EBSA Proposed Rules

Target Date Disclosure   [11/30/2010]
[PDF]
FR Doc 2010-29509
[Federal Register: November 30, 2010 (Volume 75, Number 229)]
[Proposed Rules]               
[Page 73987-73995]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30no10-25]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB38

 
Target Date Disclosure

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Proposed regulation.

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SUMMARY: The Department published in the Federal Register of October 
24, 2007 a final regulation (the qualified default investment 
alternative regulation) providing relief from certain fiduciary 
responsibilities for fiduciaries of participant-directed individual 
account plans who, in the absence of directions from a participant, 
invest the participant's account in a qualified default investment 
alternative. On October 20, 2010, the Department published a final 
regulation 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 (the participant-level disclosure regulation). This 
document contains proposed amendments to the qualified default 
investment alternative regulation to provide more specificity as to the 
information that must be disclosed in the required notice to 
participants and beneficiaries concerning investments in qualified 
default investment alternatives, including target date or similar 
investments. This document also contains a proposed amendment to the 
participant-level disclosure regulation that would require the 
disclosure of the same information concerning target date or similar 
investments to all participants and beneficiaries in participant-
directed individual account plans.

DATES: Written comments on the proposed regulation should be received 
by the Department of Labor no later than January 14, 2011.

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

FOR FURTHER INFORMATION CONTACT: Kristen L. Zarenko, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

    Section 624(a) of the Pension Protection Act of 2006 (Pension 
Protection Act) added a new section 404(c)(5) to ERISA. Section 
404(c)(5)(A) of ERISA provides that, for purposes of

[[Page 73988]]

section 404(c)(1) of ERISA, a participant in an individual account plan 
shall be treated as exercising control over the assets in the account 
with respect to the amount of contributions and earnings which, in the 
absence of an investment election by the participant, are invested by 
the plan in accordance with regulations prescribed by the Secretary of 
Labor. On October 24, 2007, the Department of Labor (Department) 
published a final regulation implementing the provisions of section 
404(c)(5) of ERISA.\1\ Correcting amendments to the final regulation 
were published on April 30, 2008.\2\ A fiduciary of a plan that 
complies with the final regulation, as amended, will not be liable for 
any loss, or by reason of any breach, that occurs as a result of 
investment in a qualified default investment alternative. The 
regulation describes the types of investments that qualify as default 
investment alternatives under section 404(c)(5) of ERISA and the other 
requirements that must be satisfied in order for a fiduciary to obtain 
the relief from liability described above.
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    \1\ 72 FR 60452 (Oct. 24, 2007).
    \2\ 73 FR 23349 (Apr. 30, 2008).
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    The final regulation provides that, in order for a fiduciary to 
obtain relief, participants and beneficiaries must receive information 
concerning the investments that may be made on their behalf. 
Specifically, paragraph (c)(3) of the final rule requires that 
participants and beneficiaries be furnished both an initial notice 
(generally thirty days in advance of a participant's eligibility to 
participate in the plan) and an annual notice for subsequent plan 
years. Paragraph (d) of the final rule sets forth the information that 
must be included in these notices. In addition to the notice 
requirement, paragraph (c)(4) of the final regulation required that 
fiduciaries provide certain investment-related information that must be 
disclosed under the Department's 404(c) regulation. Specifically, 
paragraph (c)(4) requires fiduciaries to provide to defaulted 
participants or beneficiaries the material described in sections 
2550.404c-1(b)(2)(i)(B)(1)(viii) and (ix) and 2550.404c-
1(b)(2)(i)(B)(2).
    Since publication of the final rule, the Department has received 
many questions about the notice requirement, for example concerning the 
timing requirements for the notice and how much information must be 
disclosed concerning investment fees and expenses. The Department 
addressed these and other issues in a series of questions and answers 
concerning the final rule that was published in a Field Assistance 
Bulletin in April 2008.\3\ With respect to the disclosure of investment 
fee and expense information, the Department indicated at that time that 
it was developing a regulation to establish disclosure requirements for 
all participant-directed individual account plans. The Department 
anticipated that furnishing the investment information required by such 
regulation, when finalized, would satisfy the investment-related fee 
and expense disclosures required by the qualified default investment 
alternative regulation. Nonetheless, the Department continues to 
receive requests for more formal guidance as to how the content 
requirements of the qualified default investment alternative notice may 
be satisfied. As discussed below, the Department proposes amending the 
qualified default investment alternative regulation to provide more 
specificity as to the information that must be disclosed.
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    \3\ See Field Assistance Bulletin No. 2008-03 (April 29, 2008).
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    In addition to questions about the notice requirement, recent 
attention has been paid to the increased use of ``target date'' or 
``lifecycle'' funds and other similar investments (TDFs) as an 
investment alternative in participant-directed retirement plans, such 
as 401(k) plans.\4\ The Department's final regulation included TDFs as 
one of the permissible categories of investment funds or products that 
may be used as a qualified default investment alternative, if all of 
the requirements of the final rule have been satisfied. The growing 
popularity of these products led to a focus in recent years on issues 
relating to the design, operation, and selection of TDFs for 401(k) 
plans, both as investment alternatives for plans generally and as 
qualified default investment alternatives for participants that do not 
provide investment direction. The designation of all investment 
alternatives, including TDFs, to be made available under a private 
sector retirement plan is governed by the fiduciary responsibility 
provisions of ERISA. Persons with this responsibility must prudently 
select and monitor investment alternatives, including alternatives 
intended to be qualified default investment alternatives.
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    \4\ Employee Benefits Research Institute Issue Brief 
327, March 2009.
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    In 2008, the Department's ERISA Advisory Council studied several 
aspects of TDFs as 401(k) plan investment alternatives, including the 
challenges and risks they may pose to participants who invest in TDFs, 
the different types of TDFs, and appropriate criteria for selecting and 
monitoring TDFs. In its report to the Secretary of Labor, the Council 
recommended that the Department provide additional guidance to both 
plan fiduciaries and plan participants to enhance understanding of TDFs 
and the risks associated with TDF investing.\5\ In addition, there has 
been Congressional interest in target date fund issues.\6\ In June 
2009, the Department and the Securities and Exchange Commission 
(Commission) held a joint public hearing to explore issues related to 
TDFs, including how they are managed at the investment level, how they 
are selected by plan fiduciaries and by investors, and how information 
about them is disclosed to plan participants and investors.
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    \5\ See 2008 ERISA Advisory Council Working Group Report on Hard 
to Value Assets and Target Date Funds, found at: http://www.dol.gov/
ebsa/publications/2008ACreport1.html.
    \6\ See http://aging.senate.gov/record.cfm?id=308665&&; http://
aging.senate.gov/hearing_detail.cfm?id=309027& and http://
aging.senate.gov/hearing_detail.cfm?id=319426&.
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    Following the public hearing and extensive review of the testimony 
presented and supplemental materials concerning TDFs, the Department 
was persuaded that both plan fiduciaries and plan participants would 
benefit from additional guidance concerning TDFs. Accordingly, the 
Department and the Commission recently published a joint Investor 
Bulletin to better educate investors and plan participants who are 
considering investing in TDFs.\7\ The Commission also recently proposed 
rules to address concerns regarding the potential for investor 
misunderstandings about TDFs.\8\ The Department further intends to 
publish a series of tips intended to assist plan fiduciaries in 
obtaining and evaluating relevant information when selecting and 
monitoring TDFs as investment options for participant-directed 
retirement plans.
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    \7\ The Investor Bulletin, published May 6, 2010, is available 
at: http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf.
    \8\ Commission Release Nos. 33-9126, 34-62300, IC-29301, at 
http://www.sec.gov/comments/s7-12-10/s71210.shtml.
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    The Department also determined that improvements can be made in the 
information that is disclosed to participants and beneficiaries 
concerning their plan investment in TDFs, whether by their own 
investment direction or pursuant to the qualified default investment 
alternative regulation. To ensure that consistent information 
concerning TDFs is furnished to defaulted participants and to 
participants who give investment

[[Page 73989]]

directions, the Department is publishing in this Notice proposed 
amendments to both the qualified default investment alternative 
regulation and the participant-level disclosure regulation. The 
amendment to the participant-level disclosure regulation, at Sec.  
2550.404a-5 (75 FR 64910, October 20, 2010), will be included in 
paragraph (i)(4) of that regulation, which was reserved for this 
purpose. More detailed information about the participant-level 
disclosure regulation, including the general investment-related 
disclosure requirements, can be found in the Supplementary Information 
for that regulation.

B. Description of Amendments

    This proposal amends paragraphs (c)(4) and (d)(3), (4), and (5) of 
the qualified default investment alternative regulation to more 
specifically describe certain investment-related information that must 
be included in the required notice to participants and beneficiaries. 
This information is intended to complement the new investment-related 
disclosure requirements contained in the participant-level disclosure 
regulation.
    Paragraph (c)(4) of the rule is being revised to reflect amendments 
to the Department's 404(c) regulation that were made as part of the 
participant-level disclosure regulation. Rather than referring to 
requirements previously contained in the 404(c) regulation, this 
paragraph of the qualified default investment alternative regulation 
now requires fiduciaries to provide the comparable materials that are 
described in section 2550.404a-5(d)(3) and (4) of the participant-level 
disclosure regulation.\9\
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    \9\ Consistent with the participant-level disclosure regulation, 
the material required by section 2550.404a-5(d)(4), which is 
referred to in paragraph (c)(4) of this amendment, must be furnished 
upon request.
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    Paragraph (d)(3) of the rule requires that the notice include: 
``[a] Description of the qualified default investment alternative, 
including a description of the investment objectives, risk and return 
characteristics (if applicable), and fees and expenses attendant to the 
investment alternative[.]'' \10\ To ensure that plan fiduciaries 
understand the specific investment information that must be disclosed 
to defaulted participants and beneficiaries about qualified default 
investment alternatives, and to better conform these requirements to 
those of all participant-directed individual account plans pursuant to 
the Department's participant-level disclosure regulation, proposed 
paragraph (d)(3) contains six separate elements. The description of the 
qualified default investment alternative must first include the name of 
the investment's issuer. Second, the description must include the 
investment's objectives or goals. Third, the description must include 
the investment's principal strategies (including a general description 
of the types of assets held by the investment), and principal risks 
(e.g., as required by Securities and Exchange Commission Form N-1A). 
Fourth, the description must include the investment's historical 
performance data (e.g., 1-, 5-, and 10-year returns) and, if 
applicable, any fixed return, annuity, guarantee, death benefit, or 
other ancillary features; 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. Fifth, the description must 
include the investment's attendant fees and expenses, including: Any 
fees charged directly against the amount invested in connection with 
acquisition, sale, transfer of, or withdrawal (e.g., sales loads, sales 
charges, deferred sales charges, redemption fees, surrender charges, 
exchange fees, account fees, and purchase fees); any annual operating 
expenses (e.g., expense ratio); and any ongoing expenses in addition to 
annual operating expenses (e.g., mortality and expense fees). For 
purposes of these requirements to disclose an investment's objectives 
or goals, principal strategies and principal risks, historical 
performance, and fees and expenses, the Department requests comment on 
the extent to which these requirements should conform to the final 
participant-level disclosure regulation; for example, should the more 
specific standards for investment-related information contained in the 
participant-level disclosure regulation be incorporated by reference 
into the qualified default investment alternative regulation? The 
Department believes that conforming the requirements will make it 
easier for plan fiduciaries and administrators to comply and help to 
avoid confusion among participants and beneficiaries who will receive 
the required disclosures.
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    \10\ Sec.  2550.404(c)-5(d)(3).
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    The sixth requirement will ensure that participants and 
beneficiaries obtain comprehensive information about TDFs that apply 
age or target retirement-based asset allocations, described in 
paragraph (e)(4)(i) of the qualified default investment alternative 
regulation. Specifically, to the extent the information is not already 
disclosed pursuant to the preceding requirements of paragraph (d)(3) of 
the rule, the description must satisfy three requirements. The first is 
an explanation of the asset allocation, how the asset allocation will 
change over time, and the point in time when the investment will reach 
its most conservative asset allocation, including a chart, table, or 
other graphical representation that illustrates such change in asset 
allocation over time and that does not obscure or impede a 
participant's or beneficiary's understanding of the information 
explained pursuant to this requirement. The Department understands that 
many investment issuers and service providers already include simple 
and straight-forward graphs, pie chart series, or other illustrations 
to assist investors by showing them how asset allocations in TDFs 
change over time. To the extent such illustrations are not already 
furnished to participants and beneficiaries, the Department is 
persuaded that any additional burden associated with preparation of a 
compliant illustration will prove highly beneficial to enhance 
participants' and beneficiaries' understanding of a TDF's asset 
allocation and how it will change over time.
    The second requirement depends on whether the alternative is named, 
or otherwise described, with reference to a particular date (e.g., a 
target date). For example, many funds include a target retirement date 
in the name itself (e.g., a ``2030 fund'' or a ``2040 fund''). In some 
cases the name of the alternative may not include a date, but a 
retirement or other target date may be referenced or implied in the 
description of the alternative's objectives or goals, or principal 
strategies or principal risks; this requirement applies to those 
alternatives as well. The notice must explain the age group for whom 
the investment is designed, the relevance of the date, and any 
assumptions about a participant's or beneficiary's contribution and 
withdrawal intentions on or after such date. The third requirement is a 
statement that the participant or beneficiary may lose money by 
investing in the qualified default investment alternative, including 
losses near and following retirement, and that there is no guarantee 
that investment in the qualified default investment alternative will 
provide adequate retirement income. All of the information required to 
be disclosed concerning TDFs and similar products is consistent with 
the analysis discussed in the Department's recent guidance to plan 
participants and expected guidance to plan fiduciaries

[[Page 73990]]

concerning the factors that must be taken into account when selecting 
and monitoring, or investing in, these products. The Department is 
interested in comments as to whether, and to what extent, the final 
rule should include disclosure elements or concepts contained in the 
Commission's rulemaking.\11\
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    \11\ See footnote 8, above.
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    To ensure that all participants and beneficiaries in participant-
directed individual account plans, not only participant and 
beneficiaries who are invested in a qualified default investment 
alternative, receive the same information about TDFs, the Department 
also is proposing in this Notice to include the same three disclosure 
requirements concerning TDFs in the participant-level disclosure 
regulation. Specifically, these new requirements, if adopted, will be 
added to paragraph Sec.  2550.404a-5(i)(4) of the participant-level 
disclosure regulation, which was reserved for this purpose. To ensure 
consistency between these regulations, the Department expects that any 
changes made to the TDF disclosure requirements in response to comments 
on this Notice will be reflected in both the qualified default 
investment alternative regulation and the participant-level disclosure 
regulation.
    Paragraph (d)(4) of the qualified default investment alternative 
regulation requires that the notice to participants contain a 
``description of the right of the participants and beneficiaries on 
whose behalf assets are invested in a qualified default investment 
alternative to direct the investment of those assets to any other 
investment alternative under the plan, including a description of any 
applicable restrictions, fees or expenses in connection with such 
transfer[.]'' \12\ In the proposal published today, this paragraph has 
been modified. If any such fees or restrictions are applicable, this 
paragraph would only require a statement that certain fees and 
limitations may apply in connection with such transfer. The requirement 
to disclose the fees and expenses themselves would be moved to 
paragraph (d)(3)(v), discussed above; if other limitations may apply, 
the notice must so state.
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    \12\ Sec.  2550.404(c)-5(d)(4).
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    Finally, paragraph (d)(5) of the qualified default investment 
alternative regulation would be broadened to clarify that comprehensive 
information about the qualified default investment alternative, as well 
as the other investment alternatives available under the plan, is 
available to participants and beneficiaries. Currently, paragraph 
(d)(5) only requires ``[a]n explanation of where the participants and 
beneficiaries can obtain investment information concerning the other 
investment alternatives available under the plan.'' \13\ As amended by 
this proposal, this paragraph requires an explanation of where the 
participants and beneficiaries can obtain additional investment 
information concerning the qualified default investment alternative and 
the other investment alternatives available under the plan. The 
Department included this modification to conform to the participant-
level disclosure regulation. Specifically, the Department expects that 
paragraph (d)(5), if adopted in final form, will ensure that defaulted 
participants and beneficiaries know where to obtain any additional 
investment information required to be disclosed pursuant to the final 
participant-level disclosure regulation concerning all of the plan's 
investment alternatives, including qualified default investment 
alternatives.
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    \13\ Sec.  2550.404(c)-5(d)(5).
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C. Furnishing Required Disclosures

    In conjunction with the adoption of the final participant-level 
disclosure regulation, Sec.  2550.404a-5 (75 FR 64910, October 20, 
2010), the Department explained in the Supplementary Information that, 
given the differing views on the use of and standards for electronic 
disclosure, it would be undertaking a review of the safe harbor 
applicable to the use of electronic media for furnishing information to 
plan participants and beneficiaries (29 CFR 2520.104b-1(c)). The 
Department further indicated that, in the very near future, it will 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. The Department also noted that, 
pending the completion of its review and the issuance of further 
guidance, the general disclosure regulation at 29 CFR 2520.104b-1 
applies to material furnished under the participant-level disclosure 
regulation, including the safe harbor for electronic disclosures at 
paragraph (c) of the general disclosure regulation. The Department 
anticipates that resolution of the issues involved with the electronic 
disclosure of plan information will directly affect the manner in which 
materials required by the amendments contained in this notice may be 
furnished to participants and beneficiaries. Accordingly, interested 
persons are encouraged to participate in the Department's forthcoming 
solicitation of comments on the use of electronic media for furnishing 
plan information.

D. Effective Date

    The Department proposes that the amendments to regulation sections 
2550.404a-5 and 2550.404c-5 contained in this notice will be effective 
90 days after publication of the final rule in the Federal Register. 
The Department invites comment on whether the final rule should be 
effective on a different date.

E. Regulatory Impact Analysis

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. 
Although the Department believes that this regulatory action is not 
economically significant within the meaning of section 3(f)(1) of the 
Executive Order, the action has been determined to be significant 
within the meaning of section 3(f)(4) of the Executive Order, and 
accordingly, OMB has reviewed this notice of proposed rulemaking 
pursuant to the Executive Order. The Department provides the following 
assessment of the potential costs and benefits associated with the 
proposed regulation below.

Need for Regulatory Action

    As discussed earlier in this preamble, on October 24, 2007, the 
Department published a final regulation implementing the provisions of 
section

[[Page 73991]]

404(c)(5) of ERISA.\14\ A fiduciary of a plan that complies with the 
final regulation, as amended, will not be liable for any loss, or by 
reason of any breach, that is the direct and necessary result of 
investing all or a part of a participant's or beneficiary's account in 
a qualified default investment alternative. As noted in the regulation, 
this relief does not apply to fiduciary duties or liability related to 
the selection or monitoring of particular qualified default investment 
alternatives. The regulation describes the types of investments that 
qualify as default investment alternatives under section 404(c)(5) of 
ERISA and the other requirements that must be satisfied in order for a 
fiduciary to obtain the relief from liability described above.
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    \14\ 72 FR 60452 (Oct. 24, 2007). Correcting amendments to the 
final regulation were published on April 30, 2008 (73 FR 23349).
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    As discussed earlier, the Department's final qualified default 
investment alternative regulation includes TDFs as one of the 
permissible categories of investment funds or products that may be used 
as a qualified default investment alternative, if all of the 
requirements of the final rule have been satisfied. Since the issuance 
of the Department's final qualified default investment alternative 
regulation, plans have increased their use of TDFs as an investment 
alternative.\15\ At the end of the first quarter of 2009, the amount of 
employer sponsored defined contribution plan assets invested in TDFs 
totaled $145 billion, compared to $37 billion in 2003.\16\ A recent 
survey found that nearly 60 percent of plans have made TDFs the 
qualified default investment alternative for participants that do not 
provide investment direction and nearly 60 percent of participant-
directed individual account plans, such as 401(k) plans, offer TDFs as 
an investment alternative.\17\
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    \15\ Donahue, Andrew. Testimony Concerning Target Date Funds. 
Before the United States Senate Special Committee on Aging. October 
28, 2009.
    \16\ Borzi, Phyllis. Testimony of Phyllis C. Borzi. Before the 
United States Senate Special Committee on Aging. October 28, 2009.
    \17\ Profit Sharing/401k Council of America, 52nd Annual Survey 
of Profit Sharing and 401(k) plans, for plan year 2008.
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    The financial market downturn that started in 2008 increased 
volatility and lowered returns of TDFs.\18\ Many TDFs designed for 
people recently nearing or entering retirement suffered large losses. 
For example, on average, participants invested in TDFs dated 2010 and 
2015 lost about a quarter of their value in 2008. Many of these funds 
typically held about half of the holdings in stocks, following glide 
paths that did not significantly reduce that percentage for 5 years or 
more after the average investor retired.\19\ The Background discussion, 
above, summarizes responses to this development, for example from the 
U.S. Senate Special Committee on Aging, and activities undertaken by 
the Department and the Securities and Exchange Commission since then.
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    \18\ Deloitte Financial Advisory Services LLP, Target Date 
Funds: Historical Volatility/Return Profiles, unpublished 
presentation to the U.S. Department of Labor, Employee Benefits 
Security Administration (Sept. 30, 2009). In particular, the 
research found that the 1-year volatility was generally greater than 
the 3-year volatility and the 1-year returns were lower than the 3-
year returns. Deloitte also found that funds with target date 2010 
were more volatile in 2008 than they were in 2007. In addition, 
Deloitte reports that volatility among 2010 TDFs correlated with the 
fraction of the funds that are invested in stock and small 2010 
funds are more heterogeneous in rates of return and in volatility 
than large funds.
    \19\ Borzi, Phyllis. Testimony of Phyllis C. Borzi. Before the 
United States Senate Special Committee on Aging. October 28, 2009.
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    Experts within the investment community agree that TDF disclosures 
to participants and beneficiaries need to be improved. For example, the 
Investment Company Institute (ICI) Target Date Fund Disclosure Working 
Group reviewed existing TDF disclosures and in a June 2009 Report, 
recommended that TDFs display prominently five key pieces of 
information to help enhance investors' understanding such as the 
relevance of the target date used in a fund's name, the assumptions the 
fund makes regarding the investor's withdrawal intentions at and after 
the target date, the age group for whom the fund is designed, an 
illustration of the glide path that the TDF follows to reduce its 
equity exposure and become more conservative over time, and a statement 
that the risks associated with a TDF include the risk of loss near, at, 
or after the target date and that there is no guarantee that the fund 
will provide adequate income at and through the investor's 
retirement.\20\
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    \20\ See e.g. Principles to Enhance Understanding of Target Date 
Funds: Recommended by the ICI Target Date Fund Disclosure Working 
Group. June 18, 2009. http://www.ici.org/pdf/ppr_09_
principles.pdf.
     In order to address some of the deficiencies in communication 
relating to TDFs, the Investment Company Institute made a series of 
recommendations for disclosure, many of which overlap with the 
requirements contained in these proposed regulations. See e.g. 
Charlson, Josh et al. Target Date Series Research Paper: 2010 
Industry Survey, Morningstar, 2010. http://
corporate.morningstar.com/US/documents/MethodologyDocuments/
MethodologyPapers/TargetDateFundSurvey_2010.pdf.
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    Based on the foregoing, the Department is proposing to amend its 
final qualified default investment alternative and participant-level 
disclosure regulations to improve the information that is disclosed to 
participants and beneficiaries regarding TDFs.

 Affected Entities

    Based on the latest available information, the Department estimates 
that there are approximately 483,000 participant-directed individual 
account plans.\21\ The Department's proposed amendment to its final 
qualified default investment alternative rule would affect the 
approximately 114,000 participant-directed individual account plans 
that use TDFs as their qualified default investment alternative and the 
proposed amendment to its participant-level disclosure final rule would 
affect 278,000 participant-directed individual account plans that offer 
TDFs as an investment alternative.\22\ The Department also estimates 
that 43.6 million participants and beneficiaries are covered by plans 
using TDFs as an investment alternative.
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    \21\ Based on 2007 Form 5500 filings.
    \22\ The Department's estimate is based on the Profit Sharing/
401k Council of America, 52nd Annual Survey of Profit Sharing and 
401(k) plans, for plan year 2008. This survey finds that 57.7 
percent of participant-directed individual account plans offer TDFs 
as an investment option (483,000 * .577 = 278,691). It also finds 
that 39.6 percent of participant-directed individual account plans 
have automatic enrollment and that 59.7 percent of those plans use 
TDFs as the QDIA (483,000 * .396 * .597 = 114,187).
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Benefits

    The Department expects that the enhanced disclosures required by 
the proposed regulation would benefit participants and beneficiaries by 
providing them with critical information they need to evaluate the 
quality of TDFs and how specific TDFs match their risk profile. This 
should lead to improved investment results and retirement planning 
decisions. The TDF disclosures would foster a better understanding of 
how TDFs operate and the glide path that is associated with each fund. 
The Department believes that the disclosures under this proposed 
regulation, combined with the greater transparency required by the 
Department's participant-level disclosure regulation, would allow 
participants and beneficiaries to determine whether the efficient way 
in which TDFs allow them to invest in a mix of asset classes and 
rebalance their asset allocation periodically is worth the price 
differential they generally pay for such funds.\23\
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    \23\ Collins, Margaret. Target-Date Funds May Miss Mark for 
Unsavvy Savers. Bloomberg http://www.bloomberg.com/apps/
news?pid=20603037&sid=aSGY6tmw7IXs. The author finds that the median 
fee for TDFs is approximately .85 (depending on the age of the 
saver). However, some expense ratios are as low as .19 percent, 
while others are as high as 1.50 percent.

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[[Page 73992]]

    Although the Department is unable to quantify the benefits 
associated with the proposed regulation, it is confident that the 
benefits justify their costs.

Costs

    The Department estimates that the proposed regulation would result 
in 66.2 million TDF disclosures being distributed. The associated total 
hour burden for affected plans is estimated to be 29,000 hours with an 
equivalent cost of $1.8 million annually. The estimated cost burden for 
plans to distribute the notices is $4.1 million annually. Because these 
costs are associated with information collection requests covered by 
the Paperwork Reduction Act, the data and methodology used in 
developing the cost estimates are more fully discussed in the Paperwork 
Reduction Act section, below.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data 
can be provided in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the impact of collection requirements on respondents 
can be properly assessed.
    Currently, EBSA is soliciting comments concerning the information 
collection request (ICR) included in the Proposed Rule on the Fiduciary 
Requirements for Disclosure and Default Investment Alternatives Under 
Participant Directed Individual Account Plans. A copy of the ICR may be 
obtained by contacting the PRA addressee shown below.
    The Department has submitted a copy of the proposed rule to OMB in 
accordance with 44 U.S.C. 3507(d) for review of its information 
collections. The Department and OMB are particularly interested in 
comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.

Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. OMB requests that comments 
be received within 30 days of publication of the proposed rule to 
ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to G. 
Christopher Cosby, Office of Policy and Research, U.S. Department of 
Labor, Employee Benefits Security Administration, 200 Constitution 
Avenue, NW., Room N-5718, Washington, DC 20210.
    Telephone (202) 693-8410; Fax: (202) 219-5333. These are not toll-
free numbers. ICRs submitted to OMB also are available at http://
www.RegInfo.gov.
(a) Proposed Amendment to Qualified Default Investment Alternative 
Regulation
    Under the proposed amendment to paragraph (d)(3) of the 
Department's qualified default investment alternative regulation, the 
notice provided to participants and beneficiaries that use TDFs as a 
qualified default investment alternative (the QDIA notice) would be 
required to contain comprehensive information about TDFs. This 
information is described in detail earlier in this preamble, along with 
other changes to the information required to be disclosed in the QDIA 
notice that do not relate specifically to TDFs.
    The Department understands that many investment issuers and service 
providers currently furnish straight-forward graphs, pie chart series, 
and other illustrations to demonstrate to investors how asset 
allocations in TDFs change over time and other information that would 
be required to be disclosed in the QDIA notice by the proposed 
regulation. Therefore, the burden that would be imposed by this 
proposed regulation stems primarily from incorporating the more 
comprehensive TDF disclosure into the QDIA notice. The Department 
invites comments regarding this assumption.
    The Department believes that a financial professional should be 
able to incorporate the TDF disclosures into the QDIA notice, on 
average, in approximately 15 minutes at a labor rate of approximately 
$63 per hour.\24\ The Department estimates that the hour burden imposed 
on the approximately 114,000 affected plans would be 28,520 hours 
(114,079 plans * 0.25 hours) with an equivalent cost of $1.79 million 
(114,079 plans * .25 hours per plan * $62.81/hour).
---------------------------------------------------------------------------

    \24\ EBSA estimates of labor rates include wages, other 
benefits, and overhead based on the National Occupational Employment 
Survey (May 2008, Bureau of Labor Statistics) and the Employment 
Cost Index (June 2009, Bureau of Labor Statistics).
---------------------------------------------------------------------------

    The Department estimates that the disclosure would add two pages to 
the QDIA notice, and that an estimated 18.4 million participants would 
be required to receive the disclosures.\25\ The Department expects that 
38 percent of participants would receive the disclosure by electronic 
means, leaving an estimated 11.4 million paper disclosures that would 
be sent via mail. The Department estimates that 6.8 percent of 
participants are new to a plan \26\ in a given year; therefore, 780,000 
\27\ participants generally would be required to receive the QDIA 
notice at least 30 days in advance of the date of plan eligibility. No 
mailing costs are included in the cost estimates, because the TDF 
disclosure would be incorporated into the QDIA notice. In total, 12.2 
million paper disclosures would be required. Assuming paper costs of 
$.05 per page, the Department estimates that the cost burden associated 
with this proposed regulation's amendment to the QDIA notice would be 
$1.2 million.
---------------------------------------------------------------------------

    \25\ The Department estimate of 18.4 million participants is 
derived as follows: 76.6 percent of eligible workers participate in 
employer-sponsored pension plans. Based on 2007 Form 5500 data, the 
Department estimates that 59.6 million individuals are active 
participants in participant-directed individual account plans. Using 
those two numbers, the Department estimates that 77.8 million 
workers are eligible to participate in participant-directed 
individual account plans (77.8 million * .766 = 59.6 million). The 
Department estimates that 39.6 percent of plans have automatic 
enrollment, and 59.7 percent of these plans use TDFs as their QDIA 
(77.8 million*.396 * .597=18.4 million).
    \26\ These individuals receive the QDIA notice twice in their 
first year of participation: Once when they are eligible to 
participate in the plan and once when all participants receive the 
plan's annual QDIA notice.
    \27\ 18.4 million * .062 * .068=.78 million (rounded).

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[[Page 73993]]

(b) Proposed Amendment to Participant-Level Disclosure Regulation
    The proposed amendment to the Department's participant-level 
disclosure regulation would require participant-directed individual 
account plans that offer TDFs as a designated investment alternative to 
include the TDF disclosures as an appendix to the participant-level 
disclosures required by 29 CFR 2550.404a-5(d)(1) and (d)(2).
    The Department assumes that plans would incur a de minimis cost to 
prepare the appendix, because, as stated above, investment issuers and 
service providers already have the TDF information readily available to 
provide to plans. No additional mailing costs are expected, because the 
TDF disclosures would be attached as an appendix to, and distributed 
with, the participant-level disclosure. Thus, the only anticipated 
additional costs would pertain to the additional paper costs associated 
with including the additional TDF appendix with the participant-level 
disclosure.
    The TDF appendix is expected, on average, to add two pages to the 
participant-level disclosure. As discussed above, the Department 
estimates that 43.6 million participants are covered by participant-
directed individual account plans that offer TDFs as an investment 
alternative.\28\ The Department estimates that 6.8 percent of 
participants are new to a plan in a given year; therefore, 2.96 million 
additional disclosures would be required \29\ resulting in a total of 
46.5 million TDF fund appendices being distributed annually. The 
Department estimates that 38 percent of the disclosures would be 
distributed electronically at a de minimis cost, leaving 28.8 million 
paper disclosures to be distributed via mail. Assuming paper costs of 
$0.10 per participant ($.05 per page), the proposed amendment to the 
participant-level disclosure regulation would impose an additional cost 
of approximately $2.9 million to the participant-level disclosure.
---------------------------------------------------------------------------

    \28\ The Department's estimate is based on the Profit Sharing/
401k Council of America, 52nd Annual Survey of Profit Sharing and 
401(k) plans, for plan year 2008.
    \29\ 43.6 million * .068 = 2.96 million.
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(c) Summary
    Overall, the proposed amendments to the qualified default 
investment alternative and participant-level disclosure regulations 
would result in approximately 66.2 million TDF disclosures being 
distributed. The total hour burden associated with the additional 
disclosures would be an estimated 29,000 hours with an equivalent cost 
of $1.8 million (all allocated to the qualified default investment 
alternative regulation). The Department estimates that the total cost 
burden for the disclosures would be $4.1 million ($1,217,000 (qualified 
default investment alternative); $2,884,000 (participant-level 
disclosure)).
    These paperwork burden estimates are summarized as follows:
    Type of Review: Revised collections.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Default Investment Alternatives Under Participant Directed 
Individual Account Plans (QDIA Regulation Amendment) and Fiduciary 
Requirements for Disclosure in Participant-Directed Individual Account 
Plans (Participant-Level Disclosure Regulation Amendment).
    OMB Control Number: 1210-0132; 1210-0090.
    Affected Public: Business or other for-profit; not-for-profit 
institutions.
    Respondents: 114,000 (QDIA Regulation Amendment); 278,000 
(Participant-Level Disclosure Amendment).
    Responses: 66,157,539 (19,636,964 QDIA Regulation Amendment; 
46,520,575 Participant-Level Disclosure Regulation Amendment).
    Frequency of Response: Annually.
    Estimated Total Annual Burden Hours: 29,000 hours (first year and 
subsequent years; all allocated to QDIA Regulation Amendment).
    Estimated Total Annual Burden Cost: $4,102,000 (first year and 
subsequent years); $1,217,500 (QDIA Regulation Amendment); $2,884,500 
(Participant-Level Disclosure Regulation Amendment).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless the head of an agency certifies that a proposed 
rule is not likely to have a significant economic impact on a 
substantial number of small entities, section 603 of the RFA requires 
that the agency present an initial regulatory flexibility analysis at 
the time of the publication of the notice of proposed rulemaking 
describing the impact of the rule on small entities and seeking public 
comment on such impact.
    For purposes of the RFA, the Department continues to consider a 
small entity to be an employee benefit plan with fewer than 100 
participants.\30\ Further, while some large employers may have small 
plans, in general small employers maintain most small plans. Thus, the 
Department believes that assessing the impact of this proposed rule on 
small plans is an appropriate substitute for evaluating the effect on 
small entities. The definition of small entity considered appropriate 
for this purpose differs, however, from a definition of small business 
that is based on size standards promulgated by the Small Business 
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business 
Act (15 U.S.C. 631 et seq.). The Department therefore requests comments 
on the appropriateness of the size standard used in evaluating the 
impact of this proposed rule on small entities.
---------------------------------------------------------------------------

    \30\ The basis for this definition is found in section 104(a)(2) 
of the Act, which permits the Secretary of Labor to prescribe 
simplified annual reports for pension plans that cover fewer than 
100 participants..
---------------------------------------------------------------------------

    The Department certifies, as required by the RFA, that while the 
proposed regulation would impact a substantial number of small 
entities, the economic impact of the proposed rule would not be 
significant. The Department estimates that the cost per plan to prepare 
the notice would be less than $20, because much of the required 
information is expected to be readily available from service providers. 
Moreover, the anticipated cost per participant for plans to send the 
qualified default investment alternative and participant-level fee TDF 
disclosures are estimated to be $0.20 annually.
    Based on industry survey data, the Department believes that small 
plans would be less likely to be affected by this regulation, because 
while small plans are slightly more likely to be participant-directed, 
they are less likely to default participants into TDFs or provide 
access to such funds as an investment alternative. The survey showed 
that 56.3 percent of plans with 5,000 or more participants have 
automatic enrollment compared to just 15.8 percent of plans with 1-49 
participants, and that while 64 percent of participant-directed plans 
with more than 5,000 participants offer TDFs as an investment option, 
only 47.9 percent of such plans with 1-49 participants offer TDFs as an 
investment option.\31\ The

[[Page 73994]]

burden that would be imposed by the proposed regulation on small plans 
also would be mitigated by the fact that most of the information 
required for the TDF disclosures is expected to be readily available 
from service providers.
---------------------------------------------------------------------------

    \31\ Profit Sharing/401k Council of America, 52nd Annual Survey 
of Profit Sharing and 401(k) Plans, for plan year 2008.
---------------------------------------------------------------------------

Congressional Review Act

    The proposed 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, if finalized, will be transmitted to 
Congress and the Comptroller General for review. The proposed rule is 
not a ``major rule'' as that term is defined in 5 U.S.C. 804, because 
it is not likely to result in (1) An annual effect on the economy of 
$100 million or more; (2) a major increase in costs or prices for 
consumers, individual industries, or Federal, State, or local 
government agencies, or geographic regions; or (3) significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic and export markets.

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 proposed rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or tribal governments in the aggregate of more than $100 
million, adjusted for inflation, or increase expenditures by the 
private sector of more than $100 million, adjusted for inflation.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism, and requires the adherence to specific 
criteria by Federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. The proposed regulation does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. The requirements that 
would be implemented in the proposed rule do not alter the fundamental 
reporting and disclosure requirements of the statute with respect to 
employee benefit plans, and as such have no implications for the States 
or the relationship or distribution of power between the national 
government and the States.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Exemptions, Fiduciaries, Investments, 
Pensions, Prohibited transactions, Real estate, Securities, Surety 
bonds, Trusts and Trustees.

    For the reasons set forth in the preamble, the Department of Labor 
proposes to amend 29 CFR part 2550 as follows:

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

    1. The authority citation for part 2550 is revised to read as 
follows:

    Authority:  29 U.S.C. 1135 and Secretary of Labor's Order No. 6-
2009, 74 FR 21524 (May 7, 2009). Sec. 2550.401c-1 also issued under 
29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec. 657, Pub. L. 
107-16, 115 Stat. 38. Sections 2550.404c-1 and 2550.404c-5 also 
issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also issued under 29 
U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 5 
U.S.C. App. 1. Sec. 2550.408b-19 also issued under sec. 611, Pub. L. 
109-280, 120 Stat. 780, 972, and sec. 102, Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1. Sec. 2550.412-1 also issued under 29 
U.S.C. 1112.

    2. Amend Sec.  2550.404a-5 by revising paragraph (i)(4) to read as 
follows:


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

* * * * *
    (i) * * *
    (4) Target date or similar funds. In the case of a designated 
investment alternative that is described in 29 CFR 2550.404c-5(e)(4)(1) 
(e.g., ``life-cycle'' or ``target date'' funds) the plan administrator 
shall, in addition to the information required by paragraph (d)(1) and, 
if applicable, paragraph (i) of this section, furnish to each 
participant or beneficiary the following information as an appendix or 
appendices to the chart or similar document intended to satisfy 
paragraph (d)(2) of this section--
    (i) An explanation of the alternative's asset allocation, how the 
asset allocation will change over time, and the point in time when the 
alternative will reach its most conservative asset allocation; 
including a chart, table, or other graphical representation that 
illustrates such change in asset allocation over time and that does not 
obscure or impede a participant's or beneficiary's understanding of the 
information explained pursuant to this paragraph (i)(4)(i);
    (ii) If the alternative is named, or otherwise described, with 
reference to a particular date (e.g., a target date), an explanation of 
the age group for whom the alternative is designed, the relevance of 
the date, and any assumptions about a participant's or beneficiary's 
contribution and withdrawal intentions on or after such date; and
    (iii) A statement that the participant or beneficiary may lose 
money by investing in the alternative, including losses near and 
following retirement, and that there is no guarantee that the 
alternative will provide adequate retirement income.
* * * * *
    3. Amend Sec.  2550.404c-5 by revising paragraphs (c)(4), (d)(3), 
(d)(4), and (d)(5) to read as follows:


Sec.  2550.404c-5  Fiduciary relief for investments in qualified 
default investment alternatives.

* * * * *
    (c) * * *
    (4) A fiduciary provides to a participant or beneficiary the 
material set forth in 29 CFR 2550.404a-5(d)(3) and (4) relating to a 
participant's or beneficiary's investment in a qualified default 
investment alternative;
* * * * *
    (d) * * *
    (3) A description of the qualified default investment alternative, 
including:
    (i) The name of the investment's issuer;
    (ii) The investment's objectives or goals;
    (iii) The investment's principal strategies (including a general 
description of the types of assets held by the investment) and 
principal risks;
    (iv) The investment's historical performance data and a statement 
indicating that an investment's past performance is not necessarily an 
indication of how the investment will perform in the future; and, if 
applicable, a description of any fixed return, annuity, guarantee, 
death benefit, or other ancillary features;
    (v) The investment's attendant fees and expenses, including:
    (A) Any fees charged directly against the amount invested in 
connection with acquisition, sale, transfer of, or

[[Page 73995]]

withdrawal (e.g., commissions, sales loads, sales charges, deferred 
sales charges, redemption fees, surrender charges, exchange fees, 
account fees, and purchase fees);
    (B) Any annual operating expenses (e.g., expense ratio); and
    (C) Any ongoing expenses in addition to annual operating expenses 
(e.g., mortality and expense fees); and
    (vi) For an investment fund product or model portfolio intended to 
satisfy paragraph (e)(4)(i) of this section, and to the extent not 
already disclosed pursuant to this paragraph (d)(3):
    (A) An explanation of the asset allocation, how the asset 
allocation will change over time, and the point in time when the 
qualified default investment alternative will reach its most 
conservative asset allocation; including a chart, table, or other 
graphical representation that illustrates such change in asset 
allocation over time and that does not obscure or impede a 
participant's or beneficiary's understanding of the information 
explained pursuant to this paragraph (d)(3)(vi)(A);
    (B) If the qualified default investment alternative is named, or 
otherwise described, with reference to a particular date (e.g., a 
target date), an explanation of the age group for whom the investment 
is designed, the relevance of the date, and any assumptions about a 
participant's or beneficiary's contribution and withdrawal intentions 
on or after such date; and
    (C) If applicable, a statement that the participant or beneficiary 
may lose money by investing in the qualified default investment 
alternative, including losses near and following retirement, and that 
there is no guarantee that the investment will provide adequate 
retirement income.
    (4) A description of the right of the participants and 
beneficiaries on whose behalf assets are invested in a qualified 
default investment alternative to direct the investment of those assets 
to any other investment alternative under the plan and, if applicable, 
a statement that certain fees and limitations may apply in connection 
with such transfer; and
    (5) An explanation of where the participants and beneficiaries can 
obtain additional investment information concerning the qualified 
default investment alternative and the other investment alternatives 
available under the plan.
* * * * *

    Signed at Washington, DC, this 16th day of November, 2010.
Phyllis C. Borzi
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2010-29509 Filed 11-29-10; 8:45 am]
BILLING CODE 4510-29-P