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EBSA Final Rules

Investment Advice--Participants and Beneficiaries   [10/25/2011]
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Federal Register, Volume 76 Issue 206 (Tuesday, October 25, 2011)
[Federal Register Volume 76, Number 206 (Tuesday, October 25, 2011)]
[Rules and Regulations]
[Pages 66136-66167]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26261]



[[Page 66135]]

Vol. 76

Tuesday,

No. 206

October 25, 2011

Part II





Department of Labor





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Employee Benefits Security Administration





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29 CFR Part 2550





Investment Advice; Participants and Beneficiaries; Final Rule

Federal Register / Vol. 76 , No. 206 / Tuesday, October 25, 2011 / 
Rules and Regulations

[[Page 66136]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB35


Investment Advice--Participants and Beneficiaries

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains a final rule under the Employee 
Retirement Income Security Act, and parallel provisions of the Internal 
Revenue Code of 1986, relating to the provision of investment advice to 
participants and beneficiaries in individual account plans, such as 
401(k) plans, and beneficiaries of individual retirement accounts (and 
certain similar plans). The final rule affects sponsors, fiduciaries, 
participants and beneficiaries of participant-directed individual 
account plans, as well as providers of investment and investment advice 
related services to such plans.

DATES: The final rule is effective on December 27, 2011.

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

SUPPLEMENTARY INFORMATION:

A. Background

    Section 3(21)(A)(ii) of the Employee Retirement Income Security Act 
of 1974 (ERISA) and section 4975(e)(3)(B) of the Internal Revenue Code 
of 1986 (Code) include within the definition of ``fiduciary'' a person 
that renders investment advice for a fee or other compensation, direct 
or indirect, with respect to any moneys or other property of a plan, or 
has any authority or responsibility to do so.\1\ The prohibited 
transaction provisions of ERISA and the Code prohibit a fiduciary from 
dealing with the assets of the plan in his own interest or for his own 
account and from receiving any consideration for his own personal 
account from any party dealing with such plan in connection with a 
transaction involving the assets of the plan.\2\ These statutory 
provisions have been interpreted as prohibiting a fiduciary from using 
the authority, control or responsibility that makes it a fiduciary to 
cause itself, or a party in which it has an interest that may affect 
its best judgment as a fiduciary, to receive additional fees.\3\ As a 
result, in the absence of a statutory or administrative exemption, 
fiduciaries are prohibited from rendering investment advice to plan 
participants regarding investments that result in the payment of 
additional advisory and other fees to the fiduciaries or their 
affiliates. Section 4975 of the Code applies similarly to the rendering 
of investment advice to an individual retirement account (IRA) 
beneficiary.
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    \1\ See also 29 CFR 2510.3-21(c) and 26 CFR 54.4975-9(c).
    \2\ ERISA section 406(b)(1) and (3) and Code section 
4975(c)(1)(E) and (F).
    \3\ 29 CFR 2550.408b-2(e).
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    With the growth of participant-directed individual account plans, 
there has been an increasing recognition of the importance of 
investment advice to participants and beneficiaries in such plans. Over 
the past several years, the Department of Labor (Department) has issued 
various forms of guidance concerning when a person would be a fiduciary 
by reason of rendering investment advice, and when such investment 
advice might result in prohibited transactions.\4\ Responding to the 
need to afford participants and beneficiaries greater access to 
professional investment advice, Congress amended the prohibited 
transaction provisions of ERISA and the Code, as part of the Pension 
Protection Act of 2006 (PPA),\5\ to permit a broader array of 
investment advice providers to offer their services to participants and 
beneficiaries responsible for investment of assets in their individual 
accounts and, accordingly, for the adequacy of their retirement 
savings.
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    \4\ See Interpretative Bulletin relating to participant 
investment education, 29 CFR 2509.96-1 (Interpretive Bulletin 96-1); 
Advisory Opinion (AO) 2005-10A (May 11, 2005); AO 2001-09A (December 
14, 2001); and AO 97-15A (May 22, 1997).
    \5\ Public Law 109-280, 120 Stat. 780 (Aug. 17, 2006).
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    Specifically, section 601 of the PPA added a statutory prohibited 
transaction exemption under sections 408(b)(14) and 408(g) of ERISA, 
with parallel provisions at Code sections 4975(d)(17) and 
4975(f)(8).\6\ Section 408(b)(14) sets forth the investment advice-
related transactions that will be exempt from the prohibitions of ERISA 
section 406 if the requirements of section 408(g) are met. The 
transactions described in section 408(b)(14) are: the provision of 
investment advice to the participant or beneficiary with respect to a 
security or other property available as an investment under the plan; 
the acquisition, holding or sale of a security or other property 
available as an investment under the plan pursuant to the investment 
advice; and the direct or indirect receipt of compensation by a 
fiduciary adviser or affiliate in connection with the provision of 
investment advice or the acquisition, holding or sale of a security or 
other property available as an investment under the plan pursuant to 
the investment advice. As described more fully below, the requirements 
in section 408(g) are met only if advice is provided by a fiduciary 
adviser under an ``eligible investment advice arrangement.'' Section 
408(g) provides for two general types of eligible arrangements: one 
based on compliance with a ``fee-leveling'' requirement (imposing 
limitation on fees and compensation of the fiduciary adviser); the 
other, based on compliance with a ``computer model'' requirement 
(requiring use of a certified computer model). Both types of 
arrangements also must meet several other requirements.
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    \6\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, Oct. 
17, 1978), 5 U.S.C. App. 1, 92 Stat. 3790, the authority of the 
Secretary of the Treasury to issue rulings under section 4975 of the 
Code has been transferred, with certain exceptions not here 
relevant, to the Secretary of Labor. Therefore, the references in 
this notice to specific sections of ERISA should be taken as 
referring also to the corresponding sections of the Code.
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    On February 2, 2007, the Department issued Field Assistance 
Bulletin (FAB) 2007-01 addressing certain issues presented by the new 
statutory exemption. This Bulletin affirmed that the enactment of 
sections 408(b)(14) and 408(g) did not invalidate or otherwise affect 
prior guidance of the Department relating to investment advice and that 
such guidance continues to represent the views of the Department.\7\ 
The Bulletin also confirmed the applicability of the principles set 
forth in section 408(g)(10) [Exemption for plan sponsor and certain 
other fiduciaries] \8\ to plan

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sponsors and fiduciaries who offer investment advice arrangements with 
respect to which relief under the statutory exemption is not required. 
Finally, the Bulletin addressed the scope of the fee-leveling 
requirement under the statutory exemption.
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    \7\ In this regard, the Department cited the following: August 
3, 2006 Floor Statement of Senate Health, Education, Labor and 
Pensions Committee Chairman Enzi (who chaired the Conference 
Committee drafting legislation forming the basis of H.R. 4) 
regarding investment advice to participants in which he states, ``It 
was the goal and objective of the Members of the Conference to keep 
this advisory opinion [AO 2001-09A, SunAmerica Advisory Opinion] 
intact as well as other pre-existing advisory opinions granted by 
the Department. This legislation does not alter the current or 
future status of the plans and their many participants operating 
under these advisory opinions. Rather, the legislation builds upon 
these advisory opinions and provides alternative means for providing 
investment advice which is protective of the interests of plan 
participants and IRA owners.'' 152 Cong. Rec. S8,752 (daily ed. Aug. 
3, 2006) (statement of Sen. Enzi).
    \8\ Section 408(g)(10) addresses the responsibility and 
liability of plan sponsors and other fiduciaries in the context of 
investment advice provided pursuant to the statutory exemption. 
Subject to certain requirements, section 408(g)(10) provides that a 
plan sponsor or other person who is a plan fiduciary, other than a 
fiduciary adviser, is not treated as failing to meet the fiduciary 
requirements of ERISA solely by reason of the provision of 
investment advice as permitted by the statutory exemption. This 
provision does not exempt a plan sponsor or a plan fiduciary from 
fiduciary responsibility under ERISA for the prudent selection and 
periodic review of the selected fiduciary adviser.
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    On January 21, 2009, the Department published in the Federal 
Register final rules implementing section 408(b)(14) and 408(g) of 
ERISA, and the parallel provisions in the Code.\9\ The final rules also 
included an administrative class exemption, adopted pursuant to ERISA 
section 408(a), granting additional prohibited transaction relief. The 
effective and applicability dates of the final rules, originally set 
for March 23, 2009, subsequently were delayed to allow the Department 
to solicit and review comments from interested persons on legal and 
policy issues raised under the final rules.\10\ Based on a 
consideration of the concerns raised by commenters as to whether the 
conditions of the class exemption would be adequate to mitigate 
advisers' conflicts, the Department decided to withdraw the final rule. 
Notice of the withdrawal of the final rule was published in the Federal 
Register on November 20, 2009 (74 FR 60156).
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    \9\ In connection with the development of the January 2009 final 
rules, the Department published two requests for information from 
the public (see 71 FR 70429 (Dec. 4, 2006) and 72 FR 70427; comments 
found at http://www.dol.gov/ebsa/regs/cmt-Investmentadvice.html and 
http://www.dol.gov/ebsa/regs/cmt-InvestmentadviceIRA.html); 
published proposed regulations and class exemption with solicitation 
of public comment (see 73 FR 49896 (Aug. 22, 2008) and 73 FR 49924; 
comments found at http://www.dol.gov/ebsa/regs/cmt-investment-advice.html and http://www.dol.gov/ebsa/regs/cmt-investmentadviceexemption.html); and held public hearings on October 
21, 2008 (see 73 FR 60657 (Oct. 21, 2008) and 73 FR 60720) and July 
31, 2007 (see 72 FR 34043 (June 20, 2007)).
    \10\ 74 FR 59092 (Nov. 17, 2009); 74 FR 23951 (May 22, 2009); 74 
FR 11847 (Mar. 20, 2009). Comments can be found at: http://www.dol.gov/ebsa/regs/cmt-investmentadvicefinalrule.html.
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    On March 2, 2010, the Department published in the Federal Register 
new proposed regulations that, upon adoption, implement the statutory 
prohibited transaction exemption under ERISA sections 408(b)(14) and 
408(g), and the parallel provisions in the Code (75 FR 9360). In 
response to the proposal, the Department received 74 comment 
letters.\11\
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    \11\ Comments can be found at: http://www.dol.gov/ebsa/regs/cmt-1210-AB35.html.
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    Set forth below is an overview of the final rule and an overview of 
the major comments received on the proposed rule.

B. Overview of Final Sec.  2550.408g-1 and Public Comments

1. General

    In general, Sec.  2550.408g-1 tracks the requirements under section 
408(g) of ERISA that must be satisfied in order for the investment 
advice-related transactions described in section 408(b)(14) to be 
exempt from the prohibitions of section 406. Paragraph (a) describes 
the general scope of the statutory exemption and regulation. Paragraph 
(b) sets forth the requirements that must be satisfied for an 
arrangement to qualify as an ``eligible investment advice arrangement'' 
and for the exemption to apply. Paragraph (c) defines certain terms 
used in the regulation. Paragraph (d) sets forth the record retention 
requirement applicable to an eligible investment advice arrangement. 
Paragraph (e) describes the implications of noncompliance on the 
prohibited transaction relief under the statutory exemption.
    The provisions in paragraph (a) of the final rule have not been 
changed from the proposal. Paragraph (a)(1) describes the general scope 
of the final rule, referencing the statutory exemption under sections 
408(b)(14) and 408(g)(1) of ERISA, and under sections 4975(d)(17) and 
4975(f)(8) of the Code, for certain transactions in connection with the 
provision of investment advice, as set forth in paragraph (b) of the 
final rule. It further provides that the requirements and conditions of 
the final rule apply solely for the relief described in the final rule, 
and that no inferences should be drawn with respect to the requirements 
applicable to the provision of investment advice not addressed by the 
rule.
    Several comment letters raised issues with respect to the general 
scope of the proposal. Although a number of commenters supported the 
Department's decision with respect to the withdrawal of the class 
exemption, others requested its re-proposal. The latter group argued 
that increasing the availability of investment advice to plan 
participants and beneficiaries requires broader prohibited transaction 
relief than provided under the proposed regulation. Other commenters 
argued that plan sponsors also would benefit from increased access to 
investment advice, and suggested extending exemptive relief to advice 
provided to plan sponsors, either through the final rule or by an 
administrative class exemption. Another commenter requested that the 
final rule provide relief for management of managed accounts. These 
comments are beyond the scope of the proposal, which was limited to 
implementation of the statutory exemption for the provision of 
investment advice to plan participants and beneficiaries, and have not 
been adopted by the Department.
    Two commenters observed that paragraph (a)(1) indicates that the 
requirements contained in the final rule should not be read as 
applicable to arrangements for which prohibited transaction relief is 
not necessary. They requested clarification that a plan sponsor's 
selection and monitoring responsibilities do not differ for advice 
provided pursuant to the regulation compared to arrangements for which 
prohibited transaction relief is not necessary. In response, we note 
that, as stated in FAB 2007-1, it is the Department's view that, except 
for section 408(g)(10)(A)(i) to (iii), the same fiduciary duties and 
responsibilities apply to the selection and monitoring of an investment 
adviser regardless of whether the arrangement for investment advice 
services is one to which the regulation applies. As further explained 
in that Bulletin, a plan sponsor or other fiduciary that prudently 
selects and monitors an investment advice provider will not be liable 
for the advice furnished by such provider to the plan's participants 
and beneficiaries, whether or not that advice is provided pursuant to 
the statutory exemption under section 408(b)(14).
    Paragraph (a)(2) provides that nothing contained in ERISA section 
408(g)(1), Code section 4975(f)(8), or the final rule imposes an 
obligation on a plan fiduciary or any other party to offer, provide or 
otherwise make available any investment advice to a participant or 
beneficiary. Paragraph (a)(3) provides that nothing contained in those 
same provisions of ERISA and the Code, or the final rule invalidates or 
otherwise affects prior regulations, exemptions, interpretive or other 
guidance issued by the Department pertaining to the provision of 
investment advice and the circumstances under which such advice may or 
may not constitute a prohibited transaction under section 406 of ERISA 
or section 4975 of the Code.
    Several commenters suggested that, rather than merely affirming the 
continued applicability of pre-PPA guidance in paragraph (a)(3),\12\ 
the Department should reconsider its past guidance in light of the 
safeguards contained in the statutory exemption and the proposed rule. 
Such an undertaking is beyond the scope of the

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current proposal, and the Department has not adopted this suggestion.
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    \12\ See also Field Assistance Bulletin 2007-1 (Feb. 2, 2007).
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    Other commenters requested a general clarification of how the final 
rule applies in the context of IRAs. In particular, a commenter asked 
if paragraph (a)(3) indicates that prior ERISA regulations are now 
applicable to IRAs. Code section 4975(c), similar to ERISA section 406, 
generally prohibits a plan fiduciary from rendering investment advice 
that results in the payment of additional advisory and other fees to 
the fiduciaries or their affiliates. A fiduciary who participates in a 
prohibited transaction is subject to excise taxes under Code section 
4975(a) and (b).\13\ The application of the Code section 4975 
prohibited transaction provisions to IRAs pre-dates the enactment of 
the PPA.\14\ The statutory exemption implemented by this rule merely 
provides limited conditional relief from the application of those Code 
provisions. Except for the relief afforded by the statutory exemption, 
the final rule does not change the manner or extent to which Code 
section 4975 applies to an IRA.\15\ Nor does the final rule make 
ERISA's fiduciary responsibility provisions applicable to an IRA that 
is not covered by ERISA.
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    \13\ See Code section 4975(a), (b), and (e)(2)(A).
    \14\ Code section 4975(e)(1)(B). Public Law 93-406 section 
2003(a), 88 Stat. 971.
    \15\ As indicated in footnote 6 above, pursuant to section 102 
of Reorganization Plan No. 4 of 1978, the Secretary of Labor has 
authority to interpret certain provisions of Code section 4975.
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    Commenters also asked questions relating to the prohibited 
transaction implications of making recommendations to plan participants 
to roll-over plan benefits into an IRA. The Department has taken the 
position that merely advising a plan participant to take an otherwise 
permissible plan distribution, even when that advice is combined with a 
recommendation as to how the distribution should be invested, does not 
constitute ``investment advice'' within the meaning of 29 CFR 2510-
3.21(c).\16\ The Department, however, has invited public comment on the 
issue as part of its review of the definition of ``fiduciary'' with 
regard to persons providing investment advice to plans or plan 
participants and beneficiaries under 29 CFR 2510.3-21(c).\17\ The 
Department has not completed its review of those comments and, 
accordingly, is not addressing the issue as part of this final rule.
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    \16\ AO 2005-23A (Dec. 7, 2005). This opinion further states 
that where someone who is already a plan fiduciary responds to 
participant questions concerning the advisability of taking a 
distribution or the investment of amounts withdrawn from the plan, 
that fiduciary is exercising discretionary authority respecting 
management of the plan and must act prudently and solely in the 
interest of the participant.
    \17\ 75 FR 65263 (Oct. 22, 2010).
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2. Statutory Exemption

a. General
    Paragraph (b) of the final rule describes the requirements that 
must be satisfied in order for the investment advice-related 
transactions described in section 408(b)(14) to be exempt from the 
prohibitions of section 406. These requirements generally track the 
requirements in section 408(g)(1) of ERISA.
    Paragraph (b)(1) of the final rule sets forth the general scope of 
the statutory exemption and regulation as providing relief from the 
prohibitions of section 406 of ERISA for transactions described in 
section 408(b)(14) of ERISA in connection with the provision of 
investment advice to a participant or a beneficiary if the investment 
advice is provided by a fiduciary adviser under an ``eligible 
investment advice arrangement.'' The transactions described in section 
408(b)(14) include the provision of investment advice to a participant 
or beneficiary with respect to a security or other property available 
as an investment under the plan; the acquisition, holding or sale of a 
security or other property available as an investment under the plan 
pursuant to the advice; and the direct or indirect receipt of fees or 
other compensation by the fiduciary adviser or an affiliate in 
connection with the provision of the advice or in connection with the 
acquisition, holding or sale of the security or other property. 
Paragraph (b)(1) also notes that the Code contains parallel provisions 
at section 4975(d)(17) and (f)(8).
    A commenter asked whether relief would be provided for extensions 
of credit intrinsic to investments made pursuant to investment advice 
rendered. It is the view of the Department that transactions in 
connection with the provision of investment advice described in section 
3(21)(A)(ii) of ERISA include, for purposes of the statutory exemption, 
otherwise permissible routine transactions necessary for the efficient 
execution and settlement of trades of securities, such as extensions of 
short term credit in connection with settlements.
    Commenters also requested clarification as to whether advice to a 
participant or beneficiary concerning the selection of an investment 
manager to manage some or all of the participant's or beneficiary's 
plan assets constitutes the provision of investment advice within the 
meaning of section 3(21)(A)(ii) of ERISA for purposes of the statutory 
exemption. As previously stated in the context of adopting the 2009 
final rule, the Department has long held the view that individualized 
recommendations of particular investment managers to plan fiduciaries 
constitutes the provision of investment advice within the meaning of 
section 3(21)(A)(ii) in the same manner as recommendations of 
particular securities or other property. The fiduciary nature of such 
advice does not change merely because the advice is being given to a 
plan participant or beneficiary.\18\ The Department has reaffirmed this 
position in connection with proposed amendments to regulations at 29 
CFR 2510.3-21(c).\19\
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    \18\ 74 FR 3822, 3824 (Jan. 21, 2009). See also AO 84-04A (Jan. 
4, 1984); AO 84-03A (Jan. 4, 1984); 29 CFR 2509.96-1(c).
    \19\ See footnote 17, above.
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    Paragraph (b)(2) provides that, for purposes of section 408(g)(1) 
of ERISA and section 4975(f)(8) of the Code, an ``eligible investment 
advice arrangement'' is an arrangement that meets either the 
requirements of paragraph (b)(3) [describing investment advice 
arrangements that use fee-leveling] or paragraph (b)(4) [describing 
investment advice arrangements that use computer modeling], or both.
b. Arrangements Using Fee-Leveling
    With respect to arrangements that use fee-leveling, paragraph 
(b)(3)(i)(A) requires that any investment advice must be based on 
generally accepted investment theories that take into account historic 
returns of different asset classes over defined periods of time, but 
also notes that generally accepted investment theories that take into 
account additional considerations are not precluded. Paragraph 
(b)(3)(i)(B) requires that investment advice must take into account 
investment management and other fees and expenses attendant to the 
recommended investments. These provisions have not been changed from 
the proposal.
    Paragraph (b)(3)(i)(C) of the final rule requires that investment 
advice provided under a fee-leveling arrangement must take into 
account, to the extent furnished, information relating to age, time 
horizons (e.g., life expectancy, retirement age), risk tolerance, 
current investments in designated investment options, other assets or 
sources of income, and investment preferences of the participant or 
beneficiary. Despite a request for re-consideration by commenters, 
paragraph (b)(3)(i)(C) requires that a fiduciary adviser must request 
such information. These

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commenters noted that ERISA section 408(g)(3) does not contain a 
mandatory request for information, and that the Department similarly 
should avoid such a mandate. The Department believes that this 
information is sufficiently important to the provision of useful 
investment advice that fiduciary advisers should be required to make a 
request for the information. Accordingly, this requirement is retained 
in both the fee-leveling and computer modeling provisions of the final 
rule. We note that, as also reflected in paragraph (b)(3)(i)(C) of the 
final rule, investment advice need not take into account information 
requested, but not furnished by a participant or beneficiary, and a 
fiduciary adviser is not precluded from requesting and taking into 
account additional information that a plan or participant or 
beneficiary may provide. Furthermore, the Department does not believe 
that this provision, or paragraph (b)(4)(i)(D) applicable to 
arrangements using computer models, would preclude a fiduciary adviser 
or computer model, when making an information request, from also 
providing a participant or beneficiary with an opportunity to direct 
the use of information previously provided.
    Paragraphs (b)(3)(i)(D) of the final rule sets forth the 
limitations on fees and compensation applicable to fee-leveling 
arrangements. As proposed, paragraph (b)(3)(i)(D) provided that no 
fiduciary adviser (including any employee, agent, or registered 
representative) that provides investment advice receives from any party 
(including an affiliate of the fiduciary adviser), directly or 
indirectly, any fee or other compensation (including commissions, 
salary, bonuses, awards, promotions, or other things of value) that is 
based in whole or in part on a participant's or beneficiary's selection 
of an investment option. Some commenters suggested that the fee and 
compensation limitation be expanded to include the affiliates of a 
fiduciary adviser. The Department has not adopted this suggestion. In 
FAB 2007-1, the Department concluded that the requirement in ERISA 
section 408(g)(2)(A)(i) that fees not vary depending on the basis of 
any investment option selected applies only to a fiduciary adviser, and 
does not extend to affiliates of the fiduciary adviser unless the 
affiliate also is a provider of investment advice. In reaching this 
conclusion, the Department explained that, consistent with its previous 
guidance, if the fees and compensation received by an affiliate of a 
fiduciary that provides investment advice do not vary or are offset 
against those received by the fiduciary for the provision of investment 
advice, no prohibited transaction will result solely by reason of 
providing investment advice, and prohibited transaction relief, such as 
provided under sections 408(b)(14) and 408(g), is not necessary.\20\
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    \20\ See AO 97-15A and AO 2005-10A.
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    Several commenters suggested that the Department revise the 
language in paragraph (b)(3)(i)(D) that refers to fees or compensation 
that is ``based in whole or in part'' on a participant's investment 
selection to conform to the statutory provision, and make clear that 
the regulation only proscribes fees or compensation that vary based on 
investment selections. As an example, a commenter explained that if 
commissions paid with respect to each plan investment option are the 
same, the commission could nonetheless be considered ``based on'' an 
investment selection because it is paid only if an investment is made, 
and therefore would appear to violate the proposal. Such a result, it 
is argued, is inconsistent with the section 408(g)(2)(A)(i), which only 
requires that ``any fees (including any commission or other 
compensation) received by the fiduciary adviser * * * do not vary 
depending on the basis of any investment option selected.'' (Emphasis 
added) Another commenter cautioned that the proposal could be 
misinterpreted as proscribing only those payments that a payor intends 
to act as an incentive, whereas the statutory provision appears to 
address receipt of any varying payment that has the effect of creating 
an incentive, without regard to the payor's intent.\21\ This commenter 
also recommended that the proposal should be revised to conform to the 
statutory language.
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    \21\ The commenter focused on the Department's preamble 
explanation that, even though an affiliate of a fiduciary adviser 
would be permitted to receive fees that vary depending on investment 
options selected, any provision of financial or economic incentives 
by an affiliate (or any other party) to a fiduciary adviser or 
person employed by such fiduciary adviser to favor certain 
investments would be impermissible under the proposal. 75 FR 9361
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    The Department agrees with the observations of the commenters and, 
accordingly, has revised the provision in response to these comments. 
Paragraph (b)(3)(i)(D) of the final rule requires that no fiduciary 
adviser (including any employee, agent, or registered representative) 
that provides investment advice receives from any party (including an 
affiliate of the fiduciary adviser), directly or indirectly, any fee or 
other compensation (including commissions, salary, bonuses, awards, 
promotions, or other things of value) that varies depending on the 
basis of a participant's or beneficiary's selection of a particular 
investment option. Consistent with the statute, this provision 
proscribes the receipt of fees or compensation that vary based on 
investment options selected, and therefore could have the effect of 
creating an incentive for a fiduciary adviser, or any individual 
employed by the adviser, to favor certain investments.
    A commenter expressed the view that by encompassing bonuses, 
awards, promotions, or other things of value, the fee-leveling 
requirement may be unnecessarily broad. Some commenters asked whether 
particular compensation arrangements or structures described in their 
comment letters would meet the fee-leveling requirement. Others 
similarly sought confirmation that bonuses, where it can be established 
that plan and IRA components are excluded from, or constitute a 
negligible portion of, the calculation, would not violate the fee-
leveling requirement. The Department intends the fee-leveling 
requirement to be broadly applied in order to ensure the objectivity of 
the investment advice recommendations to plan participants and 
beneficiaries is not compromised by the advice provider's own financial 
interest in the outcome. For purposes of applying the provision, the 
Department would consider things of value to include trips, gifts and 
other things that, while having a value, are not given in the form of 
cash. Accordingly, almost every form of remuneration that takes into 
account the investments selected by participants and beneficiaries 
would likely violate the fee-leveling requirement of the final rule. On 
the other hand, a compensation or bonus arrangement that is based on 
the overall profitability of an organization may be permissible if the 
individual account plan and IRA investment advice and investment option 
components are excluded from, or constituted a negligible portion of, 
the calculation of the organization's profitability. The Department 
believes, however, that whether any particular salary, bonus, awards, 
promotions or commissions program meets or fails the fee-leveling 
requirement ultimately depends on the details of the program. In this 
regard, the Department notes that, under paragraph (b)(6), the details 
of such programs will be the subject of both a review and a report by 
an independent auditor as a condition for relief under the statutory 
exemption.
    In addition to the foregoing, under paragraph (b)(3)(ii), fiduciary 
advisers utilizing investment advice

[[Page 66140]]

arrangements that employ fee-leveling must comply with the requirements 
of paragraphs (b)(5) [authorization by plan fiduciary], (b)(6) 
[audits], (b)(7) [disclosure to participants], (b)(8) [disclosure to 
authorizing fiduciary], (b)(9) [miscellaneous], and (d) [maintenance of 
records] of the final rule, each of which is discussed in more detail 
below.
c. Arrangements Using Computer Models
    Paragraph (b)(4) addresses the requirements applicable to 
investment advice arrangements that rely on use of computer models 
under the statutory exemption. To qualify as an eligible investment 
advice arrangement, the only investment advice provided under the 
arrangement must be advice generated by a computer model described in 
paragraph (b)(4)(i) [computer model design and operation] and (ii) 
[computer model certification], and the arrangement must meet the 
requirements of paragraphs (b)(5) through (9) and paragraph (d), each 
of which is discussed in more detail below.

1. Computer Model Design and Operation

    In general, the computer model design and operation provisions in 
the proposal were based on section 408(g)(3)(B)(i)-(v) of ERISA. They 
also reflected comments received during development of the January 2009 
final rule. However, the proposal also included a new provision, at 
paragraph (b)(4)(i)(E)(3), requiring that a computer model must be 
designed and operated to avoid investment recommendations that 
inappropriately distinguish among investment options within a single 
asset class on the basis of a factor that cannot confidently be 
expected to persist in the future. The Department added this provision 
to enhance the rule's protections against the potential that the 
adviser's conflicts might taint advice given under the exemption. To 
further explore the merits of enhancing the rule's protections by 
providing more specific computer model standards, the Department 
solicited comment on a number of questions involving computer models. 
These questions related to matters such as the identification and 
application of, and practices consistent with, generally accepted 
investment theories; use of historical data (such as past performance) 
of asset classes and plan investments; and criteria appropriate for 
consideration in developing asset allocation recommendations consisting 
of plan investments.
    As in the proposal, paragraph (b)(4)(i)(A) of the final rule 
relates to the application of generally accepted investment theories 
that take into account the historic risks and returns of different 
asset classes over defined periods of time. In response to the 
Department's solicitation, commenters indicated that generally accepted 
investment theories is a term defined by wide usage and acceptance by 
investment experts and academics, and is subject to change over time. 
Most did not believe, however, that the Department should specifically 
define or identify generally accepted investment theories, or prescribe 
particular practices or computer model parameters. These commenters 
explained that economic and investment theories and practices 
continuously evolve over time in response to changes and developments 
in academic and expert thinking, technology, and financial markets. 
Commenters cautioned that defining generally accepted theories and 
practices through the final rule would reflect a determination made at 
a particular point in time, and that such a determination might limit 
the ability of advisers to select and apply investment theories and 
methodologies they believe to be appropriate, and cause them to apply 
theories and methodologies that they otherwise might determine to be 
outdated. They also suggested that establishing a specific standard 
might inhibit innovation in participant-oriented investment advice. 
Commenters further noted that the proposal's computer model provisions, 
without modification, would be sufficient to protect against use of 
specious or highly unorthodox methods, or inappropriate consideration 
of factors such as recent performance of plan investment options. These 
commenters therefore suggested that specifying theories and practices 
is not necessary to protect participants, and furthermore may impede 
the development of advice that is in their best interests.
    Other commenters suggested that more specific standards might be 
helpful. One commenter stated that lack of guidance on what constitutes 
a generally accepted investment theory may present difficulties in 
performing the rule's required computer model certifications. The 
commenter recommended that the Department revise the rule to include a 
process for determining whether a theory is generally accepted, which 
could include submission to a panel of experts for determination and 
publication of an acceptable list of theories. Another commenter 
suggested that the final rule contain non-exclusive ``safe harbor'' 
computer model parameters. Another commenter requested clarification 
that a computer model must apply generally accepted investment theories 
that take into account the other considerations described in the 
regulation's computer model provisions (e.g., information about a 
participants age and time horizon).
    Virtually all commenters who addressed this issue indicated that 
use of historical performance data is required by generally accepted 
investment theories, but only in ways that recognize statistical 
uncertainty. Most noted that defining ``historical'' differently can 
have a tremendous impact on the resulting data and investment 
recommendations, and generally agreed that long-term performance 
information is preferable to short-term performance information. Some 
opined that historical performance data must reflect at least one 
market or economic cycle, but provided different timeframes (e.g., at 
least 5, 10, or 20 years) that they believe would meet this standard. 
Some also suggested that use of historical performance data should be 
limited to estimating future performance for an entire asset class, 
rather than as a predictor for individual investments within an asset 
class.
    After careful consideration of all the comments on the issue, the 
Department does not believe it has a sufficient basis for determining 
appropriate changes to the generally accepted investment theory 
standard. While several commenters described theories and practices 
they believe to be generally accepted, there did not appear to be any 
consensus among them, with the exception of modern portfolio 
theory,\22\ which the Department believes is already reflected in the 
rule's reference to investment theories that take into account the 
historic returns of different asset classes over defined periods of 
time. Moreover, the Department is concerned that attempting to provide 
further clarification or additional specificity in this area may have 
potentially significant unintended consequences--such as limiting 
advisers' ability to select, apply or make further innovations in 
participant-oriented investment advice--that could potentially lower 
the quality of

[[Page 66141]]

investment advice received by participants and reduce the economic 
benefit of the statutory exemption. The Department also is persuaded 
that, without additional specificity, the final rule's computer model 
requirements are sufficient to safeguard participants from 
inappropriate application of investment theories. As the party seeking 
prohibited transaction relief under the exemption, the fiduciary 
adviser has the burden of demonstrating satisfaction of all applicable 
requirements of the exemption. A fiduciary adviser relying on use of 
computer models therefore must be able to demonstrate that the computer 
model is designed and operated to apply generally-accepted investment 
theories. Furthermore, as with the other computer model requirements in 
paragraph (b)(4)(i), application of generally-accepted investment 
theories is subject to certification by an eligible investment expert 
under paragraph (b)(4)(ii). This provides significant additional 
procedural and substantive safeguards, as the expert must be 
independent of the fiduciary adviser as described in paragraph 
(b)(4)(ii), and must following its evaluation of a computer model 
prepare a written certification report. Paragraph (d) of the final 
rule, in turn, requires the fiduciary adviser to retain for a period of 
no less than 6 years any records necessary for determining whether the 
applicable requirements of the regulation have been met.
---------------------------------------------------------------------------

    \22\ This is consistent with a survey of literature on generally 
accepted investment theories prepared for the Department. See 
Deloitte Financial Advisory Services LLP, Generally Accepted 
Investment Theories (July 11, 2007) (unpublished, on file with the 
Department of Labor).
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    Accordingly, paragraph (b)(4)(i)(A) of the final rule has not been 
changed from the proposal. This provision requires that a computer 
model must be designed and operated to apply generally accepted 
investment theories that take into account the historic risks and 
returns of different asset classes over defined periods of time, but 
also makes clear that the provision does not preclude a computer model 
from applying generally accepted investment theories that take into 
account additional considerations.
    Paragraph (b)(4)(i)(B) of the final rule requires that a computer 
model must take into account investment management and other fees and 
expenses attendant to the recommended investments. No substantive 
comments were received on this provision, and it is being adopted 
unchanged from the proposal.
    Paragraph (b)(4)(i)(C) of the final rule, as described below, 
reflects the requirement that was contained in paragraph 
(b)(4)(i)(E)(3) of the proposal.
    Paragraph (b)(4)(i)(D) of the final rule, as with paragraph 
(b)(4)(i)(C) of the proposal, requires a computer model to request from 
a participant or beneficiary and, to the extent furnished, utilize 
information relating to age, time horizons, risk tolerance, current 
investments in designated investment options, other assets or sources 
of income, and investment preferences. The provision further makes 
clear, however, that a computer model is not precluded from requesting, 
and utilizing, other information from a participant or beneficiary. As 
discussed above in the description of paragraph (b)(3)(i)(C) 
(applicable to arrangements that use fee-leveling), the Department has 
not adopted commenter requests to remove the regulation's mandatory 
request for information from participants and beneficiaries. A few 
commenters also suggested that the Department revise the regulation to 
provide additional factors that must be considered in computer models, 
such as participant contribution rates and liquidity needs. Although 
paragraph (b)(4)(i)(D) has not been modified to reflect these factors, 
the Department notes that there is nothing in the final rule that 
expressly precludes a computer model from requesting and taking into 
account additional factors to the extent the model otherwise complies 
with the requirements of the regulation.
    Paragraph (b)(4)(i)(D) of the proposal requires that a computer 
model must be designed and operated to utilize appropriate objective 
criteria to provide asset allocation portfolios comprised of investment 
options available under the plan. Paragraph (b)(4)(i)(E) of the 
proposal further requires that a computer model be designed and 
operated to avoid investment recommendations that inappropriately favor 
investment options offered by the fiduciary adviser or certain other 
persons, over other investment options, if any, available under the 
plan (paragraph (b)(4)(i)(E)(1)); inappropriately favor investment 
options that may generate greater income for the fiduciary adviser or 
certain other persons (paragraph (b)(4)(i)(E)(2)); or inappropriately 
distinguish among investment options within a single asset class on the 
basis of a factor that cannot confidently be expected to persist in the 
future (paragraph (b)(4)(i)(E)(3)). With respect to paragraph 
(b)(4)(i)(E)(3), the Department explained that while some differences 
between investment options within a single asset class, such as 
differences in fees and expenses or management style, are likely to 
persist in the future and therefore to constitute appropriate criteria 
for asset allocation, other differences, such as differences in 
historical performance, are less likely to persist and therefore less 
likely to constitute appropriate criteria for asset allocation; asset 
classes, in contrast, can more often be distinguished from one another 
on the basis of differences in their historical risk and return 
characteristics.
    The Department did not receive any substantive comments with 
respect to paragraphs (b)(4)(i)(D), (b)(4)(i)(E)(1) and (2), and 
therefore is adopting these provisions as proposed, now at paragraphs 
(b)(4)(i)(E), (b)(4)(i)(F)(1) and (2) of the final rule. A number of 
commenters requested that the Department consider removing paragraph 
(b)(4)(i)(E)(3) of the proposal. Some opined that the test contained in 
that provision--which applies on an asset-class by asset-class basis--
lacks sufficient clarity because it fails to define the essential term 
``asset class.'' A commenter further noted that a rules-based 
definition of asset class, and the necessary confidence of future 
persistence, likely would be too vague or too restrictive. Some 
commenters also requested removal of this provision unless the 
Department clarifies that it would be acceptable for a computer model 
to take into account historical performance data. According to these 
commenters, the proposal's discussion of paragraph (b)(4)(i)(E)(3) and 
related computer model questions has been construed as strictly 
prohibiting, or strongly cautioning against, any consideration of 
historical performance data, even if considered in conjunction with 
other information. These commenters opined that a complete disregard of 
historical performance data would be inconsistent with generally 
accepted investment theories, as discussed above. Furthermore, some 
cautioned that, by limiting consideration to only those factors that 
can confidently be expected to persist in the future, a computer model 
might be limited to distinguishing between investment options solely on 
the basis of fees and expenses. A commenter noted that, other than 
fees, it could not identify any other factor with the necessary 
likelihood of persistence it believed would be required under the 
proposal. Although commenters generally agreed that fees are an 
important consideration, most recognized they should not be the only 
factor taken into account.
    Several commenters indicated that, while the rule is limited to 
implementation of the statutory exemption for investment advice, any 
views the Department expresses with respect to investment theories and 
practices might be read as applying more generally to any fiduciary 
decision

[[Page 66142]]

relating to investments. Thus, a number of commenters expressed concern 
that the proposal, with its focus on historical performance data, 
superior past performance and fees, appeared to suggest that it would 
be impermissible under any circumstances for a plan fiduciary to pursue 
an active management style, or that a plan fiduciary would bear a very 
high burden of justification. Commenters also stated that the 
Department's proposal appeared to demonstrate a clear bias in favor of 
passive investment styles over active styles, which they believe to be 
premature because it is the subject of ongoing debate among investment 
experts.
    Other commenters, however, questioned the utility of historical 
performance data beyond estimating future performance of an entire 
asset class. They further noted that, because the regulation permits a 
fiduciary adviser to provide investment recommendations to plan 
participants when the adviser has an interest in the investment options 
being recommended, there is the potential that the computer model might 
be designed to favor certain options by giving undue weight to 
historical performance data. They therefore stressed the importance of 
scrutinizing the use of historical performance data and supported the 
inclusion of paragraph (b)(4)(i)(E)(3) of the proposal.
    Paragraph (b)(4)(i)(E)(3) of the proposal incorporated the 
generally-recognized premise that an investment option's historical 
performance on its own is not an adequate predictor of such investment 
option's future performance. The provision was not intended to prohibit 
a computer model from any consideration of an investment option's 
historical performance, as some commenters interpreted. Rather, as some 
commenters recognized, the provision is intended to ensure that in 
evaluating investment options for asset allocation, it would be 
appropriate and consistent with generally accepted investment theories 
for a computer model to take into account multiple factors, including 
historical performance, attaching weights to those factors based on 
surrounding facts and circumstances. As with the consideration of fees 
and expenses attendant to investment options, commenters generally 
recognized the importance of ensuring that historical performance of 
options is not given inappropriate weight. The Department is not 
persuaded by the comments received that the provision should be 
eliminated, however, to avoid further misinterpretation of the 
provision, the requirement has been clarified and moved to paragraph 
(b)(4)(i)(C) of the final rule. This provision requires that a computer 
model must be designed and operated to appropriately weight the factors 
used in estimating future returns of investment options.
    Paragraph (b)(4)(i)(G)(1) of the final rule, like paragraph 
(b)(4)(i)(F)(1) of the proposal, requires a computer model to take into 
account all ``designated investment options'' available under the plan 
without giving inappropriate weight to any investment option. The term 
``designated investment option'' is defined in paragraph (c)(1) of the 
final rule to mean any investment option 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 option'' does not include ``brokerage 
windows,'' ``self-directed brokerage accounts,'' or similar plan 
arrangements that enable participants and beneficiaries to select 
investments beyond those designated by the plan.
    As with paragraph (b)(4)(i)(F)(2) of the proposal, paragraph 
(b)(4)(i)(G)(2) of the final rule provides that a computer model will 
not be treated as failing to meet paragraph (b)(4)(i)(G)(1) merely 
because it does not make recommendations relating to the acquisition, 
holding or sale of certain types of investment options. Under the 
proposal, this exception applied to: qualifying employer securities; an 
investment that allocates the invested assets of a participant or 
beneficiary to achieve varying degrees of long-term appreciation and 
capital preservation through equity and fixed income exposures, based 
on a defined time horizon or level of risk of the participant or 
beneficiary; and an annuity option with respect to which a participant 
or beneficiary may allocate assets toward the purchase of a stream of 
retirement income payments guaranteed by an insurance company.
    Several commenters suggested removal of one or more of these 
exceptions. Commenters noted that requiring computer models to be 
capable of providing recommendations with respect to employer 
securities could help participants avoid risks associated with 
overconcentrated investments in equity securities of a single company. 
As to asset allocation funds (e.g., lifecycle, or target date, funds), 
commenters noted that, if a computer model does not include 
recommendations on these popular investments, then interested 
participants would need to conduct their own research beyond the 
general explanation required under the proposal.\23\ With respect to 
in-plan annuity options, several commenters noted that these newly-
developing options can help participants address longevity risk and 
improve retirement security, and that permitting their exclusion from 
computer model advice could result in low utilization by participants. 
A commenter also expressed confidence that, in the time since the 
Department's 2009 final rule, computer modeling technology has become 
sufficiently sophisticated to take in-plan annuity options into 
account.
---------------------------------------------------------------------------

    \23\ Under paragraph (b)(4)(i)(F)(2)(ii) of the proposal, the 
limitation for these types of funds was subject to the condition 
that the participant, contemporaneous with the provision of the 
computer-generated advice, would be furnished with a general 
description of the fund and how they operate.
---------------------------------------------------------------------------

    The Department has decided to remove qualifying employer securities 
and asset allocations funds from the list of excepted options in 
paragraph (b)(4)(i)(G)(2). The Department believes that it is feasible 
to develop a computer model capable of addressing investments in 
qualifying employer securities, and that plan participants may 
significantly benefit from this advice. The Department also believes 
that participants who seek investment advice as they manage their plan 
investments would benefit from advice that takes into account asset 
allocation funds, if available under the plan. Based on recent 
experience in examining target date funds and similar investments, the 
Department believes it is feasible to design computer models with this 
capability.\24\
---------------------------------------------------------------------------

    \24\ In 2009, the Department and the U.S. Securities and 
Exchange Commission (SEC) held a joint public hearing to examine 
issues related to the design and operation of target date funds and 
similar investments. See http://www.dol.gov/ebsa/regs/cmt-targetdatefundshearing.html. In 2010, the agencies jointly provided 
an Investor Bulletin to help investors and plan participants better 
understand the operations and risks of target date fund investments. 
See http://www.dol.gov/ebsa/pdf/TDFinvestorbulletin.pdf. The 
Department is in the process of developing regulations to address 
disclosures related to target date funds, 75 FR 73987 (Nov. 30, 
2010), and also is currently developing guidance to assist plan 
sponsors in the selection and monitoring of target date funds for 
their plans.
---------------------------------------------------------------------------

    The Department, however, is less certain that computer models are 
able to give adequate consideration to in-plan annuity products, which 
permit a participant to allocate a portion of the assets in his or her 
plan account towards the purchase of an annuitized retirement benefit. 
In the absence of a better understanding of the computer modeling 
issues raised by in-plan annuities, the Department is hesitant to 
mandate their inclusion in a computer

[[Page 66143]]

model. The Department therefore is retaining the exception for in-plan 
annuity options. Thus, paragraph (b)(4)(i)(G)(2)(i) of the final rule 
provides that a computer model will not fail to satisfy paragraph 
(b)(4)(i)(G)(1) merely because it does not make recommendations 
relating to the acquisition, holding, or sale of an annuity option with 
respect to which a participant or beneficiary may allocate assets 
toward the purchase of a stream of retirement income payments 
guaranteed by an insurance company, provided that, contemporaneous with 
the provision of investment advice generated by the computer model, the 
participant or beneficiary is also furnished a general description of 
such options and how they operate. The Department notes, however, that 
even though paragraph (b)(4)(i)(G)(2)(i) permits a computer model to 
not make recommendations to allocate amounts to an in-plan annuity, 
amounts that a participant or beneficiary have already allocated to 
such an annuity must be taken into account by the computer model in 
developing the recommendation with respect to the investment of the 
participant's remaining available assets. The Department further notes 
that, while not mandated, there is nothing in the regulation that 
precludes a computer model from being designed to make recommendations 
to allocate amounts to an in-plan annuity, subject to the other 
conditions of the regulation being satisfied.
    Also, the Department has added a new provision to reflect the 
interaction between paragraph (b)(4)(i)(G)(1) and paragraph 
(b)(4)(i)(C), which requires a computer model to request and, to the 
extent furnished, take into account a participant's investment 
preferences. This new provision, paragraph (b)(4)(i)(G)(2)(ii) of the 
final rule, provides that a computer model will not fail to satisfy 
paragraph (b)(4)(i)(G)(1) merely because it does not provide a 
recommendation with respect to an investment option that a participant 
or beneficiary requests to be excluded from consideration in such 
recommendations.
    A commenter requested clarification as to whether an IRA with an 
unlimited universe of investment options would be treated similar to a 
brokerage window or self-directed brokerage account for purposes of 
this provision. Another commenter indicated that some IRAs permit 
beneficiaries to make investments in a limited universe of options, 
while also permitting them to hold other investments that are not 
offered by the IRA, and asked if paragraph (b)(4)(i)(G)(1) would be 
violated if a computer model provides ``buy'' ``hold'' and ``sell'' 
recommendations with respect to the limited universe of options, while 
accommodating ``hold'' and ``sell'' recommendations for the investments 
not available through the IRA. While the Department believes that 
computer models should, with few exceptions, be required to model all 
investment options available under a plan or through an IRA, the 
Department does not believe that it is reasonable to expect that all 
computer models be capable of modeling the universe of investment 
options, rather than just those investment alternatives designated as 
available investments through the IRA. Accordingly, it is the view of 
the Department that a computer model would not fail to meet the 
requirements of paragraph (b)(4)(i)(G)(1) merely because it limits buy 
recommendations only to those investment options that can be bought 
through the plan or IRA, even if the model is capable of modeling hold 
and sell recommendations with respect to investments not available 
through the plan or IRA, provided, of course, that the plan participant 
or beneficiary or IRA beneficiary is fully informed of the model's 
limitations in advance of the recommendations, thereby enabling the 
recipient of advice to assess the usefulness of the recommendations.

2. Computer Model Certification

    Paragraph (b)(4)(ii) of the final rule, like the proposal, requires 
that, prior to utilization of the computer model, the fiduciary adviser 
must obtain a written certification that the computer model meets the 
requirements of paragraph (b)(4)(i), discussed above. If the model is 
subsequently modified in a manner that may affect its ability to meet 
the requirements of paragraph (b)(4)(i), the fiduciary adviser, prior 
to utilization of the modified model, must obtain a new certification. 
The required certification must be made by an ``eligible investment 
expert,'' within the meaning of paragraph (b)(4)(iii), and must be made 
in accordance with the requirements of paragraph (b)(4)(iv).
    Paragraph (b)(4)(iii) of the final rule, like the proposal, defines 
an ``eligible investment expert'' to mean a person that, through 
employees or otherwise, has the appropriate technical training or 
experience and proficiency to analyze, determine and certify, in a 
manner consistent with paragraph (b)(4)(iv), whether a computer model 
meets the requirements of paragraph (b)(4)(i). Consistent with section 
408(g)(3)(C)(iii) of ERISA, paragraph (b)(4)(iii) further limits this 
definition by excluding certain parties that would not have sufficient 
independence from an arrangement to certify a computer model for 
compliance with the regulation. The proposal provided that the term 
``eligible investment expert'' does not include any person that has any 
material affiliation or material contractual relationship with the 
fiduciary adviser, with a person with a material affiliation or 
material contractual relationship with the fiduciary adviser, or with 
any employee, agent, or registered representative of the foregoing.
    Several commenters asked for additional guidance on the credentials 
necessary to serve as an ``eligible investment expert.'' The Department 
previously attempted to define with greater specificity the 
qualifications of the eligible investment expert. It received public 
comments on this issue in response to a specific request for 
information published in 2006 and to similar proposed rules published 
in 2008.\25\ At that time, it concluded that it could not define a 
specific set of academic or other credentials for an eligible 
investment expert. The Department continues to believe it would be very 
difficult to do so, and the comments received with respect to this most 
recent proposal did not provide significant additional information for 
consideration. As a result, no changes have been made to this aspect of 
the final rule. The Department notes, however, that as provided in 
paragraph (b)(4)(v) of the final rule, the fiduciary adviser's 
selection of the eligible investment expert is a fiduciary act governed 
by section 404(a)(1) of ERISA. Therefore, a fiduciary adviser must act 
prudently in its selection. Moreover, as the party seeking prohibited 
transaction relief under the exemption, the fiduciary adviser has the 
burden of demonstrating that all applicable requirements of the 
exemption are satisfied with respect to its arrangement.
---------------------------------------------------------------------------

    \25\ See footnote 9, above.
---------------------------------------------------------------------------

    Commenters raised general questions as to whether the provision of 
certain types of services for a fiduciary adviser would disqualify a 
person from acting as the ``eligible investment expert'' required under 
paragraph (b)(4) or as the independent auditor required under paragraph 
(b)(6).\26\ With respect to the eligible investment expert, the 
Department believes that the 10% gross revenue test in the definition 
of the term ``material contractual relationship,''

[[Page 66144]]

which contemplates that there may be instances in which a person might 
be performing other services for a fiduciary adviser or affiliates, 
generally is sufficient to minimize any influence on the part of the 
fiduciary adviser by virtue of service relationships that might 
compromise the independence of the person in performing the 
certification under the regulation. However, the Department does not 
believe that a person who develops a computer model should be 
considered sufficiently independent to conduct a certification of the 
same model.\27\ The exclusionary language of paragraph (b)(4)(iii) of 
the final rule has been modified accordingly, and provides that the 
term ``eligible investment expert'' does not include any person that: 
Has any material affiliation or material contractual relationship with 
the fiduciary adviser, with a person with a material affiliation or 
material contractual relationship with the fiduciary adviser, or with 
any employee, agent, or registered representative of the foregoing; or 
develops the computer model utilized by the fiduciary adviser to 
satisfy paragraph (b)(4).
---------------------------------------------------------------------------

    \26\ The Department's response as it relates to the independent 
auditor is contained in the discussion of the audit provisions, 
below.
    \27\ For example, a person who develops a computer model used 
under the exemption generally is treated as a fiduciary adviser 
under paragraph (c)(2)(ii) of the final rule. However, the fiduciary 
election described in Sec. 2550.408g-2 permits another person to be 
treated as fiduciary adviser.
---------------------------------------------------------------------------

    One commenter asked whether the eligible investment expert must be 
bonded for purposes of section 412 of ERISA. In the view of the 
Department, an eligible investment expert, in performing the computer 
model certification described in the final rule, would neither be 
acting as a fiduciary under ERISA, nor be ``handling'' plan assets such 
that the bonding requirements would be applicable to the eligible 
investment expert.
    Paragraph (b)(4)(iv) of the final rule provides that a 
certification by an eligible investment expert shall be in writing and 
contain the following: An identification of the methodology or 
methodologies applied in determining whether the computer model meets 
the requirements of paragraph (b)(4)(i) of the final rule; an 
explanation of how the applied methodology or methodologies 
demonstrated that the computer model met the requirements of paragraph 
(b)(4)(i); and a description of any limitations that were imposed by 
any person on the eligible investment expert's selection or application 
of methodologies for determining whether the computer model meets the 
requirements of paragraph (b)(4)(i). In addition, the certification is 
required to contain a representation that the methodology or 
methodologies were applied by a person or persons with the educational 
background, technical training or experience necessary to analyze and 
determine whether the computer model meets the requirements of 
paragraph (b)(4)(i); and a statement certifying that the eligible 
investment expert has determined that the computer model meets the 
requirements of paragraph (b)(4)(i). Finally the certification must be 
signed by the eligible investment expert. The Department received no 
comments on this provision and, accordingly, has adopted the provision 
as proposed.
    Paragraph (b)(4)(v) of the final rule provides that the selection 
of an eligible investment expert as required by the regulation is a 
fiduciary act governed by section 404(a)(1) of ERISA. A commenter 
recommended that the eligible investment expert should be treated as a 
fiduciary under ERISA. The Department does not believe it would be 
appropriate, as part of this final rule, without further notice and 
comment to adopt such a potentially significant change. Accordingly, 
the Department has not adopted this recommendation.
d. Authorization by a Plan Fiduciary
    Paragraph (b)(5)(i) of the final rule requires that, except as 
provided in paragraph (b)(5)(ii), the arrangement pursuant to which 
investment advice is provided to participants and beneficiaries must be 
expressly authorized by a plan fiduciary (or, in the case of an IRA, 
the IRA beneficiary) other than: The person offering the arrangement; 
any person providing designated investment options under the plan; or 
any affiliate of either. For purposes of this authorization, an IRA 
beneficiary will not be treated as an affiliate of a person solely by 
reason of being an employee of such person. Therefore, an IRA 
beneficiary is not precluded from providing the authorization required 
under paragraph (b)(5)(i) merely because the IRA beneficiary is an 
employee of the fiduciary adviser. Paragraph (b)(5)(iii) provides that 
a plan sponsor is not treated as a person providing a designated 
investment option under the plan merely because one of the designated 
investment options of the plan is an option that permits investment in 
securities of the plan sponsor or an affiliate. Therefore, a plan 
sponsor-fiduciary is not precluded from providing the authorization 
required by paragraph (b)(5)(i) merely because the plan includes 
qualifying employer securities as a designated investment option.
    Paragraph (b)(5)(ii) addresses authorization in connection with the 
adviser's own plan. This provision accommodates a fiduciary adviser's 
provision of investment advice to its own employees (or employees of an 
affiliate) pursuant to an arrangement under the final rule, provided 
that the fiduciary adviser or affiliate offers the same arrangement to 
participants and beneficiaries of unaffiliated plans in the ordinary 
course of its business. The Department notes, however, that the 
statutory exemption does not provide relief for the selection of the 
fiduciary adviser or the arrangement pursuant to which advice will be 
provided. Accordingly, a plan fiduciary must nonetheless be prudent in 
its selection and may not, in contravention of ERISA section 406(b), 
use its position to benefit itself or a person in which such fiduciary 
has an interest that may affect the exercise of such fiduciary's best 
judgment as a fiduciary. In this regard, the Department has indicated 
that if a fiduciary provides services to a plan without the receipt of 
compensation or other consideration (other than reimbursement of direct 
expenses properly and actually incurred in the performance of such 
services) the provision of such services does not, in and of itself, 
constitute an act described in section 406(b).\28\
---------------------------------------------------------------------------

    \28\ See 29 CFR 2550.408b-2(e)(3).
---------------------------------------------------------------------------

    One commenter asked whether paragraph (b)(5) requires authorization 
by the employer or the IRA beneficiary with respect to an employer-
sponsored SIMPLE IRA. Savings Incentive Match Plan for Employees 
(SIMPLE) IRA plans and Simplified Employee Pension (SEP) plans are 
relatively uncomplicated IRA-based retirement savings vehicles that 
allow contributions to be made on a tax-favored basis to individual 
retirement accounts and individual retirement annuities (IRAs) owned by 
the employees. Although generally a SEP or SIMPLE IRA is a plan subject 
to Title I of ERISA, many of the rules applicable to other ERISA-
covered employer sponsored pension plans do not apply to SIMPLE IRA and 
SEP plans.\29\ For example, SIMPLE IRA and SEP plans are subject to 
minimal reporting and disclosure requirements.\30\ Many employers that 
sponsor these IRA-based plans that are intended to be

[[Page 66145]]

uncomplicated to establish and administer may not be willing to assume 
the duty to authorize an investment advice provider under the 
regulation, even one selected by an IRA beneficiary. This could limit 
access to fiduciary investment advice under the regulation for the 
participants and beneficiaries of such IRA-based plans. Under these 
circumstances, the Department has defined the term ``IRA'' in this 
regulation to include a ``simplified employee pension'' described in 
section 408(k) of the Code, and a ``simple retirement account'' 
described in section 408(p) of the Code. Thus, SIMPLE IRA plans and SEP 
plans would be treated like IRAs under the requirements of the final 
regulation, and the required authorization would be given by the 
participant or beneficiary to whom the account belongs and who receives 
the advice. The Department is interested in continuing to receive 
public input on the operation of the regulation in the context of 
SIMPLE IRA plans and SEP plans, especially the experience of 
participants and beneficiaries and, to the extent public input suggests 
that changes in this context are necessary, the Department may consider 
further adjustments to the regulation in the future.
---------------------------------------------------------------------------

    \29\ See ERISA sections 101(h) (application of reporting 
requirements) and 404(c)(2) (application of fiduciary responsibility 
requirements). The Department treats SEP and SIMPLE IRA plans 
differently from other ERISA-covered pension plans in other 
contexts. See 29 CFR 2550.404a-5 (disclosures to participants in 
participant-directed individual account plans) and 2550.408b-2(c)(1) 
(disclosures to fiduciaries of pension plans).
    \30\ 29 CFR 2520.104-48 and 2520.104-49.
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e. Annual Audit
    Paragraph (b)(6) of the final rule sets forth the annual audit 
requirements for the statutory exemption.\31\ Paragraph (b)(6)(i), like 
the proposal, provides that the fiduciary adviser shall, at least 
annually, engage an independent auditor, who has appropriate technical 
training or experience and proficiency, and so represents in writing to 
the fiduciary adviser, to conduct an audit of the adviser's investment 
advice arrangements for compliance with the requirements of the 
regulation and, within 60 days following completion of the audit, to 
issue a written report to the fiduciary adviser and, except with 
respect to an arrangement with an IRA, to each fiduciary who authorized 
the use of the investment advice arrangement. The written report must 
set forth the specific findings of the auditor regarding compliance of 
the arrangement with the requirements of the regulation (paragraph 
(b)(6)(i)(B)(4)). However, as discussed below, because of the 
importance of the annual audit in helping an authorizing fiduciary 
monitor compliance of the arrangement, paragraph (b)(6)(i)(B) of the 
final rule, unlike the proposal, also enumerates certain basic 
information about the audited arrangement that must be included in the 
audit report. Specifically, the report must identify the fiduciary 
adviser and the type of arrangement (i.e., fee leveling, computer 
models, or both) (paragraphs (b)(6)(i)(B)(1) and (2)). Further, if the 
arrangement uses computer models, or both computer models and fee 
leveling, the report must also indicate the date of the most recent 
computer model certification, and identify the eligible investment 
expert that provided the certification (paragraph (b)(6)(i)(B)(3)). The 
Department believes that this basic information will benefit the 
authorizing fiduciary or IRA beneficiary in understanding the 
arrangement without imposing a significant burden on the auditor, which 
ordinarily will have such information.
---------------------------------------------------------------------------

    \31\ The audit provisions are set forth in section 408(g)(6) of 
ERISA.
---------------------------------------------------------------------------

    Given the significant number of reports that an auditor would be 
required to send if the written report was required to be furnished to 
all IRA beneficiaries, the Department framed an alternative requirement 
for investment advice arrangements with IRAs. This alternative is set 
forth in paragraph (b)(6)(ii) of the proposal and the final rule. Under 
this provision, the fiduciary adviser must, within 30 days following 
receipt of the report from the auditor as required under paragraph 
(b)(6)(i)(B), furnish a copy of the report to the IRA beneficiary or 
make such report available on its Web site, provided that such 
beneficiaries are provided information, along with other required 
participant disclosures (see paragraph (b)(7) of the final rule), 
concerning the purpose of the report, and how and where to locate the 
report applicable to their account. The Department believes that making 
reports available on a Web site in this manner to IRA beneficiaries 
satisfies the requirement of section 104(d)(1) of the Electronic 
Signatures in Global and National Commerce Act (E-SIGN) \32\ that any 
exemption from the consumer consent requirements of section 101(c) of 
E-SIGN must be necessary to eliminate a substantial burden on 
electronic commerce and will not increase the material risk of harm to 
consumers. The Department solicited comments on this finding in 
connection with the prior proposal, and received no comments in 
response.\33\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 7004(d)(1) (2000).
    \33\ See 74 FR 3829 (Jan. 21, 2009).
---------------------------------------------------------------------------

    Obtaining consent from each IRA holder or participant before 
publication on the Web site would be a tremendous burden on the plan or 
IRA provider. This element, along with the broad availability of 
Internet access and the lack of any direct consequences to any 
particular participant for a failure to review the audit for the 
participants and beneficiaries, supports these findings.
    As with the proposal, paragraph (b)(6)(ii) of the final rule also 
provides with respect to an arrangement with an IRA that, if the report 
of the auditor identifies noncompliance with the requirements of the 
regulation, then the fiduciary adviser must send a copy of the report 
to the Department. The final rule, like the proposal, requires that the 
fiduciary adviser submit the report to the Department within 30 days 
following receipt of the report from the auditor. This report will 
enable the Department to monitor compliance with the statutory 
exemption.
    Some commenters expressed concern with the requirement in paragraph 
(b)(6)(ii)(B) that the fiduciary adviser must send a copy of the 
auditor's report to the Department if that report identifies instances 
of noncompliance. They recommended that reports only be required to be 
filed with the Department when there is ``material'' noncompliance. 
Other commenters recommended that fiduciary advisers be afforded a 
period within which to self-correct prior to the reporting of 
noncompliance. This filing requirement will enable the Department to 
monitor compliance with the exemption in those instances where there is 
no authorizing ERISA plan fiduciary to carry out that function. While 
it recognizes that not every instance of noncompliance would, itself, 
affect the quality of the advice provided to an IRA beneficiary, the 
Department believes that, given the overall significance of the audit 
as a protection for advice recipients, all reports that identify 
noncompliance in this area should be furnished to the Department for 
review, thereby giving it the opportunity to evaluate the significance 
of the noncompliance, the function that an authorizing plan fiduciary 
would carry out for its plan. Accordingly, the Department is adopting 
the filing requirement as proposed without substantive change. We note, 
however, that language has been added to paragraph (b)(6)(ii)(B) to 
provide a means for electronic submission to the Department.
    A commenter suggested that plan participants should be informed of 
audit results. The Department does not believe it is appropriate as 
part of the final rule, without further notice and comment, to adopt 
such a requirement, which could involve a significant number of audit 
reports being furnished to plan participants. The Department believes 
that the furnishing of the audit report to the authorizing plan 
fiduciary, who must act prudently and solely in

[[Page 66146]]

the interest of plan participants, is sufficient to protect the 
interests of participants and beneficiaries. The fiduciary should 
examine the audit report furnished and, if noncompliance is identified, 
take appropriate steps. Because of the importance of the audit report, 
the Department has included a new provision, at paragraph (b)(8), which 
requires that the fiduciary adviser provide the authorizing fiduciary 
with written notification that the fiduciary adviser intends to comply 
with the statutory exemption and the regulations and that the fiduciary 
adviser's investment advice arrangement will be audited annually by an 
independent auditor for compliance, and that the auditor will furnish 
the authorizing fiduciary with a copy of that auditor's findings within 
60 days of its completion of the audit. This disclosure serves to place 
the authorizing fiduciary on notice that an audit will be conducted 
annually and that a report of that audit will be furnished. The 
Department would expect the authorizing fiduciary to take reasonable 
steps if the report is not furnished in a timely manner, such as making 
inquiries with the auditor, the fiduciary adviser, or both.
    With regard to the person who conducts the audit, one commenter 
recommended that the auditor should be treated as a fiduciary. Others 
asked if the audit must be conducted by a certified public accountant. 
Another requested that the final rule provide additional guidance with 
respect to necessary credentials to conduct an audit, such as minimum 
standards of experience, education, or professional certification or 
licensing. As with the requirements for an ``eligible investment 
expert,'' the Department does not believe there is necessarily one set 
of credentials, such as being a certified public accountant, auditor, 
or lawyer, that qualifies an individual to conduct the required audits. 
In addition to any licenses, certifications or other evidence of 
professional or technical training, a fiduciary adviser will want to 
consider the relevance of that training to the required audit, as well 
as the individual's or organization's experience and proficiency in 
conducting similar types of audits. In this regard, because the 
selection of an auditor is a fiduciary act (see paragraph (b)(6)(v)), a 
fiduciary adviser's selection must be carried out in a manner 
consistent with the prudence requirements of section 404(a)(1), taking 
into account the nature and scope of the audit and the expertise and 
experience necessary to conduct such an audit.
    Paragraph (b)(6)(iii) describes the circumstances under which an 
auditor will be considered independent for purposes of paragraph 
(b)(6). As proposed, this paragraph required that the auditor not have 
a material affiliation or material contractual relationship with the 
person offering the investment advice arrangement to the plan or any 
designated investment options under the plan. The terms ``material 
affiliation'' and ``material contractual relationship'' are defined in 
paragraphs (c)(6) and (7) of the final rule, respectively. Some 
commenters asked whether an auditor's provision of certain services 
(e.g., computer model certification required under the regulation) 
would disqualify the auditor. The Department believes that the 10% 
gross revenue test in the definition of the term ``material contractual 
relationship,'' which contemplates that there may be instances in which 
an auditor might be performing other services for a fiduciary adviser 
or affiliates, generally is sufficient to minimize any influence on the 
part of the fiduciary adviser by virtue of service relationships that 
would serve to compromise the independence of the auditor. However, if 
an auditor participates in the development of a fiduciary adviser's 
investment advice arrangement, then the auditor would appear to be in a 
position of auditing its own work for compliance with the exemption. 
The Department does not believe such an auditor is sufficiently 
independent for purposes of the regulation. Similarly, in the case of 
an investment advice arrangement that uses computer modeling, because 
an auditor would be in the position of determining whether the person 
who certifies a computer model, as required by paragraph (b)(4)(ii), 
has any relationship that would preclude it from acting as an 
``eligible investment expert'' as defined in paragraph (b)(4)(iii), the 
Department does not believe an auditor may also act as the computer 
model certifier. Paragraph (b)(6)(iii) has been modified accordingly.
    With regard to the scope of the audit, paragraph (b)(6)(iv) of the 
final rule provides that the auditor shall review sufficient relevant 
information to formulate an opinion as to whether the investment advice 
arrangements, and the advice provided pursuant thereto, offered by the 
fiduciary adviser during the audit period were in compliance with the 
regulation. Paragraph (b)(6)(iv) further provides that it is not 
intended to preclude an auditor from using information obtained by 
sampling, as reasonably determined appropriate by the auditor, 
investment advice arrangements, and the advice pursuant thereto, during 
the audit period. The final rule, like the proposal, does not require 
an audit of every investment advice arrangement at the plan or 
fiduciary adviser-level or of all the advice that is provided under the 
exemption. In general, the final rule appropriately leaves to the 
auditor the determination of how to conduct its review, including the 
extent to which it can rely on representative samples for determining 
compliance with the exemption.
    A number of comments requested clarification with respect to the 
conduct and scope of the audit. Several commenters asked whether each 
plan, IRA, and participant and beneficiary must be included. A 
commenter also asked whether the audit could be performed by only 
reviewing documentation of compliance with the fiduciary adviser's 
internal compliance policies and procedures. As discussed above, the 
audit provisions of the final rule require that the auditor review 
sufficient information to formulate an opinion as to whether the 
investment advice arrangements, and the advice provided pursuant 
thereto, are in compliance with the final rule. Accordingly, the 
methods used to conduct the audit are to be determined by the auditor. 
The Department does note, however, that nothing in these provisions 
precludes the auditor from using sampling, as determined reasonably 
appropriate by the auditor, of investment advice arrangements and 
investment advice. The Department expects that the sample used by an 
auditor will depend on the facts and circumstances encountered. For 
example, an auditor may initially believe that the most appropriate way 
to make the required findings is to construct a sample that represents 
a subset of all advice arrangements of a fiduciary adviser, and advice 
provided. In testing the sample, however, the auditor should look for, 
and may find, patterns of compliance failures that indicate that 
certain areas are more prone to compliance failures than others. If 
such patterns appear, the auditor may need to expand the sample to more 
accurately assess the extent and causes of noncompliance. While the 
Department believes that internal policies and procedures, if 
reasonably designed and followed, can be helpful to a fiduciary adviser 
to ensure compliance with the requirements of the regulation, the 
Department does not believe it would be appropriate for an

[[Page 66147]]

auditor to limit, in any way, the conduct of its audit to an 
examination of compliance with those policies and procedures.
    Another commenter appeared to suggest development of audit 
alternatives for fiduciary advisers that are regulated and subject to 
periodic examination by other agencies. This commenter, however, did 
not include sufficient information for further consideration. The 
Department notes, moreover, that section 408(g)(6) of ERISA requires an 
annual audit for compliance with the exemption.
    Paragraph (b)(6)(v) of the final rule, like the proposal, provides 
that for purposes of the statutory exemption, the selection of an 
auditor is a fiduciary act governed by section 404(a)(1) of ERISA. In 
response to a question from a commenter, the Department notes that, in 
its view, the performance of an audit under the final rule would not, 
by itself, cause an auditor to be a fiduciary under ERISA.
f. Disclosure to Participants
    As in the proposal, paragraph (b)(7) of the final rule sets forth a 
number of requirements involving disclosures to participants and 
beneficiaries that are based on, and generally track, the disclosure 
requirements contained in section 408(g)(6).
    Paragraph (b)(7)(i) generally requires that the fiduciary adviser 
provide to participants and beneficiaries without charge, prior to the 
initial provision of investment advice with regard to any security or 
other property offered as an investment option, a written notification 
describing: the role of any party that has a material affiliation or 
material contractual relationship with the fiduciary adviser in the 
development of the investment advice program and in the selection of 
investment options available under the plan; the past performance and 
historical rates of return of the designated investment options 
available under the plan, to the extent that such information is not 
otherwise provided; all fees or other compensation relating to the 
advice that the fiduciary adviser or any affiliate thereof is to 
receive (including compensation provided by any third party) in 
connection with the provision of the advice, the sale, acquisition, or 
holding of the security or other property pursuant to such advice, or 
any rollover or other distribution of plan assets or the investment of 
distributed assets in any security or other property pursuant to such 
advice; and any material affiliation or material contractual 
relationship of the fiduciary adviser or affiliates thereof in the 
security or other property.
    The notification to participants and beneficiaries also is required 
to explain: the manner, and under what circumstances, any participant 
or beneficiary information provided under the arrangement will be used 
or disclosed; the types of services provided by the fiduciary adviser 
in connection with the provision of investment advice by the fiduciary 
adviser; that the adviser is acting as a fiduciary of the plan in 
connection with the provision of the advice; and that a recipient of 
the advice may separately arrange for the provision of advice by 
another adviser that could have no material affiliation with and 
receive no fees or other compensation in connection with the security 
or other property. Because the computer model exception for qualifying 
employer securities has been removed from paragraph (b)(4)(i)(G)(2), 
explained above, the language in paragraph (b)(7)(i)(F) of the proposal 
that required the notification to include any limitations with respect 
to a computer model's ability to take into account qualifying employer 
securities also has been removed.
    Paragraph (b)(7)(ii)(A) of the final rule requires that the 
notification furnished to participants and beneficiaries must be 
written in a clear and conspicuous manner and in a manner calculated to 
be understood by the average plan participant and must be sufficiently 
accurate and comprehensive to reasonably apprise such participants and 
beneficiaries of the information required to be provided in the 
notification.
    Paragraph (b)(7)(ii)(B) of the final rule references the 
availability of a model disclosure form in the appendix to the final 
rule. As with the proposal, the model disclosure form may be used for 
purposes of satisfying the requirements set forth in paragraph 
(b)(7)(i)(C), as well as the requirements of paragraph (b)(7)(ii)(A) of 
the final rule. The final rule, like the proposal, makes clear, 
however, that the use of the model disclosure form is not mandatory.
    The Department received a number of comments related to the 
contents and timing of the disclosures required under paragraph (b)(7). 
One commenter suggested that the final rule require the disclosure be 
provided at least 14 days before the initial provision of investment 
advice, and further require that each advice session be accompanied by 
a summary disclosure that includes a subset of the information required 
under the proposal (e.g., fees or other compensation that may be 
received, and that the adviser is acting as a fiduciary). Another 
commenter recommended disclosure of each investment option's 
profitability to the fiduciary advisers or their affiliates, suggesting 
that this would enable participants to better understand the advisers' 
financial interests. In contrast, another commenter stated that 
requiring disclosure of ``all'' fees or other compensation could 
overwhelm participants and beneficiaries with information, and that the 
Department should instead adopt a materiality standard for such 
disclosure. Another commenter suggested removal of the past return 
information disclosure, arguing that participants may focus on 
investments with the highest returns without considering or 
understanding the associated risks. Another commenter suggested that 
the provision should require disclosure of historical rates of return 
at the asset class level, rather than the individual investment level. 
Others also indicated the practical difficulties in providing the 
proposal's disclosures for plans with numerous investment options, and 
requested that the Department consider more limited disclosures.
    After consideration of the comments received, the Department 
believes that the statutory disclosure framework, reflected in both the 
proposal and final rule, strikes the appropriate balance in terms of 
ensuring participants and beneficiaries have the information to assess 
the potential for conflicts of interest and compensation of the 
fiduciary adviser.
    Some commenters requested that the Department clarify that the 
required disclosures may be combined with other disclosures the adviser 
is required to furnish under securities or other laws. It is the view 
of the Department that nothing in the final rule forecloses the use of 
other materials for making the disclosures required by the final rule, 
so long as the understandability and clarity of the disclosures is not 
compromised by virtue of their inclusion in such other materials and 
the requirements of paragraph (b)(7)(ii)(A) are satisfied.
    Like the proposal, paragraph (b)(7)(iii) of the final rule provides 
that the required notifications may, in accordance with 29 CFR 
2520.104b-1, be furnished in either written or electronic form. Some 
commenters requested more flexibility for electronic disclosures than 
is permitted under 29 CFR 2520.104b-1. Others, however, suggested more 
limited use of electronic disclosures. Because the Department currently 
is reviewing issues related to use of electronic media to furnish 
information to participants and beneficiaries, this provision has not

[[Page 66148]]

been changed from the proposal in response to these comments.\34\
---------------------------------------------------------------------------

    \34\ See 76 FR 19285 (Apr. 7, 2011).
---------------------------------------------------------------------------

    Paragraph (b)(7)(iv) of the final rule sets forth miscellaneous 
recordkeeping and furnishing responsibilities of the fiduciary adviser. 
Specifically, this paragraph requires that, at all times during the 
provision of advisory services to the participant or beneficiary 
pursuant to the arrangement, the fiduciary adviser must: Maintain the 
information required to be disclosed to participants and beneficiaries 
in accurate form; provide, without charge, accurate, up-to-date 
disclosures to the recipient of the advice no less frequently than 
annually; provide, without charge, accurate information to the 
recipient of the advice upon request of the recipient; and provide, 
without charge, to the recipient of the advice any material change to 
the required information at a time reasonably contemporaneous to the 
change in information. These provisions are being adopted in the final 
rule without substantive change from the proposal.
g. Disclosure to Authorizing Fiduciary
    As discussed in more detail above in connection with the audit 
provision, paragraph (b)(8) of the final rule is a new provision that 
requires disclosure of certain information to the fiduciary that 
authorizes an investment advice arrangement. Under this provision, the 
fiduciary adviser must provide the authorizing fiduciary with a written 
notification that the fiduciary adviser intends to comply with the 
conditions of the statutory exemption for investment advice under 
section 408(b)(14) and (g) and this regulation. The notification also 
must inform the authorizing fiduciary that the fiduciary adviser's 
arrangement will be audited annually by an independent auditor for 
compliance with the requirements of the statutory exemption and this 
regulation, and that the auditor will furnish the authorizing fiduciary 
a copy of that auditor's findings within 60 days of its completion of 
the audit.
    Because paragraph (b)(5) of the rule already requires authorization 
by an independent fiduciary, the Department does not believe the 
notification requirement in paragraph (b)(8) will impose a significant 
additional burden on fiduciary advisers.
h. Other Conditions
    Paragraph (b)(9) of the final rule, like paragraph (b)(8) of the 
proposal, sets forth the additional requirements contained in section 
408(g)(7) of ERISA that apply to the provision of investment advice 
under the statutory exemption. These requirements are as follows: The 
fiduciary adviser must provide appropriate disclosure, in connection 
with the sale, acquisition, or holding of the security or other 
property, in accordance with all applicable securities laws (paragraph 
(b)(9)(i)); any sale, acquisition, or holding of a security or other 
property occurs solely at the direction of the recipient of the advice 
(paragraph (b)(9)(ii)); the compensation received by the fiduciary 
adviser and affiliates thereof in connection with the sale, 
acquisition, or holding of the security or other property is reasonable 
(paragraph (b)(9)(iii)); and the terms of the sale, acquisition, or 
holding of the security or other property are at least as favorable to 
the plan as an arm's length transaction would be (paragraph 
(b)(9)(iv)). This provision is unchanged from the corresponding 
provision of the proposal.
    A commenter described a situation where an IRA owner or participant 
gives standing instructions to rebalance his or her portfolio on a pre-
determined basis (which the commenter referred to as ``ministerial 
rebalancing'') and another situation where changes to a portfolio are 
permitted when a model changes and the client receives advance notice 
(which the commenter referred to as ``re-optimization'' or ``re-
allocation''), and asked whether these were consistent with the 
requirement in paragraph (b)(9)(ii) that any sale, acquisition or 
holding of a security or other property occurs solely at the direction 
of the recipient of the advice.
    In general, it is the view of the Department that a pre-
authorization for a fiduciary adviser to maintain a particular asset 
allocation structure for a participant's portfolio by periodic 
rebalancing of investments would not violate the ``solely at the 
direction'' requirement in paragraph (b)(9)(ii), provided that such 
maintenance does not involve the exercise of discretion on the part of 
the fiduciary adviser, that is, when a participant is informed of and 
approves, at the time of the authorization, the specific circumstances 
under which a rebalancing of his or her portfolio will take place and 
the particular investments that will be utilized for such rebalancing. 
If, on the other hand, the particular investments that might be 
utilized for purposes of rebalancing a participant's account are not 
known and the fiduciary adviser is given the discretion to select the 
required investments, it is the view of the Department that, in order 
to avoid violating paragraph (b)(9)(ii), the participant must be 
afforded advance notice of the fiduciary adviser's intended investments 
and a reasonable opportunity, generally at least 30 days, to object to 
the investments. With respect to a different asset allocation 
structure, the Department believes that the participant or beneficiary 
must make an affirmative direction for its implementation.
i. Definitions
    Paragraph (c) sets forth definitions of terms used in the final 
rule.
    Paragraph (c)(1) defines the term ``designated investment option.'' 
The term ``designated investment option'' means any investment option 
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 option'' 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. The Department has added a cross-reference to clarify that the 
term ``designated investment option'' has the same meaning as 
``designated investment alternative'' as defined in 29 CFR 2550.404a-5 
(relating to certain disclosures to participants).
    Paragraph (c)(2) defines the term ``fiduciary adviser,'' as it 
appears in section 408(g)(11)(A) of ERISA. A commenter suggested that 
paragraph (c)(2)(ii), which treats a person who develops the computer 
model or markets the investment advice program or computer model 
utilized in satisfaction of paragraph (b)(4) as a fiduciary adviser, is 
overly broad, and could result in higher costs overall and fewer 
parties willing to provide these functions. In response, the Department 
notes that such fiduciary status is conferred by statute at section 
408(g)(11)(A). However, the Department further notes that Sec. 
2550.408g-2, discussed in more detail below, permits one such fiduciary 
to elect to be treated as a fiduciary with respect to the plan.
    Paragraph (c)(3) defines the term ``registered representative'' as 
set forth in ERISA section 408(g)(11)(C), which states that a 
registered representative of another entity means a person described in 
section 3(a)(18) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(18)) (substituting the entity for the broker or dealer referred 
to in such section) or a person described in section 202(a)(17) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(17)) (substituting 
the entity for the

[[Page 66149]]

investment adviser referred to in such section).
    Paragraph (c)(4), consistent with section 601(b)(3)(A)(i) of the 
PPA, generally defines the term ``Individual Retirement Account'' or 
``IRA'' for purposes of the final rule to mean plans described in 
paragraphs (B) through (F) of section 4975(e)(1) of the Code, as well 
as a trust, plan, account, or annuity which, at any time, has been 
determined by the Secretary of the Treasury to be described in such 
paragraphs. However, as explained above, paragraphs (c)(4)(vii) and 
(c)(4)(viii) have been added to make clear that for purposes of the 
regulation, the term ``IRA'' includes a ``simplified employee pension'' 
described in section 408(k) of the Code, and a ``simple retirement 
account'' described in section 408(p) of the Code.
    Like the proposal, paragraph (c)(5) of the final rule defines the 
term ``affiliate.'' Under this provision, an ``affiliate'' of another 
person means: Any person directly or indirectly owning, controlling, or 
holding with power to vote, 5 percent or more of the outstanding voting 
securities of such other person (paragraph (c)(5)(i)); any person 5 
percent or more of whose outstanding voting securities are directly or 
indirectly owned, controlled, or held with power to vote, by such other 
person (paragraph (c)(5)(ii)); any person directly or indirectly 
controlling, controlled by, or under common control with, such other 
person (paragraph (c)(5)(iii)); and any officer, director, partner, 
copartner, or employee of such other person (paragraph (c)(5)(iv)). 
Consistent with ERISA section 408(g)(11)(B), this definition is based 
on the definition of an ``affiliated person'' of an entity as contained 
in section 2(a)(3) of the Investment Company Act of 1940 (ICA) (15 
U.S.C. sec. 80a-2(a)(3)), except that it does not reflect clauses (E) 
and (F) thereof. The Department has determined that including 
provisions similar to clauses (E) and (F) is unnecessary, because these 
clauses appear to focus on persons who exercise control over the 
management of an investment company.\35\ These persons would be treated 
as affiliates under paragraph (c)(5)(iii) of the final rule because 
they would be persons directly or indirectly controlling, controlled 
by, or under common control with, such other person.
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    \35\ ICA section 2(a)(3)(E) and (F) include in the definition of 
an affiliated person: If the other person is an investment company, 
any investment adviser thereof or any member of an advisory board 
thereof; and if such other person is an unincorporated investment 
company not having a board of directors, the depositor thereof. 15 
U.S.C. 80a-2(a)(3)(E)-(F).
---------------------------------------------------------------------------

    A number of commenters presented factual questions on the 
definition of ``affiliate'' in paragraph (c)(5). These have not been 
addressed here because of their inherently factual nature.
    One comment requested that the Department instead adopt the 
definition of ``affiliate'' that applies under 29 CFR 2510.3-21. For 
purposes of that regulation, an ``affiliate'' of a person includes: Any 
person directly or indirectly, through one or more intermediaries, 
controlling, controlled by, or under common control with such person; 
any officer, director, partner, employee or relative (as defined in 
ERISA section 3(15)) of such person; and any corporation or partnership 
of which such person is an officer, director or partner.\36\ Because 
section 408(g)(11)(B) of ERISA defines the term ``affiliate'' for 
purposes of the statutory exemption specifically by reference to the 
definition in section 2(a)(3) of the ICA, the Department has not 
adopted this comment.
---------------------------------------------------------------------------

    \36\ 29 CFR 2510.3-21(e)(1).
---------------------------------------------------------------------------

    In a variety of places, the final rule refers to persons with 
``material affiliations'' or ``material contractual relationships,'' 
which are defined in paragraphs (c)(6) and (c)(7), respectively. 
Paragraph (c)(6)(i) of the final rule describes a person with a 
``material affiliation'' with another person as: Any affiliate of the 
other person; any person directly or indirectly owning, controlling, or 
holding, 5 percent or more of the interests of such other person; and 
any person 5 percent or more of whose interests are directly or 
indirectly owned, controlled, or held, by such other person. Paragraph 
(c)(6)(ii) provides that, for these purposes, an ``interest'' means 
with respect to an entity: The combined voting power of all classes of 
stock entitled to vote or the total value of the shares of all classes 
of stock of the entity if the entity is a corporation; the capital 
interest or the profits interest of the entity if the entity is a 
partnership; or the beneficial interest of the entity if the entity is 
a trust or unincorporated enterprise.
    Paragraph (c)(7) of the final rule provides that persons shall be 
treated as having a ``material contractual relationship'' if payments 
made by one person to the other person pursuant to written contracts or 
agreements between the persons exceed 10 percent of the gross revenue, 
on an annual basis, of such other person. The Department notes that 
this 10% gross revenue test is not limited to amounts paid pursuant to 
contracts or arrangements that have been reduced to writing.\37\
---------------------------------------------------------------------------

    \37\ See 74 FR 3822 (Jan. 21, 2009) (explaining corresponding 
language in the 2009 final rule).
---------------------------------------------------------------------------

    Lastly, paragraph (c)(8) defines ``control'' to mean the power to 
exercise a controlling influence over the management or policies of a 
person other than an individual.
j. Retention of Records
    As with the proposal, paragraph (d) of the final rule sets forth 
the record retention requirements applicable to an eligible investment 
advice arrangement. Consistent with section 408(g)(9) of ERISA, 
paragraph (d) provides that the fiduciary adviser must maintain, for a 
period of not less than 6 years after the provision of investment 
advice under the section any records necessary for determining whether 
the applicable requirements of the final rule have been met, noting 
that a transaction prohibited under section 406 of ERISA shall not be 
considered to have occurred solely because the records are lost or 
destroyed prior to the end of the 6-year period due to circumstances 
beyond the control of the fiduciary adviser.
k. Noncompliance
    Paragraph (e) of the final rule, like the proposal, specifically 
addresses the consequences of noncompliance with the regulation. This 
provision makes clear that the prohibited transaction relief described 
in paragraph (b) of the regulation will not apply to any transaction 
with respect to which the applicable conditions of the final rule have 
not been satisfied. Further, in the case of a pattern or practice of 
noncompliance with any of the applicable conditions of the final rule, 
the relief will not apply to any transaction in connection with the 
provision of investment advice provided by the fiduciary adviser during 
the period over which the pattern or practice extended. With respect to 
what would constitute a ``pattern or practice,'' the Department 
believes that it is important to identify both individual violations 
and patterns of such violations. Isolated, unrelated, or accidental 
occurrences would not themselves constitute a pattern or practice. 
However, intentional, regular, deliberate practices involving more than 
isolated events or individuals, or institutionalized practices will 
almost always constitute a pattern or practice. In determining whether 
a pattern or practice exists, the Department will consider whether the 
noncompliance appears to be part of either written or unwritten 
policies or established

[[Page 66150]]

practices, whether there is evidence of similar noncompliance with 
respect to more than one plan or arrangement, and whether the 
noncompliance is within a fiduciary adviser's control.
    This provision is being adopted without change from the proposal. 
The Department believes that one of the most significant deterrents to 
noncompliance with the conditions of the statutory exemption is the 
potentially significant excise taxes applicable to transactions that 
fail to satisfy its conditions, and that extending the potential for 
excise taxes to encompass a period over which a pattern or practice of 
noncompliance extends creates additional incentives on the part of 
fiduciary advisers that take advantage of the exemptive relief to be 
vigilant in assuring compliance.
l. Effective Date
    The Department proposed that the regulation would be effective 60 
days after the date of publication of the final rule. One commenter 
indicated that the 60 day effective date would not constitute 
sufficient time to comply with the final rule, and suggested the 
effective date should be extended to 180 days after publication of the 
final rule.
    Given the importance of investment advice to participants and 
beneficiaries generally and given that the exemption implemented in the 
final rule will expand the opportunity for participant and 
beneficiaries to obtain affordable, quality investment advice, the 
Department believes that the final rule should be effective on the 
earliest possible date, and has not made the suggested change. 
Accordingly, the final rule contained in this document will be 
effective 60 days after the date of publication in the Federal Register 
and will apply to transactions described in paragraphs (b) of the final 
rule occurring on or after that date.
m. Miscellaneous
    A number of commenters made suggestions beyond the scope of this 
regulation that they believed would additionally benefit participants 
and beneficiaries. These suggestions were not adopted by the 
Department.

C. Overview of Final Sec.  2550.408g-2 and Public Comments

    Section 408(g)(11)(A) of ERISA provides that, with respect to an 
arrangement that relies on use of a computer model to qualify as an 
``eligible investment advice arrangement'' under the statutory 
exemption, a person who develops the computer model, or markets the 
investment advice program or computer model, shall be treated as a 
fiduciary of a plan by reason of the provision of investment advice 
referred to in ERISA section 3(21)(A)(ii) to the plan participant or 
beneficiary. Such a person also shall be treated as a ``fiduciary 
adviser'' for purposes of ERISA sections 408(b)(14) and 408(g). The 
Secretary of Labor, however, may prescribe rules under which only one 
fiduciary adviser may elect to be treated as a fiduciary with respect 
to the plan. Section 4975(f)(8)(J)(i) of the Code contains a parallel 
provision to ERISA section 408(g)(11)(A) that applies for purposes of 
Code sections 4975(d)(17) and 4975(f)(8).
    In conjunction with the proposed regulation implementing the 
statutory exemption for investment advice, the Department also proposed 
a rule, Sec. 2550.408g-2, governing the requirements for electing to be 
treated as a fiduciary and fiduciary adviser by reason of developing or 
marketing a computer model or an investment advice program used in an 
eligible investment advice arrangement. Section 2550.408g-2 sets forth 
requirements that must be satisfied in order for one such fiduciary 
adviser to elect to be treated as a fiduciary with respect to a plan 
under such an eligible investment advice arrangement. See paragraph (a) 
of Sec. 2550.408g-2.
    Paragraph (b)(1) of Sec. 2550.408g-2 provides that, if an election 
meets the requirements of paragraph (b)(2), then the person identified 
in the election shall be the sole fiduciary adviser treated as a 
fiduciary by reason of developing or marketing a computer model, or 
marketing an investment advice program, used in an eligible investment 
advice arrangement. Paragraph (b)(2) requires that the election be in 
writing and that the writing identify the arrangement, and person 
offering the arrangement, with respect to which the election is to be 
effective. The writing also must identify the electing person. Under 
paragraph (b)(2)(ii), the electing person must: fall within any of 
paragraphs (c)(2)(i)(A) through (E) of Sec. 2550.408g-1; develop the 
computer model or market the computer model or investment advice 
program; and acknowledge that it elects to be treated as the only 
fiduciary, and fiduciary adviser, by reason of developing such computer 
model or marketing such computer model or investment advice program. 
Paragraph (b)(2) of Sec. 2550.408g-2 requires that the election be 
signed by the person acknowledging that it elects to be treated as the 
only fiduciary and fiduciary adviser; that a copy of the election be 
furnished to the person who authorized use of the arrangement; and that 
the writing be retained in accordance with the record retention 
requirements of Sec. 2550.408g-1(d).
    The Department notes that this election applies only for purposes 
of limiting fiduciary status that results from developing or marketing 
a computer model or investment advice program used under the statutory 
exemption. It would not, for example, permit a fiduciary adviser who 
actually renders investment advice to participants or beneficiaries to 
avoid fiduciary status.
    The Department received no substantive comments on this regulation 
and, therefore, is adopting the regulation substantially as proposed. 
This regulation, like Sec. 2550.408g-1, will be effective 60 days after 
the date of publication of the final rule in the Federal Register.

D. Regulatory Impact Analysis

Regulatory Procedures

Executive Order 12866 ``Regulatory Planning and Review'' and Executive 
Order 13563 ``Improving Regulation and Regulatory Review''

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. Executive Order 12866 and 13563 require a comprehensive 
regulatory impact analysis be performed for any economically 
significant regulatory action, defined as an action that would result 
in an annual effect of $100 million or more on the national economy or 
which would have other substantial impacts. In accordance with OMB 
Circular A-4, the Department has examined the economic and policy 
implications of this final rule and has concluded that the action's 
benefits justify its costs.

Summary of Impacts

    The provisions of this final regulation reflect the Department's 
efforts to ensure that the advice provided pursuant to them will be 
affordable and of high quality. The results of this final regulation 
will depend on its impacts on the availability, cost, use, and quality 
of participant investment advice. The

[[Page 66151]]

Department anticipates that, as a result of these actions, quality, 
affordable expert investment advice will proliferate, producing 
significant net gains for participant-directed defined contribution 
(DC) plan participants and beneficiaries and beneficiaries of 
individual retirement accounts (IRAs) (collectively hereafter, 
``participants''). The improved investment results will reflect 
reductions in investment errors such as poor trading strategies and 
inadequate diversification.
    The Department estimates that this final rule will yield benefits 
of between $7 billion and $18 billion annually, at a cost of between $2 
billion and $5 billion, thereby producing a net financial benefit of 
between $5 billion and $13 billion. The estimated costs of the final 
regulation include costs of approximately $745 million that are 
associated with the Paperwork Reduction Act information collection 
requests contained in the final rule. Table 1 below presents these 
average annual real benefits and costs given a ten year horizon with 
discount rates of 3 percent and 7 percent.

                                                              Table 1--Accounting Statement
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Estimates                                    Units
                                                                    ------------------------------------------------------------------------------------
                              Category                                                      Low          High                    Discount      Period
                                                                      Primary estimate    estimate     estimate   Year dollar      rate        covered
--------------------------------------------------------------------------------------------------------------------------------------------------------
Benefits:
    Annualized.....................................................           13,200.0      7,000.0     18,300.0         2009           7%     2011-2020
    Monetized ($millions/year).....................................           13,200.0      7,000.0     18,300.0         2009           3%     2011-2020
    Annualized.....................................................                0.0          0.0          0.0  ...........           7%
    Quantified.....................................................                0.0          0.0          0.0  ...........           3%
                                                                    ------------------------------------------------------------------------------------
    Qualitative....................................................  In addition to the quantified benefits, the Department anticipates that the
                                                                     regulation will improve aggregate investment results, reflecting reduced
                                                                     participants' investment related expenses, and will improve the welfare of
                                                                     participants by better aligning participant investments and their risk tolerances.
    Notes..........................................................  The regulation is anticipated to extend quality, expert investment advice to a
                                                                     significantly greater number of participants. This will improve aggregate
                                                                     investment results, reflecting reductions in investment errors (including poor
                                                                     trading strategies and inadequate diversification).
                                                                    ------------------------------------------------------------------------------------
Costs:
    Annualized.....................................................            3,700.0      1,900.0      5,100.0         2009           7%     2011-2020
    Monetized ($millions/year).....................................            3,700.0      1,900.0      5,100.0         2009           3%     2011-2020
    Annualized.....................................................                0.0          0.0          0.0  ...........           7%
    Quantified.....................................................                0.0          0.0          0.0  ...........           3%
    Qualitative
                                                                    ------------------------------------------------------------------------------------
    Notes..........................................................  The costs of this regulation are due to the direct cost of providing (or paying
                                                                     for) investment advice, including approximately $745 million that are associated
                                                                     with the Paperwork Reduction Act information collection requests contained in this
                                                                     final rule.
                                                                    ------------------------------------------------------------------------------------
Transfers..........................................................    Not applicable.
                                                                    ------------------------------------------------------------------------------------
Effects:
    State, Local, and/or Tribal Government.........................    Not applicable.
    Small Business.................................................    Not applicable.
    Wages..........................................................    Not applicable.
                                                                    ------------------------------------------------------------------------------------
    Growth.........................................................  The regulation may also have macroeconomic consequences, which are likely to be
                                                                     small but positive.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Need for Regulatory Action

    With the growth of participant-directed retirement savings 
accounts, the retirement income security of America's workers 
increasingly depends on their investment decisions. Unfortunately, 
there is evidence that many participants of these retirement accounts 
often make costly investment errors due to flawed information or 
reasoning. As more fully discussed in the Benefits section below, these 
participants may make financial mistakes which result in lower asset 
accumulation, and thus final retirement account balances, for these 
individuals and/or result in less than optimal levels of compensated 
risk. Financial losses (including foregone earnings) from such mistakes 
likely amounted to more than $114 billion in 2010.\38\ These losses 
compound and grow larger as workers progress toward and into 
retirement.
---------------------------------------------------------------------------

    \38\ See 74 FR No 164 (Aug. 22, 2008), 74 FR No 12 (Jan. 21, 
2009), and 75 FR No 40 (Mar. 2, 2010) for background on the analysis 
contained in the Department's Regulatory Impact Analysis.
---------------------------------------------------------------------------

    Such mistakes and consequent losses historically can be attributed 
at least in part to provisions of the Employee Retirement Income 
Security Act of 1974 that effectively preclude a variety of 
arrangements whereby financial professionals might otherwise provide 
retirement plan participants with expert investment advice. 
Specifically, these ``prohibited transaction'' provisions of section 
406 of ERISA and section 4975 of the Internal Revenue Code prohibit 
fiduciaries from dealing with DC plan or IRA assets in ways that 
advance their own interests. The prohibited transaction provisions 
prohibit a fiduciary from dealing with the assets of a plan in his own 
interest or for his own account and from receiving any consideration 
for his own personal account from any party dealing with the plan in 
connection with a transaction

[[Page 66152]]

involving the assets of the plan.\39\ These statutory provisions have 
been interpreted as prohibiting a fiduciary from using the authority, 
control or responsibility that makes it a fiduciary to cause itself, or 
a party in which it has an interest that may affect its best judgment 
as a fiduciary, to receive additional fees.\40\ As a result, in the 
absence of a statutory or administrative exemption, fiduciaries are 
prohibited from rendering investment advice to plan participants 
regarding investments that result in the payment of additional advisory 
and other fees to the fiduciaries or their affiliates. Section 4975 of 
the Code applies similarly to the rendering of investment advice to an 
individual retirement account (IRA) beneficiary.
---------------------------------------------------------------------------

    \39\ ERISA section 406(b)(1) and (3) and Code section 
4975(c)(1)(E) and (F).
    \40\ 29 CFR 2550.408b-2(e).
---------------------------------------------------------------------------

    Over the past several years, the Department has issued various 
forms of guidance concerning when a person would be a fiduciary by 
reason of rendering investment advice, and when such investment advice 
might result in prohibited transactions.\41\ Responding to the need to 
afford participants and beneficiaries greater access to professional 
investment advice, Congress amended the prohibited transaction 
provisions of ERISA and the Code, as part of the Pension Protection Act 
of 2006 (PPA),\42\ to permit a broader array of investment advice 
providers to offer their services to participants responsible for 
investment of assets in their individual accounts and, accordingly, for 
the adequacy of their retirement savings.
---------------------------------------------------------------------------

    \41\ See Interpretative Bulletin relating to participant 
investment education, 29 CFR 2509.96-1 (Interpretive Bulletin 96-1); 
Advisory Opinion (AO) 2005-10A (May 11, 2005); AO 2001-09A (December 
14, 2001); and AO 97-15A (May 22, 1997). In October 2010, the 
Department proposed amendments to the regulation, at 29 CFR 2510.3-
21(c) that define when the provision of advice causes a person to be 
a fiduciary.
    \42\ Public Law 109-280, 120 Stat. 780 (Aug. 17, 2006).
---------------------------------------------------------------------------

    Specifically, section 601 of the PPA added a statutory prohibited 
transaction exemption under sections 408(b)(14) and 408(g) of ERISA, 
with parallel provisions at Code sections 4975(d)(17) and 
4975(f)(8).\43\ Section 408(b)(14) sets forth the investment advice-
related transactions that will be exempt from the prohibitions of ERISA 
section 406 if the requirements of section 408(g) are met.\44\ These 
requirements are met only if advice is provided by a fiduciary adviser 
under an ``eligible investment advice arrangement.'' Section 408(g) 
provides for two general types of eligible arrangements: one based on 
compliance with a ``fee-leveling'' requirement (imposing limitation on 
fees and compensation of the fiduciary adviser); the other, based on 
compliance with a ``computer model'' requirement (requiring use of a 
certified computer model). Both types of arrangements also must meet 
several other requirements.
---------------------------------------------------------------------------

    \43\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, Oct. 
17, 1978), 5 U.S.C. App. 1, 92 Stat. 3790, the authority of the 
Secretary of the Treasury to issue rulings under section 4975 of the 
Code has been transferred, with certain exceptions not here 
relevant, to the Secretary of Labor. Therefore, the references in 
this notice to specific sections of ERISA should be taken as 
referring also to the corresponding sections of the Code.
    \44\ The transactions described in section 408(b)(14) are: the 
provision of investment advice to the participant or beneficiary 
with respect to a security or other property available as an 
investment under the plan; the acquisition, holding or sale of a 
security or other property available as an investment under the plan 
pursuant to the investment advice; and the direct or indirect 
receipt of compensation by a fiduciary adviser or affiliate in 
connection with the provision of investment advice or the 
acquisition, holding or sale of a security or other property 
available as an investment under the plan pursuant to the investment 
advice.
---------------------------------------------------------------------------

    The Department's final investment advice regulation is needed to 
provide additional guidance regarding the conditions set forth in the 
PPA statutory exemption for investment advice. The Department 
calibrated this final regulation to protect participants while 
promoting the affordability of investment advice arrangements operating 
pursuant to the PPA's statutory exemptive relief. The Department 
expects that as a result of this regulatory action, high-quality, 
affordable investment advice will proliferate, producing significant 
net benefits for participants. For a further discussion of these 
benefits, see the Benefits section below.

Benefits

    The Department believes this final regulation will provide 
important benefits to society by extending quality, expert investment 
advice to more participants, leading them to make fewer investment 
mistakes. As noted below, prior to implementation of the PPA, 
investment mistakes cost participants approximately $114 billion in 
2010 for participants, the Department estimates.\45\ The Department 
believes that participants, after having received such advice, may pay 
lower fees and expenses, engage in less excessive or poorly timed 
trading, more adequately diversify their portfolios and thereby assume 
less uncompensated risk, achieve a more optimal level of compensated 
risk, and/or pay less excess taxes. The Department estimates that 
advice available prior to the PPA reduced errors by $15 billion 
annually (i.e., investment errors would have been $124 billion absent 
this advice). Increased use of investment advice under the PPA will 
incrementally reduce such mistakes by between $7 billion and $18 
billion annually (roughly 6 percent to 16 percent of the $114 billion 
in investment errors remaining after pre-PPA advise is given), the 
Department estimates. Thus, the cumulative benefit of the pre-PPA 
investment advice and the new investment advice under the PPA and this 
final rule ranges between $22 billion and $33 billion. The Department's 
estimates of the magnitude of these investment errors and the resulting 
reductions from participants receiving investment advice are summarized 
in Table 2 below. The sections below describe in more detail the 
investment errors participants may make along with the method the 
Department used to calculate the baseline, benefit and impact estimates 
for this final regulation.
---------------------------------------------------------------------------

    \45\ The Department bases these estimates upon the retirement 
assets in DC plans and Individual Retirement Accounts reported by 
the Federal Reserve Board's Flow of Funds Accounts (Mar. 2011), at 
http://www.federalreserve.gov/releases/z1/Current/. This estimate is 
subject to wide uncertainty. See 74 FR No 164 (Aug. 22, 2008), 74 FR 
No 12 (Jan. 21, 2009), and 75 FR No 40 (Mar. 2, 2010) for the 
details of the Department's Regulatory Impact Analysis.

        Table 2--Long Term Investment Errors and Impact of Advice
                           [$Billions, annual]
------------------------------------------------------------------------
                                                 Errors eliminated by
                                   Remaining            advice
         Policy context             errors   ---------------------------
                                               Incremental   Cumulative
------------------------------------------------------------------------
No advice.......................        $124            $0            $0
Existing/Pre-PPA advice only             114            15            15
 (Baseline).....................
New/PPA advice:

[[Page 66153]]

 
    Low Estimate................          96             7            22
    Primary Estimate............         101            13            28
    High Estimates..............         107            18            33
------------------------------------------------------------------------

Investment Mistakes

    The Department believes that many participants make costly 
investment mistakes and therefore could benefit from receiving and 
following good advice. In theory, investors can optimize their 
investment mix over time to match their investment horizon and personal 
taste for risk and return. But in practice many investors do not 
optimize their investments, at least not in accordance with generally 
accepted financial theories.
    Some investors fail to exhibit clear, fixed and rational 
preferences for risk and return. Some base their decisions on flawed 
information or reasoning. For example some investors appear to anchor 
decisions inappropriately to plan features or to mental accounts or 
frames, or to rely excessively on past performance measures or peer 
examples. Some investors suffer from overconfidence, myopia, or simple 
inertia.\46\ Such informational and behavioral problems translate into 
at least five distinct types of investment mistakes.\47\
---------------------------------------------------------------------------

    \46\ See, e.g., Richard H. Thaler & Shlomo Benartzi, The 
Behavioral Economics of Retirement Savings Behavior, AARP Public 
Policy Institute White Paper 2007-02 (Jan. 2007); and Jeffrey R. 
Brown & Scott Weisbenner, Individual Account Investment Options and 
Portfolio Choice: Behavioral Lessons from 401(k) Plans, Social 
Science Research Network Abstract 631886 (Dec. 2004).
    \47\ The Department notes that much of the research documenting 
investment mistakes does not account for whether advice was present 
or not. At least some of the mistakes may have been made despite 
good advice to the contrary; some may have been made pursuant to bad 
advice. There is evidence both that advice sometimes is not 
followed, and that advice is sometimes bad. These issues are 
explored more below.
---------------------------------------------------------------------------

Fees and Expenses

    Two distinct types of inefficiency can result in higher than 
optimal consumer expenditures for a particular type of good. The first 
is prices that are higher than would be efficient. Efficient markets 
require vigorous competition. Sellers with market power can command 
inefficiently high prices, thereby capturing consumer surplus and 
imposing a ``dead weight loss'' of welfare on society. Efficient 
markets also require perfect information and rational, utility 
maximizing consumers. Imperfect information, search costs and 
consumers' behavioral biases likewise can allow some sellers to command 
inefficiently high prices. The Department accordingly has considered 
whether such conditions might exist in the market for investment 
products and services bought by or on behalf of participants. The 
second type of inefficiency is suboptimal consumer choices among 
available products. Even if goods are priced competitively, welfare 
will be lost if consumers make poor purchasing decisions. Imperfect 
information, search costs and behavioral biases can compromise 
purchasing decisions, and the Department has considered whether 
participants' purchases of investment products and services might be so 
compromised.
    The Department believes that the research available at this time 
provides an insufficient basis to confidently determine whether or to 
what degree participants pay inefficiently high investment prices.\48\ 
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, 
especially IRA beneficiaries, pay inefficiently high investment prices. 
If so, the Department would expect that quality advice reduces that 
inefficiency. Such a reduction in inefficiencies would increase 
participants' welfare by transferring economic surplus from producers 
of investment products and services to participants and thereby 
reducing societal 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, 
participants buy investment products and services whose marginal cost 
exceed their associated marginal benefit.\49\ The Department expects 
the PPA and this final regulation to reduce such investment errors, 
improving participant and societal welfare. However, at this time the 
Department has no basis on which to quantify such errors or 
improvements.
---------------------------------------------------------------------------

    \48\ See 74 FR No 164 (Aug. 22, 2008), 74 FR No 12 (Jan. 21, 
2009), and 75 FR No 40 (Mar. 2, 2010) for background on the analysis 
contained in the Department's Regulatory Impact Analysis.
    \49\ It is possible that the converse could sometimes occur: 
participants might fail to buy efficiently priced products and 
services whose marginal cost lags their associated marginal benefit. 
If so advice, by correcting this error, might lead to higher 
expenses, but would still improve overall societal welfare. The 
economic research suggests that participants are insensitive to fees 
rather than excessively sensitive to fees, thus the Department 
believes that the converse situation is likely to be rare.
---------------------------------------------------------------------------

Poor Trading Strategies

    There is evidence that some participants trade excessively, while 
many more participants trade too little, failing even to rebalance. In 
DC plans, excessive participant trading often worsens performance, and 
participants in accounts that are automatically rebalanced generally 
fare best.\50\ Among inferior strategies, it is likely that active 
trading aimed at timing the market generates more adverse results than 
failing to rebalance. Many mutual funds investors' experience badly 
lags the performance of the funds they hold because they buy and sell 
shares too frequently and/or at the wrong times.\51\ Investors often 
buy and sell in response to short-term past returns, and suffer as a 
result.\52\ Good advice is likely to discourage market timing efforts 
and encourage rebalancing, thereby

[[Page 66154]]

ameliorating adverse impacts from poor trading strategies.
---------------------------------------------------------------------------

    \50\ See, e.g., Takeshi Yamaguchi et al., Winners and Losers: 
401(k) Trading and Portfolio Performance, Michigan Retirement 
Research Center Working Paper WP2007-154 (June 2007).
    \51\ See, e.g., Dalbar Inc., Quantitative Analysis of Investor 
Behavior 2007 (2007).
    \52\ See, e.g., Rene Fischer & Ralf Gerhardt, Investment 
Mistakes of Individual Investors and the Impact of Financial Advice, 
Science Research Network Abstract 1009196 (Aug. 2007); Julie Agnew & 
Pierluigi Balduzzi, Transfer Activity in 401(k) Plans, Social 
Science Research Network Abstract 342600 (June 2006); and George 
Cashman et al., Investor Behavior in the Mutual Fund Industry: 
Evidence from Gross Flows, Social Science Research Network Abstract 
966360 (Feb. 2007).
---------------------------------------------------------------------------

Inadequate Diversification

    Investors sometimes fail to diversify adequately and thereby assume 
uncompensated risk and suffer associated losses. For example, DC plan 
participants sometimes concentrate their assets excessively in stock of 
their employer.\53\ Relative to full diversification,\54\ employer 
stock investments can be costly for DC plan participants.\55\ Other 
lapses in diversification may involve omission from portfolios asset 
classes such as overseas equity or debt, small cap stocks, or real 
estate. Such lapses may sometimes reflect limited investment menus 
supplied by DC plans.\56\ Yet even where adequate choices are available 
and company stock is not a factor, investors sometimes fail to 
diversify adequately.\57\ The Department believes that quality advice 
will address over concentration in employer stock and other failures to 
properly diversify.
---------------------------------------------------------------------------

    \53\ See, e.g., Olivia S. Mitchell & Stephen P. Utkus, The Role 
of Company Stock in Defined Contribution Plans, National Bureau of 
Economic Research Working Paper W9250 (Oct. 2002); and Jeffrey R. 
Brown & Scott Weisbenner, Individual Account Investment Options and 
Portfolio Choice: Behavioral Lessons from 401(k) Plans, Social 
Science Research Network Abstract 631886 (Dec. 2004).
    \54\ This comparison should be viewed as an outer bound. Full 
diversification of the same assets might not be feasible if 
companies are unwilling to alter the compensation mix in this way 
(see, e.g., Olivia S. Mitchell & Stephen P. Utkus, The Role of 
Company Stock in Defined Contribution Plans, National Bureau of 
Economic Research Working Paper W9250 (Oct. 2002)). The comparison 
also neglects some potential tax benefits of employer stock 
investments that might offset losses from reduced diversification 
(see, e.g., Mukesh Bajaj et al., The NUA Benefit and Optimal 
Investment in Company Stock in 401(k) Accounts, Social Science 
Research Network Abstract 965808 (Feb. 2007)). See also, Lisa K. 
Meulbroek, Company Stock in Pension Plans: How Costly Is It?, Social 
Science Research Network Abstract 303782 (Mar. 2002) and Krishna 
Ramaswamy, Company Stock and Pension Plan Diversification, in The 
Pension Challenge: Risk Transfers and Retirement Income Security 71, 
71- 88 (Olivia S. Mitchell & Kent Smetters eds., 2003). The economic 
literature provides some evidence that investing in employer stock 
increases participants' exposure to equity overall, which might 
increase average wealth (see, e.g., Jack L. Vanderhei, The Role of 
Company Stock in 401(k) Plans, Employee Benefit Research Institute 
T-133 Written Statement for the House Education and Workforce 
Committee, Subcommittee on Employer-Employee Relations, Hearing on 
Enron and Beyond: Enhancing Worker Retirement Security (Feb. 2002), 
at http://www.ebri.org/pdf/publications/testimony/t133.pdf).
    \55\ Following findings reported in Lisa K. Meulbroek, Company 
Stock in Pension Plans: How Costly Is It?, Social Science Research 
Network Abstract 303782 (Mar. 2002), this estimate reflects losses 
amounting to 14 percent of the employer stock's value, assuming 10 
percent of DC plan assets are held in employer stock, the DC plan is 
one-half of total wealth, and the holding period is 10 years. For 
comparison, following findings reported in Krishna Ramaswamy, 
Company Stock and Pension Plan Diversification, in The Pension 
Challenge: Risk Transfers and Retirement Income Security 71, 71-88 
(Olivia S. Mitchell & Kent Smetters eds., 2003), the annualized cost 
of an option to receive the higher of the return on a typical 
company stock or the return on a fully diversified equity portfolio 
over a three-year horizon would amount to approximately $24 billion, 
the Department estimates. This measure probably exaggerates the loss 
to participants, however, insofar as it would preserve for the 
participant the potential upside of a company stock that outperforms 
the market.
    \56\ See, e.g., Edwin J. Elton et al., The Adequacy of 
Investment Choices Offered By 401(k) Plans, Social Science Research 
Network Abstract 567122 (Mar. 2004), which finds that menus are 
frequently inadequate, and Ning Tang and Olivia S. Mitchell, The 
Efficiency of Pension Plan Investment Menus: Investment Choices in 
Defined Contribution Pension Plans, University of Michigan 
Retirement Research Center Working Paper WP 2008-176 (June 2008), at 
http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp176.pdf, 
which finds that most menus are efficient.
    \57\  See, e.g., Laurent E. Calvet et al., Down or Out: 
Assessing the Welfare Costs of Household Investment Mistakes, 
Harvard Institute of Economic Research Discussion Paper No. 2107 
(Feb. 2006).
---------------------------------------------------------------------------

Inappropriate Risk

    Investors who avoid the foregoing mistakes might be said to invest 
efficiently, in the sense that the investor generally can expect the 
maximum possible return given their level risk. However, these 
participants may still be making a costly mistake: they may fail to 
calibrate the risk and return of their portfolio to match their own 
risk and return preferences. As a result, participant investments may 
be too risky or too safe for their own tastes. The Department currently 
lacks a sufficient basis on which to estimate the magnitude of such 
mistakes, but believes mistakes associated with inappropriate risk 
levels may be common and large. The characteristics of a diversified 
portfolio's risks and returns generally are determined by the 
portfolio's allocation across asset classes. As noted above, there is 
ample evidence that participants' asset allocation choices often are 
inconsistent with fixed or well behaved risk and return preferences. If 
participants' true preferences are in fact fixed or well behaved, then 
observed asset allocations, which often appear to shift in response to 
seemingly irrelevant factors (or fail to shift in response to relevant 
factors), certainly entail large welfare losses. The Department 
believes good advice might help participants calibrate their asset 
allocations to match their true preferences.

Excess Taxes

    It is likely that many households pay excess taxes as a result of 
disconnects between their investments and current tax strategies. 
Households saving for retirement must decide not only what assets to 
hold, but also whether to locate these assets in taxable or tax-
deferred accounts. For example, households may be able to maximize 
their expected after-tax wealth by first placing heavily taxed bonds in 
their tax-deferred account and then placing lightly taxed equities in 
their taxable account. However a significant number of households do 
not follow this practice.\58\ What is not clear, however, is whether 
such households are in fact making investment mistakes. In practice, 
this simple asset location rule may fail to minimize taxes.\59\ As a 
result the Department currently has no basis to estimate the magnitude 
of excess taxes that might derive from participants' investment 
mistakes. In any event, whether or to what extent investment advisers 
would be positioned to provide advice on tax efficiency is unclear.
---------------------------------------------------------------------------

    \58\ See, e.g., Daniel B. Bergstresser & James M. Poterba, Asset 
Allocation and Asset Location: Household Evidence from the Survey of 
Consumer Finances, Journal of Public Economics, Volume 88 1893, 
1893-1915 (2004).
    \59\ See, e.g., James M. Poterba et al., Asset Location for 
Retirement Savers, in Public Policies and Private Pensions 290, 290-
331 (John B. Shoven et al. eds., 2004); John B. Shoven & Clemens 
Sialm, Asset Location in Tax-Deferred and Conventional Savings 
Accounts, Journal of Public Economics, Volume 88 (2003); James M. 
Poterba et al., Asset Location for Retirement Savers, in Public 
Policies and Private Pensions 290, 290-331 (John B. Shoven et al. 
eds., 2004); Gene Amromin, Portfolio Allocation Choices in Taxable 
and Tax-Deferred Accounts: An Empirical Analysis of Tax-Efficiency, 
Social Science Research Network Abstract 302824 (May 2002); Lorenzo 
Garlappi & Jennifer C. Huang, Are Stocks Desirable in Tax-Deferred 
Accounts?, Journal of Public Economics, Volume 90 2257, 2257- and 
Robert M. Dammon et al., Optimal Asset Location and Allocation with 
Taxable and Tax-Deferred Investing, The Journal of Finance, Volume 
LIX, Number 3 999, 999-1037 (2004).
---------------------------------------------------------------------------

Baseline Estimates: Availability and Use of Advice by Participants

    Participants have always had the option of obtaining permissible 
investment advice services directly in the retail market. DC plan 
sponsors likewise have had the option of obtaining such services in the 
commercial market and making them available to plan participants and 
beneficiaries in connection with the plan.
    Prior to the 2006 enactment of the PPA, a substantial fraction of 
DC plan sponsors made investment advice available to plan participants 
and beneficiaries. Today, as the PPA's implementation progresses, many 
more have begun providing or are gearing up to provide such advice. The 
Department bases its estimate for pre-PPA availability of advice to DC 
plan participants on reported plan

[[Page 66155]]

experiences in 2006.\60\ The Department assumes that approximately 40 
percent of DC plan sponsors provided access to investment advice either 
on line, by phone, or in-person in 2006, as outlined in Table 3 below. 
The Department further assumes that approximately 25 percent of the 
participants that are offered advice use the offered advice, as 
outlined in Table 4 below. In-person advice seems to be offered by most 
plan sponsors. On-line advice and, to a lesser degree, telephone advice 
are favored more by large sponsors. Smaller plan sponsors appear to 
offer advice generally, and in-person advice in particular, more 
frequently than larger plan sponsors.
---------------------------------------------------------------------------

    \60\ This assessment is based on the Department's reading of 
Hewitt Associates LLC, Survey Findings: Hot Topics in Retirement, 
2007 (2007); Profit Sharing/401(k) Council of America, 50th Annual 
Survey of Profit Sharing and 401(k) Plans (2007); and Deloitte 
Development LLC, Annual 401(k) Benchmarking Survey, 2005/2006 
Edition (2006). In addition to investment advice, a majority of 
sponsors also provide one or more other types of support to 
participants' investment decisions.

        Table 3--Availability of Advice: DC Plans Offering Advice
------------------------------------------------------------------------
                                                              Any advice
                       Policy context                         (computer
                                                               or live)
------------------------------------------------------------------------
Pre-PPA....................................................          40%
PPA--Low Estimate..........................................          56%
PPA--Primary Estimate......................................          63%
PPA--High Estimate.........................................          69%
------------------------------------------------------------------------

    Investment advice is also already used by a substantial fraction of 
IRA participants, the Department believes. A majority of IRA 
participants that invest in mutual funds purchase some or all of their 
funds via a professional financial adviser.\61\ Overall in 2006, 60 
percent of U.S. workers and retirees said they use the advice of a 
financial professional when making retirement savings and investment 
decisions; 40 percent said the advice of a financial professional was 
more helpful to them than alternatives.\62\ However, what is not clear 
from the survey was how recently the participant received the 
referenced advice: in the same survey just 29 percent of participants 
stated that in the past year they obtained investment advice from a 
professional financial adviser who was paid through fees or 
commissions.\63\
---------------------------------------------------------------------------

    \61\ Eighty-two percent of mutual fund shareholders who hold 
funds outside of DC plans purchase some or all of their funds from a 
professional financial adviser such as a full-service broker, 
independent financial planner, bank or savings institution 
representative, insurance agent, or accountant (see, e.g., Victoria 
Leonard-Chambers & Michael Bogdan, Why Do Mutual Fund Investors Use 
Professional Financial Advisers?, Investment Company Institute 
Research Fundamentals, Volume 16, Number 1 (April 2007)). As 
families owning IRAs outnumber those owning pooled investment 
vehicles outside of retirement accounts (see, e.g., Brian K. Bucks 
et al., Recent Changes in U.S. Family Finances: Evidence from the 
2001 and 2004 Survey of Consumer Finances, Federal Reserve Bulletin 
92 A1, A1-A38 (2006)), it is reasonable to conclude that a large 
majority of IRA beneficiaries who invest in mutual funds purchase 
them via such professionals. However, the Department has no basis to 
estimate the fraction of these beneficiaries that receive true 
investment advice from such professionals. It is possible that some 
make their purchase decisions without receiving any recommendation 
or material guidance from the professional making the sale.
    \62\ Alternatives including advice of peers, written plan 
materials, print media, television and radio, seminars, software, 
on-line information or advice, and retirement benefit statements 
were all less likely to be characterized as ``most helpful.''
    \63\ See, e.g., Employee Benefit Research Institute, 2007 
Retirement Confidence Survey, Wave XVII, Posted Questionnaire (Jan. 
2007).

                             Table 4--Use of Advice by DC Plan and IRA Participants
----------------------------------------------------------------------------------------------------------------
                                                                         Share of participants advised
                                                              --------------------------------------------------
                        Policy context                                     DC Plans
                                                              ----------------------------------       IRA
                                                                Where offered       Overall
----------------------------------------------------------------------------------------------------------------
Pre-PPA......................................................              25%              10%              33%
PPA--Low Estimate............................................              25%              14%              50%
PPA--Primary Estimate........................................              25%              16%              67%
PPA--High Estimates..........................................              25%              17%              80%
----------------------------------------------------------------------------------------------------------------

    The effect of investment advice depends not merely on its 
availability but on its use by DC plan and IRA participants. Do the 
participants seek advice, and if so do they follow it? According to one 
survey, among DC plan participants offered investment advice, 
approximately one in four uses the offered advice. There is some 
evidence that historically in-person advice has achieved higher use 
rates than on-line advice, with on-line advice appealing more to 
higher-income participants.\64\ In another survey large fractions of 
workers say they would be very likely (19 percent) or somewhat likely 
(35 percent) to take advantage of advice provided by the company that 
manages their employer's DC plan. Of these, two-thirds said they would 
implement only those recommendations that were in line with their own 
ideas; 21 percent said they would implement all of the recommendations 
they receive as long as they trusted the source.\65\ In a subsequent 
survey, among those obtaining investment advice, 36 percent say they 
implemented ``all'' of the advice, 58 percent ``some,'' and just 5 
percent ``none.'' \66\
---------------------------------------------------------------------------

    \64\ See, e.g., Profit Sharing/401(k) Council of America, 50th 
Annual Survey of Profit Sharing and 401(k) Plans (2007); and Julie 
Agnew, Personalized Retirement Advice and Managed Accounts: Who Uses 
Them and How Does Advice Affect Behavior in 401(k) Plans?, Center 
for Retirement Research Working Paper 2006-9 (2006).
    \65\ See, e.g., Employee Benefit Research Institute, 2007 
Retirement Confidence Survey, Wave XVII, Posted Questionnaire (Jan. 
2007). In practice this might translate into a high rate of 
compliance with recommendations, if recommendations turn out not to 
diverge too much from participants' own ideas.
    \66\ See, e.g., Employee Benefit Research Institute, 2008 
Retirement Confidence Survey, Wave XVIII, Posted Questionnaire (Jan. 
2008).
---------------------------------------------------------------------------

    The Department's assumptions regarding use of advice are summarized 
in Tables 3 and 4 above.\67\ The

[[Page 66156]]

Department believes it is likely that in practice a large proportion of 
participants who receive advice will follow that advice either in whole 
or in part. This is especially likely if the advice turns out to be 
broadly in line with the participants' own thinking. Nonetheless, some 
advice will not be followed, and as a result some investment errors 
will not be corrected. For purposes of this analysis, the Department 
has assumed that advised participants make investment errors at one-
half the rate of unadvised participants. The remaining errors reflect 
participant failures to follow advice. Additionally, for purposes of 
this analysis, the Department assumes that all permissible advice 
arrangements deliver advice of similar quality and effectiveness.
---------------------------------------------------------------------------

    \67\ The Department's bases its assumptions on its reading of 
Employee Benefit Research Institute, 2007 Retirement Confidence 
Survey, Wave XVII, Posted Questionnaire (Jan. 2007); Hewitt 
Associates LLC, Survey Findings: Hot Topics in Retirement, 2007 
(2007); Profit Sharing/401(k) Council of America, 50th Annual Survey 
of Profit Sharing and 401(k) Plans (2007); and Deloitte Development 
LLC, Annual 401(k) Benchmarking Survey, 2005/2006 Edition (2006). 
There are a number of reasons to believe that use of advice will be 
higher among IRA beneficiaries than DC plan participants. The 
aforementioned survey reports, read together, generally support this 
conclusion. In addition, relative to IRA beneficiaries, DC 
participants may have less need for advice and/or easier access to 
alternative forms of support for their investment decisions. DC plan 
participants' choice is usually confined to a limited menu selected 
by a plan fiduciary, and the menu may include one-stop alternatives 
such as target date funds that may mitigate the need for advice. 
Their plan or employer may provide general financial and investment 
education in the form of printed material or seminars. They often 
make initial investment decisions (sometimes by default) before 
contributing to the plan so the decisions' impact may seem small. 
Finally, the availability of advice in connection with the plan is 
intermediated by the plan sponsor and fiduciary. In contrast, IRA 
beneficiaries generally have wider choice and are more likely to be 
without employer-provided support for their decisions. Decision 
points may more often occur when account balances are large, such as 
when rolling a large DC plan balance into an IRA or when retiring. 
Finally, the availability of advice to IRA beneficiaries is not 
intermediated by an employer--rather IRA beneficiaries interface 
directly with the retail market and will thereby be more directly 
affected by the exemptive relief provided by the PPA and this final 
regulation. For all of these reasons IRA beneficiaries may use 
advice more frequently than DC plan participants.

                       Table 5--Number of Entities
------------------------------------------------------------------------
                                                       PPA
                                        --------------------------------
                               Pre-PPA      Low      Primary      High
                                          estimate   estimate   estimate
------------------------------------------------------------------------
DC:
    Plans offering (000s)...        238        335        372        410
    Participants offered             30         42         46         51
     (MM)...................
    Participants using (MM).          6          9         10         11
                             -------------------------------------------
IRA:
    IRAs using (MM).........         17         25         34         41
------------------------------------------------------------------------

Impact--Benefit

    For purposes of this assessment, the Department estimates that as a 
result of the PPA and this final regulation the proportion of 
participants using advice will increase.\68\ As stated above, the 
Department has assumed that advised participants make investment errors 
at one-half the rate of unadvised participants. The estimates provided 
in the Tables 3 to 5 show three possible impacts for the PPA and this 
final regulation to reflect the uncertainty surrounding the 
availability and use of advice as well as the percentage of errors 
eliminated by advice: ``low'' estimates assume that 14 percent of DC 
plan participants and half of IRA beneficiaries will utilize advice 
which eliminates 25 percent of investment errors, ``primary'' estimates 
assume that 16 percent of DC plan participants and two-thirds of IRA 
beneficiaries will utilize advice which eliminates half of investment 
errors, and ``high'' estimates assume that 17 percent of DC plan 
participants and 80 percent of IRA beneficiaries will utilize advice 
which eliminates 75 percent of investment errors.
---------------------------------------------------------------------------

    \68\ See 74 FR No 164 (Aug. 22, 2008), 74 FR No 12 (Jan. 21, 
2009), and 75 FR No 40 (Mar. 2, 2010) for background on the analysis 
contained in the Department's Regulatory Impact Analysis.
---------------------------------------------------------------------------

    As summarized in Tables 3 through 5 above, the PPA and this final 
regulation will increase the availability of investment advice and 
thereby increase the use of investment advice by participants. The PPA 
and this final regulation will reduce investment mistakes by between $7 
billion and $18 billion annually, the Department estimates. 
Cumulatively, after implementation of this final regulation, use of 
existing and new investment advice by DC plan and IRA participants will 
eliminate between $22 billion and $33 billion worth of investment 
errors annually. The Department's estimates of investment errors and 
reductions from investment advice are summarized in Table 2 above.

Costs

    Compliance with the terms and condition of the final rule is a 
condition of relief from the prohibited transaction provisions of ERISA 
and the Code. Such exemptive relief would allow a fiduciary adviser to 
receive compensation from providers of recommended investments. As 
such, this final rule does not include any Federal mandates that will 
require expenditures by the private sector per se. Plan sponsors and 
participants are expected to take advantage of these new opportunities 
in the marketplace; therefore these plans and participants will 
shoulder the costs to reap the associated benefits.
    Nevertheless, participant gains from investment advice must be 
weighed against the cost of that advice. This final rule is expected to 
make quality fiduciary advice available to participants at a lower 
direct price, because advisers will be able to rely on indirect revenue 
sources, subject to the safeguards and conditions of the final rule, to 
compensate their efforts. It may also make such advice available at a 
lower total cost to participants.
    The general prohibition against transactions wherein fiduciary 
advisers' and participants' interests may conflict carries costs. Faced 
with such bars advisers may forgo certain potential economies of scale 
in production and distribution of financial services that would derive 
from more vertical and horizontal integration.\69\ If they choose 
instead to take advantage of these opportunities and relationships, 
they must incur costs to carefully monitor and calibrate their 
relationships and compensation arrangements to avoid a prohibited 
fiduciary conflict, or structure and monitor their arrangements to meet 
the conditions of an applicable prohibited transaction exemption.
---------------------------------------------------------------------------

    \69\ For example, an adviser employed by an asset manager can 
share the manager's research instead of buying or producing such 
research independently.
---------------------------------------------------------------------------

    On the other hand, absent adequate protections, conflicts 
themselves may be more costly to participants than a general 
prohibition against them. The safeguards and conditions included in 
this final regulation are calibrated to ensure that conflicts do not 
compromise the quality of fiduciary advice.
    The Department therefore expects this final rule to produce cost 
savings by harnessing economies of scale and by reducing compliance 
burdens. The Department is unaware of any available empirical basis on 
which to determine

[[Page 66157]]

whether or by how much costs might be reduced, however.
    Different types of advice may come with different costs. For 
example, advice generated by an automated computer program may be less 
costly than advice provided by a personal adviser. For purposes of this 
analysis the Department assumed that in the context of a DC plan, 
computer generated advice costs 10 basis points annually, while adviser 
provided advice costs 20 basis points. In connection with an IRA the 
corresponding assumptions are 15 and 30 basis points. These assumptions 
are reasonable in light of information available to the Department 
about the cost of various existing advice arrangements. On this basis 
the Department estimates the aggregate cost of advice under the final 
rule to be a range between $1.9 billion and $5.1 billion annually as 
summarized in Table 6 below. These costs include the costs, outlined in 
the Paperwork Reduction Act section below, associated with requirements 
to document and keep records, provide disclosures to participants, hire 
an independent auditor, and obtain certification of the model from an 
eligible investment expert.

                         Table 6--Cost of Advice
------------------------------------------------------------------------
                                                       PPA
                                        --------------------------------
                               Pre-PPA      Low        Mid        High
                                          estimate   estimate   estimate
------------------------------------------------------------------------
Incremental:
    Advice cost ($billions).      $3.90      $1.90      $3.70      $5.10
    Advice cost rate (bps,         22.4       22.6       23.0       23.1
     average)...............
                             -------------------------------------------
Cumulative (combined with
 policies to the left):
    Advice cost ($billions).       3.90       5.80       7.60       9.00
    Advice cost rate (bps,         22.4       22.4       22.7       22.8
     average)...............
------------------------------------------------------------------------

Regulatory Alternatives

    Executive Order 12866 requires an economically significant 
regulation to include an assessment of the costs and benefits of 
potentially effective and reasonably feasible alternatives to a planned 
regulation, and an explanation of why the planned regulatory action is 
preferable to the identified potential alternatives. In formulating 
this final regulation, the Department considered several alternative 
approaches regarding computer model design and operation, which are 
discussed below. For a more detailed discussion of these alternatives, 
see section B.2., above.
    Paragraph (b)(4)(i)(A) of the March 2010 proposal requires a 
computer model to be designed and operated to apply generally accepted 
investment theories that take into account historical risks and returns 
of different asset class over defined periods of time. The Department 
solicited comments in the proposal regarding whether the Department 
should amend the rule to specify generally accepted investment theories 
and require their application or specify certain practices required by 
such theories. Most commenters indicated that they did not believe the 
Department should specifically define or identify generally accepted 
investment theories or prescribe particular practices or computer model 
parameters. They explained that economic and investment theories and 
practices continually evolve over time in response to changes and 
developments in academic and expert thinking, technology, and financial 
markets. Some commenters explained that additional specificity would 
facilitate compliance determinations. Other commenters described 
theories and practices they believed to be generally accepted.
    After carefully considering the comments, the Department decided 
not to change the provision in the final rule. The Department is 
concerned that attempting to provide additional specificity in this 
area, such as by prescribing an acceptable list of theories and 
practices, may result in significant unintended consequences. Specific 
requirements might limit advisers' ability to select or apply the most 
current or effective investment theories, and thereby impede beneficial 
innovations in investment advice and reduce the economic benefits of 
the statutory exemption. The Department also believes that the final 
rule's computer model requirements, taken together, are sufficient to 
safeguard against application of investment theories that are not 
generally accepted.
    Paragraph (b)(4)(i)(F)(1) of the March 2010 proposal requires a 
computer model to take into account all ``designated investment 
options'' available under the plan without giving inappropriate weight 
to any investment option. The term ``designated investment option'' is 
defined to mean any investment option 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 option'' does not include ``brokerage windows,'' ``self-
directed brokerage accounts,'' or similar plan arrangements that enable 
participants and beneficiaries to select investments beyond those 
designated by the plan.
    Under paragraph (b)(4)(i)(F)(2) of the proposal, a computer does 
not have to make recommendations relating to the acquisition, holding 
or sale of the following: qualifying employer securities; an investment 
that allocates the invested assets of a participant or beneficiary to 
achieve varying degrees of long-term appreciation and capital 
preservation through equity and fixed income exposures, based on a 
defined time horizon or level of risk of the participant or 
beneficiary; and an annuity option with respect to which a participant 
or beneficiary may allocate assets toward the purchase of a stream of 
retirement income payments guaranteed by an insurance company.
    The Department considered retaining this provision in the 
corresponding provision of the final rule, paragraph (b)(4)(i)(G). 
However, the Department has decided to remove qualifying employer 
securities and asset allocations funds from the list of excepted 
options. Based on comments received in response to the proposal, the 
Department believes that it is feasible to develop a computer model 
capable of addressing investments in qualifying employer securities, 
and that plan participants will significantly benefit from this advice. 
For example, DC plan participants sometimes concentrate their assets 
excessively in stock of their

[[Page 66158]]

employer.\70\ Participant investments in employer securities can 
undermine diversification and thereby cause participants to bear 
uncompensated risk. This uncompensated risk comes at a cost.\71\ 
According to 2008 Department estimates, holding employer stock instead 
of a diversified portfolio of investments cost DC plan participants $3 
billion in risk-adjusted value annually.\72\ Yet, participants often 
seem unaware of this uncompensated risk and falsely believe that they 
can gauge how their company stock will perform in the future.\73\ Good 
investment advice can benefit participants by promoting appropriate 
diversification \74\ and combat some of the false perceptions of 
participants concerning employer stock.\75\
---------------------------------------------------------------------------

    \70\ Mitchell, Olivia S., and Stephen P. Utkus. October 2002. 
``The Role of Company Stock in Defined Contribution Plans.'' NBER 
Working Paper No. W9250. Citing EBRI/ICI data, the authors find 
that, of those participants who are offered company stock through 
their 401(k), 48 percent of them hold over 20 percent of their 
401(k) assets in company stock and approximately one third of them 
hold over 40 percent of their 401(k) assets in company stock. The 
authors acknowledge that there are potential productivity gains 
attributable to employee stock ownership. However, diversifying 
assets, on average, decreases wealth volatility. While not 
explicitly pointed out in this article, the volatility argument is 
particularly relevant when a participant holds a high concentration 
of one's own company stock because company financial distress will 
correspond directly with both lower job security and decreased 
financial returns.
    \71\ Meulbroek, Lisa. 2002. ``Company Stock in Pension Plans: 
How Costly is it?'' Harvard Business School Working Paper 02-058.
    \72\ This figure is based upon an estimate from Meulbroek (2002) 
where if 10 percent of DC plan assets are held in employer stock, 
the DC plan is one-half total wealth, and the holding period is 10 
years, investors lose out on 14 percent of risk-adjusted value.
    \73\ Benartzi, Shlomo and Richard Thaler. 2007. ``Heuristics and 
Biases in Retirement Savings Behavior'' The Journal of Economic 
Perspectives, Vol. 21, Summer, pp. 81-104. Citing a Boston Research 
Group (2002) study of individuals (most of whom were highly aware of 
the Enron scandal), half of the respondents said their company stock 
carries less risk than a money market fund. Another study, that 
included the coauthors, found that only 33 percent of the 
respondents who own company stock realize that it is riskier than a 
``diversified fund with many stocks.'' Employees' investment 
decisions reflect a belief that strong past performance by their 
company means that they should invest more in employee stock. Yet, 
this seems to have little bearing on future performance.
    \74\ Mottola, Gary and Stephen Utkus. 2007. ``Red, Yellow, and 
Green: A Taxonomy of 401(k) Choices'' Pension Research Council 
Working Paper, PRC WP 2007-14. Examining Vanguard's database of 2.9 
million participants, the authors found that 17.2 percent of 
participants had invested more than 20 percent of their assets in 
company stock. A subset of 12,000 participants adopted managed 
account services. The authors were able to compare this subset's 
behavior before and after adopting the services. Before adoption, 11 
percent of the participants had over 20 percent of their portfolio 
in company stock; a year after adoption, only 2 percent of the 
participants did.
    \75\ Choi, James, David Laibson, and Brigitte Madrian. 2005. 
Brookings Papers on Economic Activity, Vol. 2005, No. 2, pp. 151-
198. Participants view the offering of the employee stock as a 
recommendation to purchase the stock. Loyalty to one's company may 
also be a factor.
---------------------------------------------------------------------------

    The Department also decided to remove asset allocation funds from 
the list of excepted options. Asset allocation funds generally are 
designed to maintain a particular asset allocation that takes into 
account the time horizon or risk tolerance of the participant. Some 
commenters to the Department's 2008 proposed rule opined that it served 
no purpose to include such funds in an investment advice model's 
unrelated, overlaying asset allocation analysis. However, the 
Department's subsequent consideration of asset allocation funds has 
demonstrated that: (1) The asset allocation and associated risk and 
return characteristics of different funds targeted at similar 
participants varies widely; (2) the risk and return preferences of 
participants vary widely with factors other than the time horizons that 
are the sole targeting factor for many asset allocation funds; (3) 
participants investing in asset allocation funds sometimes do not 
understand the funds' risk and return characteristics; and (4) as a 
result of the forgoing, the risk and return characteristics of the 
asset allocation funds participants invest in are sometimes poorly 
aligned with the participants' own risk and return preferences. Because 
investment advice models will take into account designated investment 
options' true risk and return characteristics as well as participant 
characteristics and circumstances beyond time horizons, the Department 
believes that participants will benefit from investment advice that 
considers any asset allocation funds that are available to them.
    The Department notes that a provision added to the final rule, 
paragraph (b)(4)(i)(G)(2)(ii), provides that a computer model will not 
fail to satisfy the requirements of paragraph (b)(4)(i)(G)(1) merely 
because it does not provide a recommendation with respect to an 
investment option that a participant or beneficiary requests to be 
excluded from consideration in such recommendations. Therefore, 
participants may express a preference for asset allocation funds to be 
excluded from a recommendation. This would be relevant in situations 
where participants do not want to include asset allocation funds in 
computer model investment advice, because such products themselves rely 
on a fund manager to maintain a particular asset allocation taking into 
account their time horizons (retirement age, life expectancy) and risk 
tolerance.
    The Department, however, has decided to retain the exception for 
in-plan annuity products. It might be challenging for a computer model 
that is designed to select the optimal asset allocation for a 
participant's investments to also incorporate an option about whether 
the participant should purchase an in-plan annuity and how much of the 
portfolio should be dedicated to such a product. Annuities differ from 
other investments across several dimensions. For example, one valuable 
benefit to a lifetime annuity is that it provides an insurance-like 
feature of a guaranteed income stream that will last as long as one 
lives. It is difficult to know, however, how that should be valued 
within the context of a computer model. Similarly, participants' 
preferences about annuities may vary depending on their preferences 
regarding bequests. Another factor participants must consider is that 
the annuity may lock them in, either by preventing them from pulling 
out their accumulated value and investing it elsewhere or by imposing a 
penalty for doing so. Typically other investment options offer more 
liquidity. All of these features of annuities mean that it might be 
difficult to design a computer model that could produce a 
recommendation for a participant regarding the optimal selection of 
assets and purchase of annuities.
    As an additional approach to ensuring that investment advice is not 
tainted by conflicts of interest, paragraph (b)(4)(i)(E)(3) of the 
March 2010 proposal provides that a computer model must be designed and 
operated to avoid investment recommendations that inappropriately 
distinguish among investment options in a single asset class on the 
basis of a factor that cannot confidently be expected to persist in the 
future.
    A number of commenters requested that the Department remove 
paragraph (b)(4)(i)(E)(3). Some opined that the test contained in that 
provision--which applies on an asset-class by asset-class basis--lacks 
sufficient clarity because it fails to define the essential term 
``asset class''. Some commenters also requested removal of this 
provision unless the Department clarifies that it would be acceptable 
for a computer model to take into account historical performance data. 
According to these commenters, the proposal's discussion of paragraph 
(b)(4)(i)(E)(3) and related computer model questions has been construed 
as strictly prohibiting, or strongly cautioning against, any 
consideration of historical performance data, even if

[[Page 66159]]

considered in conjunction with other information. These commenters 
opined that a complete disregard of historical performance data would 
be inconsistent with generally accepted investment theories.
    Additionally, some cautioned that, by limiting consideration to 
only those factors that can confidently be expected to persist in the 
future, a computer model might be limited to distinguishing between 
investment options solely on the basis of fees and expenses. A 
commenter noted that, other than fees, it could not identify any other 
factor with the necessary likelihood of persistence required under the 
proposal. Although commenters generally agreed that fees are an 
important consideration, most recognized they should not be the only 
factor taken into account.
---------------------------------------------------------------------------

    \76\ See e.g., Russ Wermers, ``Mutual Fund Performance: An 
Empirical Decomposition Into Stock-Picking Talent, Style, 
Transaction Costs And Expenses,'' The Journal of Finance (Aug., 
2000). This study finds that fund managers choose stocks that 
outperform their relevant benchmark by an average of 71 basis points 
per year. However, non-stock components, expense ratios, and 
transaction costs explain why the returns on these active funds are 
not as high on average as index funds.
    \77\ See e.g., Eugene Fama and Kenneth French, ``Luck Versus 
Skill in the Cross Section of Mutual Fund Returns,'' Journal of 
Finance (Sept. 21, 2010), at http://www.afajof.org/afa/forthcoming/6311.pdf. This study finds that approximately 10 percent of managers 
demonstrate higher returns before fees than what random chance would 
generate. Yet, after fees are taken into account, this share 
declines to 1 percent.
    See also Robert Kosowski, Allan Timmermann, Russ Wermers and Hal 
White, ``Can Mutual Fund `Stars' Really Pick Stocks? New Evidence 
from a Bootstrap Analysis,'' The Journal of Finance, Volume LXI, 
Number 6 (Dec. 2006). The authors find a larger share of fund 
managers demonstrating significant skill. Fama and French believe 
this analysis suffers from some of the same selection biases that 
industry prospectuses do.
    See also John Hughes, Jing Liu and Mingshan Zhang, 
``Overconfidence, Under-Reaction, and Warren Buffett's 
Investments,'' at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1635061. This study finds that mimicking Warren Buffett's 
position, or that of other top performing investment managers, can 
generate additional returns. The fact that following another fund's 
lead can be a credible exercise may be an argument in favor of 
looking at prior returns of some funds. However, the fact that 
winning strategies do get mimicked is an argument made by some that 
success cannot be indefinitely sustained. Copycats potentially drive 
up the price of the underlying assets over time.
    See e.g., Jonathan B. Berk, and Richard C. Green, ``Mutual Fund 
Flows and Performance in Rational Markets,'' Journal of Political 
Economy, Volume 112, pp. 1269-1295 (2004).
---------------------------------------------------------------------------

    A number of commenters expressed concern that this provision of the 
proposal, with its focus on historical performance data, superior past 
performance and fees, appeared to suggest that it would be 
impermissible under any circumstances for a plan fiduciary to pursue an 
active management style, or that a plan fiduciary would bear a very 
high burden of justification. Commenters also stated that the 
Department's proposal appeared to demonstrate a clear bias in favor of 
passive investment styles over active styles, which they believe to be 
premature because it is the subject of ongoing debate among investment 
experts.
    Other commenters, however, questioned the utility of historical 
performance data beyond estimating future performance of an entire 
asset class. They further noted that, because the regulation permits a 
fiduciary adviser to provide investment recommendations to plan 
participants when the adviser has an interest in the investment options 
being recommended, there is the potential that the computer model might 
be designed to favor certain options by giving undue weight to 
historical performance data. They therefore stressed the importance of 
scrutinizing the use of historical performance data and supported the 
inclusion of paragraph (b)(4)(i)(E)(3).
    As discussed above, the provision is not intended to prohibit a 
computer model from any consideration of an investment option's 
historical performance, as some commenters interpreted. Based on its 
review of relevant academic literature, the Department does not believe 
such a prohibition is warranted. Although the academic literature 
indicates that there is skill in the investment community,\76\ there is 
considerable disagreement amongst academics as to how much persistent 
skill fund managers exhibit.\77\
    Without further clarification, a fiduciary adviser might not 
consider any factors whose persistence is in doubt, such as historical 
performance, but instead would consider only factors that are 
essentially fixed, such as fees and expenses, solely because she is 
unwilling to risk noncompliance with that provision. That is, fiduciary 
advisers might omit from consideration factors that would be beneficial 
to consider, even when there is a sound empirical basis to justify 
their consideration. The Department believes that the final rule should 
not discourage consideration of factors whose predictive properties can 
be demonstrated. Accordingly, the Department has clarified application 
of this provision at paragraph (b)(4)(i)(C).

Uncertainty

    The Department is highly confident in its conclusion that 
investment errors are common and often large, producing large avoidable 
losses (including foregone earnings) for participants. It is also 
confident that participants can reduce errors substantially by 
obtaining and following good advice. While the precise magnitude of the 
errors and potential reductions therein are uncertain, there is ample 
evidence that that magnitude is large.
    However, the Department is uncertain to what extent advice will 
reach participants and to what extent advice that does reach them will 
reduce errors. To illustrate that uncertainty, the Department conducted 
sensitivity tests of how its estimates of the reduction in investment 
errors attributable to the PPA and this final rule would change in 
response to alternative assumptions regarding the availability, use, 
and quality of advice. Table 7 the results of these tests.\78\
---------------------------------------------------------------------------

    \78\ The Department maintains the 2006 baseline numbers used in 
the 2008 Proposal (73 FR 49896 (Aug. 22, 2008), at http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=21243&AgencyId=8&DocumentType=1). The 
baseline assessment was based on the Department's reading of Hewitt 
Associates LLC, Survey Findings: Hot Topics in Retirement, 2007 
(2007), at http://www.hewittassociates.com/Lib/MBUtil/AssetRetrieval.aspx?guid=CE3EEF86-50E7-4EEC-8C32-82FD055690A6; 
Profit Sharing/401(k) Council of America, 50th Annual Survey of 
Profit Sharing and 401(k) Plans (2007); and Deloitte Development 
LLC, Annual 401(k) Benchmarking Survey, 2005/2006 Edition (2006), at 
http://www.google.com/url?sa=t&source=web&cd=5&ved=0CDUQFjAE&url=http%3A%2F%2Fwww.ifebp.org%2Fpdf%2Fresearch%2F2005-06Annual401kSurvey.pdf&ei=_76UTYSXMY6y0QHBjZmADA&usg=AFQjCNFsUmmwPpFA_EoBDUGyB9uypfFCCQ.

                         Table 7--Uncertainty in Estimate of Investment Error Reduction
----------------------------------------------------------------------------------------------------------------
                            After PPA/Final Rule:                                         Impact  of
----------------------------------------------------------------------------- Impact  of      all      Remaining
            Advice eliminates:                      Advice reaches:               PPA       advice      errors
----------------------------------------------------------------------------------------------------------------
25% of errors............................  14% of DC and 50% of IRA.........          $7         $21        $107
50% of errors *..........................  16% of DC and 67% of IRA*........          13          28         101

[[Page 66160]]

 
75% of errors............................  17% of DC and 80% of IRA.........          18          33          96
----------------------------------------------------------------------------------------------------------------
 Note: Primary estimates denoted.*

    The Department is uncertain about the mix of advice and other 
support arrangements that will compose the market, and about the 
relative effectiveness of alternative investment advice arrangements or 
other means of supporting participants' investment decisions. For 
example, to what extent will arrangements pursuant to this final rule 
displace alternative arrangements? Will advice arrangements operating 
pursuant to this final rule be more, less, or equally effective as 
alternative arrangements?
    This analysis has assumed that all types of permissible advice 
arrangements are equally effective at reducing investment errors, and 
that none will increase errors (there will be no very bad advice). This 
assumption may not hold, however. The Department notes that if users of 
advice are fully informed and rational then more cost effective 
arrangements will dominate the market. This final rule establishes 
conditions to ensure that prospective users of advice available 
pursuant to it will have the opportunity to become fully informed.
    The Department is uncertain about the potential magnitude of any 
transitional costs associated with this final rule. These might include 
costs associated with efforts of prospective fiduciary advisers to 
adapt their business practices to the applicable conditions. They might 
also include transaction costs associated with initial implementation 
of investment recommendations by newly advised participants.
    Another source of uncertainty involves potential indirect 
downstream effects of this final rule. Investment advice may sometimes 
come packaged with broader financial advice, which may include advice 
on how much to contribute to a DC plan. The Department currently has no 
basis to estimate the incidence of such broad advice or its effects, 
but notes that those effects could be large. The opening of large new 
markets to a variety of investment advice arrangements to which they 
were heretofore closed may affect the evolution of investment advice 
products and services and related technologies and their distribution 
channels and respective market shares. Other possible indirect effects 
that the Department currently lacks bases to estimate include financial 
market impacts of changes in investor behavior and related 
macroeconomic effects.

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 are likely to 
have a significant economic impact on a substantial number of small 
entities. For purposes of analysis under the RFA, the Department 
proposes to continue its usual practice of considering a small entity 
to be an employee benefit plan with fewer than 100 participants.\79\ 
The Department estimates that approximately 100,000 small plans, a 
significant number, will voluntarily begin offering investment advice 
to participants as a result of this final regulation.
---------------------------------------------------------------------------

    \79\ EBSA has consulted with the SBA Office of Advocacy 
concerning use of this participant count standard for RFA purposes. 
See 13 CFR 121.903(c).
---------------------------------------------------------------------------

    The primary effect of this final regulation will be to reduce 
participants' investment errors. This is an effect on participants 
rather than on plans. The impact on plans generally will be limited to 
increasing the means by which they may make advice available to 
participants, and this impact will be similar and proportionate for 
small and large plans. Therefore the Department certifies that the 
impact on small entities will not be significant. Pursuant to this 
certification the Department has refrained from preparing an Initial 
Regulatory Flexibility Analysis of this final regulation.
    Notwithstanding this certification, the Department did separately 
consider the impact of this final regulation on participants in small 
plans.
    As noted above, prior to implementation of the PPA smaller plan 
sponsors offered advice generally, and in-person advice in particular, 
more frequently than larger plan sponsors. The Department believes that 
exemptive relief provided by both the PPA and this final regulation 
will promote wider offering of advice by small and large plans sponsors 
alike. Accordingly the Department estimated the impacts on small plans 
assuming that they generally will be proportionate to those on large 
plans. However, because smaller plan sponsors are more likely to offer 
in-person advice, their average cost for advice and the proportion of 
participants using advice may both be higher. The Department estimates 
that the PPA and this final regulation will reduce small DC plan 
participant investment errors respectively by between $169 million and 
$299 million annually, at a cost of between $38 million and $67 million 
annually. The estimated impacts on small plans and their participants 
are summarized in Table 8 below.

               Table 8--Small DC Plan Participant Impacts
------------------------------------------------------------------------
                                                       PPA
                                        --------------------------------
                               Pre-PPA      Low      Primary      High
                                          estimate   estimate   estimate
------------------------------------------------------------------------
Dollars advised ($billions).        $50        $71        $79        $87
Investment errors                  $7.9       $7.7       $7.7       $7.6
 ($billions)................
                             -------------------------------------------

[[Page 66161]]

 
Incremental:
    Errors reduced by advice       $416       $169       $234       $299
     ($millions)............
    Advice cost ($millions).        $93        $38        $52        $67
    Advice cost rate (bps,           18         18         18         18
     average)...............
    Error reduced per $1 of       $4.49      $4.49      $4.49      $4.49
     advice, average........
                             -------------------------------------------
Cumulative (combined with
 policies to the left):
    Errors reduced by advice       $416       $585       $650       $715
     ($millions)............
    Advice cost ($millions).        $93       $130       $145       $159
    Advice cost rate (bps,           18         18         18         18
     average)...............
    Error reduced per $1 of       $4.49      $4.49      $4.49      $4.49
     advice, average........
------------------------------------------------------------------------

Congressional Review Act

    This 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 the Congress and 
the Comptroller General for review.

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 will 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. 
Compliance with the terms and condition of the final rule is a 
condition of relief from the prohibited transaction provisions of ERISA 
and the Code. Such exemptive relief would allow a fiduciary adviser to 
receive compensation from providers of recommended investments. As 
such, this final rule does not include any Federal mandates that will 
require expenditures by the private sector per se.

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 the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This final rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supersede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. The requirements 
implemented in the rule do not alter the fundamental provisions of the 
statute with respect to employee benefit plans, and as such would have 
no implications for the States or the relationship or distribution of 
power between the national government and the States.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the notice of proposed rulemaking 
(NPRM) 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 NPRM, for OMB's review. 
Although no public comments were received that specifically addressed 
the paperwork burden associated with the ICR, the Department welcomes 
public comments on its estimates and any suggestions for reducing the 
paperwork burdens.
    In connection with the publication of this final rule, the 
Department submitted an ICR to OMB for a revised information 
collection. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number. OMB approved the ICR on October 
18, 2011 under OMB Control Number 1210-0134, which will expire on 
October 31, 2014. A copy of the ICR may be obtained by contacting the 
PRA addressee: G. Christopher Cosby, Office of Policy and Research, 
U.S. Department of Labor, Employee Benefits Security Administration, 
200 Constitution Avenue, NW., Room N-5718, Washington, DC 20210. 
Telephone: (202) 693-8410; Fax: (202) 219-2745. These are not toll-free 
numbers. E-mail: ebsa.opr@dol.gov. ICRs submitted to OMB also are 
available at reginfo.gov (http://www.reginfo.gov/public/do/PRAMain).
    In order to use the statutory exemption to provide investment 
advice to participants, fiduciary advisers are required to make 
disclosures to participants, authorizing fiduciaries, and hire an 
independent auditor to conduct a compliance audit and issue an audit 
report every year. Fiduciary advisers who satisfy the conditions of the 
exemption based on the provision of computer model-generated investment 
advice are required to obtain certification of the model from an 
eligible investment expert. These paperwork requirements are designed 
to safeguard the interests of participants in connection with 
investment advice covered by the rule.
    The Department calculated the estimated hour and cost burden of the 
ICRs under the final rule using the same methodology that was used in 
making such estimate in the March 2010 proposal.\80\ The Department has 
made a minor increase to the estimated number of DC plan sponsors 
offering advice, the number of DC plan participants utilizing advice, 
and the labor hour rates used to estimate the hour burden based on more

[[Page 66162]]

current data.\81\ The Department also has taken into account a new 
requirement in paragraph (b)(8) of the final rule, which requires 
fiduciary advisers to provide written notification to authorizing 
fiduciaries stating that it: (i) Intends to comply with the conditions 
of the statutory exemption under ERISA sections 408(b)(14) and 408(g) 
and these final regulations; (ii) will be audited annually by an 
independent auditor for compliance with the conditions of the exemption 
and regulations; and, (iii) that the auditor will furnish the 
authorizing fiduciary with a copy of the auditor's findings within 60 
days of completion of the audit.\82\ All other calculations remain the 
same as in the March 2010 proposed rule.
---------------------------------------------------------------------------

    \80\ 75 FR 9360, 9364-65 (Mar. 2, 2010), at http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=23559&AgencyId=8&DocumentType=1.
    \81\ The increase in the estimated number of DC plans offering 
advice and DC plan participants utilizing advice is due to updating 
the count to reflect 2008 Form 5500 data, the latest year for which 
Form 5500 data is available. The counts in the 2010 Proposed Rule 
were based on 2006 Form 5500 data.
    \82\ The Department estimates that no additional hour or cost 
burden will be associated with this disclosure, because it will be 
provided in the normal course of engaging in an eligible investment 
advice engagement.
---------------------------------------------------------------------------

    The Department made several specific basic assumptions in order to 
establish a reasonable estimate of the paperwork burden of this 
information collection:
     The Department assumes that 80% of disclosures \83\ will 
be distributed electronically via means already in existence as a usual 
and customary business practice and the costs arising from electronic 
distribution will be negligible.
---------------------------------------------------------------------------

    \83\ This estimate is derived from Current Population Survey 
October 2003 School Supplement probit equations applied to the 
February 2005 Contingent Worker Supplement. These equations show 
that approximately 81 percent of workers aged 19 to 65 had internet 
access either at home or at work in 2005. The Department further 
assumes that one percent of these participants will elect to receive 
paper documents instead of electronic, thus 20 percent of 
participants receive disclosures through paper media.
---------------------------------------------------------------------------

     The Department assumes that investment advisory firms will 
use existing in-house resources to prepare most disclosures and to 
maintain the recordkeeping systems. This assumption does not apply to 
the computer model certification, the audit or the computer program 
used to generate disclosures for IRA participants.
     The Department assumes a combination of personnel will 
perform the information collections with an hourly wage rate for 2011 
of approximately $111, including both wages and benefits, for a 
financial manager and approximately $27 for clerical personnel.\84\ 
Legal professional time is similarly assumed to be almost $124 per 
hour, and computer programming time is estimated at $72 per hour.
---------------------------------------------------------------------------

    \84\ Hourly wage estimates are based on data from the Bureau of 
Labor Statistics Occupational Employment Survey (May 2009) and the 
Bureau of Labor Statistics Employment Cost Index (October 2010). 
Clerical wage and benefits estimates are based on metropolitan wage 
rates for executive secretaries and administrative assistants. 
Financial manager wage and benefits estimates are based on 
metropolitan wage estimates for financial managers. Legal 
professional wage and benefits estimates are based on metropolitan 
wage rates for lawyers. Computer programmer wage and benefits 
estimates are based on metropolitan wage rates for professional 
computer programmers.
---------------------------------------------------------------------------

    The Department assigned an hour burden (with associated `equivalent 
costs' derived from multiplying the hour burden by the estimated 
employee compensation) and a cost burden (the actual monetary expenses 
of the entity, i.e. material and postage costs and fees paid to outside 
entities) to this final regulation. The total costs of this final 
regulation are calculated by adding the mutually exclusive hour burden 
equivalent costs and the cost burden. These PRA costs are a subset of 
the overall costs of this final regulation. The Department estimates 
that the third-party disclosures, computer model certification, and 
audit requirements for the final statutory exemption will require 
approximately 5.2 million burden hours (with an associated equivalent 
cost of approximately $602 million) and a cost burden of approximately 
$580 million in the first year. In each subsequent year the total 
burden hours are estimated to be approximately 2.8 million hours (with 
an associated equivalent cost of approximately $314 million) and the 
cost burden is estimated at approximately $431 million.
    These paperwork burden estimates are summarized as follows:
    Type of Review: Revised Collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Titles: Final Statutory Exemption for the Provision of Investment 
Advice to Participants and Beneficiaries of Participant-Directed 
Individual Account Plans and IRAs.
    OMB Control Number: 1210-0134.
    Affected Public: Business or other for-profit.
    Estimated Number of Respondents: 16,000.
    Estimated Number of Annual Responses: 20,684,000.
    Frequency of Response: Initially, Annually, Upon Request, when a 
material change.
    Estimated Total Annual Hour Burden: 5,179,000 hours in the first 
year; 2,849,000 hours in each subsequent year (with associated three 
year annualized hour burden of 3,626,000).
    Estimated Total Annual Cost Burden: $580,272,000 in the first year; 
$430,973,000 for each subsequent year (with associated three year 
annualized cost burden of $480,739,000).

List of Subjects in 29 CFR Part 2550

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

    For the reasons set forth in the preamble, Chapter XXV, subchapter 
F, part 2550 of Title 29 of the Code of Federal Regulations is amended 
as follows:

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
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). Secs. 2550.401b-1, 2550.408b-1, 
2550.408b-19, 2550.408g-1, and 2550.408g-2 also issued under sec. 
102, Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 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. 2550.404a-2 also issued under 
26 U.S.C. 401 note (sec. 657(c)(2), Pub. L. 107-16, 115 Stat. 38, 
136 (2001)). Sec. 2550.408b-1 also issued under 29 U.S.C. 
1108(b)(1). Sec. 2550.408b-19 also issued under sec. 611(g)(3), 
Public Law 109-280, 120 Stat. 780, 975 (2006).


0
2. Add Sec.  2550.408g-1 to read as follows:


Sec.  2550.408g-1  Investment advice--participants and beneficiaries.

    (a) In general. (1) This section provides relief from the 
prohibitions of section 406 of the Employee Retirement Income Security 
Act of 1974, as amended (ERISA or the Act), and section 4975 of the 
Internal Revenue Code of 1986, as amended (the Code), for certain 
transactions in connection with the provision of investment advice to 
participants and beneficiaries. This section, at paragraph (b), 
implements the statutory exemption set forth at sections 408(b)(14) and 
408(g)(1) of ERISA and sections 4975(d)(17) and 4975(f)(8) of the Code. 
The requirements and conditions set forth in this section apply solely 
for the relief described in paragraph (b) of this section and, 
accordingly, no inferences should be drawn with respect to requirements 
applicable to the provision of investment advice not addressed by this 
section.

[[Page 66163]]

    (2) Nothing contained in ERISA section 408(g)(1), Code section 
4975(f)(8), or this regulation imposes an obligation on a plan 
fiduciary or any other party to offer, provide or otherwise make 
available any investment advice to a participant or beneficiary.
    (3) Nothing contained in ERISA section 408(g)(1), Code section 
4975(f)(8), or this regulation invalidates or otherwise affects prior 
regulations, exemptions, interpretive or other guidance issued by the 
Department of Labor pertaining to the provision of investment advice 
and the circumstances under which such advice may or may not constitute 
a prohibited transaction under section 406 of ERISA or section 4975 of 
the Code.
    (b) Statutory exemption. (1) General. Sections 408(b)(14) and 
408(g)(1) of ERISA provide an exemption from the prohibitions of 
section 406 of ERISA for transactions described in section 408(b)(14) 
of ERISA in connection with the provision of investment advice to a 
participant or a beneficiary if the investment advice is provided by a 
fiduciary adviser under an ``eligible investment advice arrangement.'' 
Sections 4975(d)(17) and (f)(8) of the Code contain parallel provisions 
to ERISA sections 408(b)(14) and (g)(1).
    (2) Eligible investment advice. For purposes of section 408(g)(1) 
of ERISA and section 4975(f)(8) of the Code, an ``eligible investment 
advice arrangement'' means an arrangement that meets either the 
requirements of paragraph (b)(3) of this section or paragraph (b)(4) of 
this section, or both.
    (3) Arrangements that use fee leveling. For purposes of this 
section, an arrangement is an eligible investment advice arrangement 
if--
    (i)(A) Any investment advice is based on generally accepted 
investment theories that take into account the historic risks and 
returns of different asset classes over defined periods of time, 
although nothing herein shall preclude any investment advice from being 
based on generally accepted investment theories that take into account 
additional considerations;
    (B) Any investment advice takes into account investment management 
and other fees and expenses attendant to the recommended investments;
    (C) Any investment advice takes into account, to the extent 
furnished by a plan, participant or beneficiary, information relating 
to age, time horizons (e.g., life expectancy, retirement age), risk 
tolerance, current investments in designated investment options, other 
assets or sources of income, and investment preferences of the 
participant or beneficiary. A fiduciary adviser shall request such 
information, but nothing in this paragraph (b)(3)(i)(C) shall require 
that any investment advice take into account information requested, but 
not furnished by a participant or beneficiary, nor preclude requesting 
and taking into account additional information that a plan or 
participant or beneficiary may provide;
    (D) No fiduciary adviser (including any employee, agent, or 
registered representative) that provides investment advice receives 
from any party (including an affiliate of the fiduciary adviser), 
directly or indirectly, any fee or other compensation (including 
commissions, salary, bonuses, awards, promotions, or other things of 
value) that varies depending on the basis of a participant's or 
beneficiary's selection of a particular investment option; and
    (ii) The requirements of paragraphs (b)(5), (6), (7), (8) and (9) 
and paragraph (d) of this section are met.
    (4) Arrangements that use computer models. For purposes of this 
section, an arrangement is an eligible investment advice arrangement if 
the only investment advice provided under the arrangement is advice 
that is generated by a computer model described in paragraphs (b)(4)(i) 
and (ii) of this section under an investment advice program and with 
respect to which the requirements of paragraphs (b)(5), (6), (7), (8) 
and (9) and paragraph (d) are met.
    (i) A computer model shall be designed and operated to--
    (A) Apply generally accepted investment theories that take into 
account the historic risks and returns of different asset classes over 
defined periods of time, although nothing herein shall preclude a 
computer model from applying generally accepted investment theories 
that take into account additional considerations;
    (B) Take into account investment management and other fees and 
expenses attendant to the recommended investments;
    (C) Appropriately weight the factors used in estimating future 
returns of investment options;
    (D) Request from a participant or beneficiary and, to the extent 
furnished, utilize information relating to age, time horizons (e.g., 
life expectancy, retirement age), risk tolerance, current investments 
in designated investment options, other assets or sources of income, 
and investment preferences; provided, however, that nothing herein 
shall preclude a computer model from requesting and taking into account 
additional information that a plan or a participant or beneficiary may 
provide;
    (E) Utilize appropriate objective criteria to provide asset 
allocation portfolios comprised of investment options available under 
the plan;
    (F) Avoid investment recommendations that:
    (1) Inappropriately favor investment options offered by the 
fiduciary adviser or a person with a material affiliation or material 
contractual relationship with the fiduciary adviser over other 
investment options, if any, available under the plan; or
    (2) Inappropriately favor investment options that may generate 
greater income for the fiduciary adviser or a person with a material 
affiliation or material contractual relationship with the fiduciary 
adviser; and
    (G)(1) Except as provided in paragraph (b)(4)(i)(G)(2) of this 
section, take into account all designated investment options, within 
the meaning of paragraph (c)(1) of this section, available under the 
plan without giving inappropriate weight to any investment option.
    (2) A computer model shall not be treated as failing to meet the 
requirements of this paragraph merely because it does not make 
recommendations relating to the acquisition, holding or sale of an 
investment option that:
    (i) Constitutes an annuity option with respect to which a 
participant or beneficiary may allocate assets toward the purchase of a 
stream of retirement income payments guaranteed by an insurance 
company, provided that, contemporaneous with the provision of 
investment advice generated by the computer model, the participant or 
beneficiary is also furnished a general description of such options and 
how they operate; or
    (ii) The participant or beneficiary requests to be excluded from 
consideration in such recommendations.
    (ii) Prior to utilization of the computer model, the fiduciary 
adviser shall obtain a written certification, meeting the requirements 
of paragraph (b)(4)(iv) of this section, from an eligible investment 
expert, within the meaning of paragraph (b)(4)(iii) of this section, 
that the computer model meets the requirements of paragraph (b)(4)(i) 
of this section. If, following certification, a computer model is 
modified in a manner that may affect its ability to meet the 
requirements of paragraph (b)(4)(i), the fiduciary adviser shall, prior 
to utilization of the modified model, obtain a new certification from 
an eligible investment expert that the

[[Page 66164]]

computer model, as modified, meets the requirements of paragraph 
(b)(4)(i).
    (iii) The term ``eligible investment expert'' means a person that, 
through employees or otherwise, has the appropriate technical training 
or experience and proficiency to analyze, determine and certify, in a 
manner consistent with paragraph (b)(4)(iv) of this section, whether a 
computer model meets the requirements of paragraph (b)(4)(i) of this 
section; except that the term ``eligible investment expert'' does not 
include any person that: Has any material affiliation or material 
contractual relationship with the fiduciary adviser, with a person with 
a material affiliation or material contractual relationship with the 
fiduciary adviser, or with any employee, agent, or registered 
representative of the foregoing; or develops a computer model utilized 
by the fiduciary adviser to satisfy this paragraph (b)(4).
    (iv) A certification by an eligible investment expert shall--
    (A) Be in writing;
    (B) Contain--
    (1) An identification of the methodology or methodologies applied 
in determining whether the computer model meets the requirements of 
paragraph (b)(4)(i) of this section;
    (2) An explanation of how the applied methodology or methodologies 
demonstrated that the computer model met the requirements of paragraph 
(b)(4)(i) of this section;
    (3) A description of any limitations that were imposed by any 
person on the eligible investment expert's selection or application of 
methodologies for determining whether the computer model meets the 
requirements of paragraph (b)(4)(i) of this section;
    (4) A representation that the methodology or methodologies were 
applied by a person or persons with the educational background, 
technical training or experience necessary to analyze and determine 
whether the computer model meets the requirements of paragraph 
(b)(4)(i); and
    (5) A statement certifying that the eligible investment expert has 
determined that the computer model meets the requirements of paragraph 
(b)(4)(i) of this section; and
    (C) Be signed by the eligible investment expert.
    (v) The selection of an eligible investment expert as required by 
this section is a fiduciary act governed by section 404(a)(1) of ERISA.
    (5) Arrangement must be authorized by a plan fiduciary. (i) Except 
as provided in paragraph (b)(5)(ii) of this section, the arrangement 
pursuant to which investment advice is provided to participants and 
beneficiaries pursuant to this section must be expressly authorized by 
a plan fiduciary (or, in the case of an Individual Retirement Account 
(IRA), the IRA beneficiary) other than: The person offering the 
arrangement; any person providing designated investment options under 
the plan; or any affiliate of either. Provided, however, that for 
purposes of the preceding, in the case of an IRA, an IRA beneficiary 
will not be treated as an affiliate of a person solely by reason of 
being an employee of such person.
    (ii) In the case of an arrangement pursuant to which investment 
advice is provided to participants and beneficiaries of a plan 
sponsored by the person offering the arrangement or a plan sponsored by 
an affiliate of such person, the authorization described in paragraph 
(b)(5)(i) of this section may be provided by the plan sponsor of such 
plan, provided that the person or affiliate offers the same arrangement 
to participants and beneficiaries of unaffiliated plans in the ordinary 
course of its business.
    (iii) For purposes of the authorization described in paragraph 
(b)(5)(i) of this section, a plan sponsor shall not be treated as a 
person providing a designated investment option under the plan merely 
because one of the designated investment options of the plan is an 
option that permits investment in securities of the plan sponsor or an 
affiliate.
    (6) Annual audit. (i) The fiduciary adviser shall, at least 
annually, engage an independent auditor, who has appropriate technical 
training or experience and proficiency, and so represents in writing to 
the fiduciary adviser, to:
    (A) Conduct an audit of the investment advice arrangements for 
compliance with the requirements of this section; and
    (B) Within 60 days following completion of the audit, issue a 
written report to the fiduciary adviser and, except with respect to an 
arrangement with an IRA, to each fiduciary who authorized the use of 
the investment advice arrangement, in accordance with paragraph (b)(5) 
of this section, that--
    (1) Identifies the fiduciary adviser,
    (2) Indicates the type of arrangement (i.e., fee leveling, computer 
models, or both),
    (3) If the arrangement uses computer models, or both computer 
models and fee leveling, indicates the date of the most recent computer 
model certification, and identifies the eligible investment expert that 
provided the certification, and
    (4) Sets forth the specific findings of the auditor regarding 
compliance of the arrangement with the requirements of this section.
    (ii) With respect to an arrangement with an IRA, the fiduciary 
adviser:
    (A) Within 30 days following receipt of the report from the 
auditor, as described in paragraph (b)(6)(i)(B) of this section, shall 
furnish a copy of the report to the IRA beneficiary or make such report 
available on its Web site, provided that such beneficiaries are 
provided information, with the information required to be disclosed 
pursuant to paragraph (b)(7) of this section, concerning the purpose of 
the report, and how and where to locate the report applicable to their 
account; and
    (B) In the event that the report of the auditor identifies 
noncompliance with the requirements of this section, within 30 days 
following receipt of the report from the auditor, shall send a copy of 
the report to the Department of Labor at the following address: 
Investment Advice Exemption Notification, U.S. Department of Labor, 
Employee Benefits Security Administration, Room N-1513, 200 
Constitution Ave., NW., Washington, DC 20210, or submit a copy 
electronically to InvAdvNotification@dol.gov.
    (iii) For purposes of this paragraph (b)(6), an auditor is 
considered independent if it does not have a material affiliation or 
material contractual relationship with the person offering the 
investment advice arrangement to the plan or with any designated 
investment options under the plan, and does not have any role in the 
development of the investment advice arrangement, or certification of 
the computer model utilized under the arrangement.
    (iv) For purposes of this paragraph (b)(6), the auditor shall 
review sufficient relevant information to formulate an opinion as to 
whether the investment advice arrangements, and the advice provided 
pursuant thereto, offered by the fiduciary adviser during the audit 
period were in compliance with this section. Nothing in this paragraph 
shall preclude an auditor from using information obtained by sampling, 
as reasonably determined appropriate by the auditor, investment advice 
arrangements, and the advice pursuant thereto, during the audit period.
    (v) The selection of an auditor for purposes of this paragraph 
(b)(6) is a fiduciary act governed by section 404(a)(1) of ERISA.
    (7) Disclosure to participants. (i) The fiduciary adviser must 
provide, without charge, to a participant or a beneficiary before the 
initial provision of

[[Page 66165]]

investment advice with regard to any security or other property offered 
as an investment option, a written notification of:
    (A) The role of any party that has a material affiliation or 
material contractual relationship with the fiduciary adviser in the 
development of the investment advice program, and in the selection of 
investment options available under the plan;
    (B) The past performance and historical rates of return of the 
designated investment options available under the plan, to the extent 
that such information is not otherwise provided;
    (C) All fees or other compensation that the fiduciary adviser or 
any affiliate thereof is to receive (including compensation provided by 
any third party) in connection with--
    (1) The provision of the advice;
    (2) The sale, acquisition, or holding of any security or other 
property pursuant to such advice; or
    (3) Any rollover or other distribution of plan assets or the 
investment of distributed assets in any security or other property 
pursuant to such advice;
    (D) Any material affiliation or material contractual relationship 
of the fiduciary adviser or affiliates thereof in the security or other 
property;
    (E) The manner, and under what circumstances, any participant or 
beneficiary information provided under the arrangement will be used or 
disclosed;
    (F) The types of services provided by the fiduciary adviser in 
connection with the provision of investment advice by the fiduciary 
adviser;
    (G) The adviser is acting as a fiduciary of the plan in connection 
with the provision of the advice; and
    (H) That a recipient of the advice may separately arrange for the 
provision of advice by another adviser that could have no material 
affiliation with and receive no fees or other compensation in 
connection with the security or other property.
    (ii)(A) The notification required under paragraph (b)(7)(i) of this 
section must be written in a clear and conspicuous manner and in a 
manner calculated to be understood by the average plan participant and 
must be sufficiently accurate and comprehensive to reasonably apprise 
such participants and beneficiaries of the information required to be 
provided in the notification.
    (B) The appendix to this section contains a model disclosure form 
that may be used to provide notification of the information described 
in paragraph (b)(7)(i)(C) of this section. Use of the model form is not 
mandatory. However, use of an appropriately completed model disclosure 
form will be deemed to satisfy the requirements of paragraphs (b)(7)(i) 
and (ii) of this section with respect to such information.
    (iii) The notification required under paragraph (b)(7)(i) of this 
section may, in accordance with 29 CFR 2520.104b-1, be provided in 
written or electronic form.
    (iv) With respect to the information required to be disclosed 
pursuant to paragraph (b)(7)(i) of this section, the fiduciary adviser 
shall, at all times during the provision of advisory services to the 
participant or beneficiary pursuant to the arrangement--
    (A) Maintain accurate, up-to-date information in a form that is 
consistent with paragraph (b)(7)(ii) of this section,
    (B) Provide, without charge, accurate, up-to-date information to 
the recipient of the advice no less frequently than annually,
    (C) Provide, without charge, accurate information to the recipient 
of the advice upon request of the recipient, and
    (D) Provide, without charge, to the recipient of the advice any 
material change to the information described in paragraph (b)(7)(i) at 
a time reasonably contemporaneous to the change in information.
    (8) Disclosure to authorizing fiduciary. The fiduciary adviser 
shall, in connection with any authorization described in paragraph 
(b)(5)(i) of this section, provide the authorizing fiduciary with a 
written notice informing the fiduciary that:
    (i) The fiduciary adviser intends to comply with the conditions of 
the statutory exemption for investment advice under section 408(b)(14) 
and (g) of the Employee Retirement Income Security Act and this 
section;
    (ii) The fiduciary adviser's arrangement will be audited annually 
by an independent auditor for compliance with the requirements of the 
statutory exemption and related regulations; and
    (iii) The auditor will furnish the authorizing fiduciary a copy of 
that auditor's findings within 60 days of its completion of the audit.
    (9) Other conditions. The requirements of this paragraph are met 
if--
    (i) The fiduciary adviser provides appropriate disclosure, in 
connection with the sale, acquisition, or holding of the security or 
other property, in accordance with all applicable securities laws,
    (ii) Any sale, acquisition, or holding of a security or other 
property occurs solely at the direction of the recipient of the advice,
    (iii) The compensation received by the fiduciary adviser and 
affiliates thereof in connection with the sale, acquisition, or holding 
of the security or other property is reasonable, and
    (iv) The terms of the sale, acquisition, or holding of the security 
or other property are at least as favorable to the plan as an arm's 
length transaction would be.
    (c) Definitions. For purposes of this section:
    (1) The term ``designated investment option'' means any investment 
option 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 option'' 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. The term ``designated investment option'' has the same meaning as 
the term ``designated investment alternative'' as defined in 29 CFR 
2550.404a-5(h).
    (2)(i) The term ``fiduciary adviser'' means, with respect to a 
plan, a person who is a fiduciary of the plan by reason of the 
provision of investment advice referred to in section 3(21)(A)(ii) of 
ERISA by the person to the participant or beneficiary of the plan and 
who is--
    (A) Registered as an investment adviser under the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of the 
State in which the fiduciary maintains its principal office and place 
of business,
    (B) A bank or similar financial institution referred to in section 
408(b)(4) of ERISA or a savings association (as defined in section 
3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)), 
but only if the advice is provided through a trust department of the 
bank or similar financial institution or savings association which is 
subject to periodic examination and review by Federal or State banking 
authorities,
    (C) An insurance company qualified to do business under the laws of 
a State,
    (D) A person registered as a broker or dealer under the Securities 
Exchange Act of 1934 (15 U.S.C. 78a et seq.),
    (E) An affiliate of a person described in paragraphs (c)(2)(i)(A) 
through (D), or
    (F) An employee, agent, or registered representative of a person 
described in paragraphs (c)(2)(i)(A) through (E) of this section who 
satisfies the requirements of applicable insurance, banking, and 
securities laws relating to the provision of advice.

[[Page 66166]]

    (ii) Except as provided under 29 CFR 2550.408g-2, a fiduciary 
adviser includes any person who develops the computer model, or markets 
the computer model or investment advice program, utilized in 
satisfaction of paragraph (b)(4) of this section.
    (3) A ``registered representative'' of another entity means a 
person described in section 3(a)(18) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(18)) (substituting the entity for the broker or 
dealer referred to in such section) or a person described in section 
202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for the investment adviser referred 
to in such section).
    (4) ``Individual Retirement Account'' or ``IRA'' means--
    (i) An individual retirement account described in section 408(a) of 
the Code;
    (ii) An individual retirement annuity described in section 408(b) 
of the Code;
    (iii) An Archer MSA described in section 220(d) of the Code;
    (iv) A health savings account described in section 223(d) of the 
Code;
    (v) A Coverdell education savings account described in section 530 
of the Code;
    (vi) A trust, plan, account, or annuity which, at any time, has 
been determined by the Secretary of the Treasury to be described in any 
of paragraphs (c)(4)(i) through (v) of this section;
    (vii) A ``simplified employee pension'' described in section 408(k) 
of the Code; or
    (viii) A ``simple retirement account'' described in section 408(p) 
of the Code.
    (5) An ``affiliate'' of another person means--
    (i) Any person directly or indirectly owning, controlling, or 
holding with power to vote, 5 percent or more of the outstanding voting 
securities of such other person;
    (ii) Any person 5 percent or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held with 
power to vote, by such other person;
    (iii) Any person directly or indirectly controlling, controlled by, 
or under common control with, such other person; and
    (iv) Any officer, director, partner, copartner, or employee of such 
other person.
    (6)(i) A person with a ``material affiliation'' with another person 
means--
    (A) Any affiliate of the other person;
    (B) Any person directly or indirectly owning, controlling, or 
holding, 5 percent or more of the interests of such other person; and
    (C) Any person 5 percent or more of whose interests are directly or 
indirectly owned, controlled, or held, by such other person.
    (ii) For purposes of paragraph (c)(6)(i) of this section, 
``interest'' means with respect to an entity--
    (A) The combined voting power of all classes of stock entitled to 
vote or the total value of the shares of all classes of stock of the 
entity if the entity is a corporation;
    (B) The capital interest or the profits interest of the entity if 
the entity is a partnership; or
    (C) The beneficial interest of the entity if the entity is a trust 
or unincorporated enterprise.
    (7) Persons have a ``material contractual relationship'' if 
payments made by one person to the other person pursuant to contracts 
or agreements between the persons exceed 10 percent of the gross 
revenue, on an annual basis, of such other person.
    (8) ``Control'' means the power to exercise a controlling influence 
over the management or policies of a person other than an individual.
    (d) Retention of records. The fiduciary adviser must maintain, for 
a period of not less than 6 years after the provision of investment 
advice under this section any records necessary for determining whether 
the applicable requirements of this section have been met. A 
transaction prohibited under section 406 of ERISA shall not be 
considered to have occurred solely because the records are lost or 
destroyed prior to the end of the 6-year period due to circumstances 
beyond the control of the fiduciary adviser.
    (e) Noncompliance. (1) The relief from the prohibited transaction 
provisions of section 406 of ERISA and the sanctions resulting from the 
application of section 4975 of the Code described in paragraph (b) of 
this section shall not apply to any transaction described in such 
paragraphs in connection with the provision of investment advice to an 
individual participant or beneficiary with respect to which the 
applicable conditions of this section have not been satisfied.
    (2) In the case of a pattern or practice of noncompliance with any 
of the applicable conditions of this section, the relief described in 
paragraph (b) of this section shall not apply to any transaction in 
connection with the provision of investment advice provided by the 
fiduciary adviser during the period over which the pattern or practice 
extended.
    (f) Effective date and applicability date. This section shall be 
effective December 27, 2011. This section shall apply to transactions 
described in paragraph (b) of this section occurring on or after 
December 27, 2011.

Appendix to Sec.  2550.408g-1

Fiduciary Adviser Disclosure

    This document contains important information about [enter name 
of Fiduciary Adviser] and how it is compensated for the investment 
advice provided to you. You should carefully consider this 
information in your evaluation of that advice.
    [enter name of Fiduciary Adviser] has been selected to provide 
investment advisory services for the [enter name of Plan]. [enter 
name of Fiduciary Adviser] will be providing these services as a 
fiduciary under the Employee Retirement Income Security Act (ERISA). 
[enter name of Fiduciary Adviser], therefore, must act prudently and 
with only your interest in mind when providing you recommendations 
on how to invest your retirement assets.

Compensation of the Fiduciary Adviser and Related Parties

    [enter name of Fiduciary Adviser] (is/is not) compensated by the 
plan for the advice it provides. (if compensated by the plan, 
explain what and how compensation is charged (e.g., asset-based fee, 
flat fee, per advice)). (If applicable, [enter name of Fiduciary 
Adviser] is not compensated on the basis of the investment(s) 
selected by you.)
    Affiliates of [enter name of Fiduciary Adviser] (if applicable 
enter, and other parties with whom [enter name of Fiduciary Adviser] 
is related or has a material financial relationship) also will be 
providing services for which they will be compensated. These 
services include: [enter description of services, e.g., investment 
management, transfer agent, custodial, and shareholder services for 
some/all the investment funds available under the plan.]
    When [enter name of Fiduciary Adviser] recommends that you 
invest your assets in an investment fund of its own or one of its 
affiliates and you follow that advice, [enter name of Fiduciary 
Adviser] or that affiliate will receive compensation from the 
investment fund based on the amount you invest. The amounts that 
will be paid by you will vary depending on the particular fund in 
which you invest your assets and may range from --% to --%. Specific 
information concerning the fees and other charges of each investment 
fund is available from [enter source, such as: your plan 
administrator, investment fund provider (possibly with Internet Web 
site address)]. This information should be reviewed carefully before 
you make an investment decision.
    (if applicable enter, [enter name of Fiduciary Adviser] or 
affiliates of [enter name of Fiduciary Adviser] also receive 
compensation from non-affiliated investment funds as a result of 
investments you make as a result of recommendations of [enter name 
of Fiduciary Adviser]. The amount of this compensation also may vary 
depending on the particular fund in which you invest. This 
compensation may range from --% to --%. Specific information 
concerning the fees and other charges of each investment fund is

[[Page 66167]]

available from [enter source, such as: your plan administrator, 
investment fund provider (possibly with Internet Web site address)]. 
This information should be reviewed carefully before you make an 
investment decision.
    (if applicable enter, In addition to the above, [enter name of 
Fiduciary Adviser] or affiliates of [enter name of Fiduciary 
Adviser] also receive other fees or compensation, such as 
commissions, in connection with the sale, acquisition or holding of 
investments selected by you as a result of recommendations of [enter 
name of Fiduciary Adviser]. These amounts are: [enter description of 
all other fees or compensation to be received in connection with 
sale, acquisition or holding of investments]. This information 
should be reviewed carefully before you make an investment decision.
    (if applicable enter, When [enter name of Fiduciary Adviser] 
recommends that you take a rollover or other distribution of assets 
from the plan, or recommends how those assets should subsequently be 
invested, [enter name of Fiduciary Adviser] or affiliates of [enter 
name of Fiduciary Adviser] will receive additional fees or 
compensation. These amounts are: [enter description of all other 
fees or compensation to be received in connection with any rollover 
or other distribution of plan assets or the investment of 
distributed assets]. This information should be reviewed carefully 
before you make a decision to take a distribution.

Consider Impact of Compensation on Advice

    The fees and other compensation that [enter name of Fiduciary 
Adviser] and its affiliates receive on account of assets in [enter 
name of Fiduciary Adviser] (enter if applicable, and non-[enter name 
of Fiduciary Adviser]) investment funds are a significant source of 
revenue for the [enter name of Fiduciary Adviser] and its 
affiliates. You should carefully consider the impact of any such 
fees and compensation in your evaluation of the investment advice 
that [enter name of Fiduciary Adviser] provides to you. In this 
regard, you may arrange for the provision of advice by another 
adviser that may have no material affiliation with or receive no 
compensation in connection with the investment funds or products 
offered under the plan. This type of advice is/is not available 
through your plan.

Investment Returns

    While understanding investment-related fees and expenses is 
important in making informed investment decisions, it is also 
important to consider additional information about your investment 
options, such as performance, investment strategies and risks. 
Specific information related to the past performance and historical 
rates of return of the investment options available under the plan 
(has/has not) been provided to you by [enter source, such as: your 
plan administrator, investment fund provider]. (if applicable enter, 
If not provided to you, the information is attached to this 
document.)
    For options with returns that vary over time, past performance 
does not guarantee how your investment in the option will perform in 
the future; your investment in these options could lose money.

Parties Participating in Development of Advice Program or Selection of 
Investment Options

    Name, and describe role of, affiliates or other parties with 
whom the fiduciary adviser has a material affiliation or contractual 
relationship that participated in the development of the investment 
advice program (if this is an arrangement that uses computer models) 
or the selection of investment options available under the plan.

Use of Personal Information

Include a brief explanation of the following--What personal 
information will be collected; How the information will be used; 
Parties with whom information will be shared; How the information 
will be protected; and When and how notice of the Fiduciary 
Adviser's privacy statement will be available to participants and 
beneficiaries.

    Should you have any questions about [enter name of Fiduciary 
Adviser] or the information contained in this document, you may 
contact [enter name of contact person for fiduciary adviser, 
telephone number, address].


0
3. Add Sec.  2550.408g-2 to read as follows:


Sec.  2550.408g-2  Investment advice--fiduciary election.

    (a) General. Section 408(g)(11)(A) of the Employee Retirement 
Income Security Act, as amended (ERISA), provides that a person who 
develops a computer model or who markets a computer model or investment 
advice program used in an ``eligible investment advice arrangement'' 
shall be treated as a fiduciary of a plan by reason of the provision of 
investment advice referred to in ERISA section 3(21)(A)(ii) to the plan 
participant or beneficiary, and shall be treated as a ``fiduciary 
adviser'' for purposes of ERISA sections 408(b)(14) and 408(g), except 
that the Secretary of Labor may prescribe rules under which only one 
fiduciary adviser may elect to be treated as a fiduciary with respect 
to the plan. Section 4975(f)(8)(J)(i) of the Internal Revenue Code, as 
amended (the Code), contains a parallel provision to ERISA section 
408(g)(11)(A) that applies for purposes of Code sections 4975(d)(17) 
and 4975(f)(8). This section sets forth requirements that must be 
satisfied in order for one such fiduciary adviser to elect to be 
treated as a fiduciary with respect to a plan under an eligible 
investment advice arrangement.
    (b)(1) If an election meets the requirements in paragraph (b)(2) of 
this section, then the person identified in the election shall be the 
sole fiduciary adviser treated as a fiduciary by reason of developing 
or marketing the computer model, or marketing the investment advice 
program, used in an eligible investment advice arrangement.
    (2) An election satisfies the requirements of this paragraph (b) 
with respect to an eligible investment advice arrangement if the 
election is in writing and such writing--
    (i) Identifies the investment advice arrangement, and the person 
offering the arrangement, with respect to which the election is to be 
effective;
    (ii) Identifies a person who--
    (A) Is described in any of 29 CFR 2550.408g-1(c)(2)(i)(A) through 
(E),
    (B) Develops the computer model, or markets the computer model or 
investment advice program, utilized in satisfaction of 29 CFR 
2550.408g-1(b)(4) with respect to the arrangement, and
    (C) Acknowledges that it elects to be treated as the only 
fiduciary, and fiduciary adviser, by reason of developing such computer 
model, or marketing such computer model or investment advice program;
    (iii) Is signed by the person identified in paragraph (b)(2)(ii) of 
this section;
    (iv) Is furnished to the person who authorized the arrangement, in 
accordance with 29 CFR 2550.408g-1(b)(5); and
    (v) Is maintained in accordance with 29 CFR 2550.408g-1(d).

    Signed at Washington, DC, this 5th day of October 2011.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2011-26261 Filed 10-24-11; 8:45 am]
BILLING CODE 4510-29-P