[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Rules and Regulations]
[Pages 5631-5659]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-2262]



[[Page 5631]]

Vol. 77

Friday,

No. 23

February 3, 2012

Part II





 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; Final Rule

Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules 
and Regulations

[[Page 5632]]


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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: Final rule.

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SUMMARY: This document contains a final regulation under the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) requiring 
that certain service providers to pension plans disclose information 
about the service providers' compensation and potential conflicts of 
interest. These disclosure requirements are established as part of a 
statutory exemption from ERISA's prohibited transaction provisions. 
This regulation will affect pension plan sponsors and fiduciaries and 
certain service providers to such plans.

DATES: Effective Date: The final rule is effective on July 1, 2012.

FOR FURTHER INFORMATION CONTACT: Fil Williams or Allison Wielobob, 
Office of Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

1. General

    In recent years, the Department has undertaken a series of 
regulatory initiatives to ensure that employee benefit plan 
fiduciaries, as well as plan participants and beneficiaries, obtain 
comprehensive information about the services that are provided to 
employee benefit plans, and the cost of those services.\1\ Today, the 
Department is publishing in the Federal Register a final rule 
concerning the disclosures that must be furnished to plan fiduciaries 
in order for a contract or arrangement for plan services to be 
``reasonable,'' as required by ERISA section 408(b)(2). A proposed rule 
was published in December 2007 (72 FR 70988).\2\ Following review of 
public comments on the proposal and testimony presented at the 
Department's 2008 public hearing,\3\ the Department published an 
interim final rule in the Federal Register on July 16, 2010 (75 FR 
41600). Both the proposal and the interim final rule required that 
reasonable contracts or arrangements between employee pension 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 
Department believes that plan fiduciaries need this information, when 
selecting and monitoring service providers, to satisfy their fiduciary 
obligations under ERISA section 404(a)(1) 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.
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    \1\ The ``408(b)(2)'' regulation finalized by the Department in 
this Notice addresses disclosures that must be furnished before plan 
fiduciaries enter into, extend or renew contracts or arrangements 
for services to certain pension plans. The Department also 
implemented changes to the information that must be reported 
concerning service provider compensation as part of the Form 5500 
Annual Report. These changes to Schedule C of the Form 5500 
complement this final rule by assuring that plan fiduciaries have 
the information they need to monitor service providers consistent 
with their duties under ERISA section 404(a)(1). See 72 FR 64731; 
see also frequently asked questions on Schedule C, available on the 
Department's Web site at http://www.dol.gov/ebsa. Finally, the 
Department published a final rule in October 2010 requiring the 
disclosure of specified plan and investment-related information, 
including fee and expense information, to participants and 
beneficiaries of participant-directed individual account plans. See 
75 FR 64910.
    \2\ A notice of proposed rulemaking was published in the Federal 
Register (72 FR 70988) on December 13, 2007. On the same day, the 
Department also published, separately, a proposed class exemption 
from the restrictions of ERISA section 406(a)(1)(C) in the Federal 
Register (72 FR 70893). For ease of reference, the exemptive relief 
for fiduciaries was incorporated into the interim final rule; the 
final rule continues to incorporate the class exemption.
    \3\ Public comments on the proposed regulation, as well as 
supplemental materials submitted in connection with the Department's 
March 31 and April 1, 2008, public hearing, are available on the 
Department's Web site at http://www.dol.gov/ebsa.
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2. Public Comments on Interim Final Regulation

    Commenters on the December 2007 proposed regulation raised a number 
of technical issues, which persuaded the Department to make significant 
changes to the regulation. Because of these changes, the Department 
published the regulation in July 2010 as an interim final rule and 
invited comments from interested persons on all aspects of the rule. In 
response to this invitation, the Department received 45 written 
comments from a variety of persons, including plan sponsors, 
fiduciaries, service providers, financial institutions, and industry 
representatives of employee benefit plans and participants. These 
comments are available for review under ``Public Comments'' on the 
``Laws and Regulations'' page of the Department's Employee Benefits 
Security Administration Web site at http://www.dol.gov/ebsa.
    Set forth below is an overview of the final regulation and the 
public comments received on the Department's interim final regulation.

B. Overview of Final Regulation and Public Comments

    The Department's final regulation retains the basic structure of 
the proposal and interim final rule 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.\4\
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    \4\ See 29 CFR 2550.408b-2.
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    The interim final rule, as modified in this final rule, amends the 
regulation at 29 CFR 2550.408b-2(c) to add new conditions to the 
meaning of a ``reasonable'' contract or arrangement for covered plans. 
Previously, this paragraph stated only that a contract or arrangement 
is not reasonable unless it permits the plan to terminate without 
penalty on reasonably short notice. In publishing the July 2010 interim 
final rule, the Department added a requirement 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

[[Page 5633]]

fiduciary.'' The regulation defines this term 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 final rule published today reflects several modifications to 
the interim final rule. For example, as discussed in detail below, the 
final rule conforms the investment-related disclosure requirements to 
the Department's recently finalized participant-level disclosure 
regulation, at 29 CFR 2550.404a-5 (75 FR 64910, Oct. 20, 2010) (the 
``participant-level disclosure regulation''), and requires more 
specific information concerning ``indirect'' compensation that will be 
received by a covered service provider. The Department has retained 
most of the disclosures required by the interim final rule, subject to 
minor technical modifications, explained below. A comprehensive 
analysis of these disclosures, and how they differ from those contained 
in the Department's December 2007 proposed rule, is included in the 
Supplementary Information published with the interim final rule.\5\ The 
discussion below focuses on the final rule and how it has been modified 
in response to comments on the interim final rule.
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    \5\ See 75 FR 41600.
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    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 plan 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,\6\ Table 2 below depicts an 
accounting statement showing the Department's assessment of the 
benefits and costs associated with the final rule. The estimates vary 
from those in the interim final rule by updating the analysis to 
reflect 2008 Form 5500 data (the latest available data) and 2011 labor 
rates.
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    \6\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

                                            Table 1--Accounting Table
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                                                                Primary                   Discount      Period
                          Category                              estimate   Year dollar      rate       covered
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Benefits:
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.
The Department believes that the non-quantified benefits are substantial and exceed the quantified costs of the
 rule. A detailed analysis of the non-quantified benefits exceeding the quantified costs is contained in the
 impact analysis of the July 16, 2010 interim final regulation. The Department is confident that the benefits of
 the final rule exceed the costs.
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Costs:
    Annualized Monetized ($millions/year)...................        $63.7         2011           7%    2012-2021
                                                                     58.9         2011           3%    2012-2021
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Note: Quantified 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 the Department if the service provider fails to comply with the request.
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Transfers...................................................                    Not Applicable
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1. General

    The final regulation amends paragraph (c) of Sec.  2550.408b-2 by 
moving, without change, the original provisions of paragraph (c) to a 
newly designated paragraph (c)(3) and adding new paragraphs (c)(1) and 
(c)(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) is reserved 
for future guidance concerning the disclosure requirements for welfare 
plans.\7\
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    \7\ This separate initiative, including the Department's 
December 2010 public hearing, is discussed below.
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    Paragraph (c)(1)(i) has not changed from the interim final rule. It 
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 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 compensation being paid for such 
services, and potential conflicts of interest that might affect the 
quality of the provided services.\8\
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    \8\ See, e.g., Field Assistance Bulletin 2002-3 (Nov. 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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[[Page 5634]]

    The general paragraph in section (c)(1)(i) of the final rule goes 
on to provide, as in the interim final rule, that the rule's disclosure 
requirements are independent of a fiduciary's obligations under ERISA 
section 404.\9\ A few commenters on the interim final rule requested 
that the Department more directly address the treatment, for ERISA 
section 404 purposes, of information that is requested by the 
responsible plan fiduciary, but that is not specifically required from 
the covered service provider under the final rule. These commenters are 
concerned that responsible plan fiduciaries may believe that they need 
additional information, which a service provider is not willing to 
furnish, to satisfy their obligations under ERISA section 404 to 
prudently select and monitor plan service providers. It is the view of 
the Department that if a plan fiduciary needs particular information to 
make an informed decision when selecting or monitoring a plan service 
provider, then ERISA section 404's duty of prudence requires that 
fiduciary to request such information. If the service provider fails or 
refuses to furnish the requested information, then ERISA section 404 
may preclude the plan fiduciary from entering into (or continuing) the 
service contract or arrangement. The disclosure requirements of the 
final rule are independent of a fiduciary's obligations under ERISA 
section 404.
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    \9\ Two commenters on the interim final rule suggested that the 
final rule should explicitly state that compliance does not provide 
relief from fiduciary obligations under ERISA section 404. Such a 
provision was already included in the interim final rule, and has 
not been removed or revised for purposes of the final rule.
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    Moreover, the final rule's disclosure requirements should be 
construed broadly to ensure that responsible plan fiduciaries base 
their review of a service contract or arrangement on comprehensive 
information.

2. Scope--Covered Plans

    Paragraph (c)(1)(ii) defines a ``covered plan'' to mean, with 
certain exceptions, 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)). A ``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. For purposes of the final 
rule, paragraph (c)(1)(ii) includes an additional exclusion from the 
definition of ``covered plan.'' The Department was persuaded by 
commenters on the interim final rule to exclude all or that part of a 
Code section 403(b) plan (hereafter ``403(b) plan'') that consists 
exclusively of ``frozen'' contracts or accounts, as described in the 
Department's Field Assistance Bulletins addressing the limited 
application of the annual reporting requirements to such contracts or 
accounts.\10\ Plan sponsors and fiduciaries likely would be unable to 
comply with this rule because they often have no dealings with the 
relevant plan service providers and are unable to obtain information 
about these contracts and accounts. Accordingly, paragraph (c)(1)(ii) 
of the final rule now provides that, in the case of a Code section 
403(b) plan subject to Title I of ERISA, the ``covered plan'' would not 
include annuity contracts and custodial accounts described in section 
403(b) of the Code with respect to which the plan sponsor ceased to 
have any obligation to make contributions (including employee salary 
reduction contributions) and in fact ceased making contributions to 
such contracts or accounts for periods before January 1, 2009. Further, 
the contract or account has to have been issued to a current or former 
employee before January 1, 2009; all the rights and benefits under the 
contract or account have to be legally enforceable against the insurer 
or custodian by the individual owner of the contract or account without 
any involvement by the employer; and such individual owner has to be 
fully vested in the contract or account.
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    \10\ See Field Assistance Bulletins 2010-01 (Feb. 17, 2010) and 
2009-02 (July 20, 2009).
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    One commenter requested that the Department clarify that health 
savings accounts are not ``covered plans.'' The Department notes that 
health savings accounts are not pension plans within the meaning of 
ERISA section 3(2)(A) and generally are not employee benefit plans 
within the meaning of ERISA section 3(3), when employer involvement 
with the accounts is limited. Therefore, a health savings account would 
not be a ``covered plan'' for purposes of the final rule. See the 
Department's discussion of health savings accounts and ERISA section 
3(2)(A) in Field Assistance Bulletins 2004-1 and 2006-02.\11\
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    \11\ See Field Assistance Bulletins 2004-1 (April 7, 2004) and 
2006-02 (Oct. 27, 2006).
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    Another commenter asked whether the definition of a covered plan 
would include a plan that provides benefits only to a business owner 
and his or her spouse, such as a Keogh or ``HR-10'' plan. The final 
rule describes a ``covered plan'' as a pension plan within the meaning 
of ERISA section 3(2)(A), which is an ``employee benefit plan'' under 
section 3(3) subject to Title I. The Department's existing regulations 
at 29 CFR 2510.3-3 clarify the definition of ``employee benefit plan'' 
in section 3(3) for purposes of Title I coverage.\12\ Under such 
regulations, the term ``employee benefit plan'' does not include any 
plan, including a pension plan, under which no employees are 
participants in the plan (referred to therein as ``common law 
employees''). Section 2510.3-3(c) provides that an individual and his 
or her spouse are not ``employees'' with respect to a trade or 
business, incorporated or unincorporated, which is wholly owned by the 
individual and his or her spouse. Nor does ``employee'' include a 
partner in a partnership and his or her spouse with respect to the 
partnership. For example, a ``Keogh'' or ``H.R. 10'' plan under which 
only partners or only a sole proprietor are plan participants is not an 
``employee benefit plan'' subject to Title I. Thus, under the final 
rule, a pension plan without ``employees'' who are participants in the 
plan, as defined in Sec.  2510.3-3(c), would not be a ``covered plan.''
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    \12\ See also Raymond B. Yates, M.D., P.C. Profit Sharing Plan 
v. Hendon, 541 U.S. 1 (2004).
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3. Scope--Covered Service Provider

    The final rule, in paragraph (c)(1)(iii)(A), (B), and (C), covers 
the same categories of service providers as the interim final rule. 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 the final rule.\13\ A service 
provider will

[[Page 5635]]

be covered even if some or all of the services provided pursuant to the 
contract or arrangement are performed (or some or all of the 
compensation for such services is received) by affiliates of the 
covered service provider or subcontractors. The limitation contained in 
paragraph (c)(1)(iii)(D)(1) ensures that services providers do not 
themselves, separately, 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.
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    \13\ Some commenters on the interim final rule suggested that 
$1,000 is not an appropriate threshold for covered service 
providers. Some believe that $1,000 is too low, because it will 
subject relatively insignificant arrangements to the required 
disclosures, and suggested that $2,500 or $5,000 would be more 
appropriate. Others, however, argued that $1,000 is too high and 
will adversely affect small plans, many of which are likely to have 
smaller service arrangements (for less than $1,000) and less 
sophistication and bargaining power to obtain detailed information 
about such arrangements. Some commenters argued that the standard 
should be tied to a percentage of plan assets, subject to a cost-of-
living adjustment, or conformed to Form 5500 Schedule C standards. 
The Department was not persuaded to revise this provision and 
believes that $1,000 strikes an appropriate balance between these 
competing concerns. Some commenters asked the Department to more 
specifically delineate the time period over which the $1,000 must be 
measured, for example, over a calendar or plan year or during the 
term of the contract. The Department notes that the focus is on 
whether $1,000 is expected to be received in connection with 
providing the services specified in the contract, regardless of 
whether compensation is expected to be received in a particular year 
or during the stated term of the contract. Some compensation, for 
example, trailing commissions, may be received after the services 
have been furnished, but still be ``in connection with'' those 
services. In response to some expressed concerns, the Department 
cautions parties against attempting to structure contracts for 
ongoing services specifically to avoid the $1,000 threshold. In 
determining compliance with the threshold, the Department will look 
to the substance, rather than form, of the contract or arrangement 
between the plan and service provider(s).
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    The first category of covered service providers, described 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, as in the interim final rule: 
Paragraph (1) includes ERISA fiduciary services provided directly to 
the covered plan; paragraph (2) includes ERISA fiduciary services 
provided to an investment contract, product, or entity that holds plan 
assets 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); and paragraph (3) includes services provided directly to the 
covered plan as an investment adviser registered under either the 
Advisers Act or State law.
    The second category of covered service providers, described in 
paragraph (c)(1)(iii)(B), includes providers of recordkeeping services 
or brokerage services to a covered plan that is an ERISA section 3(34) 
individual account plan 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.
    The third category of covered service providers, described in 
paragraph (c)(1)(iii)(C), includes those providing specified services 
to the covered plan when the covered service provider (or an affiliate 
or subcontractor) reasonably expects to receive ``indirect'' 
compensation or certain payments from related parties. As discussed 
below, the final rule defines the terms ``affiliate,'' ``indirect 
compensation,'' and ``subcontractor'' in paragraph (c)(1)(viii). The 
services set forth in this category, which have not changed from the 
interim final rule, 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,\14\ investment advisory (for plan or participants), legal, 
recordkeeping, securities or other investment brokerage, third party 
administration, or valuation services provided to the covered plan.
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    \14\ One commenter on the interim final rule requested 
clarification that insurance brokerage services were included in 
this category; the commenter explained, for example, that insurance 
brokers often are involved in selling pension plan arrangements, 
especially to small plans. The Department does intend that such 
insurance services are included in this category of covered service 
providers.
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    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)).
    Paragraph (c)(1)(iii)(D) clarifies the disclosure obligations of 
multiple parties within an arrangement for plan services. The party 
entering into the contract or arrangement with the covered plan is the 
covered service provider responsible for making the rule's disclosures, 
even if other parties perform some of the services.\15\ For example, in 
cases when a ``bundled'' arrangement of multiple services is offered to 
the covered plan, only one service provider would need to furnish the 
required disclosures for the bundled services. For example, a 
recordkeeper (Recordkeeper) who enters into a contract with a covered 
plan to furnish specified recordkeeping services and to make available 
a platform of investments may outsource some of the recordkeeping and 
plan administration services, and pay transaction-based compensation, 
to an affiliated third party administrator (TPA). The TPA does not have 
any separate contract or arrangement with the covered plan. Although 
both the Recordkeeper and the TPA provide services that are described 
in the categories of covered service providers under the final rule 
(the Recordkeeper under paragraph (c)(1)(iii)(B) and the TPA under 
paragraph (c)(1)(iii)(C)), only the Recordkeeper is the covered service 
provider. The Recordkeeper is the ``covered'' service provider because 
he or she is the party entering into the service contract or 
arrangement with the covered plan.
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    \15\ The final rule should not be interpreted, however, as 
requiring that any services which otherwise would be provided 
separately must be packaged together pursuant to one contract or 
arrangement. In many cases, more than one service provider will 
enter into a contract or arrangement with a covered plan, and, in 
that case, there may be more than one ``covered'' service provider, 
whose separate contract or arrangement with the covered plan must 
comply with the final rule.
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    Multiple service providers that furnish services pursuant to a 
single contract or arrangement with a covered plan may agree among 
themselves who will enter into the contract or arrangement with the 
covered plan and be the covered service provider. The other service 
providers may be affiliates of or subcontractors to the covered service 
provider; and covered service providers' disclosures would reflect 
their status in accordance with the final rule.

4. Initial Disclosure Requirements

    The final rule continues to require that covered service providers 
furnish specified disclosures to responsible plan fiduciaries in 
writing.\16\ As discussed in detail below, these disclosures generally 
must be furnished reasonably in advance of entering into, or extending 
or renewing, the contract or arrangement for services. The disclosed 
information will assist plan fiduciaries in understanding the services 
and in

[[Page 5636]]

assessing the reasonableness of the compensation, direct and indirect, 
that the service provider will receive.
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    \16\ Consistent with the Department's position in the interim 
final rule, although required information must be disclosed ``in 
writing,'' the final rule does not require that a formal contract or 
arrangement itself be in writing or that any representations 
concerning the obligations of the covered service provider be 
included in such written contract or arrangement.
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a. Description of Services
    Paragraph (c)(1)(iv)(A) of the final rule requires that the covered 
service provider describe the services to be provided to the covered 
plan pursuant to the contract or arrangement (but not including certain 
non-fiduciary services to an investment product, contract, or entity in 
which the covered plan invests, as described in paragraph 
(c)(1)(iii)(A)(2) of the final rule). This paragraph has not changed 
from the interim final rule.
    The description of services should be clear and understandable to 
the responsible plan fiduciary. In the preamble to the interim final 
rule, the Department explained that a detailed description of the 
services may not be necessary when the parties to the contract or 
arrangement already understand the nature of the services. Some 
commenters on the interim final rule pointed out that they do not 
believe all plan fiduciaries have a basic understanding of plan 
services. They recommended that the final rule explicitly define the 
level of detail necessary for a description of services and perhaps 
require ``plain English'' disclosures, model language, or a ``check the 
box'' format. The Department has not included additional standards for 
the description of services. As noted earlier, and consistent with the 
Department's position in the interim final rule, responsible plan 
fiduciaries have a duty to carefully review the information they 
receive when entering into a contract or arrangement for plan services. 
This regulation requires that responsible plan fiduciaries receive the 
basic information needed to make informed decisions about service costs 
and potential conflicts of interest. If responsible plan fiduciaries 
need assistance in understanding any information furnished by the 
service provider, as a matter of prudence, they should request 
assistance, either from the service provider or elsewhere.
    A few commenters on the interim final rule asked whether a covered 
service provider must disclose only the services that make the service 
provider a ``covered'' service provider. The final rule provides that a 
covered service provider must describe all services that will be 
provided to the covered plan ``pursuant to the contract or 
arrangement[.]'' This includes services that will be performed by its 
affiliates and subcontractors pursuant to the contract or arrangement. 
Thus, a covered service provider may need to disclose services beyond 
those that make it a ``covered'' service provider.
b. Status of Covered Service Providers, Affiliates, and Subcontractors
    Paragraph (c)(1)(iv)(B) of the final rule 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 (within the 
meaning of section 3(21) of ERISA); 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. If a service provider will, or reasonably expects to, 
provide services both as a fiduciary and a registered investment 
adviser, the statement must reflect both of these roles. This paragraph 
has not changed from the interim final rule except that, for 
clarification purposes, the parenthetical ``within the meaning of 
section 3(21) of the Act'' was added to modify use of the term 
``fiduciary'' for this purpose.
    Two commenters on the interim final rule suggested that covered 
service providers should be required to state affirmatively whether or 
not they will be providing services as an ERISA fiduciary or a 
registered investment adviser. The Department declined to accept this 
suggestion, because statements explaining that a service provider will 
not be providing services as an ERISA fiduciary or as a registered 
investment adviser may be more confusing than helpful to responsible 
plan fiduciaries. Another commenter requested that the Department 
affirm that formal agreements stating whether a person is an ERISA 
fiduciary are not dispositive of whether the person actually is a 
fiduciary by virtue of a factual analysis of the functions performed. 
The Department agrees that a formal agreement that a person is not a 
fiduciary is not dispositive. The definition of ``fiduciary'' in ERISA, 
as set forth in section 3(21), is based on a person's actual functions, 
authority and responsibility.\17\
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    \17\ The Department issued a proposed amendment to the 
regulation on fiduciary investment advice at 29 CFR 2510.3-21. Among 
the parties treated by the proposal as ERISA fiduciaries are persons 
who provide investment advice (as defined in the proposal) for a 
fee, and who represent or acknowledge that they are acting as an 
ERISA fiduciary with respect to providing such advice. See 75 FR 
65263 (Oct. 22, 2010). See also 29 CFR 2509.75-8. The Department 
recently announced its decision to re-propose this amendment as a 
response, in part, to requests from the public, including members of 
Congress, that the agency allow an opportunity for additional input 
(Sept. 19, 2011).
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c. Disclosure of Compensation
    Paragraph (c)(1)(iv)(C) of the final rule requires the covered 
service provider to disclose comprehensive information about the 
compensation that will be received in connection with the services 
provided pursuant to the contract or arrangement. This paragraph, 
including paragraphs (1) through (4), is structured the same as in the 
interim final rule. One substantive change, discussed below, has been 
made to the disclosures required for the receipt of ``indirect'' 
compensation. Also, cross references have been modified as necessary to 
reflect the reordering of paragraphs (c)(1)(iv)(E) through (G). 
Otherwise, the final rule retains the same concepts as the interim 
final rule with respect to what types of compensation have to be 
disclosed for purposes of a reasonable contract or arrangement.
    Paragraph (c)(1)(iv)(C)(1) requires a description of all direct 
compensation, 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 final rule, ``direct'' compensation 
is compensation received directly from the covered plan. See paragraph 
(c)(1)(viii)(B)(1) of the final rule. This paragraph has not changed 
from the interim final rule. In response to comments raised on the 
interim final rule, the Department notes that ``direct'' compensation 
includes compensation that initially is paid by the plan sponsor, but 
who then is reimbursed from the plan.\18\ Parties cannot avoid this 
disclosure requirement by creating intermediary payments and arguing 
that, as a technical matter, such payments do not constitute 
``compensation'' for purposes of the final rule. The Department also 
confirms, as requested by a commenter,

[[Page 5637]]

that ``direct'' compensation, described in the final rule as coming 
from the covered plan, includes compensation that is paid directly from 
participants' and beneficiaries' accounts.
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    \18\ The Department notes that such reimbursement could be 
appropriate if there was a clear understanding or agreement, as a 
result of plan language or otherwise, on or before the time the 
services were performed, that the plan would reimburse the 
reasonable expenses paid for by the plan sponsor. However, once the 
obligation to reimburse arises but is not fulfilled, the monies then 
outstanding may become an extension of credit to the plan by the 
sponsor. Prohibited Transaction Exemption 80-26 (45 FR 28545; April 
29, 1980; amended at 71 FR 17917; April 7, 2006) may provide relief 
for such an extension of credit, depending upon the facts and 
circumstances.
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    Paragraph (c)(1)(iv)(C)(2) requires a description of all indirect 
compensation 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 
final rule, ``indirect'' compensation is compensation received from any 
source other than the covered plan, the plan sponsor, the covered 
service provider, or an affiliate. Compensation received from a 
subcontractor is indirect compensation, unless it is received in 
connection with services performed under the subcontractor's contract 
or arrangement described in paragraph (c)(1)(viii)(F). A non-
substantive revision to this definition, in paragraph 
(c)(1)(viii)(B)(2) of the final rule, is discussed below.
    The covered service provider also must identify the services for 
which the indirect compensation will be received, and the payer of the 
indirect compensation. In addition, this paragraph has been modified 
from the interim final rule to include one more requirement: the 
covered service provider must identify not only the payer of the 
indirect compensation, but also describe the arrangement between the 
payer and the covered service provider, an affiliate, or a 
subcontractor, as applicable, pursuant to which such indirect 
compensation is paid.
    This new requirement will illustrate for the responsible plan 
fiduciary potential conflicts of interest on the part of the covered 
service provider (or an affiliate or subcontractor) resulting from the 
receipt of indirect compensation. The covered service provider must 
describe its arrangement with the payer of indirect compensation so 
that the responsible plan fiduciary can analyze why the payer, 
generally an unrelated third party, is compensating the covered service 
provider in connection with the covered service provider's contract or 
arrangement with the covered plan. The proposed rule, published in 
December 2007, contained a series of specific conflict of interest 
disclosure provisions. These provisions were eliminated in the interim 
final rule, which relied instead on fuller disclosure of the 
circumstances under which the covered service provider will be 
receiving compensation from parties other than the plan (or plan 
sponsor). For instance, the interim final rule required identification 
of such parties, in addition to the compensation expected to be 
received. Although one commenter on the interim final rule suggested 
that the Department should reinstate the conflict of interest 
disclosures from the proposal, the Department continues to believe, for 
the reasons stated in the preamble to the interim final rule, that the 
scope of the proposed conflict of interest requirements, especially as 
to ``potential'' conflicts of interest, was inappropriately broad in 
the context of this regulation. The Department determined that the most 
effective way to achieve disclosure of conflicts of interest for 
purposes of the final rule is to inform plan fiduciaries of what 
compensation will be received and from whom. However, the Department 
also is persuaded that a responsible plan fiduciary would benefit from 
an explanation of the arrangement between the parties that gives rise 
to the indirect compensation paid in connection with the covered plan's 
service contract or arrangement, and, accordingly, has provided for 
such a disclosure in the final rule.
    The Department intends that the concept of compensation to be 
received by a covered service provider, or its affiliates or 
subcontractors, ``in connection with'' a particular contract or 
arrangement for services be construed broadly. To the extent a covered 
service provider reasonably expects that compensation will be received, 
which is based in whole or in part on its service contract or 
arrangement with the covered plan, the compensation will be considered 
``in connection with'' such contract or arrangement. For example, a 
recent report pertaining to conflicts of interest prepared by the 
Department's Office of Inspector General \19\ identified a fact pattern 
in which a service provider had not disclosed that certain financial 
institutions subsidized the cost of attendance at a conference that the 
service provider offered for its clients. Specifically, to help defray 
the costs of the conference, plan sponsor attendees paid a registration 
fee of $850, while the financial institution paid a subsidy fee of 
$20,000. In this regard, it is the Department's view that, when a 
covered service provider is engaged to provide consulting services to a 
covered plan (or plans) and receives subsidies or other remuneration 
from financial institutions or other parties with respect to whom the 
service provider may be making recommendations to attending plan 
sponsors or representatives, such subsidies or remuneration would be 
compensation received ``in connection with'' the service provider's 
contract or arrangement with the covered plan.
---------------------------------------------------------------------------

    \19\ See ``EBSA Needs To Do More To Protect Retirement Plan 
Assets From Conflicts Of Interest'' (U.S. Department of Labor, 
Office of Inspector General, Office of Audit, Sept. 30, 2010).
---------------------------------------------------------------------------

    With respect to the requirement to describe arrangements between a 
covered service provider and a payer of indirect compensation, the 
Department notes that certain commenters expressed concerns about the 
ability of a broker-dealer to properly identify the payer of such 
compensation in advance of service arrangements involving securities 
purchased through brokerage windows, self-directed brokerage accounts, 
or similar arrangements. The Department understands these concerns and 
believes that descriptions of indirect compensation for this purpose 
may be expressed in general terms, provided that the description 
contains information that is sufficient to permit a responsible plan 
fiduciary to evaluate the reasonableness of such compensation in 
advance of the service arrangement. Therefore, to the extent that such 
information is unknown at the time the disclosures are made, the 
description need not identify the specific payer in advance of the 
service arrangement. Instead, the description may provide information 
that would allow the responsible plan fiduciary to compare the expected 
compensation with compensation that would be received by competing 
broker-dealers for similar investment services.
    Paragraph (c)(1)(iv)(C)(3) requires 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 the final rule 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 covered service provider also must identify the 
services for which such compensation will be paid and identify 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 regardless of whether such 
compensation also is disclosed pursuant to paragraph (c)(1)(iv)(C)(1) 
or (2) (direct or indirect compensation) or (c)(1)(iv)(E) or 
(c)(1)(iv)(F) (investment disclosure) of the final rule. The final rule 
further clarifies that this paragraph (c)(1)(iv)(C)(3) shall not apply 
to compensation received by an employee

[[Page 5638]]

from his or her employer on account of work performed by the employee. 
This paragraph has not changed from the interim final rule.
    Finally, paragraph (c)(1)(iv)(C)(4) requires a description of any 
compensation that the covered service provider, an affiliate, or a 
subcontractor reasonably expects to receive in connection with the 
termination of the contract or arrangement, and how any prepaid amounts 
will be calculated and refunded upon such termination. This paragraph 
has not changed from the interim final rule, except to the extent cross 
references to other sections of the final rule have been updated.
d. Disclosures Regarding Recordkeeping Services
    Paragraph (c)(1)(iv)(D) of the final rule requires disclosure 
concerning the cost to the covered plan of recordkeeping services, to 
the extent such services will be provided to the covered plan. This 
disclosure must be provided without regard to the disclosure of 
compensation pursuant to paragraph (c)(1)(iv)(C), (c)(1)(iv)(E), or 
(c)(1)(iv)(F) of the final rule. Specifically, if recordkeeping 
services, as defined in paragraph (c)(1)(viii)(D), will be provided to 
the covered plan, paragraph (1) requires 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. Paragraph (2) also 
requires that, 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, 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.
    This provision was added to the interim final rule to reflect 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 Department 
believes that, especially in the context of complicated service 
arrangements when a variety of services (including recordkeeping 
services) are provided to a covered plan, separate disclosure is 
necessary for fiduciaries to make informed evaluations of a covered 
plan's recordkeeping costs. Commenters on the interim final rule 
generally supported this requirement. Some commenters argued that this 
disclosure element would provide little value to responsible plan 
fiduciaries, especially to the extent it might appear to create a 
``cost'' for something that does not really have a cost. One commenter 
argued that it is insufficient to require only the separate disclosure 
of the cost of recordkeeping services, and that investment management 
and administrative services also should be separately disclosed. In 
consideration of the Department's rationale for including this 
provision, discussed in more detail in the preamble to the interim 
final rule, the Department was not persuaded by these commenters that 
the requirement should be eliminated or revised. Accordingly, this 
paragraph has not changed from the interim final rule, except to the 
extent that cross references have been updated as necessary.
    Commenters also requested a few clarifications concerning this 
requirement. For example, a couple of commenters are concerned that the 
definition of ``recordkeeping services'' (paragraph (c)(1)(viii)(D) of 
the final rule) is so broad that it will be difficult for responsible 
plan fiduciaries to make meaningful comparisons, especially to the 
extent the data provided will be in some cases mere estimates of the 
cost of recordkeeping services. The Department believes that this 
provision has been constructed to manage these concerns. First, the 
definition of ``recordkeeping services'' in the final rule is designed 
to be broad and provide a basic parameter for ensuring that providers 
of recordkeeping services understand when they will be covered service 
providers under paragraph (c)(1)(iii)(B) of the final rule. The 
Department does not want service providers to avoid this responsibility 
by narrowly defining the services that they provide. However, the 
Department understands that the breadth of this definition could create 
difficulty for responsible plan fiduciaries when comparing the 
recordkeeping services of different providers. Thus, the final rule (as 
in the interim final rule) requires as part of this paragraph 
(c)(1)(iv)(D) that the covered service provider include ``a detailed 
explanation of the recordkeeping services that will be provided to the 
covered plan.'' This detailed explanation will better enable the 
responsible plan fiduciary to understand precisely what is included in 
a particular service provider's ``recordkeeping services'' such that 
comparisons among service providers' offers can be made. Second, by 
requiring ``an explanation of the methodology and assumptions used to 
prepare the estimate[,]'' this provision enhances the ability of 
responsible plan fiduciaries to analyze and compare estimates. A 
responsible plan fiduciary who understands why, and how, a particular 
service provider prepared an estimate will be better able to compare 
that estimate to other service providers' disclosures concerning the 
cost of recordkeeping services.
    Finally, a few commenters asked the Department to take definitive 
positions on whether certain specified services constitute 
``recordkeeping services'' for purposes of this provision. Although the 
Department declines to make general pronouncements concerning these 
highly contextual and fact-specific questions, the Department again 
notes that the final rule broadly defines ``recordkeeping services.'' 
Regardless of how a service arrangement is structured or funded, plan 
fiduciaries need to know when such administrative services are being 
provided and how much they contribute to the total cost of plan 
services.
e. Investment Disclosure--Fiduciary Services
    Paragraph (c)(1)(iv)(E) of the final rule (previously paragraph 
(c)(1)(iv)(F) in the interim final rule) requires additional investment 
disclosures from covered service providers described in paragraph 
(c)(1)(iii)(A)(2) (providers of fiduciary services to an investment 
contract, product, or entity that holds plan assets and in which the 
covered plan has a direct equity investment). The information set forth 
in paragraphs (c)(1)(iv)(E)(1) through (3) must be furnished for each 
investment contract, product, or entity 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

[[Page 5639]]

brokerage services (as described in paragraph (c)(1)(iii)(B)).\20\
---------------------------------------------------------------------------

    \20\ Several commenters on the interim final rule requested 
clarification concerning the meaning of ``unless such information is 
disclosed to the responsible plan fiduciary by a covered service 
provider providing recordkeeping services or brokerage services[.]'' 
Specifically, commenters were confused as to whether this language 
implies an affirmative obligation on the part of recordkeepers and 
brokers to provide this information, or whether duplicative 
disclosure is intended. The Department confirms that the ERISA 
fiduciary service provider to a plan asset vehicle has the 
obligation to furnish this investment information. This language is 
intended to avoid duplicative disclosure if, for some reason, the 
information already is disclosed to the responsible plan fiduciary 
by a recordkeeper or a broker. For instance, a recordkeeper or 
broker, separately, may agree with the ERISA fiduciary to furnish 
such information. In that case, the ERISA plan asset fiduciary would 
not also have to furnish the same information.
---------------------------------------------------------------------------

    The interim final rule required the disclosure of three categories 
of compensation information concerning such plan investments, as 
applicable: (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). These 
categories of investment-related information have been modified from 
the interim final rule, as discussed below, to better conform this 
provision of the final rule to the investment-related information 
required pursuant to the Department's participant-level disclosure 
regulation and to enhance the ability of the responsible plan fiduciary 
or covered plan administrator to comply with the participant-level 
disclosure regulation.
    Paragraph (c)(1)(iv)(E)(1) requires a description of any 
compensation that will be charged directly against an investment, such 
as commissions, sales loads, sales charges, deferred sales charges, 
redemption fees, surrender charges, exchange fees, accounts fees, and 
purchase fees; and that is not included in the annual operating 
expenses of the investment contract, product, or entity. Although this 
language has been modified from that used in paragraph (c)(1)(iv)(F)(1) 
of the interim final rule, the provision is intended to capture the 
same information; the Department merely revised the language to conform 
to the language used in a comparable provision of the participant-level 
disclosure regulation. Accordingly, the substance of the information 
required to be disclosed pursuant to this paragraph has not changed 
from the interim final rule.
    Paragraph (c)(1)(iv)(E)(2) requires a description of the annual 
operating expenses (e.g., expense ratio) if the return is not fixed 
\21\ and any ongoing expenses in addition to annual operating expenses 
(e.g., wrap fees, mortality and expense fees), or, for an investment 
contract, product, or entity that is a designated investment 
alternative, the total annual operating expenses expressed as a 
percentage and calculated in accordance with 29 CFR 2550.404a-5(h)(5). 
This first part of the requirement combines paragraphs (c)(1)(iv)(F)(2) 
and (3) from the interim final rule, requiring a description of both 
the annual operating expenses and, if applicable, any additional 
ongoing expenses. However, the latter part of this requirement is 
intended to provide consistency for parties that also are required to 
comply with the Department's participant-level disclosure regulation 
for designated investment alternatives in a participant-directed 
individual account plan. If an investment contract, product, or entity 
subject to this paragraph is a ``designated investment alternative'' 
(as defined in paragraph (c)(1)(viii)(C) of the final rule), then the 
covered service provider must disclose the total annual operating 
expenses for the designated investment alternative, calculated in 
accordance with 29 CFR 2550.404a-5(h)(5), rather than rely on the 
interim final rule's more general standards. This will ensure 
consistent disclosure and prevent confusion to the extent a covered 
service provider under this final rule otherwise may have had to 
disclose expense information for the same investment differently under 
the participant-level disclosure regulation. For investment contracts, 
products, or entities that are not designated investment alternatives, 
a covered service provider may continue to disclose annual operating 
expenses and any additional ongoing expenses, in accordance with the 
standards first introduced in the interim final rule. To avoid creating 
unnecessary cost and burden for disclosure with respect to investments 
that are not designated investment alternatives in a participant-
directed individual account plan, a covered service provider will not 
be required to calculate total annual operating expenses for such 
investments according to the participant-level disclosure regulation's 
definition.
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    \21\ A few commenters requested further guidance on how to 
determine if an investment's return is fixed. This determination 
should be made in the same manner as under the participant-level 
disclosure regulation. The preamble to the participant-level 
disclosure regulation provides that designated investment 
alternatives with fixed returns are those that provide a fixed or 
stated rate of return to the participant, for a stated duration, and 
with respect to which investment risks are borne by an entity other 
than the participant (e.g., insurance company). 75 FR 64910 (Oct. 
20, 2010).
---------------------------------------------------------------------------

    Paragraph (c)(1)(iv)(E)(3) also requires, for an investment 
contract, product, or entity that is a designated investment 
alternative, any other information or data about the designated 
investment alternative that is within the control of, or reasonably 
available to, the covered service provider and that is required for the 
covered plan administrator to comply with the disclosure obligations 
described in 29 CFR 2550.404a-5(d)(1) (the participant-level disclosure 
regulation). Although this information was not explicitly required in 
the interim final rule, the Department does not anticipate that it will 
create an undue burden on covered service providers, because the 
requirement applies only to designated investment alternatives, for 
which the same disclosures otherwise will have to be made by plan 
administrators pursuant to the participant-level disclosure regulation. 
The Department believes that this requirement will enhance compliance 
with the participant-level disclosure regulation by ensuring that a 
responsible plan fiduciary and, therefore, the covered plan's 
administrator, will obtain the investment-related information 
concerning designated investment alternatives that must be furnished to 
participants and beneficiaries. The Department does not intend to 
create a new or increased burden on a covered service provider, or 
require the covered service provider to obtain or prepare information 
that otherwise is not within the covered service provider's control or 
reasonably available to the covered service provider. For example, in 
the case of a recordkeeper that offers a platform of designated 
investment alternatives consisting of mutual funds, the recordkeeper 
could satisfy its obligations under this provision by passing through 
to the covered plan the prospectuses for such funds, in view of the 
fact that such disclosures would contain much of the required 
information and be reasonably available to the recordkeeper (the 
covered service provider).
    This provision does not require a covered service provider to 
furnish information from the plan sponsor, from

[[Page 5640]]

another unrelated service provider to the plan, or from the issuer of a 
designated investment alternative, unless it is reasonably available to 
the covered service provider. Accordingly, this requirement is limited 
to information or data that is within the control of, or reasonably 
available to, the covered service provider.
    Paragraph (c)(1)(iv)(E)(3), to the extent applicable, requires 
disclosure of information that the plan administrator will need in 
order to comply with its own disclosure obligations to participants 
under 29 CFR 2550.404a-5. This includes the following additional 
investment information about a designated investment alternative (an 
``alternative''): identifying information such as the name and type or 
category of the alternative (29 CFR 2550.404a-5(d)(1)(i)); performance 
data (29 CFR 2550.404a-5(d)(1)(ii)); benchmarks (29 CFR 2550.404a-
5(d)(1)(iii)); and fee and expense information for alternatives with 
respect to which the return is fixed (29 CFR 2550.404a-5(d)(1)(iv)(B)). 
The covered service provider already is required to disclose the fee 
and expense information described in 29 CFR 2550.404a-5(d)(1)(iv)(A)(1) 
and (2) pursuant to paragraphs (c)(1)(iv)(E)(1) and (2) of the final 
rule.
    Although the requirement in 29 CFR 2550.404a-5(d)(1)(v) to furnish 
an Internet Web site address falls on the covered plan's administrator, 
the covered service provider may have within its control, or reasonably 
available to it, some of the data that must be provided at the Web site 
address, such as the name of the investment alternative's issuer (29 
CFR 2550.404a-5(d)(1)(v)(A)); the alternative's objectives or goals (29 
CFR 2550.404a-5(d)(1)(v)(B)); the alternative's principal strategies 
and principal risks (29 CFR 2550.404a-5(d)(1)(v)(C)); and the 
alternative's portfolio turnover rate (29 CFR 2550.404a-5(d)(1)(v)(D)). 
The covered service provider would not be responsible for preparing the 
glossary required by 29 CFR 2550.404a-5(d)(1)(vi), as that is not 
specific information about a particular designated investment 
alternative.
    If the covered service provider has information about designated 
investment alternatives that fall within the participant-level 
disclosure regulation's special rules, contained in 29 CFR 2550.404a-
5(i), the covered service provider may have to furnish information 
necessary for the covered plan administrator to comply with such 
regulation's requirements for annuity options (29 CFR 2550.404a-
5(d)(1)(vii) and 29 CFR Sec.  2550.404a-5(i)(2)); employer securities 
(29 CFR 2550.404a-5(i)(1)); fixed-return investments (29 CFR 2550.404a-
5(i)(3)); and target date or similar funds (29 CFR 2550.404a-5(i)(4)). 
As set forth above, in each case, the covered service provider is 
responsible only for specific data about designated investment 
alternatives that is within the provider's control or reasonably 
available. Some of the information required pursuant to 29 CFR 
2550.404a-5 pertains to information that, although relevant to an 
investing participant or beneficiary, is not specific data about a 
particular designated investment alternative. Thus, for example, the 
covered service provider is not responsible for furnishing an Internet 
Web site address or for preparing cautionary statements designed to 
inform a plan's participant and beneficiaries. The covered service 
provider does not, by virtue of paragraph (c)(1)(iv)(E)(3), assume 
responsibility for obligations of the covered plan administrator, who 
continues to bear legal responsibility for the requirements of the 
participant-level disclosure regulation.\22\
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    \22\ Of course, as is recognized in the participant-level 
disclosure regulation, the covered plan administrator is permitted 
to retain a service provider to fulfill the plan administrator's 
obligations under the participant-level disclosure regulation.
---------------------------------------------------------------------------

f. Investment Disclosure--Recordkeeping and Brokerage Services
    Paragraph (c)(1)(iv)(F) of the final rule requires the same 
investment disclosure, discussed above, from covered service providers 
described in paragraph (c)(1)(iii)(B) (providers of recordkeeping 
services or brokerage services to an individual account plan that 
permits participants and beneficiaries to direct the investment of 
their accounts, if one or more designated investment alternatives will 
be made available in connection with such recordkeeping services or 
brokerage services). Paragraph (1) requires that such covered service 
providers furnish the additional information described in paragraph 
(c)(1)(iv)(E)(1) through (3) with respect to each designated investment 
alternative for which recordkeeping services or brokerage services will 
be provided pursuant to the contract or arrangement with the covered 
plan. Apart from updating cross references as necessary, paragraph (1) 
has not changed from the interim final rule.
    Several commenters on the interim final rule questioned statements 
in the preamble to the interim final rule and asked whether 
recordkeepers who make available a platform of investments must furnish 
the investment information for designated investment alternatives that 
are not on their platform. The commenters explained that sometimes a 
recordkeeper will administer and provide some level of recordkeeping 
services for off-platform investments as a concession to pension plan 
clients. These commenters argued that the direct relationship that 
exists between the responsible plan fiduciary and the issuer of these 
off-platform investments (which are separately selected by the plan 
fiduciary) is a more appropriate basis for requiring the provision of 
investment information from such issuer. The Department explained, in 
the preamble to the interim final rule, its view that this category of 
covered service providers encompasses service providers who provide 
recordkeeping or brokerage services that include designated investment 
alternatives independently selected by the responsible plan fiduciary. 
These ``off-platform'' investment alternatives may be included in the 
covered plan's investment options when the responsible plan fiduciary 
enters into a contract or arrangement with the recordkeeper or broker, 
or they may later be added. The Department continues to believe that 
these covered service providers are in the best position to furnish the 
required investment information. To the extent the covered service 
provider is not affiliated with the issuer of the designated investment 
alternative, the covered service provider may benefit from compliance 
with paragraph (2) of this paragraph (c)(1)(iv)(F).
    Paragraph (2) provides that a covered service provider may comply 
with this paragraph (c)(1)(iv)(F) by providing current disclosure 
materials of the issuer of the designated investment alternative, or 
information replicated from such materials, that include the 
information described in such paragraph, provided that three conditions 
are satisfied. First (paragraph (i)), the issuer cannot be an affiliate 
\23\ of the covered service provider. Second

[[Page 5641]]

(paragraph (ii)), the issuer must be a registered investment company, 
an insurance company qualified to do business in any State, an issuer 
of a publicly traded security, or a financial institution supervised by 
a State or federal agency. Finally, third (paragraph (iii)), the 
covered service provider must act in good faith and not know that the 
materials are incomplete or inaccurate, and furnish the responsible 
plan fiduciary with a statement that the covered service provider is 
making no representations as to the completeness or accuracy of such 
materials. The Department included this provision in recognition 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 that they represent; rather, they 
generally serve merely as intermediaries between plans and the issuers 
of the investment vehicles for purposes of furnishing such information. 
The final rule, like the interim final rule, enables them to comply 
with the regulation without having to vouch for the completeness and 
accuracy of such information.
---------------------------------------------------------------------------

    \23\ A few commenters on the interim final rule requested 
clarification that, even though the relief provided by this 
paragraph is available only for non-affiliated issuers, covered 
service providers still can pass through disclosure materials from 
affiliated issuers. These commenters believed that the provision 
could be read to imply that covered service providers must create 
separate, potentially different, disclosure materials for 
investments of affiliated issuers. The Department confirms that 
covered service providers may pass through disclosure materials from 
affiliated issuers; this provision was not intended to limit the 
ability of covered service providers to do so. However, covered 
service providers will be responsible for the content of the 
affiliated materials pursuant to this paragraph of the final rule.
---------------------------------------------------------------------------

    This paragraph has been modified from the interim final rule, which 
previously required that the disclosure materials must be regulated by 
a State or federal agency. The Department was persuaded by commenters 
that the ``pass through'' relief was too narrow when applied to only 
regulated disclosure materials. Commenters explained that disclosure 
materials for many common investments offered in pension plans, such as 
collective trusts, insurance general accounts, and guaranteed 
investment contracts, are not ``regulated'' as required by the interim 
final rule. Retaining this standard, commenters argued, might dissuade 
recordkeepers and brokers from offering these products on their 
platforms. Commenters also are concerned that responsible plan 
fiduciaries would expend considerable resources to find other 
recordkeepers or brokers willing to offer the products. Accordingly, 
the Department revised this provision of the final rule. Rather than 
focusing on the disclosure materials, paragraph (ii) now requires that 
the issuer of the designated investment alternative be regulated. 
Specifically, the issuer must be a registered investment company (i.e., 
by filing a registration statement with the Securities and Exchange 
Commission as required by the Investment Advisers Act of 1940), an 
insurance company qualified to do business in any State, an issuer of a 
publicly traded security, or a financial institution supervised by a 
State or federal agency. This provision focuses the requirement more 
narrowly on entities that are ``regulated'' in connection with their 
issuance of investment products, and allows the covered service 
provider to satisfy paragraph (c)(1)(iv)(F) by passing through these 
issuers' disclosure materials. Paragraph (iii) provides ``pass 
through'' relief solely for purposes of determining whether or not a 
contract or arrangement with a covered service provider falls within 
ERISA section 408(b)(2). The ``pass through'' provision does not 
provide relief from any other legal obligations or liabilities under 
ERISA or other applicable law.
    Paragraph (iii) also requires that the covered service provider 
furnish the responsible plan fiduciary with a statement that the 
covered service provider is making no representations as to the 
completeness or accuracy of such materials. This will ensure that the 
responsible plan fiduciary understands that these materials are merely 
being passed through and that the covered service provider is not, 
therefore, vouching for their completeness or accuracy. The Department 
does not intend that the covered service provider must furnish a 
separate statement for each item of investment disclosure material. 
Rather, the covered service provider could, for example, include the 
statement once in the service contract or arrangement, along with a 
description of the investment disclosure material(s) to which the 
statement applies.
    Other commenters requested that this provision be expanded to cover 
information from such regulated issuers that is consolidated or 
summarized into a user-friendly format. Otherwise, these commenters 
maintain, covered service providers will be more likely to pass through 
lengthy, technical disclosure documents, for example multiple 
Securities and Exchange Commission prospectus documents. The Department 
agrees that covered service providers should not be discouraged from 
presenting the required information in a more user-friendly format for 
responsible plan fiduciaries. Accordingly, covered service providers 
may rely on this provision if they merely are replicating information 
received from a regulated, unaffiliated issuer that the covered service 
provider does not know to be inaccurate or incomplete.
g. Manner of Receipt of Compensation
    Paragraph (c)(1)(iv)(G) of the final rule requires a description of 
the manner in which the compensation described in paragraph 
(c)(1)(iv)(C) through (F) of the final rule, as applicable, 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. This provision has not substantively changed 
from the interim final rule. However, this provision has been moved 
from paragraph (c)(1)(iv)(E) of the interim final rule to paragraph 
(c)(1)(iv)(G) of the final rule, and cross references have been updated 
throughout the final rule as necessary, to ensure that the manner of 
receipt of all compensation (including compensation received in 
connection with plan investments in paragraphs (c)(1)(iv)(E) and (F) of 
the final rule) is described.
h. Summary or Guide to Initial Disclosures; Format and Delivery
    In the preamble to the interim final rule, the Department requested 
comment on the format of disclosures required under the rule. Neither 
the proposal nor the interim final rule required covered service 
providers to disclose information in any particular format. Further, 
the preamble to the proposal specifically noted that covered service 
providers could use different documents from separate sources, as long 
as all of the documents, collectively, contained the required 
information. Commenters on the proposal disagreed as to whether this 
would lead to a cost-effective and meaningful presentation of the 
required information to responsible plan fiduciaries. In the preamble 
to the interim final rule, the Department explained that it had not 
determined whether it was feasible to provide specific and meaningful 
formatting standards. Accordingly, the Department requested comment on 
whether to revise the final rule to require a summary of, or guide to, 
the mandated disclosures, or to include other formatting requirements.
    Commenters on the interim final rule, as on the proposed rule, 
continued to disagree about the utility of, and feasibility of, 
requiring a summary or guide, or otherwise mandating any particular 
format for the required disclosures. Many commenters argued that the 
Department should retain the position taken in the proposal and the 
interim final rule, giving covered service providers flexibility to 
determine the format of their disclosures. These commenters expressed 
concern that a ``one-size-fits-all'' approach could not accommodate the 
tremendous variety of current pension plan service arrangements and 
likely changes in the future. They also believed that the costs

[[Page 5642]]

to pension plans, and the participants and beneficiaries of such plans, 
of such an approach will be significant. The commenters expressed 
concern that responsible plan fiduciaries would rely solely, and thus 
improperly, on the summary, rather than reviewing the fuller and more 
detailed disclosures required by the rule. These commenters also were 
concerned that requiring the comprehensive disclosures and a summary 
would simply result in unnecessarily duplicative disclosures. In 
addition, in the case of discrepancies between the two, questions may 
arise over which disclosures would govern. These commenters preferred 
that the Department retain the flexible position taken in the proposal 
and interim final rule or, at most, require covered service providers 
to furnish an index or ``roadmap'' to the disclosures. Commenters also 
suggested that any summary or other formatting requirement the 
Department may adopt be flexible and not mandate any particular 
language, formatting, or page limits.\24\
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    \24\ A few commenters on the interim final rule discussed, and 
disagreed on, whether a ``single document'' rule should be adopted, 
requiring that all disclosures be furnished in one document. The 
Department was convinced neither that such a requirement would be 
feasible and cost-effective for all service arrangements, nor that 
it would necessarily result in the most meaningful delivery of 
required information to responsible plan fiduciaries. The Department 
therefore declined to adopt such a requirement.
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    Other commenters, however, supported the addition of a summary 
disclosure, guide, or similar requirement. They argued that plan 
fiduciaries, especially those for small and medium-sized plans, often 
are overwhelmed by highly technical disclosures from separate sources, 
especially concerning plan investments. These commenters suggested 
placing the burden of organizing this information on covered service 
providers, who can do so more effectively and at less cost. Further, 
these commenters believe that the costs should not be overstated and 
are likely to be minimal following an initial transition to compliance 
with any new summary or other formatting requirement. These costs, they 
argued, would be greatly outweighed by the benefit of increased clarity 
to responsible plan fiduciaries. One commenter, for example, pointed 
out that fuller disclosure will not result in increased transparency if 
the information continues to be obscured in lengthy, technical 
documents. A few of these commenters suggested information that should 
be contained in a separate, summary disclosure requirement.\25\
---------------------------------------------------------------------------

    \25\ Commenters generally suggested, for example, that the 
Department focus on a summary of the rule's compensation information 
and information concerning designated investment alternatives, while 
cross referencing to assist fiduciaries in locating the primary 
information contained in other disclosures. One commenter cautioned 
that a summary should focus on total cost, not just one component of 
the cost, such as recordkeeping.
---------------------------------------------------------------------------

    Following a careful review and analysis of the comments on this 
issue, the Department has decided to reserve paragraph (c)(1)(iv)(H) of 
the final rule and intends ultimately to publish in a separate proposal 
a guide or similar requirement with respect to the initial disclosures 
(in paragraph (c)(1)(iv) of the final rule) that covered service 
providers may be required to furnish to responsible plan fiduciaries. 
Given the lack of specific suggestions or data on how best to structure 
such a requirement and what the real costs of such a requirement would 
be, the Department is not prepared at this time to implement a guide or 
similar requirement as part of the final rule. Rather, given the policy 
and economic considerations presented by commenters, the Department has 
decided not to include such a requirement in this final rule without 
providing separately for public review and comment.
    Accordingly, in the near future, the Department intends to publish 
in the Federal Register a Notice of Proposed Rulemaking, under which 
covered service providers may be required to furnish a guide or similar 
tool along with the rule's initial disclosures. For example, a proposed 
provision could require that, in addition to the information that must 
be disclosed pursuant to paragraph (c)(1)(iv)(A) through (G) of the 
final rule (the initial disclosures), the covered service provider must 
separately furnish to the responsible plan fiduciary a guide that 
specifically identifies the document, section and page number where 
specified information, as applicable to the contract or arrangement, is 
located. Furnishing the guide as a separate document would ensure that 
the responsible plan fiduciary is aware of such document and can use it 
effectively in his or her review of the required disclosures. 
Alternatively, a regulatory provision could require some or all of the 
required disclosures to be included in a chart or similar summary 
format. In any event, by separately proposing such a requirement as a 
new provision in paragraph (c)(1)(iv)(H) of the final rule, the 
Department will ensure that all interested parties can fully review the 
regulatory provision and provide feedback to the Department.
    In the meantime, the Department understands that many service 
providers already are moving in this direction. For example, service 
providers have represented to the Department that, as a best practice, 
they currently furnish their plan clients with a guide or index to the 
service providers' disclosures, a summary of certain key disclosures, 
or, in some cases, both. The Department strongly supports such 
innovation, because these tools will assist responsible plan 
fiduciaries, especially fiduciaries to small and medium-sized plans, in 
managing and analyzing the potentially complex disclosure documents 
that are provided to them or if disclosures are located in multiple 
documents. Further, the Department believes that covered service 
providers are in the best position to construct these tools, given 
their increased familiarity with and access to the various and 
potentially lengthy and technical documents that they may use to 
disclose information.
    To further encourage service providers to assist plan fiduciaries 
in this manner, the Department is including a ``sample guide'' to 
initial disclosures as an appendix to the final rule. Several 
commenters on the interim final rule suggested that if the Department 
were to adopt a summary or other formatting requirement in the final 
rule, it should provide an illustration of how a covered service 
provider may comply with such requirement to encourage consistency and 
to enable lower-cost compliance. Although the Department is not 
adopting such a requirement at this time, the sample guide published 
today may be useful, on a voluntary basis, to covered service providers 
as a format to assist responsible plan fiduciaries with the required 
disclosures. Similarly, to the extent a responsible plan fiduciary 
experiences difficulty finding and reviewing the required disclosures 
in lengthy, technical, or multiple disclosure documents received from a 
covered service provider pursuant to the requirements of the final 
rule, the fiduciary should consider requesting assistance from the 
covered service provider, for example, discussing with the covered 
service provider the feasibility and cost of using the attached sample 
guide.
    The sample guide has been included because the Department believes, 
at this time, that such a guide may strike an appropriate balance 
between the need to facilitate a responsible plan fiduciary's review of 
information important to a

[[Page 5643]]

prudent decision-making process, and the costs and burdens attendant to 
the preparation of a new disclosure document. A guide would provide a 
basic framework for responsible plan fiduciaries concerning the 
disclosures they receive, and where to find such disclosures, while 
avoiding the uncertainty and burdens inherent in attempting to 
construct a ``summary'' of existing documents and provisions. Of 
course, the Department will continue to review these issues, and 
interested persons are encouraged to submit their views on the relative 
benefits and costs of a guide requirement, versus a summary or other 
formatting requirement, in response to the Department's forthcoming 
Notice of Proposed Rulemaking.
    Finally, in addition to providing their views on a formatting 
requirement in the final rule, commenters on the interim final rule 
requested further guidance on how required information may be delivered 
to responsible plan fiduciaries. Specifically, several commenters asked 
the Department to affirm that covered service providers could furnish 
the required disclosures electronically, including by making 
information available on a secure Web site if responsible plan 
fiduciaries are notified as to how to access such information. These 
commenters argued that electronic delivery enables more cost-effective 
compliance, permits easy confirmation of delivery, and enables service 
providers to create and use tools that can enhance the review of 
information by responsible plan fiduciaries. Consistent with the views 
expressed in the 2007 proposed rule,\26\ there is nothing in the 
regulation that limits the ability of covered service providers to 
furnish information required by the regulation to responsible plan 
fiduciaries via electronic media.\27\ However, unless the covered 
service provider's disclosure information on a Web site is readily 
accessible to responsible plan fiduciaries, and fiduciaries have clear 
notification on how to gain such access, the information on the Web 
site may not be regarded as furnished within the meaning of the 
regulation.
---------------------------------------------------------------------------

    \26\ See 72 FR 70988.
    \27\ The Department's regulations at 29 CFR 2520.104b-1 apply 
solely for purposes of disclosures from plans to participants and 
beneficiaries and do not extend to disclosures from third parties to 
plan fiduciaries.
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5. Timing of Initial Disclosures; Changes

    Paragraph (c)(1)(v) of the final rule addresses the timing 
requirements for the initial disclosures described in paragraph 
(c)(1)(iv), as well as the requirements for when a covered service 
provider must disclose changes to the initial disclosures in compliance 
with the final rule. Paragraph (c)(1)(v)(A) of the final rule, 
concerning the timing of initial disclosures, has not changed from the 
interim final rule. A covered service provider must disclose the 
information required by paragraph (c)(1)(iv) of the final rule to the 
responsible plan fiduciary reasonably in advance of the date the 
contract or arrangement is entered into, and extended or renewed. A few 
commenters requested clarification on the meaning of ``the date the 
contract or arrangement is entered into.'' The Department was not 
persuaded to adopt the alternative dates that were proposed, such as 
the date the written contract is signed, the date that compensation is 
first received, or the date the contract is legally binding. The 
Department does not believe that these standards are clearer or more 
appropriate than the standard used in the final rule. Commenters on the 
proposal argued that service arrangements often go into effect without 
a signature by a plan fiduciary. In addition, delaying disclosure of 
compensation until it is received would result in piecemeal disclosures 
during the term of a service arrangement and would undercut an 
important purpose of the disclosure, which is to assist fiduciaries in 
selecting service providers. Tying disclosures to a determination of 
when a contract or arrangement becomes legally binding is not 
practicable because such determinations may depend on many facts and 
circumstances, as well as different State laws. The final rule gives 
plan fiduciaries and service providers some flexibility to determine 
when an arrangement is entered into. However, to ensure that the 
responsible plan fiduciary can review, analyze, and consider the 
disclosures in compliance with his or her ERISA fiduciary obligations, 
the covered service provider must furnish the disclosures ``reasonably 
in advance'' of the date that the parties enter into the contract or 
arrangement. The Department is confident that the parties to a service 
contract or arrangement will be able to determine what is 
``reasonable'' in this context.
    The final rule contains two exceptions to this ``reasonably in 
advance'' timing requirement. The first exception, contained in 
paragraph (c)(1)(v)(A)(1), has not changed from the interim final rule. 
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 the final rule 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. The second exception, contained in paragraph (c)(1)(v)(A)(2), 
has not changed substantively. The investment information described in 
paragraph (c)(1)(iv)(F) of the final rule 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 covered plan.\28\ The cross reference to paragraph (c)(1)(iv)(F) 
was updated to reflect minor restructuring in the final rule, discussed 
above, and the reference to investment alternatives designated by the 
``covered plan'' conforms to the final rule's slightly modified 
definition of ``designated investment alternative,'' discussed below.
---------------------------------------------------------------------------

    \28\ One commenter on the interim final rule suggested that the 
exceptions to the ``reasonably in advance'' requirement should be 
expanded for circumstances when a responsible plan fiduciary changes 
a designated investment alternative during the term of the service 
contract or arrangement; the Department believes that this situation 
would be addressed as a ``change'' to the initial disclosures and a 
covered service provider should comply with the provisions regarding 
such changes contained in paragraph (c)(1)(v)(B).
---------------------------------------------------------------------------

    Paragraph (c)(1)(v)(B) of the final rule, concerning when a covered 
service provider must disclose changes to the initial information 
previously disclosed, has been modified in response to comments 
received on the interim final rule. Specifically, this paragraph has 
been divided into two paragraphs (1) and (2). Paragraph (1) continues 
to provide that a covered service provider must disclose a change to 
required 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, 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. However, 
this 60-day standard has been limited to the information required by 
paragraphs (c)(1)(iv)(A) through (D), and (G) of the final rule (e.g., 
information concerning the services to be provided; the status of the 
covered service provider, an affiliate, or a subcontractor as an ERISA 
fiduciary or registered investment adviser; the compensation to

[[Page 5644]]

be received in connection with the contract or arrangement; the cost of 
recordkeeping services (if applicable); and the manner of receipt of 
compensation).
    Some commenters suggested that the 60-day period should be expanded 
to, for example, 90 days or 60 days following the later of the date the 
service provider is informed of the change or the effective date of the 
change. The Department was not persuaded to revise the 60-day period 
and believes that it gives covered service providers enough time to 
make the disclosure while ensuring that responsible plan fiduciaries 
receive prompt notice of changes. A few commenters suggested that the 
Department reintroduce the ``materiality'' standard used in the 
proposed rule to avoid requiring disclosure of de minimis and 
meaningless changes. The Department did not adopt this suggestion. For 
the reasons stated in the preamble to the interim final rule, the 
Department continues to believe that a materiality standard, in this 
context, would be ineffective. 72 FR 70988.
    Paragraph (c)(1)(v)(B)(2) contains a new requirement applicable to 
the revised investment disclosures required by paragraph (c)(1)(iv)(E) 
and (F). Several commenters on the interim final rule argued that the 
ongoing, or ``rolling,'' requirement to disclose changes to previously 
furnished information within 60 days would result in a highly 
burdensome process with respect to investment information. For example, 
commenters explained that for a covered plan offering a large number of 
designated investment alternatives, minor modifications to the 
investment information concerning those alternatives might occur 
continuously and a covered service provider would have to inundate 
responsible plan fiduciaries with frequent notifications about what are 
often nominal changes. The commenters argued that responsible plan 
fiduciaries may eventually ignore the notices. Further, covered service 
providers constantly would have to monitor all of the investment 
alternatives on their platform for changes. These commenters suggested, 
as an alternative standard, that covered service providers should have 
to periodically update the investment disclosures; this approach would 
be more consistent with current industry practice and more likely to 
focus the responsible plan fiduciary's attention on the information at 
specified intervals.
    The Department agrees that the need to constantly furnish notices 
of even minor changes to investment information could be burdensome, 
especially for plans offering a large number of investment 
alternatives. The Department also agrees that a non-stop stream of such 
notifications is inconsistent with the goal of ensuring that 
responsible plan fiduciaries receive useful and meaningful disclosures. 
Accordingly, the final rule has been modified to provide an alternate 
timing standard for changes to investment information. Rather than 
furnishing notification of each such change within 60 days, paragraph 
(2) requires that a covered service provider must, at least annually, 
disclose any changes to the investment information required by 
paragraph (c)(1)(iv)(E) and (F).

6. Reporting and Disclosure Information

    Paragraph (c)(1)(vi)(A) of the final rule requires a covered 
service provider to furnish, upon request of the responsible plan 
fiduciary or covered plan administrator, any other information relating 
to the compensation received in connection with the contract or 
arrangement that the covered plan needs in order to comply with the 
reporting and disclosure requirements of Title I of ERISA and the 
regulations, forms and schedules issued thereunder. The substantive 
requirement, in paragraph (c)(1)(vi)(A), has not changed from the 
interim final rule, except that the language has been modified to refer 
to ``the written'' request of the responsible plan fiduciary or covered 
plan administrator.\29\ The timing requirement, in paragraph 
(c)(1)(vi)(B), however, has been modified.
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    \29\ The timing requirement contained in paragraph (c)(1)(vi)(B) 
of the interim final rule previously referred to the responsible 
plan fiduciary's or covered plan administrator's ``written'' 
request. Because paragraph (c)(1)(vi)(B) was modified for purposes 
of the final rule, the concept of the ``written'' request was 
incorporated into paragraph (c)(1)(vi)(A) of the final rule.
---------------------------------------------------------------------------

    The interim final rule required, in paragraph (c)(1)(vi)(B), that 
the covered service provider disclose the information required by 
paragraph (c)(1)(vi)(A) 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. A number 
of commenters on the interim final rule requested that the Department 
better align this timing requirement with existing reporting and 
disclosure standards. For example, service providers currently must 
furnish information necessary to complete the Form 5500 Annual Report 
no later than 120 days after the end of the plan year. The Department 
is persuaded that the timing requirement for this reporting and 
disclosure information should be based on the reporting or disclosure 
requirements in question, rather than on the time that a responsible 
plan fiduciary chooses to request the information. Accordingly, 
paragraph (c)(1)(vi)(B) now requires that such information be furnished 
reasonably in advance of the date upon which such responsible plan 
fiduciary or covered plan administrator states that it must comply with 
the applicable reporting or disclosure requirement, 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 
modification will address commenters' concerns.\30\
---------------------------------------------------------------------------

    \30\ The final rule is not intended to alter any otherwise 
applicable obligation to provide information to plan fiduciaries. 
See, e.g., ERISA section 103(a)(2) (information certification 
requirements for insurance carriers or other organizations which 
provide benefits under the plan or hold plan assets, banks or 
similar institutions which hold plan assets, and plan sponsors).
---------------------------------------------------------------------------

7. Disclosure Errors

    Paragraph (c)(1)(vii) of the final rule addresses inadvertent 
disclosure errors and omissions. Specifically, the rule provides that 
no contract or arrangement will fail to be reasonable 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 rule. The covered service provider must disclose 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.\31\ This 
provision includes one change from the interim final rule. The 
Department revised the paragraph to clarify that it covers errors and 
omissions made when covered service providers disclose changes to the 
initially required information, which must be disclosed pursuant to 
paragraph (c)(1)(v)(B) of the

[[Page 5645]]

rule. Otherwise, this provision has not changed from the interim final 
rule.
---------------------------------------------------------------------------

    \31\ The class exemption, included in paragraph (c)(1)(ix) of 
the final rule, addresses 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.
---------------------------------------------------------------------------

    One commenter on the interim final rule requested that the 
Department extend the turn-around time to 90 days. The Department did 
not accept this request. Although it is important to provide a 
correction mechanism for inadvertent errors or omissions, which 
inevitably will occur as suggested by commenters on the proposal, it is 
the Department's view that errors and omissions must be communicated 
promptly to responsible plan fiduciaries. Another commenter argued that 
this provision is insufficient to protect covered service providers and 
that the class exemption should be extended to protect covered service 
providers. The Department also declined to accept this suggestion, as 
discussed in the context of the class exemption (paragraph (c)(1)(ix) 
of the final rule), below.
    A number of commenters asked whether this provision would be 
available to covered service providers (e.g., recordkeepers) who 
provide the investment disclosures described in paragraphs 
(c)(1)(iv)(E)(1)-(3) or (c)(1)(iv)(F)(1) of the final rule by using 
data obtained from a central digital database maintained by a third 
party. These commenters state, for instance, that instead of providing 
the plan fiduciary with paper or electronic versions of the issuer's 
current disclosure materials for each of the plan's designated 
investment alternatives, as permitted by paragraph (c)(1)(iv)(F)(2), it 
may be more efficient for the recordkeeper to prepare a summary 
disclosure document, tailored to the requirements of the final rule, 
using third party information technology (IT) systems that collect and 
provide access to the necessary investment disclosure information. The 
commenters maintain that third party IT systems can receive investment 
related information directly from mutual funds and other investment 
funds or from their investment advisers, or pull such information from 
regulated filings made by the issuers with the Securities and Exchange 
Commission or other State or federal agencies. These systems may, or 
may be modified to, allow recordkeepers and others to access the data 
and incorporate it into summary disclosure documents designed to meet 
the final rule.
    In the Department's view, a covered service provider's use of a 
reputable and reliable third party commercial database as a source of 
the investment information described in paragraphs (c)(1)(iv)(E)(1)-(3) 
or (c)(1)(iv)(F)(1) of the final rule would ordinarily constitute 
disclosure made ``in good faith and with reasonable diligence'' under 
paragraph (c)(1)(vii) of the final rule. An important element in 
demonstrating reliability would be a contractual provision that makes 
the third-party provider responsible for ensuring that the information 
obtained from the central database is passed on accurately to the 
covered service provider. Of course, if the covered service provider 
subsequently becomes aware of an error or omission in the data, it 
would need to disclose the correct information to the responsible plan 
fiduciary as soon as practicable, but not later than 30 days after the 
covered service provider knows of the error or omission.

8. Definitions

    Paragraph (c)(1)(viii) of the final rule defines the terms 
``affiliate,'' ``compensation,'' ``designated investment alternative,'' 
``recordkeeping services,'' ``responsible plan fiduciary,'' and 
``subcontractor.'' Several minor modifications from the interim final 
rule have been made to this definitional paragraph. Paragraph 
(c)(1)(viii)(B)(3), concerning how a description of compensation may be 
expressed, has been modified to apply to a description of 
``compensation or cost,'' rather than only to ``compensation.'' A 
commenter on the interim final rule pointed out that paragraph 
(c)(1)(iv)(D)(2) may require a covered service provider to disclose the 
``cost'' of recordkeeping services, rather than the compensation 
received from recordkeeping services. The Department agrees that the 
flexibility provided in paragraph (c)(1)(viii)(B)(3) should extend to 
how such costs may be expressed and revised this paragraph. Paragraph 
(c)(1)(viii)(B)(3) also was modified to clarify that the use of 
estimates is not limited to recordkeeping costs. The paragraph now 
provides that a description of compensation or cost 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 or cost cannot reasonably be expressed in such terms, by 
any other reasonable method. The description may include a reasonable 
and good faith estimate if the covered service provider cannot 
otherwise readily describe compensation or cost and the covered service 
provider explains the methodology and assumptions used to prepare such 
estimate. This modification is intended to make it clear that all 
covered service providers, not just those providing recordkeeping 
services, may provide estimates of monetary amounts, provided that the 
other requirements of the regulation are satisfied. Paragraph 
(c)(1)(viii)(B)(3) also provides that any description, including any 
estimate of recordkeeping cost under paragraph (c)(1)(iv)(D), must 
contain sufficient information to permit evaluation of the 
reasonableness of the compensation or cost.
    A few commenters also asked whether compensation or costs may be 
disclosed in ranges, for example by a range of possible basis points. 
The Department believes that disclosure of expected compensation in the 
form of known ranges can be a ``reasonable'' method for purposes of the 
final rule. However, such ranges must be reasonable under the 
circumstances surrounding the service and compensation arrangement at 
issue. To ensure that covered service providers communicate meaningful 
and understandable compensation information to responsible plan 
fiduciaries whenever possible, the Department cautions that more 
specific, rather than less specific, compensation information is 
preferred whenever it can be furnished without undue burden.
    A minor, non-substantive modification was made to the definition of 
``designated investment alternative'' in paragraph (c)(1)(viii)(C). The 
modified definition, which now refers to designation of investment 
alternatives by the ``covered plan,'' merely conforms this definition 
to other Departmental regulatory guidance, such as the participant-
level disclosure regulation (75 FR 64910). For purposes of the final 
rule, a ``designated investment alternative'' is any investment 
alternative designated by the covered plan into which participants and 
beneficiaries may direct the investment of assets held in, or 
contributed to, their individual accounts. The term does not include 
brokerage windows, self-directed brokerage accounts, or similar plan 
arrangements that enable participants and beneficiaries to select 
investments beyond those designated by the covered plan.
    In light of this exclusion, some commenters requested clarification 
on what information would have to be disclosed concerning brokerage 
windows and similar arrangements. Because brokerage windows and similar 
arrangements are not designated investment alternatives subject to 
paragraph (c)(1)(iv)(E) and (F), a covered service provider need not 
furnish the investment-specific information required in these 
paragraphs concerning each possible investment available through the 
brokerage window. However, the covered service provider must disclose 
all applicable information

[[Page 5646]]

concerning the brokerage window that is required by the other 
provisions of the final rule. For example, a covered service provider 
must describe the services that will be available to participants who 
elect to take advantage of the brokerage window; any fees or charges 
that may be paid ``directly'' from the plan (or from a participant's or 
beneficiary's account); and any compensation that may be received 
``indirectly'' or from related parties in connection with the brokerage 
window. In the case of indirect compensation, the covered service 
provider would have to identify the party from whom such compensation 
will be received and otherwise comply with the requirements of the 
applicable provisions of the final rule. The Department understands 
that some of the required information (for example with respect to 
compensation to be received) may depend on investments ultimately 
selected by participants through the brokerage window. The Department 
is confident nonetheless that the final rule provides sufficient 
flexibility for how compensation may be disclosed, in paragraph 
(c)(1)(viii)(B)(3), to enable the covered service provider to 
communicate meaningful information to the responsible plan fiduciary 
about the compensation the covered service provider, affiliates, and 
subcontractors expect to receive in connection with offering a 
brokerage window to the covered plan.
    A minor, non-substantive modification also was made to the 
definition of ``indirect'' compensation in paragraph 
(c)(1)(viii)(B)(2). The interim final rule defined ``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 paragraph 
(c)(1)(viii)(F) of this section). To more clearly describe when 
compensation received by a subcontractor is ``indirect'' compensation 
for purposes of the final rule, the concept contained in the 
parenthetical to paragraph (c)(1)(viii)(B)(2) of the interim final rule 
has been moved to a separate sentence. This modification is not 
intended to substantively alter the definition. Accordingly, this 
paragraph now describes ``indirect'' compensation as compensation 
received from any source other than the covered plan, the plan sponsor, 
the covered service provider, or an affiliate. Compensation received 
from a subcontractor is indirect compensation, unless it is received in 
connection with services performed under the subcontractor's contract 
or arrangement described in paragraph (c)(1)(viii)(F) of the final 
rule.
    The other definitions contained in paragraph (c)(1)(viii) have not 
changed from the interim final rule. A person or entity's ``affiliate'' 
(paragraph (c)(1)(viii)(A)) 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. As in the interim final rule, 
unless otherwise specified, an ``affiliate'' refers to an affiliate of 
the covered service provider. ``Compensation'' (paragraph 
(c)(1)(viii)(B)) 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.\32\ ``Direct'' compensation (paragraph 
(c)(1)(viii)(B)(1)) is compensation received directly from the covered 
plan. The definition of ``indirect'' compensation (paragraph 
(c)(1)(viii)(B)(2)) is modified as described above. Paragraph 
(c)(1)(viii)(B)(3), concerning how compensation may be expressed, also 
is modified as discussed above.
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    \32\ Some commenters on the interim final rule argued that the 
$250 threshold for non-monetary compensation should be revised so 
that the amount would be measured on a calendar- or plan-year basis, 
rather than over the term of the contract or arrangement. The 
Department declined to accept this suggestion. Commenters also 
requested further guidance regarding accounting for and allocating 
non-monetary compensation. The Department notes that, for purposes 
of the final rule, covered service providers may look to the 
guidance and methodologies concerning non-monetary compensation that 
have been approved for purposes of the Form 5500 Annual Report. See 
Form 5500 Instructions, available on the Department's Web site at 
http://www.dol.gov/ebsa/forms.html; see also Frequently Asked 
Questions concerning the Form 5500 Schedule C, at http://www.dol.gov/ebsa/faqs/faq_scheduleC.html and http://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html.
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    ``Recordkeeping services'' (paragraph (c)(1)(viii)(D)) 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. A ``responsible plan 
fiduciary'' (paragraph (c)(1)(viii)(E)) is a fiduciary with authority 
to cause the covered plan to enter into, or extend or renew, the 
contract or arrangement. Finally, a ``subcontractor'' (paragraph 
(c)(1)(viii)(F)) 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 the final 
rule provided for by the contract or arrangement with the covered plan. 
Additional background information concerning these definitions can be 
found in the preamble to the interim final rule (75 FR 41600).

9. Exemption for Responsible Plan Fiduciary

    Paragraph (c)(1)(ix) of the final rule permits a responsible plan 
fiduciary to avoid engaging in a prohibited transaction when a covered 
service provider fails to disclose required information.\33\ 
Specifically, the final class exemption exempts a responsible plan 
fiduciary from the restrictions of ERISA section 406(a)(1)(C) and (D) 
if, among other things, the fiduciary did not know that the covered 
service provider failed to make required disclosures and ``reasonably 
believed'' that such disclosures were made.\34\ Upon discovery of a 
disclosure failure, the responsible plan fiduciary must take certain 
specified steps within designated timeframes, as described in paragraph 
(c)(1)(ix), including notifying the Department of any disclosure 
failures that are not corrected.
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    \33\ When the Department proposed this rule in 2007, the 
prohibited transaction class exemption was proposed separately; for 
ease of reference, the class exemption was included as paragraph 
(c)(1)(ix) of the interim final rule and continues to be part of the 
final regulation.
    \34\ The Department notes that the fact that the service 
transaction, for the responsible plan fiduciary, is the subject of 
an exemption will not relieve the covered service provider, as the 
other party in interest to the transaction, from ERISA's prohibited 
transaction provisions. Thus, regardless of the relief available to 
the responsible plan fiduciary pursuant to this paragraph 
(c)(1)(ix), a disclosure failure will nonetheless result in a 
prohibited transaction, and resulting excise taxes, on the part of 
the covered service provider.
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    This paragraph continues to set forth the specific conditions 
applicable to covered transactions. 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. The conditions also set forth 
the timing, content and other requirements

[[Page 5647]]

applicable to the notice required to be filed with the Department by 
the responsible plan fiduciary. The Department notes that parties 
seeking to avail themselves of the relief provided by the exemption 
have the burden of demonstrating compliance with the conditions of the 
exemption.
    The exemption provides relief from the restrictions of ERISA 
section 406(a)(1)(C) and (D) 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 failure.
    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. 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 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 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 also may be sent 
electronically to: OE-DelinquentSPnotice@dol.gov. The Department has 
developed a sample 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 final rule requires the 
responsible plan fiduciary, following the discovery of a failure to 
disclose, to determine the extent to which the contract or arrangement 
at issue can be continued consistent with the fiduciary's duty of 
prudence under ERISA section 404. The final rule, like the interim 
final rule, assumes that plan fiduciaries will take into account 
certain factors in making such determinations, such as the nature of 
the failure and the availability and costs of a replacement service 
provider. Although this paragraph is intended to afford to the 
responsible plan fiduciary some flexibility in securing replacement 
services, this paragraph is not intended to permit fiduciaries to 
continue contracts or arrangements indefinitely when there has been an 
unresolved disclosure failure. In this regard, the final rule has been 
modified to emphasize that determinations in this area are governed by 
the prudence provisions of ERISA section 404. Thus, the final rule 
requires that if the requested information relates to future services 
(i.e., services that will be performed after the end of the 90-day 
period referred to in paragraph (c)(1)(ix)(C)) and is not disclosed 
promptly after the end of such 90-day period, then the responsible plan 
fiduciary shall terminate the contract or arrangement as expeditiously 
as possible, consistent with the duty of prudence.
    The Department received four comments on the class exemption as 
part of the public comments received on the interim final rule. Three 
commenters generally supported the class exemption, noting its 
importance to an otherwise ``innocent'' plan fiduciary. These 
commenters stated that since a plan's service provider is often the 
only party with all information about a service arrangement, 
particularly indirect compensation, the class exemption rightly imposes 
the compliance burden for disclosure on the covered service provider. 
However, two commenters were concerned about requiring the responsible 
plan fiduciary to have ``reasonably believed'' that service providers 
disclosed the requisite information. These commenters noted that 
availability of the exemption should not be determined based upon 
whether a responsible plan fiduciary can recognize disclosure omissions 
or errors. Thus, the exemption should be available, they say, if the 
fiduciary merely did not ``know or have reason to know'' that the 
covered service provider failed to make required disclosures.
    The Department has considered these comments, but has chosen not to 
modify the requirements of the class exemption based upon these 
concerns. The Department does not believe that responsible plan 
fiduciaries should be entitled to relief provided by the class 
exemption absent a reasonable belief that disclosures required to be 
provided to the covered plan are complete. To this end, responsible 
plan fiduciaries should appropriately review the disclosures made by 
covered service providers. Fiduciaries should be able to, at a minimum, 
compare the disclosures they receive from a covered service

[[Page 5648]]

provider to the requirements of the regulation and form a reasonable 
belief that the required disclosures have been made.
    Another commenter expressed concern about the requirement in 
paragraph (c)(1)(ix)(G) that a responsible plan fiduciary determine 
whether to terminate or continue a service contract after discovering 
that information remains undisclosed. This requirement, the commenters 
stated, means that any unresolved disclosure failures that continue 
will result in a non-exempt prohibited transaction in which case the 
covered plan has no choice but to discontinue the existing service 
arrangement. In such instances, the commenter believes that contractual 
requirements for a covered plan to compensate the covered service 
provider for losses or expenses relating to termination should be null 
and void. The Department does not believe that the class exemption 
should require that parties to an otherwise appropriately negotiated 
and approved service contract or arrangement simply disregard all 
agreed-upon contractual provisions designed to reasonably compensate a 
covered service provider for losses or expenses relating to a 
contract's termination. The requirements and obligations of parties to 
service contracts or arrangements pursuant to paragraph (c)(3) of the 
final rule remain unchanged, including arrangements between covered 
plans and covered service providers under this final rule.
    Finally, a commenter was concerned about the Department's failure 
to expand relief to covered service providers who may become liable for 
excise taxes despite their inability to obtain, through no fault of 
their own, information from other parties. Thus, the commenter would 
have the class exemption also cover an otherwise ``innocent'' covered 
service provider. The Department believes that the final rule's 
mechanisms for correcting inadvertent errors and omissions, and for 
updating changes in disclosures, partially address this concern. 
However, the Department maintains that the covered service provider 
dealing directly with the covered plan bears ultimate responsibility 
for disclosing the information required by the final rule, including 
information from its affiliates or subcontractors. Therefore, the 
Department has not modified the class exemption as requested by the 
commenter.

10. Preemption of State Law

    Paragraph (c)(1)(x) of the final rule 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 
various State laws, including those relating to contract, tax, and 
consumer protection. The Department's regulation does not supersede 
these State laws, which may require disclosures by parties that provide 
services described in the final rule, 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. This provision has not changed from the 
interim final rule.\35\
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    \35\ Two commenters on the interim final rule believe that such 
rule was not an appropriate place for a preemption provision and 
that the provision must be proposed. The Department is not persuaded 
by these commenters and views this provision as a logical outgrowth 
of the proposed rule. In addition, the interim final rule itself 
provided notice to affected parties and the opportunity for comment. 
Therefore, the final rule retains the preemption provision.
---------------------------------------------------------------------------

    Paragraph (c)(1)(x) of the final rule 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 disclosure in 
connection with services or service provider contracts 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.

11. 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). The interim final rule included a new 
provision in paragraph (c)(1)(xi) to clarify that compliance with the 
Department's regulation will be required for a covered service provider 
to avoid the excise taxes imposed by Code section 4975. The final rule 
includes the same provision, without modification from the interim 
final rule. Specifically, paragraph (c)(1)(xi) 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 ERISA and the regulations thereunder should be 
read to include references to the parallel provisions of section 
4975(d)(2) of the Code and the regulations thereunder at 26 CFR 
54.4975-6.
    If a covered service provider fails to disclose the information 
required by the final rule, then the contract or arrangement will not 
be ``reasonable'' unless the failure satisfies the rule's cure 
provision for inadvertent disclosure errors and omissions. 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 covered service provider. The 
responsible plan fiduciary, by causing the transaction, will have 
violated ERISA section 406(a)(1)(C) and (D). The covered 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.\36\ Section 4975(a) of the Code provides that the 
rate of the excise tax is fifteen percent of the ``amount involved'' 
with respect to the prohibited transaction for each year (or part 
thereof) in the taxable period. The Code goes on to provide in section 
4975(b) that if the prohibited transaction is not corrected within the 
taxable period, the rate of the excise tax increases to 100 percent of 
the ``amount involved.''
---------------------------------------------------------------------------

    \36\ The Code also includes definitions related to plans subject 
to the prohibited transaction and excise tax provisions in Code 
section 4975. See Code section 4975(e)(1) and (g).
---------------------------------------------------------------------------

    The Department continues to believe that the application of the 
excise tax will provide incentives for all parties to service contracts 
or arrangements to cooperate in exchanging the disclosures required by 
the final regulation. As noted above, however, the Department does not 
believe that an otherwise diligent responsible plan fiduciary should be 
penalized as a result of a failure on the part of a covered service 
provider to make the required disclosures. Accordingly, the final rule 
continues to include the exemptive relief described above (see 
paragraph (c)(1)(ix) of the final rule). But, as required as a 
condition of that exemptive relief and more generally under ERISA 
section 404, following the responsible plan fiduciary's discovery

[[Page 5649]]

that the covered service provider failed to disclose required 
information, the fiduciary must consider what steps should be taken in 
response to the covered service provider's nondisclosure, and may in 
certain circumstances have to terminate the contract or arrangement 
with the service provider.
    Several commenters asked how to determine the ``amount involved'' 
and what would be required to ``correct'' the prohibited transaction 
that results from a failure to satisfy the disclosure requirements in 
the final rule. Under Reorganization Plan No. 4 described above, the 
Secretary of the Treasury retained interpretive and regulatory 
authority over the provisions in Code section 4975(a) and (b) regarding 
calculation of excise taxes and correction of prohibited 
transactions.\37\ Accordingly, those issues are beyond the scope of 
this regulation.
---------------------------------------------------------------------------

    \37\ The Reorganization Plan at Section 102 provides: ``Except 
as otherwise provided in Section 105 of this Plan, all authority of 
the Secretary of the Treasury to issue the following described 
documents pursuant to the statutes hereinafter specified is hereby 
transferred to the Secretary of Labor: (a) Regulations, rulings, 
opinions, and exemptions under section 4975 of the Code * * * EXCEPT 
for (i) subsections 4975(a), (b), (c)(3), P(d)(3), (e)(1), and 
(e)(7) of the Code.'' Section 105 of the Reorganization Plan further 
details the scope of the Secretary of the Treasury's authority 
relating to section 4975(a) & (b): ``The transfers provided for in 
Section 102 of this Plan shall not affect the ability of the 
Secretary of the Treasury, subject to the provisions of Title III of 
ERISA relating to jurisdiction, administration, and enforcement, (a) 
to audit plans and employers and to enforce the excise tax 
provisions of subsections 4975(a) and 4975(b) of the Code, to 
exercise the authority set forth in subsections 502(b)(1) and 502(h) 
of ERISA, or to exercise the authority set forth in Title III of 
ERISA, including the ability to make interpretations necessary to 
audit, to enforce such taxes, and to exercise such authority * * *. 
However, in enforcing such excise taxes and, to the extent 
applicable, in disqualifying such plans the Secretary of the 
Treasury shall be bound by the regulations, rulings, opinions, and 
exemptions issued by the Secretary of Labor. * * *[.]''
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12. Effective Date

    Commenters on the interim final rule continued to express concern 
with the effective date for the final regulation and class exemption, 
which was July 16, 2011 (one year following publication of the interim 
final rule in the Federal Register).\38\ Both new and existing 
contracts and arrangements between covered plans and covered service 
providers must be in compliance as of and following the rule's 
effective date. The Department extended the 90-day proposed effective 
date to a one-year effective date in the interim final rule in order to 
accommodate concerns as to the cost and burden associated with 
transitioning current and future service contracts or arrangements to 
satisfy the rule's requirements.
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    \38\ One commenter on the interim final rule strongly supported 
the July 16, 2011, effective date, arguing that the industry 
dialogue concerning fee transparency has been going on for years and 
that service providers have been adequately forewarned that 
increased transparency will be required.
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    Some commenters on the interim final rule asserted that even one 
year is not enough time, suggesting that the Department delay the 
regulation's effectiveness, for example, for another year. A few 
commenters also requested that the Department modify the effective date 
for existing contracts or arrangements, giving affected parties more 
time to bring them into compliance with the regulation. However, most 
of the commenters on this issue primarily were concerned that if 
significant modifications are made from the interim final to the final 
rule, then the Department should consider extending the effective date 
to ensure that parties have sufficient time to revise necessary systems 
and comply with such modifications.
    The Department continues to believe that both existing contracts 
and arrangements, as well as those entered into on or after the final 
regulation's effective date, must comply with the final rule. However, 
given commenters' concerns about the burden associated with updating 
all existing contracts and arrangements, and the fact that the final 
rule does reflect some substantive modifications from the interim final 
rule, the Department was persuaded that the effective date should be 
delayed. Further, the final rule conforms to the Department's final 
participant-level disclosure regulation, which applies for plan years 
beginning on or after November 1, 2011 (so, for calendar year plans, 
the plan year beginning on January 1, 2012). The Department believes 
that all parties, including covered service providers, responsible plan 
fiduciaries (and their plan administrators), and plan participants and 
beneficiaries, would benefit from closer alignment in the application 
of these two disclosure initiatives. Accordingly, the Department 
previously published a notice in the Federal Register extending the 
effective date for the interim final rule to April 1, 2012.\39\ The 
final rule published in this notice, however, includes a new effective 
date of July 1, 2012. The Department decided to further extend the 
effective date due to delays in the publication of this final rule. 
Given the date of this notice, the Department determined that July 1, 
2012 would be a more appropriate effective date to ensure that covered 
service providers and other parties have sufficient time to prepare for 
compliance with the final rule. Thus, contracts or arrangements between 
a covered service provider and a covered plan that are entered into on 
or after July 1, 2012 must comply with the final rule, and contracts or 
arrangements in existence prior to July 1, 2012 also must be brought 
into compliance as of such date.
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    \39\ 76 FR 42539 (July 19, 2011). The Department also made 
corresponding changes to the transition rule for the participant-
level disclosure regulation, which are discussed in the 
Supplementary Information contained in such Federal Register notice. 
The revised effective date and transition rule published at that 
time reflected the Department's review of public comments received 
in response to its proposal to extend these dates, published on June 
1, 2011. 76 FR 31544. These comments similarly influenced the 
Department's decision to further extend the effective date herein. 
These public comments are available on the Department's Web site at 
http://www.dol.gov/ebsa/regs/cmt-1210-AB08a.html.
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C. Welfare Plan Disclosure--Reserved

    As explained in the Supplementary Information for the interim final 
rule, the Department reserved paragraph (c)(2) of the 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 and defined benefit plans. 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, more specifically 
tailored, disclosure requirements under ERISA section 408(b)(2) for 
welfare benefit plans. Although one commenter on the interim final rule 
argued that fee transparency guidance, as a general matter, is 
unnecessary in the welfare plan context, most of the commenters on this 
issue supported the Department's decision to separately address welfare 
plans. To further this distinct regulatory initiative, the Department 
held a public hearing on December 7, 2010, to explore operational, 
disclosure, and fee transparency issues concerning welfare benefit 
plans. Testimony and other materials submitted to the Department in 
connection with this hearing are available on the Department's Web 
site.

[[Page 5650]]

D. Existing Requirement Concerning Termination of Contract or 
Arrangement

    The interim final rule contained no amendments to the existing 
requirements addressing termination of contracts or arrangements for 
purposes of section 408(b)(2). Although one commenter on the interim 
final rule generally requested additional guidance on this requirement, 
no specific suggestions or problems were identified. No further 
comments or recommendations were received. Accordingly, the Department 
has not revised this provision and adopted the paragraph, without 
change, in paragraph (c)(3) of the final rule.

E. Effect on Other Statutory and Administrative Exemptions

    A few commenters on the interim final rule asked the Department to 
clarify the effect of the final rule on the availability of previously 
issued exemptions. The Department is reviewing a number of pertinent 
class exemptions involving service provider arrangements, and we 
anticipate providing guidance in this regard in the near future.

F. Regulatory Impact Analysis

1. Executive Orders 12866 and 13563

    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. OMB has determined that this action is ``economically 
significant'' within the meaning of 3(f)(1) of the executive order 
because it is likely to have an effect on the economy of $100 million 
or more in any one year. Accordingly, the rule has been reviewed by 
OMB.

2. The Need for Regulatory Action

    As documented in the regulatory impact analysis of the July 16, 
2010 interim final regulation, compensation arrangements in retirement 
plan services market are complex. Payments from third parties and among 
service providers can create conflicts of interest between service 
providers and their clients. For example, a 401(k) plan vendor may 
receive ``revenue sharing'' from a mutual fund that it makes available 
to its clients, and a consultant may receive a ``finder's fee'' from an 
investment adviser it recommends to its clients.
    Such compensation arrangements and the conflicts they can create 
are myriad and in the past have been largely hidden from view. Their 
opacity has sometimes prevented plan fiduciaries from assessing the 
reasonableness of the costs for plan services and allowed harmful 
conflicts to persist in the market.
    In evaluating the reasonableness of contracts or arrangements for 
services, responsible plan fiduciaries have a duty to consider 
compensation that will be received by a covered service provider from 
all sources in connection with the services it provides to a covered 
plan pursuant to the service provider's contract or arrangement. 
However, many plans, especially small plans, lack the knowledge and 
bargaining power to require service providers to disclose the 
compensation that they expect to receive from third parties as a result 
of the service provider's arrangement with the plan. 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. This final rule will 
improve the transparency of service arrangements by requiring specific 
disclosures of service provider compensation before a service contract 
or arrangement can be considered reasonable under ERISA Section 
408(b)(2).

3. Summary of Impacts

    As further discussed below, the Department is confident that this 
final rule will provide substantial benefits by reducing search time 
and costs for fiduciaries to identify the relevant fee and compensation 
information that they need to fulfill their fiduciary responsibility 
under ERISA. The final rule will also discourage harmful conflicts, 
reduce information gaps, improve fiduciary decision-making about plan 
services, enhance value for plan participants, and increase the 
Department's ability to redress abuses committed by service providers. 
Covered service providers will incur compliance and implementation 
costs to create and provide disclosures that satisfy the requirements 
of the final rule, but the Department is confident that the benefits of 
the final regulation will exceed its costs.
    The final regulation retains the structure of the interim final 
rule by requiring covered service providers to provide certain 
disclosures to responsible plan fiduciaries in order to qualify for the 
statutory exemption under ERISA section 408(b)(2). Generally, the 
Department has retained most of the disclosure concepts and 
requirements from the interim final rule. The modifications in this 
final rule do not significantly affect the costs and benefits of the 
interim final rule.
    In accordance with OMB Circular A-4,\40\ Table 2 below depicts an 
accounting statement showing the Department's assessment of the 
benefits and costs associated with the final rule. The estimates vary 
from those in the interim final rule by updating the analysis to 
reflect 2008 Form 5500 data (the latest available data) and 2011 labor 
rates.
---------------------------------------------------------------------------

    \40\ Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

                           Table 2--Accounting Table (Total Impact of the Final Rule)
----------------------------------------------------------------------------------------------------------------
                                                                Primary        Year       Discount      Period
                          Category                              estimate      dollar        rate       covered
----------------------------------------------------------------------------------------------------------------
Benefits:
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.
 
The Department believes that the non-quantified benefits are substantial and exceed the quantified costs of the
 rule. A detailed analysis of the non-quantified benefits exceeding the quantified costs is contained in the
 impact analysis of the July 16, 2010 interim final regulation. The Department is confident that the benefits of
 the final rule exceed the costs.
----------------------------------------------------------------------------------------------------------------

[[Page 5651]]

 
Costs:......................................................
    Annualized Monetized ($millions/year)...................        $63.7         2011           7%    2012-2021
                                                                     58.9         2011           3%    2012-2021
----------------------------------------------------------------------------------------------------------------
 
Note: Quantified 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 the Department if the service provider fails to comply with the request.
----------------------------------------------------------------------------------------------------------------
Transfers...................................................                    Not Applicable.
----------------------------------------------------------------------------------------------------------------

4. Affected Entities and Other Assumptions

    This final rule will affect about 48,000 defined benefit pension 
plans with over 42 million participants and almost 669,000 defined 
contribution pension plans with approximately 83 million participants. 
Out of these pension plans, about 38,000 are small defined benefit 
plans and 597,000 small individual account plans.\41\ Most of the 
defined contribution pension plans, approximately 498,000, are 
participant-directed individual account plans.
---------------------------------------------------------------------------

    \41\ Estimates of the number of plans and participants are taken 
from the EBSA's 2008 Pension Research File, http://www.dol.gov/ebsa/publications/form5500dataresearch.html#planbulletins. Small pension 
plans are plans with generally less than 100 participants, as 
specified in the Form 5500 instructions.
---------------------------------------------------------------------------

    The final regulation applies to contracts or arrangements between 
covered plans and covered service providers. 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 2008 
submissions of the Form 5500 and its Schedule C.
    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 services 
described in paragraph (c)(1)(iii) of the final rule, which defines 
which service providers are ``covered.'' \42\ In total, there were 
nearly 9,500 unique covered service providers reported in the Form 5500 
Schedule C data, almost 1,000 of which were reported to have received 
in aggregate $1 million or more in direct and indirect compensation.
---------------------------------------------------------------------------

    \42\ 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 be covered service providers.
---------------------------------------------------------------------------

    The Department acknowledges that this estimate may be imprecise. On 
the one hand, some of the service providers counted here may not be 
covered service providers, but the Department is unable to further 
refine this group due to the limitations of the Schedule C data. On the 
other hand, because small plans generally do not file Schedule C, the 
number of covered service providers will be understated 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; therefore, the estimate based on the Schedule 
C filings by large plans is reasonable.\43\
---------------------------------------------------------------------------

    \43\ 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 120,000 arrangements with covered service providers, 
while defined contribution plans have over 836,000 arrangements.
    In the interim final rule, the Department assumed that 50 percent 
of disclosures would be delivered electronically. The Department did 
not receive any comments regarding this assumption; therefore, the 
Department continues to assume that about 50 percent of disclosures 
between covered service providers and responsible plan fiduciaries are 
delivered only in electronic format.

5. Benefits

    As explained in the regulatory impact analysis for the interim 
final rule, mandatory proactive disclosure will reduce the plan's 
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 and costs are difficult 
to quantify, the Department is confident that the benefits more than 
justify the costs.

6. Costs

    This section summarizes the total costs of the final regulation. 
The Department estimated costs for the rule over a ten-year time frame 
for purposes of this analysis. In addition to the costs to service 
providers, the Department also considered the potential costs to plans.
    These costs include the following: Cost incurred for compliance 
review and implementation; costs to make initial and investment 
disclosures and to disclose additional information on request; costs 
for responsible plan fiduciaries to request additional information from 
service providers to comply with the class exemption and to prepare 
notices to the Department if the covered service provider fails to 
comply with the request, and costs to prepare the guide. These costs 
are identical to the estimates in the interim final regulation except 
they have been updated to reflect more recent Form 5500 data and 2011 
labor rates.
    As shown in Table 3 below, total costs for covered service 
providers and covered plans total approximately $164 million for the 
year 2012.

[[Page 5652]]



                    Table 3--Total Discounted Costs Rule (Shown With 7 Percent Discount Rate)
----------------------------------------------------------------------------------------------------------------
                                                      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
----------------------------------------------------------------------------------------------------------------
2012............................     $64,061,000     $82,842,000     $14,584,000      $2,588,000    $164,076,000
2013............................       7,248,000      23,690,000       8,471,000       1,209,000      40,619,000
2014............................       6,774,000      22,140,000       7,917,000       1,130,000      37,962,000
2015............................       6,331,000      20,692,000       7,399,000       1,056,000      35,478,000
2016............................       5,917,000      19,338,000       6,915,000         987,000      33,157,000
2017............................       5,530,000      18,073,000       6,463,000         923,000      30,988,000
2018............................       5,168,000      16,891,000       6,040,000         862,000      28,961,000
2019............................       4,830,000      15,786,000       5,645,000         806,000      27,066,000
2020............................       4,514,000      14,753,000       5,275,000         753,000      25,296,000
2021............................       4,219,000      13,788,000       4,930,000         704,000      23,641,000
                                 -------------------------------------------------------------------------------
    Total with 7% Discounting...  ..............  ..............  ..............  ..............     447,244,000
                                 -------------------------------------------------------------------------------
    Total with 3% Discounting...  ..............  ..............  ..............  ..............    502,475,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

7. 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 such an impact, 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. This rule is necessary to help both large and small plan 
fiduciaries get the information they need to negotiate with and select 
service providers who offer high quality services at reasonable rates 
and to comply with their fiduciary duties. The Department's requirement 
for covered service providers to provide disclosures to responsible 
plan fiduciaries will be especially helpful to small plan fiduciaries.
b. Affected Small Entities
    The Department estimates that the final rule will apply to 
approximately 9,300 small service providers (generally, those with 
revenue less than $7.0 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, third party 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.
c. Compliance Requirements
    The classes of small service providers subject to the final rule 
include service providers who are ERISA fiduciaries (for example, 
because they manage plan investments or are fiduciaries to investment 
vehicles holding plan assets), who provide services as registered 
investment advisers to plans, who receive indirect compensation (or 
certain compensation from related parties) in connection with provision 
of specified 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 recordkeeping or brokerage services involving 
an investment platform of investment options for participant-directed 
individual account plans.
    These small covered service providers will be required to disclose 
certain written information to responsible plan fiduciaries in 
connection with their covered service arrangements. Such information 
will include a description of the services that will be included in the 
arrangement and what direct and indirect compensation the covered 
service provider will receive, or that will be paid among related 
parties, in connection with the arrangement. Service providers whose 
arrangements include making investment products available to plans 
additionally must disclose specified investment-related information 
about such products. The required disclosures must be provided to the 
responsible plan fiduciary reasonably in advance of the parties 
entering into the contract or arrangement for covered services. 
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.
d. Agency Steps To Minimize Negative Impacts
    The Department took a number of steps to minimize any negative 
impact of the interim final rule on small service providers. These 
include clarifying the scope of the rule's application to include only 
those categories of service providers likely to be involved in 
undisclosed or indirect compensation arrangements, excepting from the 
rule's requirements contracts or arrangements for which compensation or 
fees are less

[[Page 5653]]

than $1,000, omitting from the rule a requirement that all arrangements 
be maintained under formal contracts, and not requiring covered service 
providers to disclose information in any particular format. Moreover, 
the disclosure requirements included in the 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 fiduciary 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.
    The Department rejected as unnecessarily costly approaches that 
would have applied disclosure requirements to arrangements involving 
compensation or fees of less than $1,000, or to a broader scope of 
service providers, or that would have required a formal, written 
contract. The Department also rejected these approaches as inadequate 
to achieve a central policy and legal goal--namely, enabling 
responsible plan fiduciaries, including especially small plan 
fiduciaries, to efficiently and effectively carry out their duty to 
assess information needed to purchase of plan services at a reasonable 
rate.

8. Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department submitted an 
information collection request (ICR) to OMB in accordance with 44 
U.S.C. 3507(d), contemporaneously with the publication of the interim 
final regulation, for OMB's review. OMB approved the ICR under OMB 
Control Number 1210-0133 on May 20, 2010, which will expire on May 31, 
2013.
    Although no public comments were received that specifically 
addressed the paperwork burden analysis of the information collections 
at the interim final rule stage, the comments that were submitted and 
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 final rule and in developing the revised 
paperwork burden analysis summarized below.
    In connection with publication of this final rule, the Department 
submitted a revised ICR to OMB for approval. The Department intends to 
publish a notice announcing OMB's decision regarding the revised ICR 
upon completion of OMB review. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number.
    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 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 final rule, the Department estimated the number of 
service providers, plans, and arrangements covered by the rule. Based 
on information from the 2008 Form 5500, the Department estimates that 
approximately 48,000 defined benefit pension plans (DB plans) covering 
more than 42 million participants and approximately 669,000 defined 
contribution plans (DC plans) covering almost 83 million participants 
are covered by the rule.\44\
---------------------------------------------------------------------------

    \44\ Out of these pension plans, about 38,000 are small DB plans 
and 597,000 small DC plans. Small plans generally are those with 
less than 100 participants.
---------------------------------------------------------------------------

    The Department also estimates that based on data from the 2008 Form 
5500 Annual Return/Report and Schedule C that there are about 9,500 
covered service providers. The 2008 Form 5500 Schedule C data was also 
used to count the number of covered plan-covered 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 120,000 arrangements with 
covered service providers, while DC plans have an estimated 836,000 
arrangements. For purposes of this analysis, the Department assumes 
that about 50 percent of disclosures between covered service providers 
and responsible plan fiduciaries are made only electronically.
    The final regulation retains the basic structure of the interim 
final rule by requiring covered service providers to provide certain 
disclosures to responsible plan fiduciaries in order to qualify for the 
statutory exemption under ERISA section 408(b)(2). Generally, the 
Department has retained most of the disclosure concepts and 
requirements from the interim final rule. As noted above, the 
Department estimates that there are approximately 9,500 covered service 
providers and 960,000 arrangements with covered plans that are affected 
by this rule.
Summary
    Table 4 shows the total hour burden of the information collection 
and Table 5 shows the total equivalent cost. The total three-year 
average hour burden for covered service providers and covered plans is 
estimated to be 1.6 million hours with an equivalent cost of $134.7 
million.

                                              Table 4--Hour Burden
----------------------------------------------------------------------------------------------------------------
                                                                 Year 1       Year 2       Year 3      Average
----------------------------------------------------------------------------------------------------------------
Service Providers...........................................    2,315,000      813,000      813,000    1,313,000

[[Page 5654]]

 
Plans.......................................................      758,000      117,000      117,000      331,000
                                                             ---------------------------------------------------
    Total...................................................    3,072,000      930,000      930,000   1,644,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.


                                            Table 5--Equivalent Cost
----------------------------------------------------------------------------------------------------------------
                                                   Year 1           Year 2           Year 3          Average
----------------------------------------------------------------------------------------------------------------
Service Providers...........................     $202,623,000      $68,769,000      $68,769,000     $113,387,000
Plans.......................................       48,912,000        7,563,000        7,563,000       21,346,000
                                             -------------------------------------------------------------------
    Total...................................      251,535,000       76,332,000       76,332,000     134,733,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.

Annual Cost Burden
    Table 6 reports the estimated printing and postage costs associated 
with each required disclosures and notices. 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 will be 5 cents per page. The Department estimates that the 
total cost burden of the rule in 2012 will be $9.5 million, and $1.5 
million in subsequent years. The three-year average cost burden is 
estimated to be more than $4.2 million.

                                              Table 6--Cost Burden
----------------------------------------------------------------------------------------------------------------
                                                                 Year 1       Year 2       Year 3      Average
----------------------------------------------------------------------------------------------------------------
Initial Disclosure..........................................     $401,000      $54,000      $54,000     $170,000
Update Initial Disclosure...................................            0      107,000      107,000       71,000
Information Upon Request....................................       45,000       45,000       45,000       45,000
                                                             ---------------------------------------------------
    General Information Total...............................      446,000      206,000      206,000      286,000
                                                             ---------------------------------------------------
Investment Disclosure.......................................    8,929,000    1,210,000    1,210,000    3,783,000
Update Investment Disclosure................................      116,000      116,000      116,000      116,000
                                                             ---------------------------------------------------
    Investment Disclosure Total.............................    9,045,000    1,326,000    1,326,000    3,899,000
                                                             ---------------------------------------------------
Request for Additional Information for Exemption............       19,000       10,000       10,000       13,000
Notice to the Department....................................        2,000        1,000        1,000        1,000
                                                             ---------------------------------------------------
        Total...............................................    9,513,000    1,543,000    1,543,000   4,200,000
----------------------------------------------------------------------------------------------------------------
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: Revision of existing collection
    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: 81,000 (first year); 57,000 
(three-year average).
    Estimated Number of Responses: 1,628,000 (first year); 1,274,000 
(three-year average).
    Frequency of Response: Annually; occasionally.
    Estimated Annual Burden Hours: 3,072,000 (first year); 1,644,000 
(three-year average).
    Estimated Annual Burden Cost: $9,513,000 (first year); $4,200,000 
(three-year average).
Congressional Review Act
    The final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the 
Comptroller General for review. The final rule is a ``major rule'' as 
that term is defined in 5 U.S.C. 804, because it is likely to result in 
an annual effect on the economy of $100 million or more.
Unfunded Mandates Reform Act
    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, the final rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or tribal governments in the aggregate of more than $100 
million, adjusted for inflation, or increase expenditures by the 
private sector of more than $100 million, adjusted for inflation.
Federalism Statement
    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism, and requires the adherence to specific 
criteria by Federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. The final rule does not have federalism 
implications because it has no substantial direct

[[Page 5655]]

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 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.

List of Subjects in 29 CFR Part 2550

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

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

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

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; 
an individual retirement annuity described in section 408(b) of the 
Code; or annuity contracts and custodial accounts described in section 
403(b) of the Code issued to a current or former employee before 
January 1, 2009, for which the employer ceased to have any obligation 
to make contributions (including employee salary reduction 
contributions), and in fact ceased making contributions to the contract 
or account for periods before January 1, 2009, and for which all of the 
rights and benefits under the contract or account are legally 
enforceable against the insurer or custodian by the individual owner of 
the contract or account without any involvement by the employer, and 
for which such individual owner is fully vested in the contract or 
account.
    (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

[[Page 5656]]

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 (within the meaning of section 
3(21) of the Act); 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) 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, identification of the payer of the 
indirect compensation, and a description of the arrangement between the 
payer and the covered service provider, an affiliate, or a 
subcontractor, as applicable, pursuant to which such indirect 
compensation is paid.
    (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), (c)(1)(iv)(E), or (c)(1)(iv)(F) 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), (c)(1)(iv)(E), or 
(c)(1)(iv)(F) 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) 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 an investment, such as commissions, sales loads, sales charges, 
deferred sales charges, redemption fees, surrender charges, exchange 
fees, account fees, and purchase fees; and that is not included in the 
annual operating expenses of the investment contract, product, or 
entity;
    (2) A description of the annual operating expenses (e.g., expense 
ratio) if the return is not fixed and any ongoing expenses in addition 
to annual operating expenses (e.g., wrap fees, mortality and expense 
fees), or, for an investment contract, product, or entity that is a 
designated investment alternative, the total annual operating expenses 
expressed as a percentage and calculated in accordance with 29 CFR 
2550.404a-5(h)(5); and
    (3) For an investment contract, product, or entity that is a 
designated investment alternative, any other information or data about 
the designated investment alternative that is within the control of, or 
reasonably available to, the covered service provider and that is 
required for the covered plan administrator to comply with the 
disclosure obligations described in 29 CFR 2550.404a-5(d)(1).
    (F) 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)(E)(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)(F) by providing current disclosure materials of the issuer 
of the designated investment alternative, or information replicated 
from such materials, that include the information described in such 
paragraph, provided that:

[[Page 5657]]

    (i) The issuer is not an affiliate;
    (ii) The issuer is a registered investment company, an insurance 
company qualified to do business in any State, an issuer of a publicly 
traded security, or a financial institution supervised by a State or 
federal agency; and
    (iii) The covered service provider acts in good faith and does not 
know that the materials are incomplete or inaccurate, and furnishes the 
responsible plan fiduciary with a statement that the covered service 
provider is making no representations as to the completeness or 
accuracy of such materials.
    (G) Manner of receipt. A description of the manner in which the 
compensation described in paragraph (c)(1)(iv)(C) through (F) of this 
section, as applicable, 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.
    (H) Guide to initial disclosures. [Reserved]
    (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)(F) 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 covered plan.
    (B) (1) A covered service provider must disclose a change to the 
information required by paragraph (c)(1)(iv)(A) through (D), and (G) of 
this 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.
    (2) A covered service provider must, at least annually, disclose 
any changes to the information required by paragraph (c)(1)(iv)(E) and 
(F) of this section.
    (vi) Reporting and disclosure information; timing.
    (A) Upon the written 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 reasonably in 
advance of the date upon which such responsible plan fiduciary or 
covered plan administrator states that it must comply with the 
applicable reporting or disclosure requirement, 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) of this section (or a change to such 
information disclosed pursuant to paragraph (c)(1)(v)(B) of this 
section) or paragraph (c)(1)(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, or an affiliate. Compensation received from a 
subcontractor is indirect compensation, unless it is received 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 of compensation or cost 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 or cost cannot reasonably be expressed in such terms, by 
any other reasonable method. The description may include a reasonable 
and good faith estimate if the covered service provider cannot 
otherwise readily describe compensation or cost and the covered service 
provider explains the methodology and assumptions used to prepare such 
estimate. Any description, including any estimate of recordkeeping cost 
under paragraph (c)(1)(iv)(D), must contain sufficient information to 
permit evaluation of the reasonableness of the compensation or cost.
    (C) Designated investment alternative. A ``designated investment 
alternative'' is any investment alternative designated by the covered 
plan into which participants and beneficiaries may direct the 
investment of assets held in, or contributed to, their individual 
accounts. The term ``designated investment alternative'' shall not 
include brokerage windows, self-directed brokerage accounts, or similar 
plan arrangements that enable participants and beneficiaries to select 
investments beyond those designated by the covered plan.
    (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

[[Page 5658]]

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;
    (F) The notice required by paragraph (c)(1)(ix)(C) of this section 
shall be sent to the following address: U.S. Department of Labor, 
Employee Benefits Security Administration, Office of Enforcement, 200 
Constitution Ave. NW., Suite 600, Washington, DC 20210; or may be sent 
electronically to OE-DelinquentSPnotice@dol.gov; and
    (G) If the covered service provider fails to comply with the 
written request referred to in paragraph (c)(1)(ix)(C) of this section 
within 90 days of such request, the responsible plan fiduciary shall 
determine whether to terminate or continue the contract or arrangement 
consistent with its duty of prudence under section 404 of the Act. If 
the requested information relates to future services and is not 
disclosed promptly after the end of the 90-day period, then the 
responsible plan fiduciary shall terminate the contract or arrangement 
as expeditiously as possible, consistent with such duty of prudence.
    (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 1, 2012. 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 arrangements 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 25th day of January 2012.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix--Sample Guide to Initial Disclosures

ABC Service Provider, Inc. (ABC)

Guide to Services and Compensation

Prepared for the XYZ 401(k) Plan

    The following is a guide to important information that you 
should consider in connection with the services to be provided by 
ABC to the XYZ 401(k) Plan.
    Should you have any questions concerning this guide or the 
information provided to you

[[Page 5659]]

concerning our services or compensation, please do not hesitate to 
contact [enter name of person and/or office] at [enter phone number 
and/or email address].
BILLING CODE 4510-29-P
[GRAPHIC] [TIFF OMITTED] TR03FE12.000

[FR Doc. 2012-2262 Filed 2-2-12; 8:45 am]
BILLING CODE 4510-29-C