)(3) of this section if the qualifying employer securities 
are publicly traded on a national exchange or generally recognized 
market and the designated investment alternative is not a fund with 
respect to which participants or beneficiaries acquire units of 
participation, rather than actual shares, in exchange for their 
investment.
    (B) The term ``average annual total return'' means the change in 
value of an investment in one share of stock on an annualized basis 
over a specified period, calculated by taking the sum of the dividends 
paid during the measurement period, assuming reinvestment, plus the 
difference between the stock price (consistent with ERISA section 
3(18)) at the end and at the beginning of the measurement period, and 
dividing by the stock price at the beginning of the measurement period; 
reinvestment of dividends is assumed to be in stock at market prices at 
approximately the same time actual dividends are paid.
    (C) The definition of ``average annual total return'' in paragraph 
(i)(1)(vi)(B) of this section shall apply to such designated investment 
alternatives consisting of employer securities that are not publicly 
traded on a national exchange or generally recognized market, unless 
the designated investment alternative is a fund with respect to which 
participants or beneficiaries acquire units of participation, rather 
than actual shares, in exchange for their investment. Changes in value 
shall be calculated using principles similar to those set forth in 
paragraph (i)(1)(vi)(B) of this section.
    (2) Annuity options. In the case of a designated investment 
alternative that is a contract, fund or product that permits 
participants or beneficiaries to allocate contributions toward the 
current purchase of a stream of retirement income payments guaranteed 
by an insurance company, the plan administrator shall, in lieu of the

[[Page 64941]]

information required by paragraphs (d)(1)(i) through (d)(1)(v), provide 
each participant or beneficiary the following information with respect 
to each such option:
    (i) The name of the contract, fund or product;
    (ii) The option's objectives or goals (e.g., to provide a stream of 
fixed retirement income payments for life);
    (iii) The benefits and factors that determine the price (e.g., age, 
interest rates, form of distribution) of the guaranteed income 
payments;
    (iv) Any limitations on the ability of a participant or beneficiary 
to withdraw or transfer amounts allocated to the option (e.g., lock-
ups) and any fees or charges applicable to such withdrawals or 
transfers;
    (v) Any fees that will reduce the value of amounts allocated by 
participants or beneficiaries to the option, such as surrender charges, 
market value adjustments, and administrative fees;
    (vi) A statement that guarantees of an insurance company are 
subject to its long-term financial strength and claims-paying ability; 
and
    (vii) An Internet Web site address that is sufficiently specific to 
provide participants and beneficiaries access to the following 
information--
    (A) The name of the option's issuer and of the contract, fund or 
product;
    (B) Description of the option's objectives or goals;
    (C) Description of the option's distribution alternatives/
guaranteed income payments (e.g., payments for life, payments for a 
specified term, joint and survivor payments, optional rider payments), 
including any limitations on the right of a participant or beneficiary 
to receive such payments;
    (D) Description of costs and/or factors taken into account in 
determining the price of benefits under an option's distribution 
alternatives/guaranteed income payments (e.g., age, interest rates, 
other annuitization assumptions);
    (E) Description of any limitations on the right of a participant or 
beneficiary to withdraw or transfer amounts allocated to the option and 
any fees or charges applicable to a withdrawal or transfer; and
    (F) Description of any fees that will reduce the value of amounts 
allocated by participants or beneficiaries to the option (e.g., 
surrender charges, market value adjustments, administrative fees).
    (3) Fixed-return investments. In the case of a designated 
investment alternative with respect to which the return is fixed for 
the term of the investment, the plan administrator shall, in lieu of 
complying with the requirements of paragraph (d)(1)(v) of this section, 
provide an Internet Web site address that is sufficiently specific to 
provide participants and beneficiaries access to the following 
information--
    (i) The name of the alternative's issuer;
    (ii) The alternatives objectives or goals (e.g., to provide 
stability of principal and guarantee a minimum rate of return);
    (iii) The alternative's performance data described in paragraph 
(d)(1)(ii)(B) of this section updated on at least a quarterly basis, or 
more frequently if required by other applicable law;
    (iv) The alternative's fee and expense information described in 
paragraph (d)(1)(iv)(B) of this section.
    (4) Target date or similar funds. Reserved.
    (j) Dates. (1) Effective date. This section shall be effective on 
December 20, 2010.
    (2) Applicability date. This section shall apply to covered 
individual account plans for plan years beginning on or after November 
1, 2011.
    (3) Transitional rules. (i) Notwithstanding paragraphs (b), (c) and 
(d) of this section, the initial disclosures required on or before the 
date on which a participant or beneficiary can first direct his or her 
investment must be furnished no later than 60 days after such 
applicability date to participants or beneficiaries who had the right 
to direct the investment of assets held in, or contributed to, their 
individual account on the applicability date.
    (ii) For plan years beginning before October 1, 2021, if a plan 
administrator reasonably and in good faith determines that it does not 
have the information on expenses attributable to the plan that is 
necessary to calculate, in accordance with paragraph (h)(3) of this 
section, the 5-year and 10-year average annual total returns for a 
designated investment alternative that is not registered under the 
Investment Company Act of 1940, the plan administrator may use a 
reasonable estimate of such expenses or the plan administrator may use 
the most recently reported total annual operating expenses of the 
designated investment alternative as a substitute for such expenses. 
When a plan administrator uses a reasonable estimate or the most 
recently reported total annual operating expenses as a substitute for 
actual expenses pursuant to this paragraph, the administrator shall 
inform participants of the basis on which the returns were determined. 
Nothing in this section requires disclosure of returns for periods 
before the inception of a designated investment alternative.
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[[Page 64946]]


0
3. In Sec.  2550.404c-1 revise (b)(2)(i)(B), (c)(1)(ii), and (f)(1), 
and add (d)(2)(iv) to read as follows:


Sec.  2550.404c-1  ERISA section 404(c) plans.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (B) The participant or beneficiary is provided or has the 
opportunity to obtain sufficient information to make informed 
investment decisions with regard to investment alternatives available 
under the plan, and incidents of ownership appurtenant to such 
investments. For purposes of this paragraph, a participant or 
beneficiary will be considered to have sufficient information if the 
participant or beneficiary is provided by an identified plan fiduciary 
(or a person or persons designated by the plan fiduciary to act on his 
behalf):
    (1) An explanation that the plan is intended to constitute a plan 
described in section 404(c) of the Employee Retirement Income Security 
Act, and 29 CFR 2550.404c-1, and that the fiduciaries of the plan may 
be relieved of liability for any losses which are the direct and 
necessary result of investment instructions given by such participant 
or beneficiary;
    (2) The information required pursuant to 29 CFR 2550.404a-5; and
    (3) In the case of plans which offer an investment alternative 
which is designed to permit a participant or beneficiary to directly or 
indirectly acquire or sell any employer security (employer security 
alternative), a description of the procedures established to provide 
for the confidentiality of information relating to the purchase, 
holding and sale of employer securities, and the exercise of voting, 
tender and similar rights, by participants and beneficiaries, and the 
name, address and phone number of the plan fiduciary responsible for 
monitoring compliance with the procedures (see paragraphs 
(d)(2)(ii)(E)(4)(vii), (viii) and (ix) of this section).
* * * * *
    (c) * * *
    (1) * * *
    (ii) For purposes of sections 404(c)(1) and 404(c)(2) of the Act 
and paragraphs (a) and (d) of this section, a participant or 
beneficiary will be deemed to have exercised control with respect to 
voting, tender or similar rights appurtenant to the participant's or 
beneficiary's ownership interest in an investment alternative, provided 
that the participant's or beneficiary's investment in the investment 
alternative was itself the result of an exercise of control; the 
participant or beneficiary was provided a reasonable opportunity to 
give instruction with respect to such incidents of ownership, including 
the provision of the information described in 29 CFR 2550.404a-5(d)(3); 
and the participant or beneficiary has not failed to exercise control 
by reason of the circumstances described in paragraph (c)(2) with 
respect to such incidents of ownership.
* * * * *
    (d) * * *
    (2) * * *
    (iv) Paragraph (d)(2)(i) does not serve to relieve a fiduciary from 
its duty to prudently select and monitor any service provider or 
designated investment alternative offered under the plan.
* * * * *
    (f) * * *
    (1) Plan A is an individual account plan described in section 3(34) 
of the Act. The plan states that a plan participant or beneficiary may 
direct the plan administrator to invest any portion of his individual 
account in a particular diversified equity fund managed by an entity 
which is not affiliated with the plan sponsor, or any other asset 
administratively feasible for the plan to hold. However, the plan 
provides that the plan administrator will not implement certain listed 
instructions for which plan fiduciaries would not be relieved of 
liability under section 404(c) (see paragraph (d)(2)(ii) of this 
section). Plan participants and beneficiaries are permitted to give 
investment instructions during the first week of each month with 
respect to the equity fund and at any time with respect to other 
investments. The plan administrator of Plan A provides each participant 
and beneficiary with the information described in paragraph 
(b)(2)(i)(B) of this section, including the information that must be 
provided on or before the date on which a participant or beneficiary 
can first direct his or her investments and at least annually 
thereafter pursuant to 29 CFR 2550.404a-5, and provides updated 
information in the event of any change in the information provided. 
Subsequent to any investment by a participant or beneficiary, the plan 
administrator forwards to the investing participant or beneficiary any 
materials provided to the plan relating to the exercise of voting, 
tender or similar rights attendant to ownership of an interest in such 
investment (see paragraph (b)(2)(i)(B)(3) of this section and 29 CFR 
2550.404a-5(d)(3)). Upon request, the plan administrator provides each 
participant or beneficiary with copies of any prospectuses (or similar 
documents relating to designated investment alternatives that are 
provided by entities that are not registered under the Securities Act 
of 1933 or the Investment Company Act of 1940), financial statements 
and reports, and any other materials relating to the designated 
investment alternatives available under the plan in accordance with 29 
CFR 2550.404a-5(d)(4)(i) through (iv). Also upon request, the plan 
administrator provides each participant and beneficiary with other 
information required by 29 CFR 2550.404a-5(d)(4) with respect to the 
equity fund, which is a designated investment alternative, including a 
statement of the value of a share or unit of the participant's or 
beneficiary's interest in the equity fund and the date of the 
valuation. Plan A meets the requirements of paragraph (b)(2)(i)(B) of 
this section regarding the provision of investment information.
* * * * *

    Signed at Washington, DC, this 7th day of October 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2010-25725 Filed 10-14-10; 12:45 pm]
BILLING CODE 4510-29-P