[Federal Register Volume 75, Number 136 (Friday, July 16, 2010)]
[Rules and Regulations]
[Pages 41600-41638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16768]
[[Page 41599]]
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Part III
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee
Disclosure; Interim Final Rule
Federal Register / Vol. 75 , No. 136 / Friday, July 16, 2010 / Rules
and Regulations
[[Page 41600]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB08
Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee
Disclosure
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Interim final rule with request for comments.
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SUMMARY: This document contains an interim final regulation under the
Employee Retirement Income Security Act of 1974 (ERISA or the Act)
requiring that certain service providers to employee pension benefit
plans disclose information to assist plan fiduciaries in assessing the
reasonableness of contracts or arrangements, including the
reasonableness of the service providers' compensation and potential
conflicts of interest that may affect the service providers'
performance. These disclosure requirements are established as part of a
statutory exemption from ERISA's prohibited transaction provisions.
This regulation will affect employee pension benefit plan sponsors and
fiduciaries and certain service providers to such plans. Interested
persons are invited to submit comments on the interim final regulation
for consideration by the Department of Labor.
DATES: Effective date. This interim final rule is effective on July 16,
2011.
Comment date. Written comments on the interim final rule must be
received by August 30, 2010.
ADDRESSES: To facilitate the receipt and processing of comments, EBSA
encourages interested persons to submit their comments electronically
to [email protected], or by using the Federal eRulemaking portal http://www.regulations.gov (following instructions for submission of
comments). Persons submitting comments electronically are encouraged
not to submit paper copies. Persons interested in submitting comments
on paper should send or deliver their comments (preferably three
copies) to: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attention:
408(b)(2) Interim Final Rule. All comments will be available to the
public, without charge, online at http://www.regulations.gov and http://www.dol.gov/ebsa, and at the Public Disclosure Room, Employee Benefits
Security Administration, U.S. Department of Labor, Room N-1513, 200
Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: For further information on the interim
final regulation, contact Allison Wielobob or Fil Williams, Office of
Regulations and Interpretations, Employee Benefits Security
Administration, (202) 693-8510. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
1. General
In recent years, there have been a number of changes in the way
services are provided to employee benefit plans and in the way service
providers are compensated. Many of these changes may have improved
efficiency and reduced the costs of administrative services and
benefits for plans and their participants. However, the complexity
resulting from these changes also has made it more difficult for plan
sponsors and fiduciaries to understand what service providers actually
are paid for the specific services rendered.
Despite these complexities, section 404(a)(1) of ERISA requires
plan fiduciaries, when selecting or monitoring service providers and
plan investments, to act prudently and solely in the interest of the
plan's participants and beneficiaries and for the exclusive purpose of
providing benefits and defraying reasonable expenses of administering
the plan. Fundamental to a plan fiduciary's ability to discharge these
obligations is the availability of information sufficient to enable the
plan fiduciary to make informed decisions about the services, the
costs, and the service provider. Although the Department of Labor
(Department) has issued technical guidance and compliance assistance
materials relating to the obligations of plan fiduciaries in selecting
and monitoring service providers,\1\ the Department continues to
believe that, given plan fiduciaries' need for complete and accurate
information about compensation and revenue sharing, both plan
fiduciaries and service providers would benefit from regulatory
guidance in this area. For this reason, the Department published a
notice of proposed rulemaking in the Federal Register (72 FR 70988) on
December 13, 2007. On the same day, the Department also published a
proposed class exemption from the restrictions of section 406(a)(1)(C)
of ERISA in the Federal Register (72 FR 70893). The Department proposed
the exemption on its own motion pursuant to section 408(a) of the Act,
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, August 10, 1990).
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\1\ See, e.g., Field Assistance Bulletin 2002-3 (November 5,
2002), Advisory Opinions 97-16A (May 22, 1997) and 97-15A (May 22,
1997), http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html,
and http://www.dol.gov/ebsa/newsroom/fs053105.html.
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2. Public Comments on Proposed Regulation and Class Exemption
The Department's proposal required that reasonable contracts and
arrangements between employee benefit plans and certain providers of
services to such plans include specified information to assist plan
fiduciaries in assessing the reasonableness of the compensation paid
for services and the conflicts of interest that may affect a service
provider's performance of services. The proposal also was designed to
assist plan fiduciaries and administrators in obtaining the information
they need from service providers to satisfy their reporting and
disclosure obligations.\2\ Interested persons were invited to submit
comments on the proposal. In response to this invitation, the
Department received over 100 written comments on the proposed
regulation and class exemption from a variety of parties, including
plan sponsors and fiduciaries, plan service providers, financial
institutions, and employee benefit plan and participant industry
representatives. These comments are available for review under ``Public
Comments'' on the ``Laws & Regulations'' page of the Department's
Employee Benefits Security Administration Web site at http://www.dol.gov/ebsa.
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\2\ The Department also implemented changes to the information
required to be reported concerning service provider compensation as
part of the Form 5500 Annual Report. These changes to Schedule C of
the Form 5500 complement the interim final rule under ERISA section
408(b)(2) in assuring that plan fiduciaries have the information
they need to monitor their service providers consistent with their
duties under ERISA section 404(a)(1). See 72 FR 64731; see also
frequently asked questions on Schedule C, at http://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html and http://www.dol.gov/ebsa/faqs/faq_scheduleC.html.
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Due to the large number of public comments received, the importance
of this regulatory initiative, and its potentially significant effects
on the provision of services to employee benefit plans, the Department
held a public hearing on March 31 and April 1, 2008, in order to
further develop the public record and the Department's understanding of
the issues raised in the
[[Page 41601]]
public comments. As a result of the public hearing, the Department
received a significant number of additional comments to supplement the
public record for this regulatory initiative. These supplemental
materials also are available for review on the Department's Web site.
Set forth below is an overview of the interim final regulation and
the public comments received on the proposal and during the
Department's public hearing.
B. Overview of Interim Final Regulation Under ERISA Section 408(b)(2)
and Public Comments
The Department's interim final regulation (for simplicity, the
interim final regulation also is referred to herein as the final
regulation) retains the basic structure of the proposal by requiring
that covered service providers satisfy certain disclosure requirements
in order to qualify for the statutory exemption for services under
ERISA section 408(b)(2). The furnishing of goods, services, or
facilities between a plan and a party in interest to the plan generally
is prohibited under section 406(a)(1)(C) of ERISA. As a result, a
service relationship between a plan and a service provider would
constitute a prohibited transaction, because any person providing
services to the plan is defined by ERISA to be a ``party in interest''
to the plan. However, section 408(b)(2) of ERISA exempts certain
arrangements between plans and service providers that otherwise would
be prohibited transactions under section 406 of ERISA. Specifically,
section 408(b)(2) provides relief from ERISA's prohibited transaction
rules for service contracts or arrangements between a plan and a party
in interest if the contract or arrangement is reasonable, the services
are necessary for the establishment or operation of the plan, and no
more than reasonable compensation is paid for the services. Regulations
issued by the Department clarify each of these conditions to the
exemption.\3\
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\3\ See 29 CFR 2550.408b-2.
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This rule amends the regulation under ERISA section 408(b)(2) to
clarify the meaning of a ``reasonable'' contract or arrangement for
covered plans. Currently, the regulation at 29 CFR 2550.408b-2(c)
states only that a contract or arrangement is not reasonable unless it
permits the plan to terminate without penalty on reasonably short
notice. The final regulation establishes a requirement under section
408(b)(2) that, in order for certain contracts or arrangements for
services to be reasonable, the covered service provider must disclose
specified information to a responsible plan fiduciary, defined as a
fiduciary with authority to cause the plan to enter into, or extend or
renew, a contract or arrangement for the provision of services to the
plan. The specific disclosure requirements are described in more detail
below.
The final regulation differs from the proposal in a number of
significant respects, each discussed in this rule. First, unlike the
proposal, the final rule does not require a formal written contract or
arrangement delineating the disclosure obligations, even though the
disclosures must be made in writing. The final rule focuses instead on
the substance of the disclosure that must be provided. Second, the
final rule treats separately pension and welfare plans. Paragraph
(c)(1) of the rule published today provides disclosure requirements
applicable to contracts or arrangements with pension plans. The
Department reserves paragraph (c)(2) of the rule for future guidance on
disclosure with respect to welfare plans.
Third, the final rule modifies the categories of service providers
that must comply with the disclosure requirements, including
fiduciaries, investment advisers, and recordkeepers or brokers who make
investment alternatives available to a plan. It also applies to
providers of other specified services who receive either ``indirect
compensation'' (generally from sources other than the plan or plan
sponsor) or certain types of payments from affiliates and
subcontractors. The final rule includes in its definition of ``covered
service providers'' fiduciaries to investment vehicles that hold plan
assets and in which a covered plan has a direct equity investment.
However, the definition makes clear that furnishing non-fiduciary
services to such vehicles, or services to vehicles that do not hold
plan assets will not cause a person to be a covered service provider.
In addition, the regulation requires fiduciaries to plan asset
investment vehicles in which plans make direct equity investments, as
well as parties that offer designated investment alternatives to a
participant-directed individual account plan as part of a platform, to
furnish investment-related compensation information.
Fourth, the final rule, unlike the proposal, does not contain
specific narrative conflict of interest disclosure provisions, but
rather relies on full disclosure of the circumstances under which the
covered service provider will be receiving compensation from parties
other than the plan (or plan sponsor), the identification of such
parties, and the compensation that is expected to be received. As
discussed below, the Department is persuaded that plan fiduciaries will
be in a better position to assess potential conflicts of interest by
reviewing these specific parties and the actual or expected
compensation to be received from such parties. Fifth, the final rule
includes a new provision requiring that certain providers of multiple
services disclose separately the cost to the covered plan of
recordkeeping services. Sixth, the final rule specifically addresses
the application of the requirements of the regulation to section 4975
of the Internal Revenue Code (the Code). And, lastly, the exemptive
relief for plan sponsors or other responsible plan fiduciaries,
originally proposed as a separate exemption, is now incorporated into
the final rule for ease of reference and consideration by interested
parties. A more detailed discussion of the final rule, including these
changes, is set forth below.
As required by Executive Order 12866, the Department evaluated the
benefits and costs of this final rule. The Department believes that
mandatory proactive disclosure will reduce sponsor information costs,
discourage harmful conflicts, and enhance service value. Additional
benefits will flow from the Department's enhanced ability to redress
abuse. Although the benefits are difficult to quantify, the Department
is confident they more than justify the cost. The Department estimated
costs for the rule over a ten-year time frame for purposes of this
analysis and used information from the quantitative characterization of
the service provider market presented below as a basis for these cost
estimates. This characterization did not account for all service
providers, but it does provide information on the segments of the
service provider industry that are likely to be most affected by the
rule (i.e., those with contracts listed on the Form 5500). In addition
to the costs to service providers, the Department also considered, and
discusses below, the potential costs to plans.
In accordance with OMB Circular A-4,\4\ Table 1 below depicts an
accounting statement showing the Department's assessment of the
benefits and costs associated with this regulatory action.
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\4\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
[[Page 41602]]
Table 1--Accounting Table
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Primary Period
Category estimate Year dollar Discount rate covered
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Benefits
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Annualized Monetized ($millions/year)........... Not Quantified.
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Qualitative: The final regulation will increase the amount of information that service providers disclose to
plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
interest, service value improvements through improved decisions and value, better enforcement tools to redress
abuse, and harmonization with other EBSA rules and programs.
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Costs
Annualized Monetized ($millions/year)........... 58.7 2010 7% 2011-2020
54.3 2010 3% 2011-2020
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Qualitative: Costs include costs for service providers to perform compliance review and implementation, for
disclosure of general, investment-related, and additional requested information, for responsible plan
fiduciaries to request additional information from service providers to comply with the exemption and to
prepare notices to DOL if the service provider fails to comply with the request.
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Transfers....................................... Not Applicable.
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A more detailed discussion of the need for this regulatory action,
consideration of regulatory alternatives, and assessment of benefits
and costs are included in Section K--``Regulatory Impact Analysis''
below.
1. General
The final regulation, like the proposal, amends paragraph (c) of
Sec. 2550.408b-2 by moving, without change, the current provisions of
paragraph (c) to a newly designated paragraph (c)(3) and adding new
paragraphs (c)(1) and (2) to address the disclosure requirements
applicable to a ``reasonable contract or arrangement.'' Paragraph
(c)(1) describes the disclosure requirements for pension plans.
Paragraph (c)(2) has been reserved for future guidance concerning the
disclosure requirements for welfare plans.
The general paragraph of the final rule, paragraph (c)(1)(i),
provides that no contract or arrangement for services between a covered
plan and a covered service provider, nor any extension or renewal, is
reasonable within the meaning of ERISA section 408(b)(2) and this
regulation unless the requirements of the regulation are satisfied. The
terms ``covered plan'' and ``covered service provider'' are defined in
paragraph (c)(1)(ii) and (iii), respectively. The general paragraph
also provides that the regulation's disclosure requirements are
independent of a fiduciary's obligations under section 404 of ERISA.
2. Scope--Covered Plans
Paragraph (c)(1)(ii) defines a ``covered plan'' to mean an employee
pension benefit plan or a pension plan within the meaning of ERISA
section 3(2)(A) (and not described in ERISA section 4(b)), except that
such term shall not include a ``simplified employee pension'' described
in section 408(k) of the Code, a ``simple retirement account''
described in section 408(p) of the Code, an individual retirement
account described in section 408(a) of the Code, or an individual
retirement annuity described in section 408(b) of the Code.
Under the proposal, all employee benefit plans subject to Title I
of ERISA, including employee pension benefit plans and welfare benefit
plans, were subject to the regulation's disclosure requirements. The
Department received many comments and heard testimony from parties
concerned about the implications of subjecting defined benefit plans,
welfare benefit plans, and individual retirement accounts (IRAs) to the
regulation.\5\
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\5\ A few commenters suggested that the Department not extend
the final rule to small plans (for example, those with less than 100
participants). The Department was not persuaded that any policy
rationale exists for excluding small plans.
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Commenters questioned the proposal's application to defined benefit
plans for a variety of reasons, suggesting that the Department consider
separate guidance for defined benefit plans. Commenters argued that
sponsors of defined benefit plans and their service providers have only
recently joined the public policy discussion regarding fee disclosure
for retirement plans. They believe that a thorough examination of the
issues that affect defined benefit plans is warranted before disclosure
rules apply with respect to their service providers.
In advocating for separate rules for defined benefit plans, some
commenters focused on the differences in the legal structures of
defined benefit plans and defined contribution plans. In addition,
commenters noted that services are provided to defined benefit plans in
ways that are materially different than they are for defined
contribution plans. Other commenters noted that employers have
incentives to monitor and negotiate service provider fees and expenses
for defined benefit plans, because these plans primarily rely on
employer contributions; excessive fees and expenses would make it more
expensive for the employer to fund promised benefits. In contrast,
defined contribution plans are funded primarily by employee
contributions, and employers may pass on up to 100 percent of plan
costs to employees.
After careful review of the comments, the Department is not
persuaded that the information fiduciaries of defined benefit plans
need to make informed decisions about their service providers is
fundamentally different from the information fiduciaries of defined
contribution plans need to make informed decisions. Nor is the
Department persuaded that the service provider relationships between
the two types of plans are so different as to justify exclusion of
defined benefit plans from the regulation's disclosure requirements.
Moreover, the Department does not believe that compliance with the
disclosure requirements, particularly as modified from the proposal,
will present any unreasonable compliance burdens for service providers
to defined benefit plans. For these reasons, the final rule, like the
proposal, applies to contracts and arrangements with covered service
providers to both defined contribution and defined benefit plans.
The Department also received many comments concerning the
applicability of the proposal to welfare benefit plans. Many commenters
recommended their exclusion from the scope of the final
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rule. Some commenters believe that the Department's rationales for the
proposed rule apply to pension plans but not to welfare benefit plans.
Other commenters maintain that, if the Department creates a disclosure
regime for welfare benefit plan service providers, it should be
promulgated separately.
Commenters articulated specific concerns relating to welfare
benefit plans, including the potential for negative effects on the
insurance industry, which, they argue, is highly regulated by State
laws. Many commenters asserted that, considering the high level of
State regulation, subjecting welfare benefit plans to the disclosure
regulation would be unnecessary and redundant because the disclosures
contemplated in the regulation are already made available to plan
fiduciaries through State regulatory processes. Other commenters
pointed out that most State insurance laws do not require the types of
disclosures addressed under the proposed rule and even where such State
laws exist, they are loosely enforced. Still others asserted that there
are ``transparency problems'' in general in the health and welfare
industry.
Some commenters expressed views relating to prohibited transaction
exemption (PTE) 84-24,\6\ which they indicated is often misinterpreted
and improperly utilized by service providers to suit their purposes.
Those in favor of subjecting welfare benefit plans to the regulation
said that it would eliminate the limitations of PTE 84-24. Other
commenters asserted that PTE 84-24 has worked well and that welfare
benefit plans should be allowed to continue without the impact of new
disclosure obligations under the proposal.
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\6\ 49 FR 13208 (Apr. 3, 1984); amended at 71 FR 5887 (Feb. 3,
2006) (providing prohibited transaction relief for service
arrangements and related plan transactions involving insurance
agents and brokers, pension consultants, insurance and investment
companies, and investment company principal underwriters; for
example, PTE 84-24 permits these parties to place insurance products
with plans when they are fiduciaries, or affiliated with
fiduciaries, to the plans if certain conditions are met).
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Still other commenters addressed specific concerns of pharmacy
benefit managers (PBMs), which are intermediaries between drug
manufacturers and health insurance plans. They believe that the reasons
for disclosure discussed in the preamble to the proposed rule are
inapplicable to PBMs. According to some commenters, the Federal Trade
Commission has thoroughly evaluated the industry, finding that market
forces provide sufficient information to plan fiduciaries and that
excessive mandatory disclosure could weaken competition, such that the
proposed regulation would negatively affect the delivery of
prescription drugs to plan beneficiaries. Other commenters disputed the
idea that PBMs should not be subject to the regulation, arguing that
the discounts and rebates they received from drug companies were
examples of undisclosed indirect compensation. Commenters offering this
point of view did not present any further official comment or testimony
at the public hearing.
In spite of these arguments, the Department believes that
fiduciaries and service providers to welfare benefit plans would
benefit from regulatory guidance in this area for the same reasons that
apply to defined contribution plans and defined benefit plans. However,
the Department is persuaded, based on the public comment and hearing
testimony, that there are significant differences between service and
compensation arrangements of welfare plans and those involving pension
plans and that the Department should develop separate, and more
specifically tailored, disclosure requirements under ERISA section
408(b)(2) for welfare benefit plans. Accordingly, the interim final
rule published today includes a new paragraph (c)(2), which has been
reserved for a comprehensive disclosure framework applicable to
``reasonable'' contracts or arrangements for services to welfare plans
to be developed by the Department. The Department notes, however, that
in the meantime, ERISA section 404(a) continues to obligate fiduciaries
to obtain and consider information relating to the cost of plan
services and potential conflicts of interest presented by such service
arrangements.
Several commenters requested clarification regarding the
regulation's application to IRAs or similar accounts. In some cases,
commenters argued that the Department should exclude such accounts, as
well as other plans that are not subject to Title I of ERISA, from the
scope of the final regulation. The commenters observed that there are
significant categories of arrangements that are subject to the
prohibited transaction provisions of section 4975 of the Code, but not
those of ERISA, and that do not have a fiduciary overseeing the plan.
The comments asserted that owners of IRAs and other individual
arrangements are more like individual plan participants than plan
fiduciaries and that it would be inappropriate to impose the service
provider-to-plan disclosure requirements in the context of non-ERISA
arrangements. In contrast to participant-directed individual account
plans, which typically offer a limited number of investment options,
many IRAs offer a large number of investment options, such as brokerage
accounts with essentially unlimited choices. Providing the disclosures
set forth in the proposal could be quite burdensome and costly as a
result. These costs, commenters argue, may drive service providers to
limit the number of investment choices available in IRAs. In addition,
some commenters pointed out that, under securities laws, the IRA
accountholder is treated as the actual owner of the securities held in
his or her IRA and is entitled to all securities law disclosures in the
same manner as if the accountholder owned those securities directly. In
contrast, with ERISA-covered plans, disclosure obligations under the
securities laws extend only to the plan itself, not to individual plan
participants.
The Department does not believe that IRAs should be subject to the
final rule, which is designed with fiduciaries of employee benefit
plans in mind. An IRA account-holder is responsible only for his or her
own plan's security and asset accumulation. They should not be held to
the same fiduciary duties to scrutinize and monitor plan service
providers and their total compensation as are plan sponsors and other
fiduciaries of pension plans under Title I of ERISA, who are
responsible for protecting the retirement security of greater numbers
of plan participants. Moreover, IRAs generally are marketed alongside
other personal investment vehicles. Imposing the regulation's
disclosure regime on IRAs could increase the costs associated with IRAs
relative to similar vehicles that are not covered by the regulation.
Therefore, although the final rule cross references the parallel
provisions of section 4975 of the Code, paragraph (c)(1)(ii) provides
explicitly that IRAs and certain other accounts and plans are not
covered plans for purposes of the rule.
3. Scope--Covered Service Providers
The categories of service providers covered by the final rule, in
paragraph (c)(1)(iii), vary slightly from those described in the
proposal. The proposed regulation generally included service providers
falling into one of the following categories: (1) Fiduciary service
providers, whether under ERISA or under the Investment Advisers Act of
1940; (2) service providers that will perform banking, consulting,
custodial, insurance, investment advisory, investment management,
recordkeeping,
[[Page 41604]]
or third party administration services for the plan; or (3) service
providers that will receive indirect compensation in connection with
providing accounting, actuarial, appraisal, auditing, legal, or
valuation services to the plan. The Department believed that these
service arrangements, and their associated compensation structures,
were the most likely to give rise to conflicts of interest.
The Department received a number of comments requesting
clarification as to which entities were intended to be ``service
providers'' for purposes of the proposal, both in terms of which
service providers are responsible for complying with the proposal's
written contract requirement, and who is considered a service provider
such that their compensation and conflict of interest information must
be disclosed to the responsible plan fiduciary. Some commenters argued
that the proposal's disclosure requirements should be limited to
service providers that deal directly with employee benefit plans, or
that customarily are in contractual privity with the plan, and
questioned the application of the rule to indirect service providers.
These commenters were concerned that the proposed rule appears to
apply, potentially without limit, to ``indirect'' service providers,
for example a service provider to a direct service provider, or a
service provider to an investment provider or mutual fund company; in
some cases, they argue, the services provided by these indirect
providers bear little or no relation to the particular plan service
arrangement in question. For example, commenters questioned whether the
proposed disclosure requirements would apply to a copy service, if a
plan recordkeeper subcontracts with that copy service to perform
administrative functions for both the recordkeeper and its plan
clients, or to legal counsel to a registered investment company, when
counsel's role is limited to ensuring that the company complies
generally with applicable securities laws.
In connection with their request that the Department clarify
whether providers of services to a plan service provider, or to an
investment provider, are themselves service providers to the plan for
purposes of the disclosure requirements of the proposed rule, some
commenters note that confusion on this issue may stem from language of
the proposed rule that adopted the view taken by the Department as to
who is a ``service provider'' for purposes of reporting service
provider compensation on the recent Form 5500, Schedule C, revisions.
The new Schedule C reporting requirements are not limited to
information concerning the compensation of persons with direct service
provider relationships to a plan but also include compensation
information regarding persons who provide services to investment
vehicles in which plans invest. Commenters questioned whether a similar
position is appropriate in the context of a prohibited transaction for
which relief is obtained under section 408(b)(2).
Other commenters raised concerns about the proposal insofar as it
was interpreted as raising technical issues under the Department's plan
asset guidance.\7\ For example, several commenters questioned whether
and how the proposed disclosure requirements would apply to service
providers to ``non-plan asset'' vehicles, an issue that often arises in
the context of plan investments. For instance, commenters observed that
mutual funds, real estate operating companies, venture capital
operating companies, and private equity funds that do not have
significant equity participation by ``benefit plan investors'' (i.e.,
25% or more of any class of equity interest held by such investors) are
not plan asset vehicles, and thus managers of these entities are not
ERISA fiduciaries. These commenters argued that the proposed disclosure
requirements also should not apply to any person who is providing
services to a non-plan asset vehicle.
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\7\ See 29 CFR 2510.3-101.
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The Department believes that the definition of covered service
provider contained in the final rule addresses the ambiguities raised
by the commenters and reflects the Department's intent to focus on
contracts or arrangements between covered plans and fiduciaries,
platform providers and other specified service providers dealing
directly with covered plans who may receive indirect compensation or
certain compensation from related parties. The Department notes that
the parties that must be reported as service providers for Schedule C
purposes will not necessarily be the same as the parties that will be
covered service providers for purposes of this rule.
The Department continues to believe that requiring every service
provider to a plan to satisfy the disclosure requirements of this
regulation may not be appropriate or yield helpful information to plan
fiduciaries. The Department also believes that certain service
providers, because of the nature of the services that they provide to
pension plans, the potential influence they have on plan fiduciaries'
decisions and on the plan services that they ultimately will provide,
or the complexity of their compensation arrangements, must provide
comprehensive information to plan fiduciaries about the compensation
that they will be paid for their services. The Department is sensitive
to the technical and practical issues raised by commenters about how
the scope of this rule will be applied to various parties in the
employee benefit plan industry. The Department also agrees with
commenters that service providers and plan fiduciaries would benefit
from more certainty as to whether any particular service contract or
arrangement will be required to comply with this rule. The Department
believes that the interim final rule, in terms of defining the service
providers covered by the rule, responds to the concerns of these
commenters. However, the Department welcomes comments from interested
persons who continue to have concerns about the scope of service
providers covered by the interim final rule.
Paragraph (c)(1)(iii) of the final rule defines the term ``covered
service provider.'' Among other changes, the final rule establishes a
$1,000 threshold for service providers otherwise coming within the
definition of a covered service provider (regardless of whether the
threshold is met by compensation received by the covered service
provider, an affiliate, or a subcontractor that is performing one or
more of the services to be provided under the contract or arrangement
with the covered plan). A ``covered service provider'' is a service
provider that enters into a contract or arrangement with the covered
plan and reasonably expects to receive $1,000 or more in compensation,
direct or indirect, to be received in connection with providing one or
more specified services. The Department included the $1,000 threshold
in response to commenters' request that the final rule exclude
contracts or arrangements that involve de minimis amounts of
compensation. In these circumstances, the Department is persuaded that
the parties to these relatively small service contracts or arrangements
may not need to provide the detailed disclosures required under this
rule in order to ensure that plan fiduciaries have the information they
need to make informed decisions about the services and cost of the
services to be provided. Commenters did not suggest a particular
minimum amount for such contracts or arrangements, but the Department
believes that $1,000 is a reasonable threshold amount to address their
concerns. As this is an interim final rule, the Department welcomes
[[Page 41605]]
additional input from commenters on our decision.
The types of service providers covered by the final regulation fall
into three categories, and each category is discussed below. A service
provider may be a covered service provider under the final rule even if
some or all of the services provided pursuant to the contract or
arrangement are performed by affiliates of the covered service provider
or subcontractors. Further, as noted in paragraph (c)(1)(iii)(D)(1),
service providers do not become ``covered service providers'' solely as
a result of services that they perform in their capacity as an
affiliate of the covered service provider or a subcontractor.
The first category of covered service providers, in paragraph
(c)(1)(iii)(A), includes those providing services as an ERISA fiduciary
or as an investment adviser registered under either the Investment
Advisers Act of 1940 (Advisers Act) or any State law. This category is
split into three subsections. Subparagraph (1) includes ERISA
fiduciaries providing services directly to the covered plan.
Subparagraph (2) includes ERISA fiduciaries providing services to
an investment contract, product, or entity that holds plan assets and
in which the covered plan has a direct equity investment. These service
providers are ERISA fiduciaries by virtue of providing services to a
plan asset investment vehicle, rather than providing services directly
to the covered plan. The Department placed these fiduciaries of plan
asset vehicles in a separate subcategory because, under the final rule,
these fiduciaries have an additional obligation to disclose
compensation information about the investment vehicle for which they
serve as a fiduciary.
This subcategory includes fiduciaries to the initial-level
investment vehicle in which the covered plan makes a direct equity
investment and which holds plan assets. However, it does not include
fiduciaries to that initial vehicle's underlying investments, even
though such down-level investment vehicles also may hold ``plan
assets.'' The determination of whether an investment contract, product,
or entity holds ``plan assets'' is made under sections 3(42) and 401 of
ERISA and the regulation at 29 CFR 2510.3-101. The regulation uses the
term ``direct equity investment'' to distinguish the covered plan's
initial-level investment in an investment contract, product, or entity
from investments made by such initial-level contract, product or entity
in which the plan invests, without regard to whether the underlying,
second-tier investment vehicles hold plans assets. Specifically, the
regulation provides that a direct equity investment does not include
investments made by the investment contract, product, or entity in
which the covered plan invests.
Subparagraph (3) includes investment advisers providing services
directly to the covered plan. This provision has been modified from the
proposal to require disclosure from an investment adviser
``registered'' under either the Advisers Act or State law, rather than
a ``fiduciary'' under the Advisers Act.
The Department received a number of comments concerning the
requirement to identify services as ``fiduciary'' services under ERISA
or the Advisers Act. In general, commenters argued that whether such
services will be provided may be unclear, given the facts-and-
circumstances nature of fiduciary status under section 3(21) of ERISA,
creating an unnecessary level of uncertainty for both plan fiduciaries
and service providers in terms of compliance with the regulation.
Commenters also argued that by including fiduciaries under the Advisers
Act, the proposal included advisers that may not be registered under
the Advisers Act, thereby adding a degree of uncertainty as to which
service providers might be covered by the rule. Other commenters argued
that plan sponsors may be confused as to whether a particular service
provider is acting as a fiduciary under ERISA or as a fiduciary under
the Advisers Act. The Department believes that the modifications
reflected in paragraph (c)(1)(iii)(A) of the final rule respond to
these concerns. The Department continues to believe, however, that it
is important for plan fiduciaries to know whether a party will be
providing or reasonably expects to provide services to the plan as an
ERISA fiduciary or as a registered investment adviser.\8\ See paragraph
(c)(1)(iv)(B) relating to the requirement that this status be disclosed
to the responsible plan fiduciary.
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\8\ To the extent a service provider is a ``dual registrant''
(i.e., an investment adviser registered under the Advisers Act and a
broker-dealer registered under the Securities Exchange Act of 1934,
as amended), the service provider would be a covered service
provider under paragraph (c)(1)(iii)(A)(3) only when acting as an
investment adviser to a covered plan, and not when acting merely as
a broker-dealer to such plan. However, broker-dealers to covered
plans may be covered service providers under paragraph
(c)(1)(iii)(B) or (C), as discussed further below.
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The second category of covered service providers, in paragraph
(c)(1)(iii)(B), includes providers of recordkeeping services or
brokerage services to a covered plan that is an individual account plan
(under ERISA section 3(34)) and that permits participants and
beneficiaries to direct the investment of their accounts, if one or
more designated investment alternatives will be made available (e.g.,
through a platform or similar mechanism) in connection with such
recordkeeping services or brokerage services. This category encompasses
recordkeepers and brokers that offer, as part of their contract or
arrangement, a platform of investment options, or a similar mechanism,
to a participant-directed individual account plan. This category also
encompasses service providers who provide recordkeeping or brokerage
services that include designated investment alternatives independently
selected by the responsible plan fiduciary and which are later added to
the covered plan's platform. Under the proposal, these service
providers had no disclosure obligations beyond those directly relating
to the services they were providing as recordkeepers or brokers for the
plan. Under the interim final rule, however, covered service providers
in this category, as discussed later, must disclose to the responsible
plan fiduciary compensation information regarding each of the
designated investment alternatives for which they provide recordkeeping
or brokerage services. See paragraphs (c)(1)(iii)(B) and (c)(1)(iv)(G).
The term ``designated investment alternative'' is defined in paragraph
(c)(1)(viii)(C), discussed below.
The third category of covered service providers, in paragraph
(c)(1)(iii)(C), includes those providing specified services to the
covered plan when the covered service provider (or an affiliate or a
subcontractor) reasonably expects to receive ``indirect'' compensation
or certain payments from related parties. As discussed below, the terms
``affiliate'', ``indirect compensation,'' and ``subcontractor'' are
defined in paragraph (c)(1)(viii) of the final regulation. The services
included in this category are accounting, auditing, actuarial,
appraisal, banking, consulting (i.e., consulting related to the
development or implementation of investment policies or objectives, or
the selection or monitoring of service providers or plan investments),
custodial, insurance, investment advisory (for plan or participants),
legal, recordkeeping, securities or other investment brokerage, third
party administration, or valuation services provided to the covered
plan.
The services in the final rule's third category generally are the
same as those in the proposal. However, whether or not these services
will cause a service provider to be a covered service
[[Page 41606]]
provider under the rule depends upon the expectation by the covered
service provider, its affiliate, or a subcontractor of receiving
certain types of compensation, namely indirect compensation or
compensation paid by related parties. A few commenters asked the
Department to define the types of services referenced in the proposal.
Although the Department understands that there may be, in some
instances, subtle differences in how employee benefits services are
described and, therefore, some clarification may be helpful, the
Department also is concerned that too much specificity may have the
undesirable effect of narrowing the application of the regulation
solely on the basis of an overly technical definition. The Department
believes that the financial industry and employee benefits community
have a reasonable understanding of the services referenced in the
regulation and that any remaining ambiguity will not result in undue
burdens attendant to compliance with the final rule.
Nonetheless, the Department, in response to commenters, has
attempted to narrow the scope of the term ``consulting'' by adding a
parenthetical clarifying that ``consulting'' as used in the final
regulation is consulting related to the development or implementation
of investment policies or objectives, or the selection or monitoring of
service providers or plan investments. Also, it should be noted that
investment advisory services are included in both the first and third
categories of covered service providers, but the investment advisers
who are covered in each category may be different. The first category
includes only registered investment advisers, even if they receive only
direct compensation from the covered plan. The third category includes
investment advisers that reasonably expect to receive compensation that
is indirect or paid from related parties, whether or not they are
registered investment advisers.
Paragraph (c)(1)(iii)(D) of the final regulation clarifies that,
notwithstanding the preceding categories of ``covered service
providers,'' no person or entity is a ``covered service provider''
solely by providing services (1) as an affiliate or a subcontractor
that is performing one or more of the services to be provided under the
contract or arrangement with the covered plan (see paragraph
(c)(1)(iii)(D)(1)), or (2) to an investment contract, product, or
entity in which the covered plan invests, regardless of whether or not
the investment contract, product, or entity holds assets of the covered
plan, other than services as a fiduciary described in paragraph
(c)(1)(iii)(A)(2) (see paragraph (c)(1)(iii)(D)(2)). In other words,
paragraph (c)(1)(iii)(D)(1) clarifies that the concept of a ``covered
service provider'' captures only the party directly responsible to the
covered plan for the provision of services under the contract or
arrangement, even though some or all of such services may be performed
by an affiliate or subcontractor. In the view of the Department, the
service provider directly responsible to the plan for the provision of
services is the appropriate party to ensure that the required
disclosures under the regulation are made. Paragraph (c)(1)(iii)(D)
addresses the possibility of multiple disclosure obligations with
respect to the same services.
Paragraph (c)(1)(iii)(D)(2) further clarifies that, other than
providers of fiduciary services to an investment contract, product, or
entity holding plan assets with respect to which the covered plan has a
direct equity investment (described above), the term ``covered service
provider'' does not include a mere provider of services to an
investment contract, product, or entity (regardless of whether or not
the investment contract, product, or entity holds assets of the covered
plan).
The Department believes that these clarifications resolve much of
the uncertainty raised by commenters about the intended application of
the proposal in the context of plan investments. Other than a fiduciary
described in paragraph (c)(1)(iii)(A)(2), service providers that only
provide non-fiduciary administrative, legal or other services to an
investment vehicle, even one holding plan assets, are not covered
service providers. For example, a recordkeeper servicing a collective
investment fund is not a covered service provider to a plan investing
in the fund merely because the fund holds plan assets. On the other
hand, if that same recordkeeper provides services directly to a covered
plan and receives indirect compensation or certain compensation from
related parties, then it would be a covered service provider. Its
covered status, however, would derive from the services it provides
directly to the plan, not to the collective investment fund. A similar
analysis would apply to an investment vehicle that does not hold plan
assets, such as a registered investment company.
4. Contracts or Arrangements Not Covered by Interim Final Regulation
The Department notes that some contracts or arrangements will fall
outside the scope of the final regulation because they do not involve a
``covered plan'' and a ``covered service provider.'' ERISA nonetheless
requires such contracts or arrangements to be ``reasonable'' in order
to satisfy the ERISA section 408(b)(2) statutory exemption. ERISA
section 404(a) also obligates plan fiduciaries to obtain and carefully
consider information necessary to assess the services to be provided to
the plan, the reasonableness of the fees and expenses being paid for
such services, and potential conflicts of interest that might affect
the quality of the provided services.\9\
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\9\ See, e.g., Field Assistance Bulletin 2002-3 (November 5,
2002), Advisory Opinion 97-15A (May 22, 1997), Advisory Opinion 97-
16A (May 22, 1997), Understanding Retirement Plans Fees and
Expenses, (http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.), and Selection and Monitoring Pension
Consultants--Tips for Plan Fiduciaries, (http://www.dol.gov/ebsa/newsroom/fs053105.html.)
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5. Initial Disclosure Requirements
a. Overview of Initial Disclosure Requirements; Request for Comments on
Format Requirement for Initial Disclosures
The proposed regulation would have required that the terms of the
contract or arrangement for services between the covered plan and the
covered service provider be in writing and that the writing delineate
the specific disclosure obligations of the covered service provider
under the regulation. The Department received a number of comments on
the requirement that contracts and arrangements, as well as the
disclosure obligations thereunder, must be in writing. Many commenters
argued that such written documents are not used with respect to the
provision of many services and that requiring formal written contracts
adds complexity and costs, as well as potentially raising concerns
under State contract law, without affecting the quality of such
services. For example, these points were made by providers of insurance
products and services, who explained that any amendments to their
contracts, which are approved and regulated by State insurance
agencies, would have to be submitted to such agencies; this would be a
lengthy and burdensome process with an outcome that is not within the
service providers' control.
While the interim final rule continues to require that the
responsible plan fiduciary be furnished the required disclosures in
writing, the rule does not require that a formal contract or
arrangement itself be in writing or that any representations concerning
the
[[Page 41607]]
specific obligations of the service provider be included in such
written contract or arrangement. The Department is persuaded that,
given the varying relationships between plans and their service
providers, requiring such a formal contract or arrangement in every
instance may result in unnecessary burdens, complexity, and costs. The
Department continues to believe, however, that setting forth a covered
service provider's disclosure obligations under the regulation in
writing generally will help ensure that both the responsible plan
fiduciary and the service provider clearly understand their respective
responsibilities for purposes of compliance with the statutory
exemption.
As discussed above, neither the proposal nor the interim final rule
requires the covered service provider to make disclosures in any
particular manner or format. Further, the preamble to the proposal
specifically noted that the covered service provider could disclose
using different documents from separate sources as long as the
documents, collectively, contained all of the required information.
Commenters on the proposal disagreed as to whether or not this would
lead to an effective presentation to responsible plan fiduciaries,
especially those for small plans. Commenters also disagreed as to the
anticipated costs and burdens associated with more stringent format
requirements and the extent to which those costs would be absorbed by
service providers or passed through to plans, and therefore potentially
to participants and beneficiaries. Some commenters encouraged the
Department to retain its flexible approach, arguing that it is best
left to the parties to service contracts or arrangements to determine
the optimal way to fulfill the substantive disclosure requirements.
Other commenters encouraged the Department to adopt a model form for
disclosure or to otherwise mandate that the required information be
conveyed in a summary or consolidated fashion, arguing that this would
lead to more consistency in the way that information is disclosed and
make it easier for responsible plan fiduciaries to review and analyze
information received from plan service providers.
At this time, the Department has not determined whether it is
feasible, as part of this regulation, to provide specific and
meaningful standards for the format in which the required information
must be disclosed, given the large variety of plan service arrangements
that are covered by the interim final regulation and the variation in
the way service providers currently disclose information to plan
fiduciaries. The Department is persuaded that plan fiduciaries may
benefit from increased uniformity in the way that information is
presented to them. However, the Department does not want to
unnecessarily increase the cost and burden for service providers to
furnish required information, especially to the extent such cost may be
passed along to plan participants and beneficiaries, unless it is clear
that the benefit to plan fiduciaries outweighs such cost and burden. If
the Department is convinced that the benefits would outweigh the costs,
the final regulation may be revised. Specifically, the Department is
considering adding a requirement that covered service providers furnish
a ``summary'' disclosure statement, for example limited to one or two
pages, that would include key information intended to provide an
overview for the responsible plan fiduciary of the information required
to be disclosed. The summary also would be required to include a
roadmap for the plan fiduciary describing where to find the more
detailed elements of the disclosures required by the regulation.
To assist the Department in its decision whether to include such a
requirement in the final rule, interested persons are encouraged to
submit comments on three issues: first, the likely cost and burden to
covered service providers, and to any other parties, of complying with
such a requirement; second, the anticipated benefits to responsible
plan fiduciaries, whether due to time savings, cost savings, or other
factors, of including a summary disclosure statement; and third, how to
most effectively construct the requirement for a summary disclosure
statement to ensure both its feasibility and its usefulness in helping
the Department achieve its objectives.
As to the substance of the information required to be disclosed,
the proposal generally required the disclosure of information intended
to assist plan fiduciaries in understanding the services that will be
furnished and in assessing the reasonableness of the compensation,
direct and indirect, that the service provider would receive in
connection with the provision of such services. The proposal also
required the disclosure of specific information intended to assist plan
fiduciaries in assessing any real or potential conflicts of interest
that may affect the quality of the services to be provided. As
discussed above, the proposal did not require that the information be
furnished in any particular format. While the proposal did require that
the required disclosures be furnished in advance of entering into a
contract or arrangement, along with a representation that all of the
required disclosures had been furnished to the responsible fiduciary,
the proposal did not designate any specific time period for making such
advance disclosure.
The proposal broadly defined compensation or fees \10\ to include
money and any other thing of monetary value received by the service
provider or its affiliates in connection with the services provided to
the plan or the financial products in which assets are invested. As
noted, the proposal required the disclosure of both direct and indirect
compensation, the latter including fees that the service provider
receives from parties other than the plan, the plan sponsor, or the
service provider. Service providers also would have been required to
disclose compensation received by their affiliates from third parties.
The proposal also addressed the manner in which compensation could be
disclosed, permitting the use of formulas, references to a percentage
of the plan's assets, or per capita charges.
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\10\ For ease of reference, the interim final regulation refers
only to ``compensation'' and not ``compensation or fees'' or
``compensation and fees.'' Given the broad definition of
``compensation'' contained in the final regulation, the Department
does not intend any substantive distinction by changing from the
phrase ``compensation or fees'' or ``compensation and fees'' to the
term ``compensation.''
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With regard to the disclosure of compensation generally, the
proposal contained a special rule for providers of multiple services
(commonly referred to as ``bundles'' of services). In the case of
bundled service arrangements, the proposal required only that the
provider of the bundle make the prescribed disclosures. In such
instances, the bundled service provider would be required to disclose
information concerning all of the services to be provided in the
bundle, regardless of who actually performs the service. Further, the
bundled provider would be required to disclose the aggregate direct
compensation that will be paid for the bundle, as well as all indirect
compensation that will be received by the service provider, or its
affiliates or subcontractors within the bundle, from third parties. The
preamble explained that generally the bundled provider would be
required to break down the aggregate compensation among the individual
services comprising the bundle only when the compensation was
separately charged against the plan's investment (such as management
fees and 12b-1 fees) or was set on a
[[Page 41608]]
transaction basis (such as finder's fees and brokerage commissions).
While the Department retained many of the disclosure concepts of
the proposal, the interim final rule contains a number of changes made
in response to issues raised by commenters. Paragraph (c)(1)(iv) of the
final rule describes the initial disclosure requirements that must be
satisfied, in writing, by the covered service provider; paragraph
(c)(1)(v) describes the timing requirements applicable to the initial
disclosures and when changes to the initial disclosures must be
furnished; paragraph (c)(1)(vi) describes the requirement that a
covered service provider disclose information requested by the
responsible plan fiduciary or covered plan administrator to comply with
ERISA's reporting and disclosure requirements; and paragraph
(c)(1)(vii) addresses inadvertent errors and omissions in disclosing
the required information.
b. Description of Services
Paragraph (c)(1)(iv)(A) requires a description of the services to
be provided to the covered plan pursuant to the contract or
arrangement, but not including non-fiduciary services described in
paragraph (c)(1)(iii)(D)(2). In other words, for purposes of this
disclosure, ``services'' to the covered plan do not include services
described in paragraph (c)(1)(iii)(D)(2), e.g., services provided by
non-fiduciary service providers to investment vehicles holding plan
assets. Thus, in the case of a person that is a covered service
provider by reason of paragraph (c)(1)(iii)(A)(2), paragraph (c)(1)(iv)
would require a description of services provided as a fiduciary to the
investment vehicle that holds plan assets and in which the covered plan
has a direct equity investment.
Some commenters requested guidance as to the level of detail
necessary when describing the services. For example, commenters asked
whether general descriptions of the services would be acceptable, or
whether detailed and itemized descriptions must be provided. It is the
view of the Department that the level of detail required to adequately
describe the services to be provided pursuant to a contract or
arrangement will vary depending on the needs of the responsible plan
fiduciary.
In certain instances, it may be well understood that a particular
service necessarily encompasses, among other things, a variety of sub-
services such that a description of the sub-services is unnecessary.
For example, plan fiduciaries may understand that the execution of
securities transactions includes, but is not limited to, valuation,
safekeeping, posting of income, clearing and settling transactions, and
reporting transactions, thereby eliminating the need to describe such
sub-services. In an effort to clarify the flexibility inherent in this
disclosure requirement, the final rule omits the word ``all'' from the
required description of services.
Ultimately, though, the responsible plan fiduciary must, under
sections 404 and 408(b)(2) of ERISA, decide whether it has enough
information about the services to be provided pursuant to the contract
or arrangement to determine whether the cost of such services to the
plan is reasonable. Accordingly, if a particular description of
services provided by a covered service provider lacks sufficient detail
to enable the responsible plan fiduciary to determine whether the
compensation to be received for such services is reasonable, the
responsible plan fiduciary must request additional information
concerning those services.
There is one provision of the interim final rule that includes a
more specific standard for the level of detail that must be furnished
when describing the provision of recordkeeping services in specified
circumstances. See section (c)(1)(iv)(D)(2), discussed below.
c. Status of Covered Service Providers, Affiliates, and Subcontractors
Paragraph (c)(1)(iv)(B) of the regulation requires, if applicable,
a statement that the covered service provider, an affiliate, or a
subcontractor will provide, or reasonably expects to provide, services
pursuant to the contract or arrangement directly to the covered plan
(or to an investment vehicle that holds plan assets and in which the
covered plan has a direct equity investment) as a fiduciary; and, if
applicable, a statement that the covered service provider, an
affiliate, or a subcontractor will provide, or reasonably expects to
provide, services pursuant to the contract or arrangement directly to
the covered plan as an investment adviser registered under either the
Advisers Act or any State law. Thus, if a service provider will, or
reasonably expects to, provide services as both a fiduciary and a
registered investment adviser, the statement must reflect both of these
roles. While the proposal contained a similar disclosure requirement,
the requirement contained in the final rule reflects changes that are
intended to address concerns raised by commenters.
Commenters on the proposal expressed concern that, given the
factual nature of fiduciary status under ERISA, this requirement added
a level of uncertainty to the statutory exemption. Commenters also
expressed concern that disclosing fiduciary status by virtue of being
an investment adviser involved similar uncertainties and, in addition,
would only serve to confuse plan fiduciaries regarding the nature of
the services that the plan would receive. As discussed above, the
Department continues to believe that plan fiduciaries should understand
whether a service provider will provide, or reasonably expects to
provide, services as an ERISA fiduciary or services as a registered
investment adviser in light of their heightened level of responsibility
under ERISA and the Advisers Act, respectively. The Department,
however, believes that the final disclosure provision addresses the
concerns of the commenters. First, the final provision only requires
disclosure if the provider will or reasonably expects to be providing
services as a fiduciary or registered investment adviser. Service
providers do not have to indicate that they will not be providing such
services. Second, the disclosure with respect to services as an
investment adviser is required only for investment advisers who are
registered under the Advisers Act or any State law, thereby providing a
degree of certainty as to who must make the required disclosure. The
final provision does not require investment advisers to identify their
services as ``fiduciary services.''
d. Disclosure of Compensation
The Department received a number of comments on the compensation
disclosure requirements of the proposal. Many of the commenters
expressed concern about the parties for whom compensation might have to
be reported under the proposal, such as providers of services to mutual
funds and other investment products in which a plan might invest, and
the increased level of complexity attendant to more detailed levels of
disclosure generally. The Department believes that many of the issues
raised by commenters in this area have been addressed in the final
regulation by more specifically defining the parties that would be
treated as ``covered service providers'' for purposes of the disclosure
requirements.
The compensation disclosure requirements of the final rule are set
forth at paragraph (c)(1)(iv)(C). While structured differently than the
proposal, the final rule retains many of the same concepts of the
proposal with respect to what types of compensation have to be
disclosed for purposes of a reasonable contract or arrangement. The
compensation disclosure requirement of
[[Page 41609]]
the final rule is divided into four subparagraphs to more clearly
describe the compensation information that must be disclosed.
Paragraph (c)(1)(iv)(C)(1) requires a description of all direct
compensation, as defined in paragraph (c)(1)(viii)(B)(1), either in the
aggregate or by service, that the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive in
connection with the services described in paragraph (c)(1)(iv)(A). For
purposes of the regulation, ``direct'' compensation is compensation
received directly from the covered plan.\11\
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\11\ This definition, therefore, excludes from the term
``direct'' compensation any compensation received from a plan asset
vehicle in which the covered plan has a direct equity investment.
---------------------------------------------------------------------------
This requirement to disclose direct compensation generally follows
the requirement of the proposal, with a clarifying change. A number of
commenters on the proposal questioned whether the proposal's definition
of compensation, which referred to payments received ``directly from
the plan or plan sponsor'' was intended to subject to ERISA section
408(b)(2) payments for services made solely by the plan sponsor and not
out of plan assets,. The proposal's reference to payments received from
plan sponsors was intended to distinguish direct compensation from
indirect compensation. As reflected above, the final regulation omits
the reference to the plan sponsor, so as to avoid the confusion raised
by commenters. The final rule also clarifies that a covered service
provider generally may disclose the direct compensation received from
the plan either as a total for all services (i.e., in the aggregate) or
on an itemized, service-by-service basis. The Department continues to
believe as a general matter that a fiduciary who understands the
services the covered service provider is providing pursuant to the
contract or arrangement and their aggregate cost is in a position to
compare services and costs consistent with its obligations under
sections 404 and 408(b)(2) of ERISA, and to determine the
reasonableness of compensation paid for such services in the aggregate.
There is one exception to this rule, discussed below, for the
disclosure of certain compensation received in connection with
recordkeeping services. See section (c)(1)(iv)(D) of the final rule.
Finally, in response to the concerns of some commenters about
whether a failure to disclose unexpected compensation would result in a
prohibited transaction by reason of losing relief under section
408(b)(2), the final rule requires disclosure only of compensation that
the service provider, an affiliate, or a subcontractor ``reasonably
expects'' to receive in connection with the services.
Paragraph (c)(1)(iv)(C)(2) of the final regulation provides for the
disclosure of indirect compensation. Specifically, it requires a
description of all indirect compensation (as defined in paragraph
(c)(1)(viii)(B)(2)) that the covered service provider (or an affiliate
or a subcontractor) reasonably expects to receive in connection with
the services to be provided pursuant to the contract or arrangement.
The rule also requires the covered service provider to identify the
services for which the indirect compensation will be received and the
payer of the indirect compensation. For purposes of the final
regulation, ``indirect'' compensation is compensation received from any
source other than the covered plan, the plan sponsor, the covered
service provider, an affiliate, or a subcontractor (if the
subcontractor receives such compensation in connection with services
performed under the subcontractor's contract or arrangement with the
covered service provider). See section (c)(1)(viii)(B)(2) of the final
rule.
The proposal defined compensation or fees as ``indirect'' if
received from any source other than the plan, the plan sponsor, or the
covered service provider. The substance of the final rule with regard
to disclosure of indirect compensation is similar to the proposed rule,
but has been expanded to require disclosure of not only the indirect
compensation that a covered service provider expects to receive, as
proposed, but also identification of the services for which the
indirect compensation will be received and identification of the payer
of the indirect compensation.
Paragraph (c)(1)(iv)(C)(3) of the final rule provides specific
guidance for when compensation paid among related parties, i.e., among
the covered service provider, its affiliates, and subcontractors, must
be disclosed. The covered service provider must separately disclose
such compensation if it is set on a transaction basis (e.g.,
commissions, soft dollars, finder's fees or other similar incentive
compensation based on business placed or retained) or is charged
directly against the covered plan's investment and reflected in the net
value of the investment (e.g., Rule 12b-1 fees). The final rule also
requires the covered service provider to identify the services for
which such compensation will be paid, the payers and recipients of such
compensation, and the status of each payer or recipient as an affiliate
or a subcontractor. Under this paragraph (c)(1)(iv)(C)(3) of the final
rule, compensation must be disclosed regardless of whether such
compensation also is disclosed under paragraph (c)(1)(iv)(C)(1) or (2)
(direct and indirect compensation) or (c)(1)(iv)(F) or (G) (investment
disclosures). This provision does not apply to compensation received by
an employee from his or her employer on account of work performed by
the employee. Unless described in paragraph (c)(1)(iv)(C)(3) or
elsewhere in the final rule, compensation paid among these related
parties need not be disclosed. Such payments affect only how
compensation is allocated among the parties and generally do not affect
the total costs of services to the plan. Thus, the final rule responds
to commenters' concerns that when services are provided by multiple
parties and priced as a package, the covered service provider is not
required to create an artificial allocation of compensation for
services among the parties. However, if compensation is paid among
related parties in the specific circumstances described in this
paragraph (c)(1)(iv)(C)(3), the Department does not consider such
compensation to be based on artificial methods, such as would be the
case when allocations are driven by bookkeeping, tax, or other
considerations of the related parties.
The disclosure of indirect compensation and certain compensation
paid among related parties serves two purposes. First, the disclosures
are intended to enable plan fiduciaries to better assess the
reasonableness of the compensation paid for services to the plan by
taking into account all of the compensation being received in
connection with such services. Second, the disclosures are intended to
enable plan fiduciaries to assess actual or potential conflicts of
interest that may impact the quality of services provided to the plan.
The proposed rule required the covered service provider to furnish
to plan fiduciaries specific information relating to conflicts of
interest (see Sec. 2550.408b-2(c)(1)(iii)(C) through (F), at 72 FR
71005). These provisions would have required disclosure of, among other
things, information concerning: whether the service provider expects to
participate in any transactions entered into with the plan; material
financial relationships with certain parties related to the provision
of services to the plan; whether the service provider will be able to
unilaterally affect its own compensation
[[Page 41610]]
in connection with its provision of services; whether the service
provider has policies or procedures that address actual or potential
conflicts and, if so, an explanation of such policies and procedures.
A number of commenters expressed concern about the scope of the
proposal's conflict of interest disclosures and the ultimate usefulness
of the information to responsible plan fiduciaries in evaluating
potential conflicts. Specifically, commenters asserted that the
requirements, as proposed, were too broad, pointing out that having to
disclose, in addition to actual conflicts, all potential conflicts,
would create a potentially limitless, and therefore extraordinarily
burdensome, requirement for service providers. Without a clear
definition of what kinds of relationships may constitute a conflict and
without knowing what other parties a covered plan may be engaging for
other services, commenters argued such disclosure would be nearly
impossible. Further, commenters pointed out that service providers
likely would over-disclose in order to avoid a prohibited transaction,
thus inundating plan fiduciaries with excessive, potentially confusing,
and ultimately meaningless information. Commenters also requested
additional guidance as to what would be a ``material'' relationship and
argued that ambiguity surrounding this term would lead to inconsistent
disclosures among various service providers.
Finally, the proposal required a covered service provider to
disclose its ability to affect its own compensation. Commenters pointed
out that ERISA's prohibited transaction rules preclude fiduciary
service providers from engaging in such activity. They also noted that,
to the extent that a service provider is not a fiduciary, exercising
such discretion over its compensation likely would constitute a
fiduciary act resulting in a separate prohibited transaction.
As an alternative to the disclosure regime of the proposed
regulation, some commenters suggested that a better indicator of the
existence and significance of a conflict of interest is information
about the amounts and sources of compensation that service providers
expect to receive in connection with the services provided to the plan.
After careful consideration of the comments regarding the proposed
requirement for narrative descriptions of conflicts of interest, the
Department agrees that the final regulation's more detailed disclosure
of compensation arrangements, particularly the additional information
concerning the receipt of indirect compensation and compensation paid
among related parties, will provide clearer and more meaningful
information to the responsible plan fiduciaries about potential
conflicts of interest than the narrative description of such conflicts
required by the proposal. Accordingly, the final rule does not require
the narrative disclosures about potential conflicts that were contained
in the proposed regulation. Rather, the final rule requires that in
conjunction with the description of the indirect compensation being
received by the covered service provider (or an affiliate or
subcontractor) in connection with the services provided to the plan,
the covered service provider must disclose the services to which the
indirect compensation relates and the payer of the compensation.
Covered service providers similarly must identify the source and
recipient of certain compensation paid among related parties, and the
services to which such compensation relates. The Department believes
that compliance with these disclosure requirements will ensure that
fiduciaries have meaningful information with which to assess potential
conflicts of interest on the part of their service providers.
Paragraph (c)(1)(iv)(C)(4), also consistent with the proposal,
requires the covered service provider to describe compensation that the
covered service provider, an affiliate, or a subcontractor reasonably
expects to receive in connection with termination of the contract or
arrangement, and how any prepaid amounts will be calculated and
refunded upon such termination. This provision, however, has been
modified slightly from the proposal in an effort to clarify the
requirement. Some commenters on the proposal expressed a general
concern that fees and charges associated with contract terminations are
not currently disclosed, as well as a specific concern that the
proposed regulation was not clear as to whether disclosure of these
fees and charges was required. In an effort to eliminate any ambiguity
concerning the requirement to disclose such information, the
requirement has been set forth in a separate paragraph of the final
regulation.
e. Disclosures Regarding Recordkeeping Services
The final rule also includes a requirement concerning specific
disclosures for recordkeeping services, which was not included in the
proposal. Paragraph (c)(1)(iv)(D) provides that, if recordkeeping
services will be provided to the covered plan, the covered service
provider must furnish a description of all direct and indirect
compensation that the covered service provider, an affiliate, or a
subcontractor reasonably expects to receive in connection with such
recordkeeping services. In addition, if the covered service provider
reasonably expects recordkeeping services to be provided, in whole or
in part, without explicit compensation for such recordkeeping services,
or when compensation for recordkeeping services is offset or rebated
based on other compensation received by the covered service provider,
an affiliate, or a subcontractor, the covered service provider must
furnish a reasonable and good faith estimate of the cost to the covered
plan of such recordkeeping services. The covered service provider must
explain the methodology and assumptions used to prepare the estimate
and describe in detail the recordkeeping services that will be provided
to the covered plan. The estimate shall take into account, as
applicable, the rates that the covered service provider, an affiliate,
or a subcontractor would charge to, or be paid by, third parties, or
the prevailing market rates charged, for similar recordkeeping services
for a similar plan with a similar number of covered participants and
beneficiaries.
The addition of this provision to the final rule reflects the
Department's belief that information relating to recordkeeping services
and the costs to covered plans of those services should be disclosed to
responsible plan fiduciaries in a meaningful way. The availability of
information sufficient to enable the plan fiduciary to make informed
decisions about the costs of recordkeeping is fundamental to a
responsible plan fiduciary's ability to satisfy its ERISA obligations.
Especially in complicated service arrangements when a variety of
services, including recordkeeping services, are provided to the covered
plan and may be paid for through charges at the plan investment level
or through revenue sharing, it is sometimes difficult for a plan
fiduciary to determine the portion of aggregate charges that will be
applied to recordkeeping services. The Department believes that
requiring such information to be separately disclosed will better
enable fiduciaries to make informed evaluations of a covered plan's
recordkeeping costs. To the extent recordkeeping costs will not be
covered by relatively straightforward direct or indirect compensation
received by plan service providers, and to accommodate industry
variation in how recordkeeping costs are otherwise absorbed by plan
[[Page 41611]]
service providers and investment-level charges, the Department included
a standard for estimating recordkeeping costs in paragraph
(c)(1)(iv)(D)(2). A covered service provider cannot avoid providing an
estimate required by paragraph (c)(1)(iv)(D)(2) merely by disclosing a
de minimis amount of direct or indirect compensation for recordkeeping
under paragraph (c)(1)(iv)(D)(1) when such amount has no relationship
to the cost of such services. In such instances, a covered service
provider would be required under the final rule to provide an estimate
pursuant to paragraph (c)(1)(iv)(D)(2) to reasonably reflect the cost
to the covered plan of recordkeeping services. The Department believes
these estimates, which must be reasonable and made in good faith by the
covered service provider, will help responsible plan fiduciaries
compare recordkeeping costs among a variety of service providers and
service arrangements.
f. Manner of Receipt of Compensation
Paragraph (c)(1)(iv)(E) of the final rule, consistent with the
proposal, requires a description of the manner in which the
compensation described in paragraphs (c)(1)(iv)(C) and (D) will be
received, such as whether the covered plan will be billed or the
compensation will be deducted directly from the covered plan's
account(s) or investments.
g. Investment Disclosure--Fiduciary Services and Recordkeeping and
Brokerage Services
The definition of compensation under the proposal was very broad
and encompassed not only the compensation and fees received by service
providers, but also compensation attendant to plan investments and
investment options. Disclosures concerning investment-related
compensation (i.e., investment management and similar fees charged
against investment returns) are particularly significant in that they
typically constitute a large portion of the total expenses incurred by
a plan and its participants. These disclosures may directly impact the
cost of plan services as a result of revenue sharing and similar
arrangements between the issuer of a particular investment product and
plan service providers. Understanding the fees and expenses attendant
to plan investments is particularly significant for fiduciaries of
individual account plans that permit participant and beneficiaries to
direct their own investments, because it is those fiduciaries who
ultimately select the plan's investment options and upon whom the
participants and beneficiaries depend to make informed choices
concerning their investments. Because investment-related fees and
expenses can dramatically reduce the retirement savings of participants
and beneficiaries, plan fiduciaries must carefully assess investment
fees and expenses, among other factors, in selecting investment options
to be made available in participant-directed individual account plans.
The Department received a number of comments concerning the
disclosure of investment-related compensation. Most of the comments
focused on what information should be disclosed and by whom it should
be disclosed. The final regulation addresses the major issues raised by
commenters through changes to the scope of the term ``covered service
provider.'' For example, the concerns relating to uncertainty as to
whether issuers of investment products, and certain service providers
to those issuers or products, are themselves covered service providers
for purposes of the regulation have been addressed by clarifying who
does not constitute a ``covered service provider'' in the final rule.
See above discussion relating to paragraph (c)(1)(iii)(D) of the final
rule. Other comments expressed concern about some of the terminology
used in the proposal. For example, one commenter expressed the view
that the proposal left unclear whether a component of a charge called
an ``investment management fee'' that actually pays recordkeeping or
other non-management costs is required to be separately disclosed. The
commenter explained that some service providers construe ``revenue
sharing'' which would be required to be disclosed to include only the
items specified in the preamble to the proposal, notwithstanding that
there may be components of an expense ratio that actually pay for non-
investment management services. Other commenters favorably
characterized the proposal's definition of fees and expenses as
comprehensive. Again, many of these commenters' concerns are addressed
by the revisions reflected in the final rule concerning who does (and
who does not) constitute a ``covered service provider.'' The Department
also believes that the final rule's requirements, discussed below,
establish clear standards as to what information concerning plan
investments must be disclosed and by whom such information must be
disclosed.
As discussed above, the final rule defines the term ``covered
service provider'' to include fiduciaries to certain investment
vehicles holding plan assets (paragraph (c)(1)(iii)(A)(2)) and
providers of recordkeeping and brokerage services to a participant-
directed individual account plan if they make available one or more
designated investment alternatives for the covered plan (paragraph
(c)(1)(iii)(B)). In addition to imposing an obligation to disclose
compensation information concerning the services they provide (i.e., as
a fiduciary or as a recordkeeper or broker), the final rule requires
these covered service providers to disclose compensation information
concerning the investments with respect to which they are a fiduciary
or provide recordkeeping or brokerage services pursuant to the contract
or arrangement with the covered plan. After careful consideration of
all of the comments, the Department concluded that these service
providers, because they have a relationship with both the investment
vehicles and the covered plan, are in the best position to ensure that
responsible plan fiduciaries have the information they need about the
investments represented by the covered service provider. These
investment-related disclosures are described in paragraphs
(c)(1)(iv)(F) and (G) of the final rule and are not limited as to who
will receive such investment-related compensation. The Department also
notes that ERISA section 404(a) obligates plan fiduciaries who invest
in vehicles holding plan assets (paragraph (c)(1)(iii)(A)(2)) to
consider the effect on the plan's rate of return of fees and expenses
associated with that vehicle's underlying investments, including any
lower tiered entity in which the plan asset vehicle invests.
Paragraph (c)(1)(iv)(F) sets forth the investment-related
disclosure obligations of fiduciaries to investment vehicles holding
plan assets. These covered service providers (as described in paragraph
(c)(1)(iii)(A)(2)) must provide, with respect to each investment
contract, product, or entity that holds plan assets and in which the
covered plan has a direct equity investment, the following information,
unless such information is disclosed to the responsible plan fiduciary
by a covered service provider described in paragraph (c)(1)(iii)(B)
(recordkeeping and brokerage services): (i) a description of any
compensation that will be charged directly against the amount invested
in connection with the acquisition, sale, transfer of, or withdrawal
from the investment contract, product, or entity (e.g., sales loads,
sales charges, deferred sales
[[Page 41612]]
charges, redemption fees, surrender charges, exchange fees, account
fees, and purchase fees); (ii) a description of the annual operating
expenses (e.g., expense ratio) if the return is not fixed; and (iii) a
description of any ongoing expenses in addition to annual operating
expenses (e.g., wrap fees, mortality and expense fees).
Paragraph (c)(1)(iv)(G) requires disclosure of the same investment-
related compensation information described above from recordkeepers and
brokers that make available investment alternatives for participant-
directed individual account plans. This information must be provided
with respect to each designated investment alternative for which
recordkeeping or brokerage services will be provided pursuant to the
contract or arrangement with the covered plan. Paragraph
(c)(1)(viii)(C), discussed below, defines the term ``designated
investment alternative'' for purposes of the final rule.
The Department recognizes that recordkeepers and brokers, unlike
fiduciaries to investment vehicles holding plan assets, are not
directly involved in the day-to-day management of the investment
vehicles they represent, but rather, merely serve as intermediaries
between plans and the issuers of these investment vehicles for purposes
of furnishing such information; the final rule limits their liability
under the regulation for the completeness and accuracy of the disclosed
information. Specifically, paragraph (c)(1)(iv)(G)(2) of the final rule
provides that a covered service provider may comply with this
investment-related disclosure requirement if the covered service
provider provides to the responsible plan fiduciary current disclosure
materials of the issuer of the designated investment alternative that
include the information described in this paragraph, provided that such
issuer is not an affiliate, the disclosure materials are regulated by a
State or federal agency, and the covered service provider does not know
that the materials are incomplete or inaccurate.
h. Timing of Initial Disclosure Requirements; Changes
With regard to the timing of the required disclosures, the proposed
regulation required that service contracts or arrangements include a
representation by the service provider that all required information
was provided to the responsible plan fiduciary before the contract or
arrangement was entered into. This requirement was intended to ensure
that the responsible plan fiduciary had the opportunity to consider all
required disclosures before entering into a contract or arrangement
with a service provider. The Department did not specify any time frame
for this disclosure, believing it was best left to the responsible plan
fiduciary and its potential service providers to work out the amount of
time, prior to entering into the contract or arrangement, that the
responsible plan fiduciary would need to review the disclosures. Some
commenters suggested that the final regulation provide a more specific
timeframe for the disclosures. However, the Department continues to
believe that the flexibility described in the proposed regulation is
appropriate and that the parties to the contract or arrangement can
determine what is reasonable; accordingly, the Department did not adopt
the suggestion.
Consistent with the proposal, the final rule, at paragraph
(c)(1)(v), requires that a covered service provider provide the initial
disclosures required by paragraph (c)(1)(iv), discussed above, to the
responsible plan fiduciary reasonably in advance of the date the
contract or arrangement is entered into, extended or renewed. The final
rule, however, contains an exception for certain persons who become
covered service providers within the meaning of paragraph
(c)(1)(iii)(A)(2) of the final rule subsequent to a plan's investment
in an investment vehicle. This situation would arise when a plan
invests in an investment vehicle that, at the time of the plan's
investment, does not hold plan assets, but that subsequently, for
reasons such as another plan's investment in the vehicle, is determined
to hold plan assets, thereby causing a fiduciary to such vehicle to be
a covered service provider pursuant to paragraph (c)(1)(iii)(A)(2). To
accommodate such instances, the final rule provides that such a
fiduciary service provider must disclose the information required by
paragraph (c)(1)(iv) as soon as practicable, but not later than 30 days
from the date on which the service provider knows that such investment
contract, product or entity holds plan assets.
The final rule also includes a special timing provision for
disclosure related to recordkeeping and brokerage services pursuant to
paragraph (c)(1)(iv)(G). Information described in paragraph
(c)(1)(iv)(G) relating to any investment alternative that is not
designated at the time the contract or arrangement is entered into must
be disclosed as soon as practicable, but not later than the date on
which the investment alternative is designated by the responsible plan
fiduciary.
In addition to requiring that certain information be disclosed to
responsible plan fiduciaries before the parties enter into, or extend
or renew, a contract or arrangement, the proposal included an ongoing
obligation for the service provider to disclose to the responsible plan
fiduciary any material change to the required information not later
than 30 days from the date on which the service provider acquired
knowledge of the change. A number of commenters requested additional
guidance on what would be considered a ``material'' change. Some of the
commenters' concerns related to the potential breadth of disclosures
required by the proposal, with commenters expressing concern as to
whether 30 days would provide sufficient time to identify material
changes, especially in the context of packaged or bundled services that
may involve parties other than the contracting service provider. Some
commenters, especially large institutions with multiple affiliations,
argued that 30 days was not enough time to discover changes to
information relating to all of their business units or affiliates.
Commenters also asserted that this requirement would result in
voluminous, costly, and inefficient monitoring of disclosures, as well
as potential ``over-disclosure'' of all changes to the extent it is not
clear whether a particular change is material. Finally, commenters
argued that disputes may result between various parties as to the
beginning date for the 30-day compliance period, which may be
subjective. Commenters suggested alternative approaches, for example
defining materiality for this purpose, extending the 30-day period, or
requiring an annual updating of all information in lieu of periodic
disclosure of material changes. In response to these comments, the
Department has made a number of changes.
Specifically, paragraph (c)(1)(v)(B) of the final rule requires
that a covered service provider disclose a change (as opposed to a
``material'' change) to the initial information required to be
disclosed pursuant to paragraphs (c)(1)(iv) as soon as practicable, but
not later than 60 days from the date on which the covered service
provider is informed of such change, unless such disclosure is
precluded due to extraordinary circumstances beyond the covered service
provider's control, in which case the information must be disclosed as
soon as practicable. The Department was persuaded by commenters'
concerns that it may take
[[Page 41613]]
more than 30 days to accurately identify and disclose changes to
information that previously was disclosed, especially in the context of
large institutions with multiple affiliates. However, the Department
does not believe that a covered service provider should have an
unlimited period of time to disclose changes to the responsible plan
fiduciary; a certain level of timeliness and efficiency is expected in
the marketplace, and covered service providers should be in a position
to ensure that the information they disclose to responsible plan
fiduciaries about the services they are providing and the compensation
they are receiving continues to be accurate. Therefore, disclosure of
changes must be made as soon as practicable, but not later than 60 days
from the date on which the covered service provider knows of such
change unless such disclosure is precluded due to extraordinary
circumstances beyond the covered service provider's control, in which
case the information must be disclosed as soon as practicable.
The Department also eliminated the concept of materiality,
persuaded by commenters that, without more specific definition, this
standard would not add to a covered service provider's understanding of
what types of changes must be disclosed. Accordingly, if information
previously disclosed to a responsible plan fiduciary changes, the
responsible plan fiduciary must be notified. The Department believes
that a responsible plan fiduciary should be made aware if any change
occurs, for example, in the services that the covered service provider
will be providing for the plan, the fiduciary status of the service
provider, or the compensation that the service provider will be
paid.\12\
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\12\ Nothing in the final rule or this preamble relieves a
service provider from other obligations or limitations under ERISA,
for example other prohibited transactions or, in the case of service
providers that are ERISA fiduciaries, the restrictions of ERISA
sections 404 or 406(b). See, e.g., Advisory Opinion 97-16A (May 22,
1997) (the Department stated that, in the context of a service
provider who retains some authority over the investment options
selected by plans by deleting or substituting, in its own
discretion, certain unrelated mutual funds, a plan fiduciary must be
provided advance notice of the change, including disclosure of fee
information, and must be afforded a reasonable amount of time in
which to accept or reject the change).
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i. Reporting and Disclosure Information; Timing
Paragraph (c)(1)(vi) of the final rule addresses the obligations of
the covered service provider to provide, upon request of the
responsible plan fiduciary or plan administrator, any other information
relating to the compensation received in connection with the contract
or arrangement that is required for the covered plan to comply with the
reporting and disclosure requirements of Title I of ERISA and the
regulations, forms and schedules issued thereunder. This provision is
very similar to the proposal. A few commenters asked the Department to
provide that only ``reasonable'' requests from the responsible plan
fiduciary or plan administrator must be accommodated under this
provision. The Department did not include this concept in the final
rule, because it did not want to create issues as to the
``reasonableness'' of a particular request. The Department believes
that the final rule minimizes the potential for abuse by restricting
covered service provider's disclosure obligation to information that is
``required'' for the covered plan to comply with its reporting and
disclosure obligations. Commenters also requested guidance from the
Department that the responsible plan fiduciary or plan administrator
may not request that this information be disclosed or presented in any
particular format. The Department expects that the covered service
provider will furnish the information in a manner that enables
effective use of the information to satisfy ERISA's Title I reporting
and disclosure requirements; no further obligation should be inferred
from this requirement.
Finally, a few commenters asked that the Department clarify that
this disclosure obligation was limited to information specifically
required by a responsible plan fiduciary or plan administrator to
complete a Form 5500 annual report. The Department declined to accept
this suggestion; the Department expects that this provision will
require service providers to disclose information that is necessary in
order to comply with ERISA's reporting and disclosure obligations in
circumstances other than the Form 5500 annual report, for example in
making required disclosures concerning plan and investment fees and
expenses to participants and beneficiaries. The Department notes that
this is not a limitless obligation; the rule limits this provision to
information relating to the contract or arrangement, and the
compensation received thereunder, that is ``required'' for the covered
plan to comply with the reporting and disclosure obligations of Title
I.
The proposal required that the service provider disclose
information requested by the responsible plan fiduciary or plan
administrator in order to comply with ERISA's reporting and disclosure
obligations, but did not specify any time frame for the service
provider to respond to such a request. Some commenters requested
additional guidance concerning when the covered service provider would
be obligated to provide such information. In response, the Department
added a new timing requirement in paragraph (c)(1)(vi)(B) of the final
rule. A covered service provider must disclose the requested
information not later than 30 days following receipt of a written
request from the responsible plan fiduciary or covered plan
administrator, unless such disclosure is precluded due to extraordinary
circumstances beyond the covered service provider's control, in which
case the information must be disclosed as soon as practicable. The
Department believes that this provision will provide more specificity
to the parties in complying with this disclosure requirement, but also
accommodate the practical reality that a covered service provider may,
because of extraordinary matters beyond its control, be unable to
satisfy the general standard.
j. Disclosure Errors
The proposed regulation did not provide specific relief for
disclosure errors or omissions by service providers. As a result, many
commenters argued that the final regulation should be revised to
include such relief for service providers in certain circumstances.
Many commenters argued that inadvertent mistakes are inevitable, in
spite of the best efforts of all involved, and that it would be
inappropriate for a service provider to be subject to a prohibited
transaction in these circumstances. These commenters believed that,
under the proposal, a prohibited transaction would result if any error,
no matter how small, existed in the detailed disclosures required by
the rule. Commenters felt this risk was especially significant in the
case of a package of services involving multiple service providers.
These commenters asserted that, with required information coming from
different, and in some cases unrelated, parties, the likelihood of
``innocent'' mistakes increases. Commenters were not comforted by the
proposal's limitation that information must be provided ``to the best
of the service provider's knowledge,'' because in some cases, such as a
typographical error, the service provider may ``know'' that the
information is inaccurate. Further, commenters argued that these errors
would not be covered by the material change provision in the proposal,
because many minor errors would not be material. Finally, commenters
noted that the material
[[Page 41614]]
change provision focused on disclosing information when changes occur
during the term of the contract and not on information that was
incorrect at the time the contract was entered into. Commenters
proposed various solutions, such as providing a cure period to allow
for correction of minor or inadvertent errors or, alternatively,
revising the rule to require only ``reasonable'' or ``good faith''
compliance with its disclosure obligations. Other commenters suggested
that a correction mechanism could be permitted through the Department's
Voluntary Fiduciary Correction (VFC) Program \13\ or that relief could
be provided through an expansion of the proposed class exemption.
---------------------------------------------------------------------------
\13\ See Voluntary Fiduciary Correction Program Under the
Employee Retirement Income Security Act of 1974, Adoption of Updated
Program, 71 FR 20262 (April 19, 2006).
---------------------------------------------------------------------------
The Department was persuaded by commenters that relief should be
provided so that certain inadvertent errors and omissions do not result
in a prohibited transaction. Accordingly, paragraph (c)(1)(vii) of the
final rule provides that no contract or arrangement will fail to be
reasonable under the regulation solely because the covered service
provider, acting in good faith and with reasonable diligence, makes an
error or omission in disclosing the information required by the
regulation. However, the covered service provider must disclose the
correct information as soon as practicable, but not later than 30 days
from the date on which the covered service provider knows of such error
or omission.
The Department notes that the class exemption, included as part of
this regulation (paragraph (c)(1)(ix)), is meant to address situations
in which a responsible plan fiduciary discovers an error or other
deficiency in the disclosure. Paragraph (c)(1)(vii) is meant to provide
the parties an opportunity to avoid a prohibited transaction by
addressing errors up front. Once a prohibited transaction has occurred,
the responsible plan fiduciary will need to rely on the relief provided
by the class exemption, discussed below.
6. Definitions
Paragraph (c)(1)(viii) of the final rule defines the terms
``affiliate,'' ``compensation,'' ``designated investment alternative,''
``recordkeeping services,'' ``responsible plan fiduciary,'' and
``subcontractor.''
Specifically, paragraph (c)(1)(viii)(A) provides that a person's or
entity's ``affiliate'' directly or indirectly (through one or more
intermediaries) controls, is controlled by, or is under common control
with such person or entity; or is an officer, director, or employee of,
or partner in, such person or entity. The rule also provides that
unless otherwise specified, an ``affiliate'' in paragraph (c)(1) refers
to an affiliate of the covered service provider. This definition
essentially is unchanged from the proposal, except that the definition
no longer includes the concept of an ``agent'' of the covered service
provider. The Department was persuaded by commenters that the notion of
an ``agent'' of the covered service provider is unclear, overly broad,
and not consistent with commonly understood ``affiliate'' arrangements.
To the extent some commenters were concerned that this term might pull
subcontractors of a covered service provider into affiliated status,
the Department notes that the final rule specifically addresses the
role of a covered service provider's subcontractors elsewhere.
Paragraph (c)(1)(viii)(B) defines ``compensation'' for purposes of
the final rule as anything of monetary value (such as money, gifts,
awards, and trips), but does not include non-monetary compensation
valued at $250 or less, in the aggregate, during the term of the
contract or arrangement. This is slightly different from the proposal,
which did not include the $250 de minimis rule. The Department added
this provision in response to suggestions from a number of comments
concerning the cost and burden of tracking insignificant non-monetary
gifts.
The definition of ``compensation'' includes descriptions of both
``direct'' and ``indirect'' compensation. Subparagraph (1) defines
``direct'' compensation as compensation received directly from the
covered plan. Subparagraph (2) defines ``indirect'' compensation as
compensation received from any source other than the covered plan, the
plan sponsor, the covered service provider, an affiliate, or a
subcontractor, if the subcontractor receives such compensation in
connection with services performed under the subcontractor's contract
or arrangement described in the definition of subcontractor contained
in paragraph (c)(1)(viii)(F).
Subparagraph (3) provides that, for purposes of the regulation, a
description or an estimate of compensation may be expressed as a
monetary amount, formula, percentage of the covered plan's assets, or a
per capita charge for each participant or beneficiary or, if the
compensation cannot reasonably be expressed in such terms, by any other
reasonable method.\14\ In this regard, any description or estimate must
contain sufficient information to permit evaluation of the
reasonableness of the compensation. This provision is slightly modified
from the proposal, because the final rule also provides that when
compensation cannot reasonably be expressed in terms of amounts,
formulae or percentages, any other reasonable method may be used
(subject to the general requirement that the description of
compensation must contain sufficient information to permit evaluation
of the reasonableness of such compensation). This standard was modified
in part in response to commenters' concern that some types of
compensation could not necessarily be expressed in a monetary amount,
formula, percentage of the plan's assets, or a per capita charge. The
Department continues to prefer disclosure in terms of a monetary
amount, formula, percentage of the plan's assets, or a per capita
charge; however, the Department is persuaded that in situations when it
is not feasible to disclose compensation in such terms, covered service
providers should be able to use another reasonable method to do so.
---------------------------------------------------------------------------
\14\ Some commenters raised concerns with language in the
preamble to the proposed regulation which seemed to imply that
formulas, percentages, or per capita charges could be used only if
it was not possible to disclose in terms of a monetary amount. The
Department did not intend this interpretation; as stated in the
final rule, there are alternatively acceptable formats for
disclosing compensation to a responsible plan fiduciary, so long as
the description sufficiently permits evaluation of the
reasonableness of such compensation.
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Paragraph (c)(1)(viii)(C) defines a ``designated investment
alternative'' as any investment alternative designated by a fiduciary
into which participants and beneficiaries may direct the investment of
assets held in, or contributed to, their individual accounts. The term
``designated investment alternative'' does not include brokerage
windows, self-directed brokerage accounts, or similar plan arrangements
that enable participants and beneficiaries to select investments beyond
those specifically designated. This definition is consistent with the
definition used by the Department for purposes of defining ``designated
investment alternative'' in its proposed participant-level fee
disclosure regulation (see proposed Sec. 2550.404a-5(h)(1), 73 FR
43041).
Paragraph (c)(1)(viii)(D) defines ``recordkeeping services'' as
including services related to plan administration and monitoring of
plan and participant and beneficiary transactions such as enrollment,
payroll deductions and
[[Page 41615]]
contributions, offering designated investment alternatives and other
covered plan investments, loans, withdrawals and distributions. It also
provides that ``recordkeeping services'' includes the maintenance of
covered plan and participant and beneficiary accounts, records, and
statements. This broad definition of recordkeeping is intended to
provide basic parameters to ensure that providers of recordkeeping
services understand when they will be covered by paragraph
(c)(1)(iii)(B) when they also make designated investment alternatives
available to the covered plan.
Paragraph (c)(1)(viii)(E) defines a ``responsible plan fiduciary''
as a fiduciary with authority to cause the covered plan to enter into,
or extend or renew, the contact or arrangement. This is consistent with
use of the phrase ``responsible plan fiduciary'' in the Department's
proposal, except that for ease of reference it has been separately
included in the definitions section.
Paragraph (c)(1)(viii)(F) defines a ``subcontractor'' as any person
or entity (or an affiliate of such person or entity) that is not an
affiliate of the covered service provider and that, pursuant to a
contract or arrangement with the covered service provider or an
affiliate, reasonably expects to receive $1,000 or more in compensation
for performing one or more services described in paragraph
(c)(1)(iii)(A) through (C) of the regulation provided for by the
contract or arrangement with the covered plan. The Department added
this concept to the final rule in order to clarify that, in certain
instances, a covered service provider will be required to report
compensation received by a subcontractor to the covered service
provider or an affiliate. For example, if a ``covered service
provider'' that contracts with a plan to provide recordkeeping in turn
subcontracts to outsource all or part of those services to another
party, then that party is a ``subcontractor,'' because it is carrying
out some or all of the covered service provider's obligations under the
contract or arrangement with the covered plan. In certain cases, the
covered service provider may have to disclose compensation received by
this subcontractor.
C. Class Exemption
The class exemption from the restrictions of ERISA section
406(a)(1)(C) was proposed by the Department separately from the
proposed regulation. It was intended to relieve a responsible plan
fiduciary from engaging in a prohibited transaction under certain
circumstances when the requirements of the regulation have not been
met. The Department received five separate public comments in response
to the invitation for comments contained in the notice of pendency
relating to the proposed class exemption, in addition to comments that
were made as part of information received from the public on the
proposed regulation. This section discusses these comments and
modifications that have been made to the final class exemption, which
now is being granted and included as section (c)(1)(ix) of the final
rule.
1. Comments on Proposed Class Exemption
A few commenters requested that the proposed class exemption be
expanded to protect service providers from potential excise taxes under
the Code. Specifically, these commenters wanted the class exemption to
cover service providers that are responsible for making the rule's
required disclosures in certain circumstances: For example, when
disclosure is made on behalf of a third party, and the service
provider, acting as a conduit, either does not receive the requested
information from the third party, or it is later discovered that the
information received from the third party was erroneous; when an
inadvertent error is made in providing the responsible plan fiduciary
with the detailed information required by the proposal, for example,
some of the narrative information about conflicts of interest,
commenters argued, was vaguely described or overly broad; or when a
responsible plan fiduciary fails to execute a service contract or
arrangement. The Department has determined not to extend specific
prohibited transaction exemption relief from the prohibitions of
section 406(a) to covered service providers in the same way that the
final class exemption covers responsible plan fiduciaries who attempt
to address a service provider's disclosure failure. However, the
Department notes that the final rule clarifies that execution of a
formal ``contract'' is not required, and gives covered service
providers more opportunities to address disclosure failures, such as
errors and omissions. The final rule also provides covered service
providers with relief for ``passing through'' certain regulated
disclosure materials that include information concerning plan-
designated investment alternatives.
One commenter suggested that the proposed class exemption be
expanded to cover prohibited transactions described under section
406(a)(1)(D) of ERISA. Section 406(a)(1)(D) prohibits the transfer to,
or use by or for the benefit of, a party in interest, of any assets of
the plan. The commenter stated that if the statutory exemption under
section 408(b)(2) is temporarily unavailable for a particular service
arrangement, but the covered service provider continues to be engaged
by the plan to provide necessary services and receives payments,
section 406(a)(1)(D) would be violated if plan assets are used to
compensate the covered service provider during such time. The
Department modified the operative language of the final class exemption
to provide relief from section 406(a)(1)(D) to cover, among other
things, situations when a responsible plan fiduciary decides to
continue a service arrangement with a covered service provider, and to
continue paying such covered service provider's fees, during periods
when the parties are attempting to cure a disclosure failure by the
covered service provider pursuant to the conditions of this exemption.
Other commenters observed that the proposed class exemption would
apply if the responsible plan fiduciary unknowingly enters into a
service contract that does not satisfy the disclosure obligations of
the regulation, provided that certain conditions are met. The proposal
required the responsible plan fiduciary to request the missing
information, in writing, from the service provider, and the covered
service provider would have been deemed to have failed to satisfy its
disclosure obligations if it did not provide the information requested
by the responsible plan fiduciary within 90 days. In this regard, the
commenters requested that a satisfactory and timely service provider
response to the 90-day request be deemed to satisfy the disclosure
requirements and that the proposed class exemption be revised to
provide relief in such instances. One commenter stated that a service
provider should not be treated as failing to comply with a responsible
plan fiduciary's request for information, for purposes of the
exemption, merely because the covered service provider is unable to
complete a response within 90 days of the request, despite good faith
efforts on the part of the service provider to obtain such information.
The Department has determined that, under the exemption, a
responsible plan fiduciary should not be permitted to give a covered
service provider an unlimited amount of time to address a disclosure
failure. Like the proposal, the final exemption requires that
disclosure failures be addressed by the parties within specific
timeframes. Under the final exemption, if the covered service
[[Page 41616]]
provider fails to comply with a responsible plan fiduciary's written
request within 90 days of the date of that request, the fiduciary must
notify the Department of the service provider's disclosure failure
within a specified time period (i.e., 30 days). At such time, the
responsible plan fiduciary will be covered by the exemption. The
covered service provider will continue to be engaging in a non-exempt
prohibited transaction until such time as the service arrangement is
terminated or the disclosure failure is cured. Once a service
provider's disclosure failure has been cured and the contract or
arrangement complies with all of the other conditions of the
Department's regulations at 29 CFR 2550.408b-2, or the contract or
arrangement is terminated, it is the view of the Department that the
prohibited transaction will cease. Thus, covered service providers will
not be liable for excise taxes under Code section 4975 for any period
following the date on which the disclosure failure is cured or the
contract or arrangement is terminated.
Further, some commenters requested that the Department extend the
proposed 30-day time period for a responsible plan fiduciary to notify
the Department of a covered service provider's failure to disclose. One
commenter argued that many plan fiduciary committees do not meet on a
monthly basis, and it may be difficult for responsible plan fiduciaries
to make final determinations about retention of covered service
providers within a 30-day period. The Department did not extend this
time period in the final class exemption, which continues to require
that notice to the Department be made not later than 30 days following
the earlier of the covered service provider's refusal to furnish the
requested information or end of the 90-day period following the
responsible plan fiduciary's written request.
Finally, one commenter suggested that the exemption should only
require responsible plan fiduciaries to notify the Department of a
disclosure failure in specific instances, such as when a disclosure
failure is made by plan service providers who are ERISA fiduciaries, or
when the disclosure failure relates specifically to information about a
service provider's fees or other compensation. This approach has not
been adopted. The Department believes that all disclosures required
under the final regulation by all covered service providers are
relevant for purposes of a responsible plan fiduciary's duty to provide
notice to the Department of a service provider's failure to correct or
address such failures in a timely fashion.
2. Description of the Final Class Exemption
The class exemption is set forth in the final regulation in
paragraph (c)(1)(ix). The Department incorporated the exemptive relief
into the final regulation in order to facilitate reference by
interested persons. The specific conditions applicable to covered
transactions are described in this paragraph. These conditions require,
among other things, a responsible plan fiduciary to notify the
Department under certain circumstances of a covered service provider's
failure to comply with its disclosure obligations. These conditions
also set forth the timing, content and other requirements applicable to
the notice required to be filed with the Department by the responsible
plan fiduciary.\15\
---------------------------------------------------------------------------
\15\ As with any exemption from ERISA's prohibited transaction
provisions, the party seeking to avail itself of the relief provided
by the exemption has the burden of demonstrating compliance with the
conditions of the exemption.
---------------------------------------------------------------------------
The exemption provides relief from the restrictions of section
406(a)(1)(C) and (D) of ERISA to a responsible plan fiduciary,
notwithstanding any failure by a covered service provider to comply
with its disclosure obligations, provided that the conditions set forth
in paragraph (c)(1)(ix)(A) through (G) are met.
Paragraph (c)(1)(ix)(A) of the regulation requires that the
responsible plan fiduciary did not know that the covered service
provider failed or would fail to make required disclosures and
reasonably believed that the covered service provider disclosed the
information required by the final rule. This condition is intended to
reinforce the principle that the plan fiduciary must have entered into,
and thereafter continued, an arrangement for services with a reasonable
belief that the covered service provider met, and would continue to
meet, the requirements of the final rule and without knowing of the
covered service provider's disclosure failures.
Paragraph (c)(1)(ix)(B) of the regulation requires that, upon
discovering that the covered service provider failed to disclose the
required information, the responsible plan fiduciary must request in
writing that the covered service provider furnish such information. If
the covered service provider fails to comply with the responsible plan
fiduciary's written request within 90 days, paragraph (c)(1)(ix)(C)
requires that the responsible plan fiduciary notify the Department. The
Department believes that this condition, along with a covered service
provider's exposure to excise tax liability under the Code, will
provide covered service providers with a sufficient incentive to
address disclosure failures within a reasonable time.\16\
---------------------------------------------------------------------------
\16\ The notice requirement does not relieve a plan
administrator of the obligation to report a prohibited transaction
in accordance with the instructions to the Annual Report Form 5500
Series, without regard to whether the covered service provider
furnishes information in response to the fiduciary's request.
---------------------------------------------------------------------------
Paragraph (c)(1)(ix)(D) through (F) of the regulation sets forth
the content, timing, and other requirements applicable to notifying the
Department of a covered service provider's failure to meet its
disclosure obligations. Paragraph (c)(1)(ix)(D) states that the notice
to the Department must contain the following information: (1) The name
of the covered plan; (2) the plan number used for the plan's Annual
Report; (3) the plan sponsor's name, address, and EIN; (4) the name,
address and telephone number of the responsible plan fiduciary; (5) the
name, address, phone number, and, if known, EIN of the covered service
provider; (6) a description of the services provided to the covered
plan; (7) a description of the information that the covered service
provider failed to disclose; (8) the date on which such information was
requested in writing from the covered service provider; and (9) a
statement as to whether the covered service provider continues to
provide services to the covered plan.
Paragraph (c)(1)(ix)(E) provides that the responsible plan
fiduciary shall file a notice with the Department not later than 30
days following the earlier of: (1) the covered service provider's
refusal to furnish the requested information; or (2) the date which is
90 days after the date the written request referred to in paragraph
(c)(1)(ix)(B)(1) is made. In this context, a covered service provider's
refusal to provide information to the responsible plan fiduciary,
following such fiduciary's written request, would constitute a covered
service provider's failure to meet its disclosure obligations prior to
the end of the 90-day period.
Paragraph (c)(1)(ix)(F) provides that the notice should be sent to
the U.S. Department of Labor, Employee Benefits Security
Administration, Office of Enforcement, 200 Constitution Ave., NW.,
Suite 600, Washington, DC 20210. Such a notice may also be sent
electronically to: [email protected]. The Department has
developed a sample
[[Page 41617]]
notice that will facilitate compliance with the notification
requirement; this sample notice will be available on the Department's
Web site at: http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc.
Finally, paragraph (c)(1)(ix)(G) of the regulation provides that,
following the responsible plan fiduciary's discovery that the covered
service provider failed to disclose required information, the fiduciary
shall determine whether to terminate or continue the contract or
arrangement with such service provider. In making such a determination,
the responsible plan fiduciary shall evaluate the nature of the
failure, the availability, qualifications and costs of potential
replacement service providers, and the covered service provider's
response to notification of the failure. However, the provisions
contained in paragraph (c)(1)(ix)(G) do not abrogate or supersede the
duties imposed upon a responsible plan fiduciary by section 404(a) of
ERISA, which would also require the fiduciary to consider what steps to
take in response to the covered service provider's nondisclosure.
D. Preemption of State Law
Paragraph (c)(1)(x) of the regulation states that the regulation
does not supersede any State law that governs disclosures by parties
that provide services to covered plans, except to the extent that such
law prevents application of the regulation. The Department understands
that the service provider relationship with the plan may be subject to
a variety of State laws, such as contract, tax, consumer protection,
and other laws. The Department's regulation is not intended to
supersede any of these State laws, which may require disclosures by
parties that provide services described in the regulation, except to
the extent that compliance with such State law would make compliance
with this regulation impossible or would otherwise conflict with one of
the regulation's protections.
Paragraph (c)(1)(x) of the regulation addresses only the preemptive
effect of the regulation itself, and does not speak to any preemptive
effect that ERISA Title I generally, or ERISA section 514 specifically,
may have on State laws that regulate parties that provide services to
employee benefit plans. A State law that requires disclosures in
connection with services or service provider contract or arrangements,
regardless of whether the services are provided directly to an ERISA
plan or other entity, generally would not be viewed by the Department
as ``relating to'' employee benefit plans within the meaning of ERISA
section 514 or as otherwise preempted by Title I of ERISA.
E. Application of Section 4975 of the Internal Revenue Code
Code section 4975(d)(2) contains a provision that is parallel to
ERISA section 408(b)(2). Several commenters questioned the interplay of
the proposal and section 4975 of the Code. These commenters explained
that this interplay was unclear, because the proposal did not
explicitly include corresponding amendments to the regulations under
Code section 4975. Commenters generally sought clarification in this
regard, asserting their belief that the Department has authority to
issue guidance under Code section 4975(d)(2) and should confirm that
compliance with the regulation will be required for a covered service
provider to avoid the excise taxes imposed by Code section 4975.
The Department added paragraph (c)(1)(xi) of the interim final
regulation to clarify this issue. This paragraph provides that, in
accordance with the transfer of authority of the Secretary of the
Treasury to promulgate regulations of the type published herein to the
Secretary of Labor, pursuant to section 102 of the Reorganization Plan
No. 4 of 1978, 5 U.S.C. App. 214 (2000 ed.), which was effective
December 31, 1978, under the final regulation, all references to
section 408(b)(2) of the ERISA and the regulations thereunder should be
read to include reference to the parallel provisions of section
4975(d)(2) of the Code and the regulations thereunder.
If a covered service provider to a covered plan fails to disclose
the information required by the final rule, then the contract or
arrangement will not be ``reasonable.'' Therefore, the service contract
or arrangement will not qualify for the relief from ERISA's prohibited
transaction rules provided by section 408(b)(2). The resulting
prohibited transaction will have consequences for both the responsible
plan fiduciary and the service provider. The responsible plan
fiduciary, by causing the transaction, will have violated ERISA section
406(a)(1)(C) and (D). The service provider, as a ``disqualified
person'' under the Code's prohibited transaction rules, will be subject
to the excise taxes that result from the service provider's
participation in a prohibited transaction under Code section 4975.\17\
---------------------------------------------------------------------------
\17\ The Code also includes rules relating to statutory relief
applicable to transactions between a plan and a service provider.
See generally Code section 4975.
---------------------------------------------------------------------------
The Department continues to believe that the application of an
excise tax will provide incentives for all parties to service contracts
or arrangements to cooperate in exchanging the disclosures required by
the final regulation. However, as noted above, the Department does not
believe that an otherwise diligent plan fiduciary should be penalized
as a result of a failure on the part of service provider to make the
required disclosure, thus the final regulation includes the exemptive
relief described above (see paragraph (c)(1)(ix) of the interim final
rule).
F. Effective Date
Many commenters expressed concern with the Department's proposal
that the final regulation and class exemption would be effective 90
days after their publication in the Federal Register. Commenters
suggested that these effective dates should be extended to as much as
12 months or longer following publication to allow service providers
sufficient time re-negotiate with their clients, to make appropriate
amendments to their service contracts and disclosure materials, and to
make other necessary changes to their business practices, for example,
revising any recordkeeping or other systems to ensure that the
appropriate information is captured. Otherwise, commenters stated,
there may be many compliance failures in the first year following the
effective date of the regulation and class exemption. Commenters also
suggested that the Department clarify whether the rule's disclosure
obligations will apply only to contracts entered into (or extended or
renewed) after the effective date of the final regulation.
In response to these concerns, the Department revised the date by
which the interim final rule will apply to the disclosures required for
a compliant contract or arrangement. Specifically, the rule will be
effective one year after the date of its publication in the Federal
Register. This modification is intended to accommodate concerns raised
by commenters as to the cost and burden associated with transitioning
current and future service contracts or arrangements to satisfy the
requirements of the interim final rule. As of the effective date, all
contracts or arrangements for services that fall within the scope of
the interim final rule must comply with the interim final rule. Thus,
the disclosures for new contracts or arrangements that are entered into
on or after the effective date must satisfy the rule. In addition,
contracts or arrangements that were entered into prior to that date
must comply with the rule as of the effective date. The Department
believes that interested persons will have sufficient
[[Page 41618]]
time to address the requirements of the interim final rule and
establish procedures to ensure compliance with both the regulation and,
if necessary, the class exemption.
G. Welfare Plan Disclosure--Reserved
As explained above in the section entitled ``Scope--Covered
Plans,'' the Department is reserving paragraph (c)(2) of the interim
final rule for a comprehensive disclosure framework applicable to
``reasonable'' contracts or arrangements for welfare plans to be
developed by the Department. The Department believes that fiduciaries
and service providers to welfare benefit plans would benefit from
regulatory guidance in this area for the same reasons that apply to
defined contribution plans and defined benefit plans. However, the
Department is persuaded that there are significant differences between
service and compensation arrangements of welfare plans and those
involving pension plans and that the Department should develop
separate, and more specifically tailored, disclosure requirements under
ERISA section 408(b)(2) for welfare benefit plans.
H. Existing Requirement Concerning Termination of Contract or
Arrangement
The Department did not propose any changes to the existing
requirements addressing termination of contracts or arrangements for
purposes of section 408(b)(2) (see 29 CFR 2550.408b-2(c)); however, the
Department did invite comments from the public as to any issues
relating to this requirement. In response to this invitation, one
commenter suggested that the Department more definitively delineate
time frames for service contracts or notice provisions, for example, by
requiring that contracts be no more than one year in length or
requiring at least 60 days notice for termination. The Department did
not accept this suggestion, because the Department believes that such
specific judgments are best left to the responsible plan fiduciaries
contracting for services to ascertain the most appropriate term for
their contracts and an appropriate notice period for termination. An
acceptable time frame in one set of circumstances would not necessarily
work in another, and the Department does not believe a mandate in this
context is appropriate.
Other commenters raised questions as to whether certain fees and
market value adjustments, generally associated with insurance or
insurance-type services and investments, constitute ``penalties'' for
purposes of this paragraph of the regulation. The regulation provides
specifically that ``a minimal fee in a service contract which is
charged to allow recoupment of reasonable start-up costs is not a
penalty.'' The Department believes that questions as to whether, for
any particular contract, the charges for contract termination are in
fact ``penalties,'' rather than a service provider's recoupment of
reasonable start-up costs, are inherently factual questions;
accordingly, the Department did not amend the rule in response to these
comments. After consideration of all of the comments on paragraph
(c)(2) of the proposal, the Department has determined to adopt that
paragraph, without change, in the interim final rule, except that this
provision has been moved to a new paragraph (c)(3) of the interim final
rule.
I. Effect on Other Statutory and Administrative Exemptions
A number of commenters requested clarification of the effect of the
Department's proposed regulation on statutory and administrative
exemptions that already are in place. Comments on these issues were
received from industry groups that represent banks, insurance companies
and broker-dealers for securities and other financial instruments, as
well as from financial institutions. According to the commenters, the
affected financial firms provide services to all types of plans,
including many large plans, and that prohibited transaction issues are
raised not only with service arrangements but with specific financial
transactions occurring in the ordinary course of their business. These
transactions often require reliance upon one or more prohibited
transaction exemptions, some of which are periodically amended to
reflect current industry practices. Commenters generally did not
address how the proposal would affect plan service arrangements that
rely on existing statutory exemptions. However, a few commenters
asserted that they would not be subject to the disclosure requirements
under the regulation because they are relying on other statutory
exemptions to avoid prohibited transactions under ERISA section 406.
The Department is expressing no view at this time on the
relationship of this interim final rule to existing statutory and
administrative exemptions. The Department will, however, be reviewing
these issues in the future on a case-by-case and exemption-by-exemption
basis.
J. Justification for Interim Final Rulemaking; Request for Comments
Following the Department's careful review of the extensive public
record on this regulatory initiative, including over 100 comments on
the proposal and many supplemental materials furnished in connection
with the Department's public hearing on this initiative, the regulation
published today in this Notice contains a number of provisions that
differ significantly from the proposal. The Department believes that
this regulation addresses the many technical concerns raised with
respect to the proposal and clarifies with sufficient specificity the
nature of the required disclosure obligations and the parties that must
comply with such obligations. However, in view of the importance of
this initiative, and the potentially significant effects that the final
regulation and class exemption may have on plan fiduciaries and service
providers, the Department decided to publish this regulation as an
interim final regulation.
The Department invites comments from interested persons on all
aspects of the interim final regulation, in accordance with the
instructions for submitting comments described above in the ADDRESSES
section of this Notice.
K. Regulatory Impact Analysis
1. Background
Compensation arrangements in the market for retirement plan
services are complex. Payments from third parties and among service
providers can create conflicts of interest between providers and their
clients. For example, a 401(k) plan vendor may receive ``revenue
sharing'' from a mutual fund that it makes available to clients. A
consultant may receive a ``finder's fee'' from an investment adviser it
recommends to clients. Such compensation arrangements and the conflicts
they create are myriad and largely hidden from view. Their opacity
obscures the true cost of plan services and allows harmful conflicts to
persist in the market. Plans may pay more than they realize for
products and services that unbeknownst to them are tainted by
conflicts. Meanwhile service providers may reap excess profits.
Under ERISA, fiduciaries have a duty to consider a service
provider's compensation from all sources, but service providers are not
obligated to disclose compensation from other sources. This interim
final rule would require service providers to proactively disclose such
arrangements to plan clients.
[[Page 41619]]
2. The Need for Regulatory Action
To the extent that plan fiduciaries are unable to obtain relevant
compensation information, or unable to use it to choose among service
providers in a manner that upholds their fiduciary duty, a failure
exists in the market for services for employee benefit plans. The
market for retirement plan services is characterized by acute
information asymmetry. The information costs of plan service providers
are far lower than their clients'. Vendors are specialists in the
design of their products, services, and compensation arrangements, and
are continually engaged in marketing to plan sponsors. Plan sponsors
often lack this degree of specialization. Even very large, relatively
sophisticated plan sponsors shop for services only periodically,
generally once every three to five years. Smaller, less sophisticated
plan sponsors face still higher information costs. As a result, vendors
are able to maintain an information advantage over their plan sponsor
clients.
Vendors have a strong incentive to use their information advantage
to distort market outcomes in their own favor. Current ERISA rules hold
plan sponsors rather than vendors accountable for evaluating the cost
and quality of plan services. And vendors can reap excess profit by
concealing indirect compensation (and attendant conflicts of interest)
from clients, thereby making their prices appear lower and their
product quality higher. Consider one typical arrangement: A pension
consultant receives a finder's fee from an investment adviser when he
recommends that adviser to a plan sponsor. The plan sponsor does not
know that the consultant is receiving the finder's fee--an expense the
plan bears indirectly. The plan sponsor relies on the consultant to
evaluate the quality of the adviser's services, but does not know that
the consultant's recommendation and evaluation are subject to a
conflict of interest.
The Department has identified evidence that information gaps exist
in certain circumstances and that these gaps may distort market
results. For example:
An Advisory Council established under ERISA to advise the
Secretary of Labor found that ``the lack of transparency in this area
has led to an inefficient market where it is extremely difficult for
the plan sponsor to determine either the absolute level of fees, or the
flow of fees, i.e., who is getting paid what.'' \18\
---------------------------------------------------------------------------
\18\ See e.g., ERISA Advisory Council on Employee Welfare and
Pension Benefit Plans, Report of The Working Group on Plan Fees and
Reporting on Form 5500 (Nov. 10, 2004), at http://www.dol.gov/ebsa/publications/AC_111804_report.html.
---------------------------------------------------------------------------
The Securities and Exchange Commission found that pension
consultants ``typically'' do not disclose to clients that they receive
compensation from the same money managers that they may recommend, and
recommended that pension consultants adopt ``policies and procedures to
ensure that all disclosures required to fulfill fiduciary obligations
are provided to prospective and existing advisory clients, particularly
regarding material conflicts of interest [which should] ensure adequate
disclosure regarding the consultant's compensation.'' \19\
---------------------------------------------------------------------------
\19\ See e.g., U.S. Securities and Exchange Commission, Office
of Compliance Inspections and Examinations, Staff Report Concerning
Examinations of Select Pension Consultants (May 2005).
---------------------------------------------------------------------------
According to GAO, ``[s]pecific fees that are `hidden' may
mask the existence of a conflict of interest * * * If the plan sponsors
do not know that a third party is receiving these fees, they cannot
monitor them, evaluate the worthiness of the compensation in view of
services rendered, and take action as needed.'' \20\ GAO found that
defined benefit (DB) pension plans using consultants with SEC-
identified undisclosed conflicts earned returns 130 basis points lower
than the others.\21\ GAO recommended that Congress ``consider amending
ERISA to explicitly require that 401(k) service providers disclose to
plan sponsors the compensation that providers receive from other
service providers.'' \22\
---------------------------------------------------------------------------
\20\ See e.g., GAO, Increased Reliance on 401(k) Plans Calls for
Better Information on Fees, Private Pensions Report (March 6, 2007),
at http://www.gao.gov/new.items/d07530t.pdf.
\21\ See e.g., GAO, Conflicts of Interest Involving High Risk of
Terminated Plans Pose Enforcement Challenges, Defined Benefit
Pension Report (June 2007), at http://www.gao.gov/new.items/d07703.pdf.
\22\ See e.g., GAO, Changes Needed to Provide 401(k) Plan
Participants and the Department of Labor Better Information on Fees,
Private Pensions Report (Nov. 2006), at http://www.gao.gov/new.items/d0721.pdf.
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Many DC retirement plan sponsors have ``difficulty''
obtaining a clear understanding of total administrative fees charged
(13 percent), a clear explanation of the normal fund operating expenses
of the funds in the plan (9 percent), a clear description of all the
revenue sharing arrangements that the recordkeeper has with the mutual
funds included in the plan (13 percent), and what it costs the provider
to administer the plan (20 percent).\23\ Many are ``dissatisfied'' with
the degree to which fees are transparent (18 percent) and the degree to
which revenue sharing is disclosed (22 percent); 23 percent feel that
their retirement plan provider(s)' current level of fee disclosure does
not meet their needs as a plan sponsor.\24\ While most fiduciaries may
think they have all the information they need, there could be
information they are lacking and are not aware of. This disclosure will
make sure fiduciaries are receiving the information the Department
believes they need to fulfill their fiduciary duty under ERISA.
---------------------------------------------------------------------------
\23\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008
Edition.
\24\ See e.g., Chatham Partners, Looking Beneath the Surface:
Plan Sponsor Perspectives on Fee Disclosure (February 2008).
---------------------------------------------------------------------------
One comment \25\ received by DOL on the proposed 408(b)(2)
regulation notes ``the difficulty that plan sponsors encounter in the
defined contribution plan marketplace in obtaining comparable
information on the charges to be incurred for the same or similar
services.'' Another commented that ``Sponsors * * * must expend
significant time and effort comparing fees among providers because of
varying formats and service models as well as unique fee structures
associated with different investment vehicles. By moving toward a more
uniform standard of fee disclosure, the Department's initiative * * *
will reduce the time and effort spent by plan sponsors assembling and
comparing price information, and * * * will help facilitate apples-to-
apples comparisons of different service models and investment
products.'' A third commenter stated that ``plan expense and fee
information is often scattered, difficult to access, or nonexistent * *
* Plan fiduciaries should know whether their plan's service providers
have potential conflicts of interest.''
---------------------------------------------------------------------------
\25\ Public comments on the proposed rule may be found at:
http://www.dol.gov/ebsa/regs/cmt-408(b)(2)-combined.html.
---------------------------------------------------------------------------
Under current rules, a large, sophisticated plan sponsor may be
able to uncover adequate information to optimize his purchase, if the
value he expects to reap is sufficient to offset his information cost.
The sophisticated plan sponsor's cost to uncover the information is
likely to be far higher than would be the vendor's cost to disclose it.
A smaller or less sophisticated plan sponsor cannot economically
uncover such information--the value he stands to gain will not offset
his information cost. A regulatory action to mandate proactive
disclosure will lower information costs for plan sponsors who currently
actively seek this information. In addition, to the extent the
information provided is
[[Page 41620]]
readily usable the disclosure will help facilitate more informed,
optimal purchases.
3. Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and, therefore, subject to the
requirements of the Executive Order and review by the Office of
Management and Budget (OMB). Under section 3(f) of the Executive Order,
a ``significant regulatory action'' is an action that is likely to
result in a rule (1) Having an effect on the economy of $100 million or
more in any one year, or adversely and materially affecting a sector of
the economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. The
Department has determined that this action is ``economically
significant'' under section 3(f)(1) because it is likely to have an
effect on the economy of $100 million or more in any one year.
4. Regulatory Alternatives
Executive Order 12866 requires an economically significant
regulation to include an assessment of the costs and benefits of
potentially effective and reasonably feasible alternatives to a planned
regulation, and an explanation of why the planned regulatory action is
preferable to the identified potential alternatives. The Department
considered but rejected a number of alternative approaches to correct
the market failure and redress abuses.
Covering Welfare Benefit Plans: The Department considered applying
the interim final rule to welfare benefit plans, because it believes
fiduciaries and service providers to such plans would benefit from
regulatory guidance in this area. However, the Department is persuaded,
based on the public comment and hearing testimony, that there are
significant differences between service and compensation arrangements
of welfare plans and those involving pension plans and that the
Department should develop separate, and more specifically tailored,
disclosure requirements under ERISA section 408(b)(2) for welfare
benefit plans. Accordingly, the interim final rule includes a new
paragraph (c)(2), which has been reserved for a comprehensive
disclosure framework applicable to ``reasonable'' contracts or
arrangements for welfare plans to be developed by the Department.
Covering IRAs: The IRA and employment-based retirement plan markets
are very different from one another. In the IRA market, decisions are
made by consumers rather than plan sponsors acting in a fiduciary
capacity, and the disclosures appropriate for the latter may not be
appropriate for the former.
More Extensive Disclosure: Applying disclosure requirements to
arrangements where compensation is less than $1,000, requiring a
comprehensive line-item breakdown of the price of bundled services, or
requiring disclosures to be part of formal written contracts might not
produce benefits that would justify the associated cost.
Directing Mandate at Fiduciaries: A mandate directed solely at
fiduciaries would diverge little from current law. Such a mandate would
merely create a brighter line of obligation for the fiduciary without
empowering him to satisfy that obligation; perpetuate the information
asymmetry, therefore not correcting the market failure; and would not
equip the Department to redress service provider abuses.
Requiring Disclosure only on Demand: Requiring disclosure only on
demand rather than proactively might correct the current market failure
and equip the Department to redress abuse. However, disclosure-on-
demand would have serious unintended adverse consequences, particularly
for plan fiduciaries:
Once fiduciaries are legally empowered to obtain full
disclosure of indirect compensation arrangements, failure to do so
would almost certainly constitute a fiduciary breach. This sets a trap
for the unwary fiduciary. The unsophisticated fiduciary is better
served by a proactive disclosure that serves as both a notice of his
duty and a means to discharge his obligation.
The cost of disclosure-on-demand could turn out to be
higher than the cost of proactive disclosure. For example, it would now
include the cost to plan sponsors of making the requests--as well as
their cost of determining what to ask. Also the number of disclosures
might be higher under a disclosure-on-demand system than under a
proactive disclosure system. All fiduciaries would have a duty to
request disclosure, so perhaps nearly all would, and many fiduciaries
might ask in increments for information that would have been
consolidated into a single proactive disclosure under a proactive
disclosure system, therefore multiplying the total number of
disclosures. The Department has not developed a cost estimate for
disclosure-on-demand, but it is likely that such an estimate would be
as high as, or higher than, the Department's estimate for proactive
disclosure.
Disclosure-on-demand would also fail to educate
unsophisticated fiduciaries who might not request full disclosure.
Proactive disclosure might raise awareness for some unsophisticated
fiduciaries.
Requiring a Summary Disclosure: The Department is persuaded that
plan fiduciaries may benefit from increased uniformity in the way that
information is presented to them. The Department considered adding a
requirement that covered service providers furnish a ``summary''
disclosure statement, for example limited to one or two pages, that
would include key information intended to provide an overview for the
responsible plan fiduciary of the information required to be disclosed.
The summary also would be required to include a roadmap for the plan
fiduciary describing where to find the more detailed elements of the
disclosures required by the regulation. However, the Department did not
implement this requirement as part of the interim final rule, because
it did not want to unnecessarily increase the cost and burden for
service providers to furnish required information, especially to the
extent such cost may be passed along to plan participants and
beneficiaries, unless it is clear that the benefit to plan fiduciaries
outweighs such cost and burden.
As stated earlier in this preamble, the Department is considering
amending the rule in the future to include a summary disclosure
requirement. To assist the Department in its decision regarding whether
to include such a requirement in the final rule, interested persons are
encouraged to submit comments regarding the potential costs and time
burden necessary for covered service providers, and any other parties,
to comply with such a requirement, the anticipated benefits to
responsible plan fiduciaries of including a summary disclosure
requirement (such as time and cost savings), and how to most
effectively design a summary disclosure statement to ensure both its
feasibility and usefulness in helping the Department achieve its
objectives. If the Department is convinced that the benefits would
outweigh the costs, the final regulation may be revised.
[[Page 41621]]
Chosen Alternative: The Department considered, and ultimately has
adopted, a rule requiring that, in order for a contract or arrangement
to be reasonable, certain categories of service providers must disclose
specified information to responsible plan fiduciaries. The rule
generally covers typical plan service providers including fiduciary
service providers and providers furnishing accounting, actuarial,
appraisal, auditing, banking, consulting, custodial, insurance,
investment advisory, legal, recordkeeping, securities or other
investment brokerage, third party administration, or valuation
services. The Department believes this framework will yield the
information that plan fiduciaries need in order to assess the
reasonableness of compensation paid for services from these service
providers and their potential conflicts of interest. Absent the
regulation, such information may be difficult to obtain. The Department
believes that the interim final rule provides the largest benefit among
the alternatives, while also limiting costs.
5. Affected Entities and Other Assumptions
According to 2006 Form 5500 filings, there exist nearly 49,000
defined benefit pension plans with over 42 million participants and
almost 646,000 defined contribution pension plans with approximately 80
million participants. Out of these pension plans, about 37,000 are
small defined benefit plans and 576,000 small individual account
plans.\26\ Most of the pension plans, approximately 462,000, are
participant directed individual account plans.
---------------------------------------------------------------------------
\26\ Small pension plans are plans with generally less than 100
participants, as specified in the Form 5500 instructions.
---------------------------------------------------------------------------
The interim final regulation applies to contracts or arrangements
between plan fiduciaries and service providers as fully discussed in
Section B., 1., above.\27\ In order to estimate the number of covered
service providers and the number of service provider-plan arrangements,
the Department has used data from plan year 2006 submissions of the
Form 5500 and its Schedule C.
---------------------------------------------------------------------------
\27\ Plan sponsors and/or plan participants may also be
indirectly affected.
---------------------------------------------------------------------------
In general, only plans with 100 or more participants that have made
payments to a service provider of at least $5,000 are required to file
the Form 5500 Schedule C. These plans are also required to report the
type of services provided by each service provider. The Department
counted the service providers most likely to provide the covered
services.\28\ In total, there were nearly 9,900 unique covered service
providers reported in the Form 5500 Schedule C data, almost 1,000 of
which reported receiving $1 million or more in compensation.
---------------------------------------------------------------------------
\28\ In order to provide a reasonable estimate, service
providers with reported type codes corresponding to contract
administrator, administration, brokerage (real estate), brokerage
(stocks, bonds, commodities), consulting (general), custodial
(securities), insurance agents and brokers, investment management,
recordkeeping, trustee (individual), trustee (corporate) and
investment evaluations were assumed to provide covered services.
---------------------------------------------------------------------------
The Department acknowledges that this estimate may be imprecise. On
the one hand, some of these service providers may not be covered
service providers if they do not meet all the above specified
requirements, but with the limited Schedule C data it is not possible
to further refine this group. On the other hand, small plans generally
do not have to fill out Schedule C which would underestimate the number
of covered service providers if a substantial number of them service
only small plans. However, the Department believes that most small
plans use the same service providers as large plans and therefore the
estimate based on the Schedule C filings by large plans is
acceptable.\29\
---------------------------------------------------------------------------
\29\ While in general small plans are not required to file a
Schedule C, some voluntarily file. Looking at Schedule C filings by
small plans, the Department verified that most small plans reporting
data on Schedule C used the same group of service providers as
larger plans.
---------------------------------------------------------------------------
Schedule C data was also used to count the number of covered plan-
service provider arrangements. On average, defined benefit plans employ
more covered service providers per plan than defined contribution
plans, and large plans use more covered service providers per plan than
small plans. In total, the Department estimates that defined benefit
plans have over 119,000 arrangements with covered service providers,
while defined contribution plans have over 780,000 arrangements.
A substantial part of the cost of the final regulation depends on
the means of disclosures between covered service providers and plan
fiduciaries. Paper disclosures involve much higher costs than
electronic disclosures. Thus, as at least one trade group commented,
the industry is interested in taking advantage of electronic
disclosure, if at all possible.\30\ This conclusion seems plausible as
most covered service providers are sophisticated entities and by the
nature of their services are electronically savvy, as are most plan
fiduciaries. Unaware of any contrary comments, the Department assumes
that about 50 percent of disclosures between service providers and plan
fiduciaries are delivered only in electronic format.
---------------------------------------------------------------------------
\30\ See http://www.dol.gov/ebsa/regs/cmt-408(b)(2)-
combined.html.
---------------------------------------------------------------------------
6. Benefits
Mandatory proactive disclosure will reduce sponsor information
costs, discourage harmful conflicts, and enhance service value.
Additional benefits will flow from the Department's enhanced ability to
redress abuse. Although the benefits are difficult to quantify, the
Department is confident they more than justify the cost. In accordance
with OMB Circular A-4,\31\ Table 2 below depicts an accounting
statement showing the Department's assessment of the benefits and costs
associated with this regulatory action.
---------------------------------------------------------------------------
\31\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
Table 2--Accounting Table
----------------------------------------------------------------------------------------------------------------
Primary Period
Category estimate Year dollar Discount rate covered
----------------------------------------------------------------------------------------------------------------
Benefits
---------------------------------------------------------------
Annualized Monetized ($millions/year)........... Not Quantified.
----------------------------------------------------------------------------------------------------------------
Qualitative: The final regulation will increase the amount of information that service providers disclose to
plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
interest, service value improvements through improved decisions and value, better enforcement tools to redress
abuse, and harmonization with other EBSA rules and programs.
----------------------------------------------------------------------------------------------------------------
Costs
Annualized Monetized ($millions/year)........... 58.7 2010 7% 2011-2020
[[Page 41622]]
54.3 2010 3% 2011-2020
----------------------------------------------------------------------------------------------------------------
Qualitative: Costs include costs for service providers to perform compliance review and implementation, for
disclosure of general, investment-related, and additional requested information, for responsible plan
fiduciaries to request additional information from service providers to comply with the exemption and to
prepare notices to DOL if the service provider fails to comply with the request.
----------------------------------------------------------------------------------------------------------------
Transfers....................................... Not Applicable.
----------------------------------------------------------------------------------------------------------------
a. Information Cost Savings
The record establishing the need for this regulatory action (see
above) documents that plan sponsors' information cost is higher than
vendors', and that many sponsors now expend substantial resources to
acquire information. Mandatory proactive disclosure will make the
information fiduciaries need available to them at lower acquisition
cost.
For sponsors in these circumstances, mandatory, proactive,
comprehensive disclosure will reduce the difficulty in obtaining the
needed information. These sponsors will have the same information as
before but will acquire it less expensively. For example, if 13 percent
\32\ of estimated 695,000 pension plans had a plan fiduciary that
experienced a one hour drop in the time needed to obtain the needed
information at an hourly labor rate \33\ of $107 the value of time
saved annually could be $9.7 million.
---------------------------------------------------------------------------
\32\ As discussed above, many surveyed DC retirement plan
sponsors (13%) have ``difficulty'' obtaining key information. This
percent is used as a proxy for the percent of plan fiduciaries that
would experience time savings from mandatory disclosure. We do not
have concrete data regarding whether the plan sponsors obtained the
information or the time/resources expended, because the survey did
not collect this information. However, ERISA requires fiduciaries to
obtain the information.
\33\ This estimate uses the average labor rate of a financial
manager as a proxy for a plan fiduciary's labor rate.
---------------------------------------------------------------------------
b. Acquisition of Critical Information
As discussed above, many surveyed DC retirement plan sponsors are
``dissatisfied'' with the level of transparency--23 percent flatly say
the current level of fee disclosure does not meet their needs. These
sponsors will now acquire critical information that was previously
inaccessible or too costly to obtain. Currently, some plan sponsors may
simply fail to seek critical information. Mandatory, proactive
disclosure will help these sponsors understand and satisfy their
fiduciary obligations. For those who otherwise would not know what
questions to ask, or what information to consider, the disclosure
provides the map. This additional information will help facilitate
better decisions as discussed in the next two sections.
c. Discouraging Harmful Conflicts
Indirect compensation arrangements can be either harmful or
beneficial. Transparency will help drive harmful conflicts from the
marketplace while sustaining arrangements that are beneficial for
plans.
Harmful arrangements generally are those that are tainted by
unmitigated conflicts. A plan's service providers may strike deals that
profit one another at the plan's expense. Such arrangements may thrive
in the shadows, but tend to wither in sunlight. These arrangements
exist today in the market for plan services precisely because
information asymmetries obscure them. Mandatory proactive disclosure
will reduce the asymmetry, creating a sunnier climate that is less
friendly to harmful arrangements.
Beneficial arrangements generally are those in which a plan's
service providers, in competition to provide the best value to the
plan, enter into transactions among themselves that leverage their
respective comparative advantages to deliver higher quality or lower
cost for the plan. Such arrangements are now evident in the segment of
the plan services that works best--namely, the very large plan segment.
There are numerous examples where large plan sponsors, after thoroughly
evaluating the quality and compensation structures of competing
vendors, choose service arrangements that involve indirect
compensation. Transparency is a bedrock of such arrangements. For
example, some arrangements establish formulas whereby the fees the
sponsor pays to a service provider will be reduced as a function of the
indirect compensation the provider receives. Mandatory, proactive
disclosure will be friendly to such arrangements because sunlight will
reveal their superiority to harmful arrangements.
d. Service Value Improvements
Fiduciaries armed with more complete information can make informed
purchases and thereby derive better value for plans. More complete
information is a benefit of mandatory disclosure that will depend
sequentially on three variables: The extent of gaps in critical
information, the extent to which closing these gaps will improve
fiduciary decisions, and the degree to which improved decisions will
improve value.
Information Gaps: Plan sponsors need comprehensive information on
service provider compensation in order to discharge their fiduciary
duty and secure good value for their plans and participants. However,
only 57 percent of sponsors report that their service provider
discloses revenue sharing agreements and investment offsets with both
alliances and their own proprietary funds.\34\ About one-quarter of
sponsors are not familiar with revenue sharing arrangements between
their investment managers and retirement plan providers (26 percent)
and compensation arrangements between retirement plan providers and the
intermediary involved in the plan (25 percent) (familiarity was lower
among sponsors of smaller plans).\35\ These findings suggest that gaps
in critical information are large and widespread. Some sponsors who
lack critical information are aware of the problem and poised to use
the information effectively once it is more accessible. Others are less
aware, but proactive disclosure will raise awareness for some of these
sponsors.
---------------------------------------------------------------------------
\34\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008
Edition.
\35\ See e.g., Chatham Partners, Looking Beneath the Surface:
Plan Sponsor Perspectives on Fee Disclosure (2008).
---------------------------------------------------------------------------
Improved Decisions: To secure better value, fiduciaries must factor
newly available critical information appropriately into their
purchasing decisions. Eighty-four percent of sponsors say they will use
fee related information supplied by their retirement plan provider(s)
to fulfill their fiduciary responsibilities. Sixty-four percent say
[[Page 41623]]
they will use it to examine their existing fee structure. Commonly
cited top concerns regarding fee disclosures include that a lack of
disclosure causes higher plan expenses (45 percent) and may lead to
legal action by participants (46 percent).\36\ Eighty-two percent of
sponsors are very (55 percent) or somewhat (27 percent) likely to
review DC fund expenses and revenue sharing in 2008.\37\ These findings
suggest that many fiduciaries are prepared to factor newly available
information on service provider compensation into their decisions.
---------------------------------------------------------------------------
\36\ See id.
\37\ See e.g., Hewitt, Hot Topics in Retirement, 2008.
---------------------------------------------------------------------------
Improved Value: The value of decisions fiduciaries make can improve
only if the current decisions made produce value that is less than
optimal. Research literature provides evidence that the current value
of decisions fiduciaries make is often less than optimal, and that the
suboptimal value is associated with undisclosed compensation
arrangements that may pose conflicts. As noted above, a recent GAO
study links undisclosed conflicts with 130 basis points of
underperformance in DB plans. Seventeen percent of DC plan sponsors
negotiate and receive fee credits for revenue sharing or investment
offsets that exceed their service providers' costs.\38\ Many others may
use this information to negotiate lower direct fee payments. A variety
of academic studies further support the hypothesis that conflicts often
erode the value provided to DC plans by mutual funds and their
distribution channels.\39\
---------------------------------------------------------------------------
\38\ See e.g., Deloitte, 401(k) Benchmarking Survey 2008
Edition.
\39\ Examples include: Daniel B. Bergstresser et al., Assessing
the Costs and Benefits of Brokers in the Mutual Fund Industry,
Social Science Research Network Abstract 616981 (Sept. 2007). Mercer
Bullard et al., Investor Timing and Fund Distribution Channels,
Social Science Research Network Abstract 1070545 (Dec. 2007). Xinge
Zhao, The Role of Brokers and Financial Advisors Behind Investment
Into Load Funds, China Europe International Business School Working
Paper (Dec. 2005), at http://www.ceibs.edu/faculty/zxinge/brokerrole-zhao.pdf.
---------------------------------------------------------------------------
Overall, the evidence suggests that the value of fiduciary
decision-making will improve once fiduciaries are apprised of and
consider service providers' indirect compensation sources.
While the improvement in the value of fiduciary decision-making is
difficult to quantify, the Department believes that it has the
potential to be very large. If just 16 percent of all plan assets
realize a fall of just 0.6 basis point (0.006 percent of plan assets),
the savings would exceed the costs of the rule, which is estimated at
$408 million over 10 years.\40\ As noted above, substantially more than
10 percent of fiduciaries report difficulty or dissatisfaction with
current fee disclosure. At the same time, one basis point is a very
small fraction of a typical plan's expenses--for example, according to
the Investment Company Institute, more than one-half of 401(k) stock
mutual fund assets are in funds with expense ratios between 50 and 100
basis points, nearly one-fourth are in funds with higher expenses.\41\
In addition, GAO's study linking undisclosed conflicts with 130 basis
points of underperformance suggests that value can be improved via
service quality as well as price.\42\ Viewed in this context, the
Department is confident that the potential for improved value of
fiduciary decision-making from mandatory proactive disclosure is
substantial.
---------------------------------------------------------------------------
\40\ For a more detailed explanation see the discussion in
Section 9 ``Uncertainty''.
\41\ Investment Company Institute. Research Fundamentals, Vol.
16, No. 4, September 2007.
\42\ GAO report, ``Private Pensions: Conflicts of Interest Can
Affect Defined Benefit and Defined Contribution Plans'', GAO-090-
503T, March 24, 2009.
---------------------------------------------------------------------------
e. Preventing and Redressing Abuse
As previously stated, the Department believes that the application
of an excise tax will provide incentives for all parties to service
contracts or arrangements to cooperate in exchanging the disclosures
required by the final regulation. However, if there continues to be
abusive conduct by rogue service providers such as misrepresentation of
compensation arrangements and attendant conflicts, this rule mandating
disclosure will equip the Department to better redress such abuse.
Enhanced enforcement will deter abuse, thereby directly benefiting
potential victims, and will promote confidence and thereby encourage
sponsors to offer plans.
The regulation requiring proactive disclosure encourages compliance
in three related ways:
If the service provider fails to provide the specific
information required by the regulation, it is subject to the imposition
of an excise tax by the Internal Revenue Service. Thus, there is a
direct sanction against the service provider for giving false,
misleading, or insufficient statements to plan fiduciaries.
The regulation specifies the disclosure that fiduciaries
must obtain to avoid a prohibited transaction, and ensures that they
will receive the information because of the consequences to the service
provider of non-disclosure (imposition of the excise tax).
Because the regulation creates a roadmap for disclosure,
it will be much easier for the courts, the Department, and regulated
parties to determine whether they have complied with the law. In the
event of non-compliance, there are clear enforcement consequences for
both the plan fiduciary and the service provider.
7. Harmonization With Other Rules and Programs
The Department pursues a comprehensive program of enforcement and
compliance assistance (including outreach and education) to ensure that
fiduciaries understand and properly discharge their duties under ERISA,
at reasonable cost.
The Department educates plan fiduciaries about their
obligations under ERISA by conducting numerous educational and outreach
activities, such as a nationwide series of 33 seminars presented to
date as part of the Department's campaign entitled ``Getting It Right--
Know Your Fiduciary Responsibilities,'' which includes a discussion of
the importance of selecting plan service providers and the role of fee
and compensation considerations.
The Department also makes a variety of materials available
on its Web site to educate plan fiduciaries about service provider fees
and relationships, including its 401(k) Plan Fee Disclosure worksheet,
a publication entitled ``Understanding Retirement Plan Fees and
Expenses,'' and, in coordination with the Securities and Exchange
Commission, a series of tips concerning fees and conflicts of interest
for plan fiduciaries to use when selecting pension consultants.
ERISA's standards of fiduciary conduct already obligate fiduciaries
to obtain and consider adequate information. They are liable for any
plan losses attributable to their failure to do so. This rule
harmonizes the prohibited transaction rules with the fiduciary rules,
so fiduciaries, in addition to being obligated to obtain and consider
such information, are also equipped to do so at minimum cost.
8. Costs
The Department estimated costs for the rule over the ten-year time
frame for purposes of this analysis and used information from the
quantitative characterization of the service provider market presented
above as a basis for these cost estimates. This characterization did
not account for all service providers, but it does provide
[[Page 41624]]
information on the segments of the service provider industry that are
likely to be most affected by the rule (i.e., those who service pension
plans). In addition to the costs to service providers, the Department
also considered, and discusses below, the potential costs to plans.
a. Costs for Service Providers
Compliance Review and Implementation: Most of the cost of the rule
will be imposed on plan service providers. Covered service providers
will need to review the rule, evaluate whether their current disclosure
practices comply with its requirements, and, if not, determine how
their disclosure practices must be changed to be compliant. The
Department projected this as a cost incurred in 2011, the year in which
the rule takes effect.
Although all affected service providers are assumed to incur these
initial costs, it is likely that service providers with complex fee
arrangements and conflicts of interest would require more time to
comply. The Department assumes that the number of service providers
with more complex arrangements can be approximated by the number of
unique service providers who are reported on the Schedule C as having
received $1 million or more in compensation (nearly 1,000 service
providers).
The Department assumes that covered service providers with complex
arrangements will require on average 24 hours of legal professional
time at a cost of approximately $119 per hour and on average 80 hours
of financial professional time at a cost of almost $63 per hour to
comply with the rule. Non-complex service providers would require only
three hours of legal professional time and 13 hours of financial
professional time. Using the number of unique service providers
identified in the quantitative analysis presented above (nearly 10,000
service providers), this cost is estimated to be about $17.9 million.
The Department also has estimated the initial compliance review and
implementation costs for service providers newly entering the market
(``new service providers'') to provide services to plans (either for
the first time or by re-entry) beginning in 2012 and each year
thereafter. Based on data from the 2005 and 2006 Form 5500, the
Department assumes that about eight percent of all service providers
will be new in each year subsequent to 2011, and that these service
providers will incur the same compliance review and implementation
costs as existing service providers. Based on the foregoing, the
Department estimates that new service providers will incur costs of
approximately $1.5 million in 2012 and thereafter. Estimates are
reported in Table 3.
Table 3--Compliance Review and Implementation
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hourly labor
Hourly labor cost for
Number of Legal cost for legal Financial financial Yearly
Year entities professional professional professional professional undiscounted
hours required (in 2010 hours required (in 2010 costs
dollars) dollars)
(A) (B) (C) (D) (E) A*(B*C+D*E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2011............................ Plans................. 695,000 .............. $119 1 $63 $43,625,000
Non-Complex Service 9,000 3 119 13 63 10,403,000
Providers.
Complex Service 1,000 24 119 80 63 7,511,000
Providers.
2012............................ Plans................. 94,000 .............. 119 1 63 5,911,000
Non-Complex Service 700 3 119 13 63 867,000
Providers.
Complex Service 100 24 119 80 63 626,000
Providers.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total for 2011..................................................................................................................... 61,539,000
Total for 2012...................................................................................................................... 7,404,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Initial Disclosure: As discussed above, covered service providers
also must develop or update their current disclosure materials to
comply with the regulatory requirements. Paragraph (c)(1)(iv)(A)
through (E) of the rule requires service providers to provide an
initial disclosure to a responsible plan fiduciary. Generally, under
paragraph (c)(1)(v)(A) of the rule, this disclosure must be made
reasonably in advance of when a contract is entered into, extended, or
renewed. The Department assumes that service providers will create an
initial disclosure that can be used for all plans and customize this
document by adding individualized information for each plan. This
activity includes developing formulae and algorithms to present or
estimate direct and indirect compensation that will be applied in a pro
forma projection for each plan with which the provider will contract.
It also includes making a reasonable and good faith estimate of the
cost to provide recordkeeping services to a covered plan if the covered
service provider reasonably expects to provide recordkeeping services
without explicit compensation or when compensation for recordkeeping is
subject to an offset or rebate for such services as required by
paragraph (c)(1)(iv)(D)(2). The Department assumes that the majority of
this cost would be incurred by service providers in 2011 and that one
hour of a legal professional's time and 45 minutes of a financial
professional's time will be required to prepare the general disclosure
for each plan. Based on the foregoing, the Department estimates that
the cost to develop the general disclosure in 2011 will be almost $75
million.
In 2012 and subsequent years, the regulation will cause additional
disclosures to be made between covered
[[Page 41625]]
plans and service providers for any new contracts and arrangements. The
Department does not have information on the number of new arrangements
in a year; therefore, the Department used the percentage of plans that
are new plans, about 14 percent, as a proxy for the percentage of new
arrangements in a year. This results in almost 122,000 new arrangements
every year. The Department assumes that half of the responsible plan
fiduciaries in these arrangements would receive the required
information even without the regulation enacted. The Department
estimates that preparing the disclosures for new arrangements will
require one hour of a legal professional's time and 45 minutes of a
financial profession's time. Based on the foregoing, the cost of
preparing these disclosures in year 2012 and thereafter will be almost
$23 million.
Paragraph (c)(1)(vi) requires service providers to provide any
other information relating to compensation received in connection with
the contract or arrangement that is required for the covered plan to
comply with the reporting and disclosure requirements of Title I of
ERISA and the regulations, forms, and schedules issued thereunder upon
the request of responsible plan fiduciaries or plan administrators of
covered plans. The Department is not aware of a basis for determining
the number of requests that responsible plan fiduciaries or plan
administrators will make; therefore, it assumes that approximately ten
percent (almost 45,000) of responsible plan fiduciaries will request
additional information annually. The Department further assumes that
service providers will already have this information available, as it
is required to comply with other legal requirements. Therefore, the
Department estimates that it will take clerical staff two minutes per
request at an hourly labor cost of approximately $26 to prepare the
information. Based on the foregoing, the Department estimates that the
annual cost to disclose information upon request will total almost
$39,000 as shown in Table 3.
Paragraph (c)(1)(v)(B) generally requires service providers to
disclose any changes to the general information as soon as practicable,
but no later than 60 days from the date the covered service provider is
informed of such change. The Department assumes that one-half hour of
legal professional time and one-third hour of a financial professional
time will be required to update the disclosures. The Department also
assumes that changes in plan disclosures will occur at least once every
three years, because plans normally conduct requests for proposal
(RFPs) from service providers at least once every three to five years.
If it is assumed that an equal number of plans conduct an RFP in any
given year, then approximately 35 percent of arrangements will require
an updated disclosure every year. In addition, half of these plans
would already have updated the information without the regulation for a
total of approximately 157,000 updates to the general information.
Based on the foregoing, the Department estimates that the cost of
updating the disclosure of general information will total about $13
million a year as shown in Table 4.
In total, the cost of the disclosure of the general information
will be almost $75 million in 2011 and almost $23 million in each
subsequent year as shown in Table 4.
Table 4--Disclosure of General Information
----------------------------------------------------------------------------------------------------------------
Professional
Year Number of Professional hourly labor Professional Total yearly
arrangements hours cost hours cost
(A) (B) (C) (D) A*B*C
----------------------------------------------------------------------------------------------------------------
2011:
Initial Disclosure: Legal... 450,000 1 $119 450,000 $53,539,000
Initial Disclosure: 450,000 0.75 63 337,000 21,189,000
Financial..................
2012:
Initial Disclosure: Legal... 61,000 1.00 119 61,000 7,254,000
Initial Disclosure: 61,000 0.75 63 46,000 2,871,000
Financial..................
Disclosure of Changes: Legal 157,000 0.50 119 79,000 9,369,000
Disclosure of Changes: 157,000 0.33 63 52,000 3,296,000
Financial..................
All Years:
Information Upon Request.... 45,000 0.03 26 1,500 39,000
----------------------------------------------------------------------------------------------------------------
Total for 2011.............. 74,767,000
Total for 2012.............. 22,830,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Investment Disclosure: As discussed in section B.,5.,g., above,
paragraphs (c)(1)(iv)(F) and (G) generally require fiduciaries of
certain investment vehicles holding plan assets (described in paragraph
(c)(1)(iii)(A)(2)) and providers of recordkeeping and brokerage
services to a participant-directed individual account plan (without
regard to whether they expect to receive indirect compensation), if
they make available one or more designated investment alternatives for
the covered plan (described in paragraph (c)(1)(iii)(B) (``platform
providers'')), to disclose investment-related fee and expense
information. This information generally must be disclosed to the
responsible plan fiduciary reasonably in advance of the date the
contract or arrangement is entered into, extended or renewed.\43\
Paragraph (c)(1)(iv)(G)(2) allows covered platform providers to satisfy
this disclosure requirement by providing current disclosure materials
of the issuer of the designated investment alternative to the
responsible plan fiduciary that include the required information,
provided that the issuer is not an affiliate of the platform provider,
the disclosure materials are regulated by a State or Federal agency,
and the covered service provider does not know that the materials are
incomplete or inaccurate.
---------------------------------------------------------------------------
\43\ Generally, service providers are required to disclose any
change to investment-related information as soon as practicable, but
not later than 60 days from the date on which the covered service
provider is informed of such change.
---------------------------------------------------------------------------
The cost of disclosing investment-related compensation information
will be attributable primarily to time spent gathering the required
information.
[[Page 41626]]
However, much of this cost will be reduced because, as discussed above,
the rule allows platform providers to satisfy this requirement by
passing through information to the responsible plan fiduciary. Based on
the foregoing, the Department assumes that preparation of investment-
related compensation and fee information will require one-half hour of
financial professional time for each of the individual account plans.
As mentioned above, it is assumed that 50 percent of these disclosures
already occur; therefore, the costs for approximately 231,000
disclosures are calculated, resulting in costs of approximately $7.3
million (see Table 5).
In addition, service providers must disclose changes to investment
information. The Department assumes that service providers will have to
disclose investment information changes to each responsible plan
fiduciary at least once per year due to the regulation, resulting in
about 200,000 disclosures. This notification is expected to require
one-half hour of financial professional time to prepare. Further, it is
assumed that 14 percent (over 31,000) of arrangements will be new in a
year and require the initial investment disclosure. Based on the
foregoing, the Department estimates that reporting the required
investment related information in years 2012 and later will cost
approximately $7.3 million annually as shown in Table 5.
Table 5--Preparation of Disclosure of Investment Information
----------------------------------------------------------------------------------------------------------------
Professional Total
Number of Professional hourly labor professional Total yearly
plans hours cost hours cost
(A) (B) (C) (D) A*B*C
----------------------------------------------------------------------------------------------------------------
2011 Initial Disclosure......... 231,000 0.5 $63 116,000 $7,255,000
2012 Initial Disclosure......... 31,000 0.5 63 116,000 983,000
Disclosure of Changes........... 200,000 0.5 63 100,000 6,272,000
Total for 2011.............. .............. .............. .............. .............. 7,255,000
Total for 2012.............. .............. .............. .............. .............. 7,255,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
b. Costs to Plans
ERISA requires plan fiduciaries, when selecting or monitoring
service providers, to act prudently and solely in the interest of the
plan's participants and beneficiaries and for the exclusive purpose of
providing benefits and defraying reasonable expenses of administering
the plan. Fundamental to a fiduciary's ability to discharge these
obligations is the availability of information sufficient to enable the
plan fiduciary to make informed decisions about the services, the
costs, and the service provider. The rule will assist plan fiduciaries
in this area by requiring service providers to make specified complete
and accurate disclosures in order to benefit from the section 408(b)(2)
statutory exemption.
The Department estimates the responsible plan fiduciaries will need
one hour to ensure compliance with the rule; therefore, the cost of the
review is expected to be approximately $43.6 million in 2011 as
reported in Table 3.
Starting in 2012 and each year thereafter, responsible plan
fiduciaries of new plans will have to familiarize themselves with the
rule to ensure their compliance . Based on data from the 2005 and 2006
Form 5500, the Department estimates that 14 percent of plans will be
new each year. The Department assumes that responsible plan fiduciaries
of new plans will have the same costs as fiduciaries of existing plans.
Therefore, the cost of the review for fiduciaries of new plans is
estimated to be $5.9 million annually for years 2012 and thereafter as
shown in Table 2.
c. Cost of Exemption for Responsible Plan Fiduciary
The final class exemption contained in paragraph of (c)(1)(ix) of
the rule provides relief from the restrictions of ERISA section
406(a)(1)(C) and (D) for plan fiduciaries that enter into a contract
with service providers upon a mistaken belief that they have received
all of the disclosures required by the interim final rule. Upon
discovering that a covered service provider failed to disclose all of
the required information, the responsible plan fiduciary must take
reasonable steps to obtain such information, including requesting in
writing that the covered service provider furnish the information in
order to rely on the exemption and notify the Department if the service
provider fails to comply with the written request within 90 days.
While the Department has no basis for estimating the percentage of
arrangements where a responsible plan fiduciary will not receive all of
the required disclosures from a covered service provider, the
Department assumes that 10 percent of arrangements (approximately
69,000) may experience a failure that will require the responsible plan
fiduciary to send a notice to the service provider in 2011. In 2012 and
thereafter, the number of requests for missing information is expected
to decrease to 5 percent of arrangements (about 35,000). The Department
estimates that one-half hour of a financial professional's time will be
required to prepare the request for the undisclosed information. Table
6 reports the cost of preparing the disclosure to be almost $2.2
million in 2011 and approximately $1.1 million annually in the
subsequent years.
Table 6--Notice to Service Providers
----------------------------------------------------------------------------------------------------------------
Requests for
Year additional Hours per Hourly labor Total hours Total cost
information request cost
(A) (B) (C) (D) A*B*C
----------------------------------------------------------------------------------------------------------------
2011............................ 69,000 0.5 $63 35,000 $2,181,000
2012............................ 35,000 0.5 63 17,000 1,091,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
[[Page 41627]]
The Department further assumes that service providers may not
respond to 10 percent of the requests for undisclosed information
within 90 days, which will result in the responsible plan fiduciary
preparing and sending a notice to the Department. The Department
estimates that one-half hour of a financial professional's time will be
required to prepare the notice. As shown in Table 7 below, almost 7,000
notices will be sent in 2011 at a cost of approximately $218,000, and
in the subsequent years, over 3,400 notices will be sent annually at a
cost of approximately $109,000.
Table 7--Notice to DOL
----------------------------------------------------------------------------------------------------------------
Number of Hourly labor
Year notices to DOL Hours per notice cost Total hours Total cost
(A) (B) (C) (D) A*B*C
----------------------------------------------------------------------------------------------------------------
2011........................ 7,000 0.5 $63 3,500 $218,000
2012........................ 3,500 0.5 63 1,700 109,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
d. Paper and Mailing Costs
The Department assumes that clerical staff will prepare all of the
required notices and disclosures for distribution and that 50 percent
of the disclosures will be sent electronically at no cost. Table 8
displays for each type of disclosure the number of notices that will be
sent, the required amount of clerical time, and the annual cost of
preparation.
Table 8--Preparation Costs
----------------------------------------------------------------------------------------------------------------
Clerical
Number of Percent not sent Clerical hours hourly labor Total cost
notices electronically cost
(A) (B) (C) (D) A*B*C*D
----------------------------------------------------------------------------------------------------------------
Initial Disclosure: 2011...... 450,000 50 1/30 $26 $196,000
Initial Disclosure: 2012...... 61,000 50 1/30 26 27,000
Information Upon Request...... 45,000 50 1/30 26 20,000
Disclosure of Changes to 157,000 50 1/30 26 69,000
Initial Disclosure...........
Investment Disclosure: 2011 *. 231,000 50 17/30 26 1,711,000
Investment Disclosure: 2012 *. 31,000 50 17/30 26 232,000
Disclosure of Changes to 200,000 50 1/30 26 87,000
Investment Disclosure........
Request for Additional 69,000 50 1/60 26 15,000
Information for Exemption:
2011.........................
Request for Additional 35,000 50 1/60 26 8,000
Information for Exemption:
2012.........................
Prepare Notice to DOL: 2011... 7,000 50 1/60 26 1,500
Prepare Notice to DOL: 2012... 3,500 50 1/60 26 800
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
* The estimate assumes 2 minutes per investment to prepare the disclosure. Plans have on average 17 investments.
Table 9 reports the printing and postage costs associated with each
required notice and disclosure. The Department assumes that 50 percent
of the disclosures will be sent electronically at no cost, and that the
cost of printing and paper for the remaining 50 percent of documents is
5 cents per page.
Table 9--Mailing Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent not sent
Number of electronically Pages Cost per page Postage Total costs
notices (percent)
(A) (B) (C) (D) (E) A*B*(C*D+E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial Disclosure: 2011.............................. 450,000 50 8 $0.05 0.44 $189,000
Initial Disclosure: 2012.............................. 61,000 50 8 0.05 0.44 26,000
Information Upon Request.............................. 45,000 50 10 0.05 0.44 21,000
Disclosure of Changes to Initial Disclosure........... 157,000 50 4 0.05 0.44 50,000
Investment Disclosure: 2011*.......................... 231,000 50 510 0.05 10.35 4,141,000
Investment Disclosure: 2012*.......................... 31,000 50 510 0.05 10.35 561,000
Disclosure of Changes to Investment Disclosure........ 200,000 50 2 0.05 0.44 54,000
Request for Additional Information for Exemption: 2011 69,000 50 2 0.05 0.44 19,000
Request for Additional Information for Exemption: 2012 35,000 50 2 0.05 0.44 9,000
Prepare Notice to DOL: 2011........................... 7,000 50 2 0.05 0.44 2,000
Prepare Notice to DOL: 2012........................... 3,000 50 2 0.05 0.44 1,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
* The number of pages is 17*30, which is the average number of investments in a plan times 30 pages per investment disclosure.
[[Page 41628]]
As shown in Table 10, total costs for service providers and plan
sponsors add up to about $152.5 million for the year 2011.
Table 10--Total Discounted Costs of Proposal
----------------------------------------------------------------------------------------------------------------
Cost of Cost of
Cost of legal general investment Cost of
Year review information information qualifying for Total costs
disclosure disclosure exemption
(A) (B) (C) (D) A+B+C+D
----------------------------------------------------------------------------------------------------------------
2011............................ $61,539,000 $75,312,000 $13,248,000 $2,437,000 $152,535,000
2012............................ 6,919,000 21,534,000 7,653,000 1,139,000 37,245,000
2013............................ 6,467,000 20,125,000 7,152,000 1,064,000 34,808,000
2014............................ 6,044,000 18,809,000 6,685,000 995,000 32,531,000
2015............................ 5,648,000 17,578,000 6,247,000 929,000 30,403,000
2016............................ 5,279,000 16,428,000 5,839,000 869,000 28,414,000
2017............................ 4,933,000 15,354,000 5,457,000 812,000 26,555,000
2018............................ 4,611,000 14,349,000 5,100,000 759,000 24,818,000
2019............................ 4,309,000 13,410,000 4,766,000 709,000 23,194,000
2020............................ 4,027,000 12,533,000 4,454,000 663,000 21,677,000
----------------------------------------------------------------------------------------------------------------
Total with 7% Discounting....................................................................... 412,183,000
Total with 3% Discounting....................................................................... 462,827,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
e. Comments and Revisions
The Department received several comments suggesting that it had
underestimated the costs of the proposal and questioning various
assumptions on which the estimates were based. In response to these
comments, the Department increased its estimate of the amount of legal
and financial professionals' time service providers would require to
become compliant with the regulation. It also reevaluated its estimates
of the number of affected service providers. (The Department also
revised some of the proposal's provisions in light of these comments to
ease compliance burdens, as explained earlier in this preamble.)
In addition to revisions made in response to comments, the
Department updated its estimates of service providers, plans,
participants, assets and labor costs, as well as its estimates of the
preparation, distribution and mailing costs of the required
disclosures, to reflect more current data.
f. Summary
In summary, the Department has calculated total costs of
approximately $412 million for the ten-year period 2011 to 2020.
9. Uncertainty
The Department's estimates of the effects of this regulation are
subject to uncertainty. While the Department is confident that improved
fee disclosures can reduce the time fiduciaries spend searching for
needed information, discourage harmful conflicts of interest, reduce
gaps in information received by plan fiduciaries, improve fiduciary
decisions relating to purchases of plan services leading to reduced
plan fees and provide better enforcement tools to redress abuses by
service providers, it is uncertain about the magnitude of these
effects. The uncertainty is attributable to gaps in available data and
empirical evidence. Some key areas of uncertainty are elaborated below.
Reduction in fees--By making information more readily available,
this regulation may increase the amount of information that is
considered, along with the effort devoted to and efficiency of such
consideration. This in turn could reduce fees paid to service providers
relative to value derived for participants in either or both of two
ways. First, fiduciaries might more accurately optimize the levels and
types of services purchased, for example by downgrading from a premium
service level, whose price exceeds the benefit to participants, to an
economy service level whose price is smaller than the benefit. This
would represent a gain in welfare equal to the cost savings reduced by
any diminishment in benefits attendant to the service downgrade.
Second, fiduciaries might identify and take advantage of opportunities
to purchase equivalent services at a lower price (or superior services
at the same price) from a different vendor. If this savings is
attributable to the service being produced more efficiently by the
competing vendor it would reflect a welfare gain; if it is attributable
to a shifting of existing surplus from the service producers to
consumers with no improvement in production efficiency, it would
reflect a transfer.
The Department attempted to consider the potential amount by which
fees might be reduced. A review of literature on dispersion of mutual
fund fee levels and the value of services purchased with such fees
suggests that at least some fiduciaries and participants of individual
account plans, by making different and more optimal choices about which
services to purchase or what vendors to purchase from, might reduce
fees by perhaps 11 basis points per year on average.\44\ There is
evidence for potential savings to defined benefit plans as well. A
recent GAO report found that defined benefit plans whose consultants
have undisclosed conflicts of interest have between 1.2 and 1.3
percentage points lower rates of return. The report acknowledges that
this finding does not
[[Page 41629]]
necessarily imply a causal arrangement, but it references ``expert''
opinions that such undisclosed conflicts of interest could result in
lower returns.\45\
---------------------------------------------------------------------------
\44\ This assumption was developed in light of evidence
presented in Brad M. Barber et al., Out of Sight, Out of Mind, The
Effects of Expenses on Mutual Fund Flows, Journal of Business,
Volume 79, Number 6 2095, 2095-2119 (2005); James J. Choi et al.,
Why Does the Law of One Price Fail? An Experiment on Index Mutual
Funds, National Bureau of Economic Research Working Paper W12261
(May 2006); Deloitte Financial Advisory Services LLP, Fees and
Revenue Sharing in Defined Contribution Retirement Plans (Dec. 6,
2007) (unpublished, on file with the Department of Labor); Edwin J.
Elton et al., Are Investors Rational? Choices Among Index Funds,
Social Science Research Network Abstract 340482 (June 2002); and
Sarah Holden & Michael Hadley, The Economics of Providing 401(k)
Plans: Services, Fees and Expenses 2006, Investment Company
Institute Research Fundamentals, Volume 16, Number 4 (Sept. 2007).
This estimate of excess expense does not take into account less
visible expenses such as mutual funds' internal transaction costs
(including explicit brokerage commissions and implicit trading
costs), which are sometimes larger than funds' expense ratios. See,
e.g., Jason Karceski et al., Portfolio Transactions Costs at U.S.
Equity Mutual Funds, University of Florida Working Paper (2004), at
http://thefloat.typepad.com/the_float/files/2004_zag_study_on_mutual_fund_trading_costs.pdf.
\45\ See Conflicts of Interest Involving High Risk or Terminated
Plans Pose Enforcement Challenges, U.S. Government Accountability
Office (June 2007).
---------------------------------------------------------------------------
In light of the foregoing evidence, the Department believes it is
highly possible that this regulation could fill gaps in critical
information, thus improving fiduciary decisions, and will reduce
service costs relative to value derived to yield benefits that exceed
costs. Table 11 below provides a break-even analysis to illustrate this
point. Previously cited studies suggest that perhaps a quarter of
sponsors currently lack critical information \46\ and as many as 65
percent would use additional information to change existing fee
structures. \47\ Given the total amount of assets in plans, if the
sponsors are able to reduce fees by 0.6 basis point per year on
average, the benefits of the mandatory disclosure requirements would
exceed the costs. Due to uncertainty about the size of the reduction in
fees, and uncertainty about what fraction of the fee reduction would
reflect welfare gains, the Department did not include the reduction in
fees in its calculation of the benefits of the regulation.
---------------------------------------------------------------------------
\46\ See e.g., Chatham Partners, Looking Beneath the Surface:
Plan Sponsor Perspectives on Fee Disclosure (2008).
\47\ See e.g., Hewitt, Hot Topics in Retirement, 2008.
Table 11--Reduction in Fees Necessary for Benefits To Exceed Costs (2011)
----------------------------------------------------------------------------------------------------------------
Percent of sponsor Total 10-Year Percent correction
Total amount of Percent of sponsors who will use the compliance costs due to disclosure
assets in plans (in currently lacking information to change annualized at 7% (in necessary for
millions of 2010 critical information existing fee millions of 2010 benefits to exceed
dollars) structures dollars) costs
(A) (B) (C) (D) D/(A*B*C)
----------------------------------------------------------------------------------------------------------------
$6,390,000 25% 65% $58.7 0.006%
----------------------------------------------------------------------------------------------------------------
Other areas of uncertainty--Also subject to substantial uncertainty
are the Department's estimates of: The fraction of plan fiduciaries
already receiving the required disclosure information (both benefits
and costs would vary negatively); the time required for legal
professionals, financial professionals and clerical professionals to
perform compliance tasks pursuant to the regulation (costs would vary
positively); and the extent to which disclosures will be made
electronically rather than on paper (costs would vary negatively). In
developing its assumptions regarding these and other variables, the
Department took into account both relevant comments received on the
proposed regulation and differences between the requirements of the
proposed and those of the final regulations. The Department believes
its assumptions are reasonable and that the uncertainty attendant to
them does not cast serious doubt on the Department's conclusion that
the regulation's benefits justify its costs.
10. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency determines that a proposal is not
likely to have a significant economic impact on a substantial number of
small entities, section 604 of the RFA requires that the agency present
a final regulatory flexibility analysis (FRFA) describing the rule's
impact on small entities and explaining how the agency made its
decisions with respect to the application of the rule to small
entities. Small entities include small businesses, organizations and
governmental jurisdictions.
a. Need for and Objectives of the Rule
Service providers to pension plans increasingly have complex
compensation arrangements that may present conflicts of interest. Thus,
small plan fiduciaries face increasing difficulty in carrying out their
duty to assess whether the compensation paid to their service providers
is reasonable. As supported by public commenters on the proposal and
witnesses at the Department's hearing, this rule is necessary to help
such fiduciaries get the information they need to negotiate with and
select service providers who offer high quality services at reasonable
rates.
b. Public Comments
Public comments on the proposed rule raised a number of issues with
respect to its application to and impact on small entities. Several
commenters affirmed the Department's view, articulated in the preamble
to the proposed rule, that the number of small service providers to
plans is large and that the cost of complying with the proposed rule
might be proportionately higher for smaller service providers. However,
some comments suggested that the Department had underestimated the cost
to small service providers to comply with the proposed rule.
Many of the comments expressed uncertainty about the scope of the
proposed rule's application, attributing complexity and cost to that
uncertainty and to the possibility that the scope might be very broad
(for example, that it might encompass a broad array of indirect service
providers). The Department has refined the proposed rule to clarify
that the interim final rule encompasses only those service providers
and compensation arrangements that are likely to require close
consideration by plan fiduciaries. Small service providers generally
fall within the scope of the interim final rule only if they are plan
fiduciaries, provide plan services as a registered investment adviser,
provide certain other services directly to a plan and receive indirect
compensation in connection with such services, or provide an investment
platform through which investment options are made available to
participants and beneficiaries in participant-directed individual
account plans. A potentially large number of small, indirect service
providers will not be subject to the interim final rule, even if they
perform services for a plan under subcontract to another (direct)
service provider. The Department lacks data on how many such indirect
service arrangements exist, because such arrangements are not required
to be identified in plans' annual reports.
Some comments suggested that the cost of rigorous disclosure is not
[[Page 41630]]
justified in the case of very small service arrangements. The interim
final rule generally excepts from its requirements contracts or
arrangements where compensation or fees are less than $1,000. It is
likely that a large number of small service provider arrangements fall
into this category. Some portion of compliance costs, including the
most recurring costs (as opposed to start-up costs), are variable: they
grow with the number of covered arrangements the service provider
maintains. Therefore, this exception will be especially helpful to
small service providers whose business consists of a large number of
small contracts or arrangements, which will be excepted from coverage
if they result in less than $1,000 in compensation or fees.
Some comments stated that many arrangements are not established
under a formal contract and that requiring all arrangements to be so
established would be costly. The Department believes such a requirement
might be disproportionately costly for small service providers, whose
arrangements might be small relative to the partially fixed cost of
entering into a contract and who might lack in-house expertise in
contract law. The interim final rule includes no such requirement, but
instead allows all required disclosures to be provided by other means
so long as they are provided in writing.
c. Affected Small Entities
The Department estimates that the interim final rule will apply to
approximately 9,600 small service providers (generally, those with
revenue less than $6.5 million per year). These service providers
generally consist of professional service enterprises that provide a
wide range of services to plans, such as investment management or
advisory services for plans or plan participants, and accounting,
auditing, actuarial, appraisal, banking, consulting, custodial,
insurance, legal, recordkeeping, brokerage, administration, or
valuation services. Many of these service providers have special
education, training, and/or formal credentials in fields such as ERISA
and benefits administration, employee compensation, taxation, actuarial
science, law, accounting, or finance.
d. Compliance Requirements
The classes of small service providers subject to the interim final
rule includes service providers who are plan fiduciaries (for example
who manage plan investments), who provide services as registered
investment advisers to plans, who receive indirect compensation in
connection with provision of certain services (namely, accounting,
auditing, actuarial, appraisal, banking, certain consulting, custodial,
insurance, participant investment advisory, legal, recordkeeping,
securities or other investment brokerage, third party administration,
or valuation services) or who provide an investment platform through
which investment options are made available to participants and
beneficiaries in participant-directed individual account plans.
These small service providers will, in connection with covered
service arrangements, be required to disclose to plan fiduciaries
certain information. Such information will include what services will
be included in the arrangement and what direct and indirect
compensation the service will receive in connection with the
arrangement. Certain service providers whose arrangements make certain
investment products available to plans also will be required to
disclose to fiduciaries certain information relating to expenses
associated with such products. Certain specified information generally
must be disclosed before the arrangement is entered into or renewed, on
request from a fiduciary, and when the information changes.
Preparing compliant disclosures often will require one or more
professional skills such as financial or legal expertise, and knowledge
of financial products and services and related compensation and revenue
sharing arrangements. Generally, small service providers will be
responsible for disclosing only those types of compensation
arrangements to which they (or their affiliate or subcontractor
performing the services) are a party.
e. Agency Steps To Minimize Negative Impacts
As explained in (b) above in connection with public comments, the
Department took a number of steps to minimize any negative impact of
this interim final rule on small service providers. These include
clarifying the scope of the rule's application to include only those
service providers and compensation arrangements that are likely to
require close consideration by plan fiduciaries, excepting from the
rule's requirements contracts or arrangements where compensation or
fees are less than $1,000, and omitting from the rule a requirement
that all arrangements be maintained under formal contracts. The
disclosure requirements included in the interim final rule are
necessary to ensure that plan fiduciaries can efficiently and
effectively carry out their duties in purchasing services for plans.
The policy justification for these requirements includes benefits
to fiduciaries, who will realize savings in the form of reduced search
costs more than commensurate to the compliance costs shouldered by
service providers. Small plan fiduciaries are likely to benefit most--
lacking economies of scale and negotiating power, they would otherwise
face the greatest potential cost to obtain and consider the information
necessary to the performance of their duty. Small service providers,
while shouldering the cost of providing disclosure, will likely often
pass these costs to their plan clients, who in turn will reap a net
benefit on average that will more than offset this shifted compliance
cost.
Major alternatives considered by the Department fell short of the
approach adopted in the interim final rule of achieving policy goals at
reasonable and justified cost. As discussed, the Department rejected as
unnecessarily costly approaches that would have applied disclosure
requirements to arrangements involving compensation or fees of less
than $1,000, to indirect service arrangements where the service
provider is not a plan fiduciary, or that would have required a formal,
written contract or arrangement to delineate the disclosure
obligations. The Department also rejected these approaches as
inadequate to achieve a central policy and legal goal--namely, enabling
plan fiduciaries, including especially small plan fiduciaries, to
efficiently and effectively carry out their duties in connection with
the purchase of plan services by easing their access to necessary
information.
An alternative approach advocated by some public commenters would
not have expressly conditioned the section 408(b)(2) prohibited
transaction exemption on the service provider's production of such
information. That approach, however, would perpetuate the information
asymmetry and therefore would not allow small plan fiduciaries to
efficiently and effectively carry out their fiduciary obligations when
purchasing plan services and equip them to redress service provider
abuses.
11. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the proposed regulation solicited
comments on the information collections included therein. The
Department also submitted an information collection request (ICR) to
OMB in accordance with 44 U.S.C.
[[Page 41631]]
3507(d), contemporaneously with the publication of the proposed
regulation, for OMB's review.\48\ Although no public comments were
received that specifically addressed the paperwork burden analysis of
the information collections, the comments that were submitted, and
which are described earlier in this preamble, contained information
relevant to the costs and administrative burdens attendant to the
proposals. The Department took into account such public comments in
connection with making changes to the proposal, analyzing the economic
impact of the proposals, and developing the revised paperwork burden
analysis summarized below.
---------------------------------------------------------------------------
\48\ On Dec. 3, 2007, OMB issued a notice (ICR Reference No.
200710-1210-001) that it would not approve the Department's request
for approval of the information collection provisions until after
consideration of public comment on the proposed regulation and
promulgation of a final rule, describing any changes. OMB issued
Control Number 1210-0133 for the collection once it approved the
information collection provisions of the final rule.
---------------------------------------------------------------------------
In connection with publication of this interim final rule, the
Department submitted an ICR to OMB for its request of a new information
collection. OMB approved the ICR on May 20, 2010, under OMB Control
Number 1210-0133, which will expire on May 31, 2013.
A copy of the ICR may be obtained by contacting the PRA addressee
shown below or at http://www.RegInfo.gov. PRA ADDRESSEE: G. Christopher
Cosby, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue,
NW., Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax:
(202) 219-4745. These are not toll-free numbers.
The information collection requirements of the interim final rule
are contained in paragraph (c)(1)(iv), which requires service providers
to disclose, in writing, specific information to responsible plan
fiduciaries related to the compensation to be received under the
contract or arrangement. Generally, the information must be disclosed
reasonably in advance of the date the contract or arrangement is
entered into, or extended or renewed. These disclosure requirements are
discussed fully in section B. of this SUPPLEMENTARY INFORMATION.
Annual Hour Burden
In order to estimate the potential costs of the disclosure
provisions of the interim final rule, the Department estimated the
number of service providers, plans, and arrangements covered by the
rule. Based on information from the 2006 Form 5500, the Department
estimates that approximately 49,000 defined benefit pension plans (DB
plans) covering more than 42 million participants and approximately
646,000 defined contribution plans (DC plans) covering almost 80
million participants are covered by the rule.\49\
---------------------------------------------------------------------------
\49\ Out of these pension plans, about 37,000 are small DB plans
and 576,000 small DC plans. Small plans generally are those with
less than 100 participants.
---------------------------------------------------------------------------
The Department also estimates that based on data from the 2006 Form
5500 Annual Return/Report and Schedule C that there are almost 10,000
covered service providers. The 2006 Form 5500 Schedule C data was also
used to count the number of covered plan-service provider arrangements.
On average, DB plans employ more covered service providers per plan
than DC plans, and large plans use more covered service providers per
plan than small plans. In total, the Department estimates that DB plans
have approximately 119,000 arrangements with covered service providers,
while DC plans have an estimated 780,000 arrangements. For purposes of
this analysis, the Department assumes that about 50 percent of
disclosures between service providers and plan fiduciaries are made
only electronically.
Compliance Review and Implementation: Most of the hour burden under
the interim final rule will be imposed on service providers. Covered
service providers will need to review the rule, evaluate whether their
current disclosure practices comply with its requirements, and, if not,
determine how their disclosure practices must be changed to be
compliant. The Department projected this as an hour burden incurred in
2011, the year in which the rule takes effect.
Although all covered service providers are assumed to incur these
initial costs, it is likely that service providers with complex fee
arrangements and conflicts of interest will require more time to
comply. The Department assumes that the number of service providers
with more complex arrangements can be approximated by the number of
unique service providers who are reported on the Schedule C as having
received $1 million or more in compensation (approximately 1,000
service providers).
The Department assumes that covered service providers with complex
arrangements will require 24 hours of legal professional time and 80
hours of financial professional time.\50\ The non-complex service
providers (approximately 9,000 service providers based on the
quantitative analysis above) would require only three hours of legal
professional time and 13 hours of financial professional time. Based on
the foregoing, the Department estimates that in the first year service
providers will incur an hour burden of approximately 241,000 hours with
an equivalent cost of approximately $17.9 million.
---------------------------------------------------------------------------
\50\ EBSA wage estimates for 2010 are based on the National
Occupational Employment Survey (May 2008, Bureau of Labor
Statistics) and the Employment Cost Index (June 2009, Bureau of
Labor Statistics), unless otherwise noted. Total labor costs (wages
plus benefits plus overhead) were estimated to average $119.03 per
hour over the period for legal professional, $62.81 for financial
professionals, and $26.14 per hour for clerical staff.
---------------------------------------------------------------------------
The Department also has estimated the initial compliance review and
implementation costs for service providers newly entering the market
(``new service providers'') to provide service to plans (either for the
first time or by re-entry) beginning in 2012 and each year thereafter.
Based on data from the 2005 and 2006 Form 5500, the Department assumes
that about eight percent of all service providers will be new in each
year subsequent to 2011, and that these service providers will incur
the same compliance review and implementation costs as existing service
providers. Based on the foregoing, the Department estimates that new
service providers will incur an hour burden of approximately 20,000
hours with an equivalent cost of approximately $1.5 million.
Based on the foregoing, the Department estimates that the three-
year average total hour burden associated with compliance review and
implementation is almost 94,000 hours. The equivalent cost of these
hours is $7.0 million.
Initial Disclosure: As discussed above, covered service providers
also must develop or update their current disclosure materials to
comply with the regulatory requirements. Paragraph (c)(1)(iv) of the
rule requires service providers to disclose general information to a
responsible plan fiduciary when a contract is entered into, renewed, or
extended. The Department assumes that service providers will create a
general disclosure that can be used for all plans and customize this
document by adding individualized information for each plan. This
activity includes developing formulae and algorithms to present or
estimate direct and indirect compensation that will be applied in a pro
forma projection for each plan with which the provider will contract.
The Department assumes that the majority of
[[Page 41632]]
this cost would be incurred by service providers in 2011 and that one
hour of a legal professional's and 45 minutes of a financial
professional's time will be required to prepare the general disclosure
for each plan. Based on the foregoing, the total hour burden to prepare
these disclosures in year 2011 will be approximately 1.6 million hours
and the equivalent cost of these hours will be approximately $150
million.
In 2012 and subsequent years, the regulation will cause additional
disclosures to be made between covered plans and service providers for
any new contracts and arrangements. The Department does not have
information on the number of new arrangements in a year; therefore, the
Department used the percentage of plans that are new plans, about 14
percent, as a proxy for the percentage of new arrangements in a year.
This results in approximately 122,000 new arrangements every year. The
Department assumes that half of the responsible plan fiduciaries in
these arrangements would receive the required information even without
the regulation enacted. The Department estimates that preparing the
disclosures for new arrangements will require one hour of a legal
professional's time at an equivalent cost of approximately $119 and 45
minutes of a financial professional's time at an equivalent cost of
almost $63. Based on the foregoing, the total hour burden to prepare
these disclosures in year 2012 and thereafter will be approximately
215,000 hours and the equivalent cost of these hours will be $20.3
million. The resulting three-year average burden hours is 673,000 hours
with an equivalent cost of $63.5 million.
Paragraph (c)(1)(vi) requires service providers to provide any
other information relating to compensation received in connection with
the contract or arrangement that is required for the covered plan to
comply with the reporting and disclosure requirements of Title I of
ERISA and the regulations, forms, and schedules issued thereunder upon
the request of responsible plans fiduciaries or plan administrators of
covered plans. The Department is not aware of a basis for determining
the number of requests that responsible plan fiduciaries or plan
administrators will make; therefore, it assumes that approximately ten
percent (approximately 90,000) of responsible plan fiduciaries will
request additional information annually. The Department further assumes
that service providers already will have this information available,
because it is required to comply with other legal requirements.
Therefore, the Department estimates that it will take clerical staff
two minutes per request to prepare the information with an hourly rate
of approximately $26. Based on the foregoing, the Department estimates
that the yearly and three-year average total hour burden to disclose
information upon request will total 4,500 hours at an equivalent cost
of $118,000.
Paragraph (c)(1)(v)(B) generally requires service providers to
disclose any changes to the general information as soon as reasonably
practicable, but no later than 60 days from the date the covered
service provider knows of such change. The Department assumes that one-
half hour of legal professional time and one-third hour of a financial
professional time will be required to update the disclosures. The
Department also assumes that changes in plan disclosures will occur at
least once every three years, because plans normally conduct requests
for proposal (RFPs) from service providers at least once every three to
five years. If it is assumed that an equal number of plans conduct an
RFP in any given year, then approximately 35 percent of arrangements
will require an updated disclosure every year and half of these would
already have updated the information without the regulation for a total
of approximately 315,000 updates to the general information. Based on
the foregoing, the Department estimates that the annual hour burden to
update the disclosure of general information will be approximately
268,000 hours with an equivalent cost of approximately $25.5 million.
In summary, the hour burden to disclose the required general
information in 2011 will be almost 1.6 million hours with an equivalent
cost of approximately $150 million. The hour burden in subsequent years
will be approximately 483,000 hours with an equivalent cost of
approximately $45.8 million. The average total hour burden to disclose
general information over the three year period 2011-2013 will be
852,000 hours, and the equivalent cost of these hours will be $80.5
million.
Investment Disclosure: Paragraphs (c)(1)(iv)(F) and (G) generally
require fiduciaries to certain investment vehicles holding plan assets
(described in paragraph (c)(1)(iii)(A)(2)) and providers of
recordkeeping and brokerage services to a participant-directed
individual account plan (without regard to whether they expect to
receive indirect compensation), if they provide access to one or more
designated investment alternatives for the covered plan (described in
paragraph (c)(1)(iii)(B) (``platform providers'')), to disclose
investment-related compensation information. This information generally
must be disclosed to the responsible plan fiduciary reasonably in
advance of the date the contract or arrangement is entered into,
extended or renewed.\51\ Paragraph (c)(1)(iv)(G)(2) allows covered
platform providers to satisfy this disclosure requirement by passing
through to the responsible plan fiduciary copies of any state or
federally regulated disclosure materials (e.g., prospectuses) of the
issuer of the designated investment alternative, so long as such issuer
is not affiliated with the platform provider, and the platform provider
does not know that any of the information contained in such materials
is incomplete or inaccurate.
---------------------------------------------------------------------------
\51\ Generally, service providers must disclose any change to
investment-related information as soon as practicable, but not later
than 60 days from the date on which the covered service provider is
informed of such change.
---------------------------------------------------------------------------
The hour burden associated with disclosing investment-related
compensation and fee information will be attributable primarily to the
time spent gathering the required information. However, much of this
cost will be reduced, because, as discussed above, the rule allows
platform providers to satisfy this requirement by passing through
information to the responsible plan fiduciary. Based on the foregoing,
the Department assumes that preparation of investment-related
compensation and fee information will require one-half hour of
financial professional time for each of the individual account plans.
There will be approximately 462,000 plan fiduciaries receiving this
information in 2011. Further, it is assumed that 14 percent
(approximately 63,000) of arrangements will be new in each subsequent
year and require the initial investment disclosure. The Department
estimates that the hour burden to disclose the required investment
information will be approximately 362,000 hours with an equivalent cost
of $17.9 million in 2011. In the subsequent years, the burden hours
will be approximately 249,000 hours with an equivalent cost of $2.4
million. The three-year average hour burden associated with disclosing
investment related information 462,000 disclosures are 286,000 hours at
an equivalent cost of $7.6 million.
In addition, service providers must disclose changes to investment
information. The Department assumes that service providers will have to
disclose investment information changes to each responsible plan
fiduciary at least once per year due to the regulation, resulting in
approximately 399,000 disclosures. This
[[Page 41633]]
notification is expected to require one-half hour of financial
professional time to prepare. Based on the foregoing, the cost to
update investment information in subsequent years is estimated to be
approximately 206,000 hours with an equivalent cost of $12.7 million.
The Department estimates that the three-year average burden hours
associated with reporting changes to the required investment related
information will be 138,000 hours at an equivalent cost of $8.5
million.
In summary, the hour burden to disclose all investment information
in 2011 is estimated to be 362,000 hours with an equivalent cost of
$17.9 million. The burden to disclose the required investment
information in subsequent years is 455,000 hours with an equivalent
cost of $15.1 million. The total three-year hour burden for service
providers to disclose the required investment information is estimate
to be 424,000 hours with an equivalent cost of $16.1 million.
Hour Burden Imposed on Plans: The main hour burden of the
regulation that is imposed on plans is additional time spent reviewing
the regulation and ensuring that the plan has received all of the
required disclosures. The Department estimates the responsible plan
fiduciaries will need one hour of time to review new requirements. The
hour burden is estimated to be 695,000 with an equivalent cost of
approximately $43.6 million in 2011.
Starting in 2012 and each year thereafter, responsible plan
fiduciaries of new plans will have to review the new requirements.
Based on data from the 2005 and 2006 Form 5500, the Department
estimates that 14 percent of plans will be new each year. The
Department assumes that responsible plan fiduciaries of new plans will
have the same costs as fiduciaries of existing plans. Therefore, the
hour burden associated with the review for fiduciaries of new plans is
estimated to be approximately 94,000 hours at an equivalent cost of
$5.9 million for years 2012 and thereafter.
Based on the foregoing, the hour burden imposed on plans to review
the regulation is estimated to be 695,000 hours in 2011 with an
equivalent cost of $43.6 million. The three-year average burden on
plans to review the regulation is estimated to be 294,000 hours with an
equivalent cost of $18.5 million.
Exemption for Responsible Plan Fiduciary: The final prohibited
transaction class exemption contained in paragraph (c)(1)(ix) of the
rule provides relief from the restrictions of sections 406(a)(1)(C) and
(D) for plan fiduciaries that enter into contracts or arrangements with
service providers upon a mistaken belief that they have received all of
the disclosures required by the interim final rule. Upon discovering
that a covered service provider failed to disclose all of the required
information, the responsible plan fiduciary must take reasonable steps
to obtain such information, including requesting in writing that the
covered service provider furnish the information in order to rely on
the exemption and notify the Department if the service provider fails
to comply with the written request within 90 days.
While the Department has no basis for estimating the percentage of
arrangements where a responsible plan fiduciary will not receive all of
the required disclosures from a covered service provider, the
Department assumes that 10 percent of arrangements (approximately
69,000) may experience a failure that will require the responsible plan
fiduciary to send a notice to the service provider in 2011. In 2012 and
thereafter, the number of requests for missing information is expected
to decrease to 5 percent of arrangements (approximately 35,000). The
Department estimates that one-half hour of a financial professional's
time will be required to prepare the request for the undisclosed
information.
The Department estimates that the burden for plans to send notice
to service providers of missing information will be approximately
35,000 hours with an equivalent cost of over $2.2 million in 2011. The
hour burden for subsequent years is estimated to be over 18,000 hours
with an equivalent cost of $1.1 million. The three-year average burden
hours for requesting missing information is estimated to be 24,000
hours with an equivalent cost of $1.5 million.
The Department further assumes that service providers may not
respond to 10 percent of the requests for undisclosed information
within 90 days, which will result in the responsible plan fiduciary
preparing and sending a notice to the Department. The Department
estimates that one-half hour of a financial professional's time will be
required to prepare the notice. The Department estimates that the
burden for plans to send notice to the Department of Labor will be
approximately 3,500 hours with an equivalent cost of $219,600 in 2011.
The hour burden for subsequent years is estimated to be approximately
1,800 hours with an equivalent cost of $110,000. The three-year average
burden hours to prepare the notice to be sent to the Department are
estimated to be 2,400 hours with an equivalent cost of $146,000.
Summary
Table 12 shows the total hour burden of the information collection
and Table 13 shows the total equivalent cost. The total three year
average hour burden for service providers and plans is estimated to be
1.4 million hours with an equivalent cost of $104 million. The total
three-year average hour burden for plans is estimated to be 320,000
hours with an equivalent cost of $20.1 million. The total three-year
average hour burden of the regulation is estimated to be 1.7 million
hours with an equivalent cost of $124 million.
Table 12--Hour Burden
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Service Providers................... 2,197,000 963,000 963,000 1,374,000
Plans............................... 733,000 114,000 114,000 320,000
---------------------------------------------------------------------------
Total........................... 2,930,000 1,076,000 1,076,000 1,694,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 13--Equivalent Cost
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Service Providers................... $185,811,000 $62,529,000 $62,039,000 $103,623,000
[[Page 41634]]
Plans............................... 46,041,000 7,119,000 7,119,000 20,093,000
---------------------------------------------------------------------------
Total........................... 231,852,000 69,648,577 69,158,577 123,716,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Annual Cost Burden
Table 14 reports the estimated printing and postage costs
associated with each required notice and disclosure. The Department
assumes that 50 percent of the disclosures will be sent electronically
at no cost, and that the cost of printing and paper for the remaining
50% of documents will be 5 cents per page. The Department estimates
that the total cost burden of the rule in 2010 will be $8,830,000
(approximately $8,810.000 for service providers and $21,000 for plans),
and $1,435,000 (approximately $1,424,000 for service providers and
$10,000 for plans in subsequent years. The three-year average cost
burden is estimated to be almost $3.9 million.
Table 14--Cost Burden
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Average
----------------------------------------------------------------------------------------------------------------
Initial Disclosure.............................. $378,000 $51,000 $51,000 $160,000
Update Initial Disclosure....................... 0 101,000 101,000 67,000
Information Upon Request........................ 42,000 42,000 42,000 42,000
---------------------------------------------------------------
General Information Total................... 420,000 194,000 194,000 270,000
---------------------------------------------------------------
Investment Disclosure........................... 8,290,000 1,122,000 1,122,000 3,509,000
Update Investment Disclosure.................... 108,000 108,000 108,000 108,000
---------------------------------------------------------------
Investment Disclosure Total................. 8,390,000 1,230,000 1,230,000 3,617,000
---------------------------------------------------------------
Request for Additional Information for Exemption 19,000 9,000 9,000 13,000
Notice to DOL................................... 2000 900 900 1,000
---------------------------------------------------------------
Total....................................... 8,830,000 1,435,000 1,435,000 3,900,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
These paperwork burden estimates are summarized as follows:
Type of Review: New collection (Request for new OMB control
number).
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Reasonable Contract or Arrangement Under Section 408(b)(2)--
Fee Disclosure.
OMB Control Number: 1210-0133.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Estimated Number of Respondents: 79,000 (first year); 56,000
(three-year average).
Estimated Number of Responses: 1,528,000 (first year); 1,194,000
(three-year average).
Frequency of Response: Annually; occasionally.
Estimated Annual Burden Hours: 2,930,000 (first year); 1,694,000
(three-year average).
Estimated Annual Burden Cost: $8,830,000 (first year); $3,900,000
(three-year average).
Congressional Review Act
The interim final rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The interim final rule is a ``major
rule'' as that term is defined in 5 U.S.C. 804, because it is likely to
result in an annual effect on the economy of $100 million or more.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, the interim final rule does
not include any Federal mandate that may result in expenditures by
State, local, or tribal governments in the aggregate of more than $100
million, adjusted for inflation, or increase expenditures by the
private sector of more than $100 million, adjusted for inflation.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism, and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. The interim final rule does not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated, that the provisions of Titles I and
IV of ERISA supersede any and all laws of the States as they relate to
any employee benefit plan covered under ERISA. The requirements
implemented in the interim final rule do not alter the fundamental
reporting and disclosure requirements of the statute with respect to
employee benefit plans, and, as such, have no implications for the
States or the relationship or distribution of power between the
national government and the States.
[[Page 41635]]
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Exemptions, Fiduciaries, Investments,
Pensions, Prohibited transactions, Reporting and recordkeeping
requirements, and Securities.
0
For the reasons set forth in the preamble, the Department amends
chapter XXV, subchapter F, part 2550 of title 29 of the Code of Federal
Regulations as follows:
SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974
PART 2550-RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
0
1. The authority citation for part 2550 continues to read as follows:
Authority: 29 U.S.C. 1135; and Secretary of Labor's Order No.
1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b-1 also issued
under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct.
17, 1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR
1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c-1 also
issued under 29 U.S.C. 1101. Sec. 2550.404c-1 also issued under 29
U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 1107. Sec.
2550.404a-2 also issued under 26 U.S.C. 401 note (sec. 657, Pub. L.
107-16, 115 Stat. 38). Sec. 2550.408b-1 also issued under 29 U.S.C.
1108(b) (1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR,
1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3,
1978), and 3 CFR, 1978 Comp. 332. Sec. 2550.408b-2 also issued under
sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p.
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR,
1978 Comp. 332. Sec. 2550.412-1 also issued under 29 U.S.C. 1112.
0
2. Section 2550.408b-2(c) is revised to read as follows:
Sec. 2550.408b-2 General statutory exemption for services or office
space.
* * * * *
(c) Reasonable contract or arrangement--
(1) Pension plan disclosure.
(i) General. No contract or arrangement for services between a
covered plan and a covered service provider, nor any extension or
renewal, is reasonable within the meaning of section 408(b)(2) of the
Act and paragraph (a)(2) of this section unless the requirements of
this paragraph (c)(1) are satisfied. The requirements of this paragraph
(c)(1) are independent of fiduciary obligations under section 404 of
the Act.
(ii) Covered plan. For purposes of this paragraph (c)(1), a
``covered plan'' is an ``employee pension benefit plan'' or a ``pension
plan'' within the meaning of section 3(2)(A) (and not described in
section 4(b)) of the Act, except that the term ``covered plan'' shall
not include a ``simplified employee pension'' described in section
408(k) of the Internal Revenue Code of 1986 (the Code), a ``simple
retirement account'' described in section 408(p) of the Code, an
individual retirement account described in section 408(a) of the Code,
or an individual retirement annuity described in section 408(b) of the
Code.
(iii) Covered service provider. For purposes of this paragraph
(c)(1), a ``covered service provider'' is a service provider that
enters into a contract or arrangement with the covered plan and
reasonably expects $1,000 or more in compensation, direct or indirect,
to be received in connection with providing one or more of the services
described in paragraphs (c)(1)(iii)(A), (B), or (C) of this section
pursuant to the contract or arrangement, regardless of whether such
services will be performed, or such compensation received, by the
covered service provider, an affiliate, or a subcontractor.
(A) Services as a fiduciary or registered investment adviser.
(1) Services provided directly to the covered plan as a fiduciary
(unless otherwise specified, a ``fiduciary'' in this paragraph (c)(1)
is a fiduciary within the meaning of section 3(21) of the Act);
(2) Services provided as a fiduciary to an investment contract,
product, or entity that holds plan assets (as determined pursuant to
sections 3(42) and 401 of the Act and 29 CFR 2510.3-101) and in which
the covered plan has a direct equity investment (a direct equity
investment does not include investments made by the investment
contract, product, or entity in which the covered plan invests); or
(3) Services provided directly to the covered plan as an investment
adviser registered under either the Investment Advisers Act of 1940 or
any State law.
(B) Certain recordkeeping or brokerage services. Recordkeeping
services or brokerage services provided to a covered plan that is an
individual account plan, as defined in section 3(34) of the Act, and
that permits participants or beneficiaries to direct the investment of
their accounts, if one or more designated investment alternatives will
be made available (e.g., through a platform or similar mechanism) in
connection with such recordkeeping services or brokerage services.
(C) Other services for indirect compensation. Accounting, auditing,
actuarial, appraisal, banking, consulting (i.e., consulting related to
the development or implementation of investment policies or objectives,
or the selection or monitoring of service providers or plan
investments), custodial, insurance, investment advisory (for plan or
participants), legal, recordkeeping, securities or other investment
brokerage, third party administration, or valuation services provided
to the covered plan, for which the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive indirect
compensation (as defined in paragraph (c)(1)(viii)(B)(2) of this
section) or compensation described in paragraph (c)(1)(iv)(C)(3) of
this section).
(D) Limitations. Notwithstanding paragraphs (c)(1)(iii)(A), (B), or
(C) of this section, no person or entity is a ``covered service
provider'' solely by providing services--
(1) As an affiliate or a subcontractor that is performing one or
more of the services described in paragraphs (c)(1)(iii)(A), (B), or
(C) of this section under the contract or arrangement with the covered
plan; or
(2) To an investment contract, product, or entity in which the
covered plan invests, regardless of whether or not the investment
contract, product, or entity holds assets of the covered plan, other
than services as a fiduciary described in paragraph (c)(1)(iii)(A)(2)
of this section.
(iv) Initial disclosure requirements. The covered service provider
must disclose the following information to a responsible plan
fiduciary, in writing--
(A) Services. A description of the services to be provided to the
covered plan pursuant to the contract or arrangement (but not including
non-fiduciary services described in paragraph (c)(1)(iii)(D)(2) of this
section).
(B) Status. If applicable, a statement that the covered service
provider, an affiliate, or a subcontractor will provide, or reasonably
expects to provide, services pursuant to the contract or arrangement
directly to the covered plan (or to an investment contract, product or
entity that holds plan assets and in which the covered plan has a
direct equity investment) as a fiduciary; and, if applicable, a
statement that the covered service provider, an affiliate, or a
subcontractor will provide, or reasonably expects to provide, services
pursuant to the contract or arrangement directly to the covered plan as
an investment adviser registered under either the Investment Advisers
Act of 1940 or any State law.
(C) Compensation.
(1) Direct compensation. A description of all direct compensation
(as defined in paragraph (c)(1)(viii)(B)(1)
[[Page 41636]]
of this section), either in the aggregate or by service, that the
covered service provider, an affiliate, or a subcontractor reasonably
expects to receive in connection with the services described pursuant
to paragraph (c)(1)(iv)(A) of this section.
(2) Indirect compensation. A description of all indirect
compensation (as defined in paragraph (c)(1)(viii)(B)(2) of this
section) that the covered service provider, an affiliate, or a
subcontractor reasonably expects to receive in connection with the
services described pursuant to paragraph (c)(1)(iv)(A) of this section;
including identification of the services for which the indirect
compensation will be received and identification of the payer of the
indirect compensation.
(3) Compensation paid among related parties. A description of any
compensation that will be paid among the covered service provider, an
affiliate, or a subcontractor, in connection with the services
described pursuant to paragraph (c)(1)(iv)(A) of this section if it is
set on a transaction basis (e.g., commissions, soft dollars, finder's
fees or other similar incentive compensation based on business placed
or retained) or is charged directly against the covered plan's
investment and reflected in the net value of the investment (e.g., Rule
12b-1 fees); including identification of the services for which such
compensation will be paid and identification of the payers and
recipients of such compensation (including the status of a payer or
recipient as an affiliate or a subcontractor). Compensation must be
disclosed pursuant to this paragraph (c)(1)(iv)(C)(3) regardless of
whether such compensation also is disclosed pursuant to paragraph
(c)(1)(iv)(C)(1) or (2), (F) or (G) of this section. This paragraph
(c)(1)(iv)(C)(3) shall not apply to compensation received by an
employee from his or her employer on account of work performed by the
employee.
(4) Compensation for termination of contract or arrangement. A
description of any compensation that the covered service provider, an
affiliate, or a subcontractor reasonably expects to receive in
connection with termination of the contract or arrangement, and how any
prepaid amounts will be calculated and refunded upon such termination.
(D) Recordkeeping services. Without regard to the disclosure of
compensation pursuant to paragraph (c)(1)(iv)(C), (F), or (G) of this
section, if recordkeeping services will be provided to the covered
plan--
(1) A description of all direct and indirect compensation that the
covered service provider, an affiliate, or a subcontractor reasonably
expects to receive in connection with such recordkeeping services; and
(2) If the covered service provider reasonably expects
recordkeeping services to be provided, in whole or in part, without
explicit compensation for such recordkeeping services, or when
compensation for recordkeeping services is offset or rebated based on
other compensation received by the covered service provider, an
affiliate, or a subcontractor, a reasonable and good faith estimate of
the cost to the covered plan of such recordkeeping services, including
an explanation of the methodology and assumptions used to prepare the
estimate and a detailed explanation of the recordkeeping services that
will be provided to the covered plan. The estimate shall take into
account, as applicable, the rates that the covered service provider, an
affiliate, or a subcontractor would charge to, or be paid by, third
parties, or the prevailing market rates charged, for similar
recordkeeping services for a similar plan with a similar number of
covered participants and beneficiaries.
(E) Manner of receipt. A description of the manner in which the
compensation described in paragraph (c)(1)(iv)(C) and (D) of this
section will be received, such as whether the covered plan will be
billed or the compensation will be deducted directly from the covered
plan's account(s) or investments.
(F) Investment disclosure--fiduciary services. In the case of a
covered service provider described in paragraph (c)(1)(iii)(A)(2) of
this section, the following additional information with respect to each
investment contract, product, or entity that holds plan assets and in
which the covered plan has a direct equity investment, and for which
fiduciary services will be provided pursuant to the contract or
arrangement with the covered plan, unless such information is disclosed
to the responsible plan fiduciary by a covered service provider
providing recordkeeping services or brokerage services as described in
paragraph (c)(1)(iii)(B) of this section--
(1) A description of any compensation that will be charged directly
against the amount invested in connection with the acquisition, sale,
transfer of, or withdrawal from the investment contract, product, or
entity (e.g., sales loads, sales charges, deferred sales charges,
redemption fees, surrender charges, exchange fees, account fees, and
purchase fees);
(2) A description of the annual operating expenses (e.g., expense
ratio) if the return is not fixed; and
(3) A description of any ongoing expenses in addition to annual
operating expenses (e.g., wrap fees, mortality and expense fees).
(G) Investment disclosure--recordkeeping and brokerage services.
(1) In the case of a covered service provider described in
paragraph (c)(1)(iii)(B) of this section, the additional information
described in paragraph (c)(1)(iv)(F)(1) through (3) of this section
with respect to each designated investment alternative for which
recordkeeping services or brokerage services as described in paragraph
(c)(1)(iii)(B) of this section will be provided pursuant to the
contract or arrangement with the covered plan.
(2) A covered service provider may comply with this paragraph
(c)(1)(iv)(G) by providing current disclosure materials of the issuer
of the designated investment alternative that include the information
described in such paragraph, provided that such issuer is not an
affiliate, the disclosure materials are regulated by a State or federal
agency, and the covered service provider does not know that the
materials are incomplete or inaccurate.
(v) Timing of initial disclosure requirements; changes.
(A) A covered service provider must disclose the information
required by paragraph (c)(1)(iv) of this section to the responsible
plan fiduciary reasonably in advance of the date the contract or
arrangement is entered into, and extended or renewed, except that--
(1) When an investment contract, product, or entity is determined
not to hold plan assets upon the covered plan's direct equity
investment, but subsequently is determined to hold plan assets while
the covered plan's investment continues, the information required by
paragraph (c)(1)(iv) of this section must be disclosed as soon as
practicable, but not later than 30 days from the date on which the
covered service provider knows that such investment contract, product,
or entity holds plan assets; and
(2) The information described in paragraph (c)(1)(iv)(G) of this
section relating to any investment alternative that is not designated
at the time the contract or arrangement is entered into must be
disclosed as soon as practicable, but not later than the date the
investment alternative is designated by the responsible plan fiduciary.
(B) A covered service provider must disclose a change to the
information required by paragraph (c)(1)(iv) of this
[[Page 41637]]
section as soon as practicable, but not later than 60 days from the
date on which the covered service provider is informed of such change,
unless such disclosure is precluded due to extraordinary circumstances
beyond the covered service provider's control, in which case the
information must be disclosed as soon as practicable.
(vi) Reporting and disclosure information; timing.
(A) Upon request of the responsible plan fiduciary or covered plan
administrator, the covered service provider must furnish any other
information relating to the compensation received in connection with
the contract or arrangement that is required for the covered plan to
comply with the reporting and disclosure requirements of Title I of the
Act and the regulations, forms and schedules issued thereunder.
(B) The covered service provider must disclose the information
required by paragraph (c)(1)(vi)(A) of this section not later than 30
days following receipt of a written request from the responsible plan
fiduciary or covered plan administrator, unless such disclosure is
precluded due to extraordinary circumstances beyond the covered service
provider's control, in which case the information must be disclosed as
soon as practicable.
(vii) Disclosure errors. No contract or arrangement will fail to be
reasonable under this paragraph (c)(1) solely because the covered
service provider, acting in good faith and with reasonable diligence,
makes an error or omission in disclosing the information required
pursuant to paragraph (c)(1)(iv) or (vi) of this section, provided that
the covered service provider discloses the correct information to the
responsible plan fiduciary as soon as practicable, but not later than
30 days from the date on which the covered service provider knows of
such error or omission.
(viii) Definitions. For purposes of paragraph (c)(1) of this
section:
(A) Affiliate. A person's or entity's ``affiliate'' directly or
indirectly (through one or more intermediaries) controls, is controlled
by, or is under common control with such person or entity; or is an
officer, director, or employee of, or partner in, such person or
entity. Unless otherwise specified, an ``affiliate'' in this paragraph
(c)(1) refers to an affiliate of the covered service provider.
(B) Compensation. Compensation is anything of monetary value (for
example, money, gifts, awards, and trips), but does not include non-
monetary compensation valued at $250 or less, in the aggregate, during
the term of the contract or arrangement.
(1) ``Direct'' compensation is compensation received directly from
the covered plan.
(2) ``Indirect'' compensation is compensation received from any
source other than the covered plan, the plan sponsor, the covered
service provider, an affiliate, or a subcontractor (if the
subcontractor receives such compensation in connection with services
performed under the subcontractor's contract or arrangement described
in paragraph (c)(1)(viii)(F) of this section).
(3) A description or an estimate of compensation may be expressed
as a monetary amount, formula, percentage of the covered plan's assets,
or a per capita charge for each participant or beneficiary or, if the
compensation cannot reasonably be expressed in such terms, by any other
reasonable method. Any description or estimate must contain sufficient
information to permit evaluation of the reasonableness of the
compensation.
(C) Designated investment alternative. A ``designated investment
alternative'' is any investment alternative designated by a fiduciary
into which participants and beneficiaries may direct the investment of
assets held in, or contributed to, their individual accounts. The term
``designated investment alternative'' shall not include brokerage
windows, self-directed brokerage accounts, or similar plan arrangements
that enable participants and beneficiaries to select investments beyond
those specifically designated.
(D) Recordkeeping services. ``Recordkeeping services'' include
services related to plan administration and monitoring of plan and
participant and beneficiary transactions (e.g., enrollment, payroll
deductions and contributions, offering designated investment
alternatives and other covered plan investments, loans, withdrawals and
distributions); and the maintenance of covered plan and participant and
beneficiary accounts, records, and statements.
(E) Responsible plan fiduciary. A ``responsible plan fiduciary'' is
a fiduciary with authority to cause the covered plan to enter into, or
extend or renew, the contract or arrangement.
(F) Subcontractor. A ``subcontractor'' is any person or entity (or
an affiliate of such person or entity) that is not an affiliate of the
covered service provider and that, pursuant to a contract or
arrangement with the covered service provider or an affiliate,
reasonably expects to receive $1,000 or more in compensation for
performing one or more services described pursuant to paragraph
(c)(1)(iii)(A) through (C) of this section provided for by the contract
or arrangement with the covered plan.
(ix) Exemption for responsible plan fiduciary. Pursuant to section
408(a) of the Act, the restrictions of section 406(a)(1)(C) and (D) of
the Act shall not apply to a responsible plan fiduciary,
notwithstanding any failure by a covered service provider to disclose
information required by paragraph (c)(1)(iv) or (vi) of this section,
if the following conditions are met:
(A) The responsible plan fiduciary did not know that the covered
service provider failed or would fail to make required disclosures and
reasonably believed that the covered service provider disclosed the
information required by paragraph (c)(1)(iv) or (vi) of this section;
(B) The responsible plan fiduciary, upon discovering that the
covered service provider failed to disclose the required information,
requests in writing that the covered service provider furnish such
information;
(C) If the covered service provider fails to comply with such
written request within 90 days of the request, then the responsible
plan fiduciary notifies the Department of Labor of the covered service
provider's failure, in accordance with paragraph (c)(1)(ix)(E) of this
section;
(D) The notice shall contain the following information--
(1) The name of the covered plan;
(2) The plan number used for the covered plan's Annual Report;
(3) The plan sponsor's name, address, and EIN;
(4) The name, address, and telephone number of the responsible plan
fiduciary;
(5) The name, address, phone number, and, if known, EIN of the
covered service provider;
(6) A description of the services provided to the covered plan;
(7) A description of the information that the covered service
provider failed to disclose;
(8) The date on which such information was requested in writing
from the covered service provider; and
(9) A statement as to whether the covered service provider
continues to provide services to the plan;
(E) The notice shall be filed with the Department not later than 30
days following the earlier of--
(1) The covered service provider's refusal to furnish the
information requested by the written request described in paragraph
(c)(1)(ix)(B) of this section; or
(2) 90 days after the written request referred to in paragraph
(c)(1)(ix)(B) of this section is made;
[[Page 41638]]
(F) The notice required by paragraph (c)(1)(ix)(C) of this section
shall be sent to the following address: U.S. Department of Labor,
Employee Benefits Security Administration, Office of Enforcement, 200
Constitution Ave., NW., Suite 600, Washington, DC 20210; or may be sent
electronically to [email protected]; and
(G) The responsible plan fiduciary, following discovery of a
failure to disclose required information, shall determine whether to
terminate or continue the contract or arrangement. In making such a
determination, the responsible plan fiduciary shall evaluate the nature
of the failure, the availability, qualifications, and cost of
replacement service providers, and the covered service provider's
response to notification of the failure.
(x) Preemption of State law. Nothing in this section shall be
construed to supersede any provision of State law that governs
disclosures by parties that provide the services described in this
section, except to the extent that such law prevents the application of
a requirement of this section.
(xi) Internal Revenue Code. Section 4975(d)(2) of the Code contains
provisions parallel to section 408(b)(2) of the Act. Effective December
31, 1978, section 102 of the Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 214 (2000 ed.), transferred the authority of the Secretary
of the Treasury to promulgate regulations of the type published herein
to the Secretary of Labor. All references herein to section 408(b)(2)
of the Act and the regulations thereunder should be read to include
reference to the parallel provisions of section 4975(d)(2) of the Code
and regulations thereunder at 26 CFR 54.4975-6.
(xii) Effective date. Paragraph (c) of this section shall be
effective on July 16, 2011. Paragraph (c)(1) of this section shall
apply to contracts or arrangements between covered plans and covered
service providers as of the effective date, without regard to whether
the contract or arrangement was entered into prior to such date; for
contracts or arrangement entered into prior to the effective date, the
information required to be disclosed pursuant to paragraph (c)(1)(iv)
of this section must be furnished no later than the effective date.
(2) Welfare plan disclosure. [Reserved]
(3) Termination of contract or arrangement. No contract or
arrangement is reasonable within the meaning of section 408(b)(2) of
the Act and paragraph (a)(2) of this section if it does not permit
termination by the plan without penalty to the plan on reasonably short
notice under the circumstances to prevent the plan from becoming locked
into an arrangement that has become disadvantageous. A long-term lease
which may be terminated prior to its expiration (without penalty to the
plan) on reasonably short notice under the circumstances is not
generally an unreasonable arrangement merely because of its long term.
A provision in a contract or other arrangement which reasonably
compensates the service provider or lessor for loss upon early
termination of the contract, arrangement, or lease is not a penalty.
For example, a minimal fee in a service contract which is charged to
allow recoupment of reasonable start-up costs is not a penalty.
Similarly, a provision in a lease for a termination fee that covers
reasonably foreseeable expenses related to the vacancy and reletting of
the office space upon early termination of the lease is not a penalty.
Such a provision does not reasonably compensate for loss if it provides
for payment in excess of actual loss or if it fails to require
mitigation of damages.
* * * * *
Signed at Washington, DC, this 6th day of July, 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2010-16768 Filed 7-15-10; 8:45 am]
BILLING CODE 4510-29-P