5632 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

1The ‘‘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. 2A 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. 

3Public 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. 4See 29 CFR 2550.408b–2. 

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. 

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. 

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

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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5633 

5See 75 FR 41600. 

6Available at http://www.whitehouse.gov/omb/

circulars/a004/a-4.pdf. 

7This separate initiative, including the 

Department’s December 2010 public hearing, is 

discussed below. 8See, 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). 

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. 

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. 

TABLE 1—ACCOUNTING TABLE

Category Primary 

estimate Year dollar Discount rate 

Period 

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. 

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 

1. General 

The final regulation amends 

paragraph (c) of § 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

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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5634 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

9Two 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. 

10See Field Assistance Bulletins 2010–01 (Feb. 

17, 2010) and 2009–02 (July 20, 2009). 

11See Field Assistance Bulletins 2004–1 (April 7, 

2004) and 2006–02 (Oct. 27, 2006). 

12See also Raymond B. Yates, M.D., P.C. Profit 

Sharing Plan v. Hendon, 541 U.S. 1 (2004). 

13Some 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 

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. 

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. 

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

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 

§ 2510.3–3(c), would not be a ‘‘covered 

plan.’’ 

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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5635 

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). 

14One 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. 

15The 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. 

16Consistent 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. 

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. 

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. 

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. 

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 

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5636 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

17The 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). 

18The 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. 

assessing the reasonableness of the 

compensation, direct and indirect, that 

the service provider will receive. 

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

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, 

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19See ‘‘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). 

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. 

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. 

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 brokerdealer 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 

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5638 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5639 

20Several 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. 

21A 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). 

brokerage services (as described in 

paragraph (c)(1)(iii)(B)).20

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 investmentrelated 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 participantdirected 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 participantdirected 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. 

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 participantlevel 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 

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5640 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

22Of course, as is recognized in the participantlevel 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. 

23A 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. 

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 § 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

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 ‘‘offplatform’’ 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 

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

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 

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5642 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

24A 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. 

25Commenters 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. 

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

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

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 

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26See 72 FR 70988. 

27The 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. 

28One 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). 

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. 

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. 

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 

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5644 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

29The 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. 

30The 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). 

31The 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. 

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. 

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

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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5645 

rule. Otherwise, this provision has not 

changed from the interim final rule. 

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, selfdirected 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 

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5646 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

32Some 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. 

33When 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. 

34The 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. 

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. 

‘‘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. 

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 

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

DisclosureNotice.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 

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5648 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

35Two 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. 

36The 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). 

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

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.’’ 

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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5649 

37The 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. * * *[.]’’ 

38One 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. 

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. 

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. 

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. 

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. 

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. 

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5650 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

40Available at http://www.whitehouse.gov/omb/ 

circulars/a004/a-4.pdf. 

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. 

TABLE 2—ACCOUNTING TABLE (TOTAL IMPACT OF THE FINAL RULE) 

Category Primary 

estimate 

Year 

dollar 

Discount 

rate 

Period 

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. 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5651 

41Estimates 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#plan

bulletins. Small pension plans are plans with 

generally less than 100 participants, as specified in 

the Form 5500 instructions. 

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. 

43While 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. 

TABLE 2—ACCOUNTING TABLE (TOTAL IMPACT OF THE FINAL RULE)—Continued 

Category Primary 

estimate 

Year 

dollar 

Discount 

rate 

Period 

covered 

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 participantdirected individual account plans. 

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. 

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

Schedule C data was also used to 

count the number of covered planservice 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. 

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5652 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

TABLE 3—TOTAL DISCOUNTED COSTS RULE (SHOWN WITH 7 PERCENT DISCOUNT RATE) 

Year Cost of legal 

review 

Cost of general information disclosure Cost of investment information disclosure Cost of 

qualifying for 

exemption 

Total costs 

(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 

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Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 5653 

44Out 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. 

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

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 

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5654 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

TABLE 4—HOUR BURDEN—Continued 

Year 1 Year 2 Year 3 Average 

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 forprofit; 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 (threeyear average). 

Frequency of Response: Annually; 

occasionally. 

Estimated Annual Burden Hours: 

3,072,000 (first year); 1,644,000 (threeyear 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 

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

■ 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 § 21524 

(May 7, 2009). Sec. 2550.401c–1 also issued 

under 29 U.S.C. 1101. Sec. 2550.404a–1 also 

issued under sec. 657, Pub. L. 107–16, 115 

Stat. 38. Sections 2550.404c–1 and 

2550.404c–5 also issued under 29 U.S.C. 

1104. Sec. 2550.408b–1 also issued under 29 

U.S.C. 1108(b)(1) and sec. 102, 

Reorganization Plan No. 4 of 1978, 5 U.S.C. 

App. 1. Sec. 2550.408b–19 also issued under 

sec. 611, Pub. L. 109–280, 120 Stat. 780, 972, 

and sec. 102, Reorganization Plan No. 4 of 

1978, 5 U.S.C. App. 1. Sec. 2550.412–1 also 

issued under 29 U.S.C. 1112. 

■ 2. Section 2550.408b–2(c) is revised to 

read as follows: 

§ 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 

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5656 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

plan pursuant to the contract or 

arrangement (but not including nonfiduciary 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: 

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

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5658 Federal Register / Vol. 77, No. 23 / Friday, February 3, 2012 / Rules and Regulations 

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 OEDelinquentSPnotice@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 

mstockstill on DSK4VPTVN1PROD with RULES2

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

[FR Doc. 2012–2262 Filed 2–2–12; 8:45 am] 

BILLING CODE 4510–29–C 


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