Wednesday, 

October 20, 2010 

Part IV 

Department of Labor 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

Fiduciary Requirements for Disclosure in 

Participant-Directed Individual Account 

Plans; Final Rule 


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64910 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

1 2007 Form 5500 Data, U.S. Department of Labor. 

The estimated 483,000 plans include plans that 

permit participants to direct the investment of all 

or a portion of their individual accounts. 

2 72 FR 20457 (April 25, 2007). 

3 73 FR 43014 (July 23, 2008). 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB07 

Fiduciary Requirements for Disclosure 

in Participant-Directed Individual 

Account Plans 

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) that requires the disclosure of 

certain plan and investment-related 

information, including fee and expense 

information, to participants and 

beneficiaries in participant-directed 

individual account plans (e.g., 401(k) 

plans). This regulation is intended to 

ensure that all participants and 

beneficiaries in participant-directed 

individual account plans have the 

information they need to make informed 

decisions about the management of their 

individual accounts and the investment 

of their retirement savings. This 

document also contains conforming 

changes to another regulation relating to 

plans that allow participants to direct 

the investments of their individual 

accounts. These regulations will affect 

plan sponsors, fiduciaries, participants 

and beneficiaries of participant-directed 

individual account plans, as well as 

providers of services to such plans. 

DATES: Effective Date. December 20, 

2010. 

Applicability Date. Notwithstanding 

the effective date, the final rule and 

amendments will apply to individual 

account plans for plan years beginning 

on or after November 1, 2011. 

FOR FURTHER INFORMATION CONTACT: 

Michael Del Conte, Office of Regulations 

and Interpretations, Employee Benefits 

Security Administration, (202) 693– 

8510. This is not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

1. General 

According to the Department of 

Labor’s (Department) most recent data, 

there are an estimated 483,000 

participant-directed individual account 

plans, covering an estimated 72 million 

participants, and holding almost $3 

trillion in assets.1 With the proliferation 

of these plans, which afford participants 

and beneficiaries the opportunity to 

direct the investment of all or a portion 

of the assets held in their individual 

plan accounts, participants and 

beneficiaries are increasingly 

responsible for making their own 

retirement savings decisions. This 

increased responsibility has led to a 

growing concern that participants and 

beneficiaries may not have access to or, 

if accessible, may not be considering, 

information critical to making informed 

decisions about the management of their 

accounts, particularly information on 

investment choices, including attendant 

fees and expenses. 

Under ERISA, the investment of plan 

assets is a fiduciary act governed by the 

fiduciary standards in ERISA section 

404(a)(1)(A) and (B), which require plan 

fiduciaries to act prudently and solely 

in the interest of the plan’s participants 

and beneficiaries. When a plan assigns 

investment responsibilities to the plan’s 

participants and beneficiaries, it is the 

view of the Department that plan 

fiduciaries must take steps to ensure 

that participants and beneficiaries are 

made aware of their rights and 

responsibilities with respect to 

managing their individual plan accounts 

and are provided sufficient information 

regarding the plan, including its fees 

and expenses and designated 

investment alternatives, to make 

informed decisions about the 

management of their individual 

accounts. To some extent, disclosure of 

such information already is required by 

plans that elect to comply with the 

requirements of ERISA section 404(c) 

(see section 2550.404c–1(b)(2)(i)(B)). 

However, compliance with section 

404(c)’s disclosure requirements is 

voluntary and does not extend to 

participants and beneficiaries in all 

participant-directed individual account 

plans. 

The Department believes that all 

participants and beneficiaries with the 

right to direct the investment of assets 

held in their individual plan accounts 

should have access to basic plan and 

investment information. For this reason, 

the Department is issuing this regulation 

under ERISA section 404(a), with 

conforming amendments to regulations 

under section 404(c). This regulation 

under ERISA section 404(a) establishes 

uniform, basic disclosures for such 

participants and beneficiaries, without 

regard to whether the plan in which 

they participate is a section 404(c) plan. 

In addition, the regulation requires 

participants and beneficiaries to be 

provided investment-related 

information in a form that encourages 

and facilitates a comparative review 

among a plan’s investment alternatives. 

2. Request for Information and Proposed 

Regulation 

To facilitate development of the 

regulation, the Department first 

published, on April 25, 2007, a Request 

for Information (RFI) in the Federal 

Register 2 requesting suggestions, 

comments and views from interested 

persons on a variety of issues relating to 

the disclosure of plan and investmentrelated fee and expense and other 

information to participants and 

beneficiaries in participant-directed 

individual account plans. Following its 

review of over 100 public comment 

letters submitted in response to the RFI, 

the Department next published a notice 

of proposed rulemaking in the Federal 

Register on July 23, 2008.3 Interested 

persons were again invited to submit 

comments on the proposal, and, in 

response to this invitation, the 

Department received over 90 written 

comments from a variety of parties, 

including plan sponsors and fiduciaries, 

plan service providers, financial 

institutions, and employee benefit plan 

and participant representatives. These 

comments are available for review 

under ‘‘Public Comments’’ on the ‘‘Laws 

& Regulations’’ page of the Department’s 

Employee Benefits Security 

Administration Web site at http:// 

www.dol.gov/ebsa. 

In addition to publishing an RFI and 

a proposed regulation, the Department 

engaged ICF International (ICF) to 

conduct a series of focus group studies 

concerning how participants generally 

make choices among their employee 

benefit plan’s investment alternatives, 

and, specifically, how participants 

would react to the Model Comparative 

Chart for plan investment alternatives 

that was published as an appendix to 

proposed section 2550.404a–5. ICF 

issued a report to the Department 

concerning the results of these focus 

group studies, and these results, where 

appropriate, have been incorporated 

below in the Department’s discussion of 

comments on the proposed regulation 

and Model Comparative Chart. 

Set forth below is an overview of the 

final regulations and a discussion of the 

public comments received on the 

proposal. 


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4This estimate is based on 2007 Form 5500 data, 

which is the latest available data. 5This calculation uses a seven percent discount 

rate. The $14.9 billion of benefits and $2.7 billion 

of costs are valued in 2010 dollars. 6 73 FR 43014 at 43018, n. 7 (July 23, 2008). 

B. Final Rule § 2550.404a–5

Concerning Fiduciary Requirements for 

Disclosure 

In general, the final regulation retains 

the basic structure of the proposal. 

Paragraph (a) of § 2550.404a–5 sets forth 

the general principle that, where 

documents and instruments governing 

an individual account plan provide for 

the allocation of investment 

responsibilities to participants and 

beneficiaries, a plan fiduciary, 

consistent with ERISA section 

404(a)(1)(A) and (B), must take steps to 

ensure that such participants and 

beneficiaries, on a regular and periodic 

basis, are made aware of their rights and 

responsibilities with respect to the 

investment of assets held in, or 

contributed to, their accounts and are 

provided sufficient information 

regarding the plan, including plan fees 

and expenses, and regarding the 

designated investment alternatives 

available under the plan, including fees 

and expenses attendant thereto, to make 

informed decisions with regard to the 

management of their individual 

accounts. Paragraph (b) addresses the 

disclosure requirements that must be 

met by plan fiduciaries for plan years 

beginning on or after the applicability 

date. Under this paragraph, plan 

fiduciaries must comply with the 

requirements of paragraph (c), dealing 

with plan-related information, and 

paragraph (d), dealing with investmentrelated information. Paragraph (e) 

describes the form in which the 

required information may be disclosed, 

such as via the plan’s summary plan 

description, a quarterly benefit 

statement, or the use of the provided 

model, depending on the specific 

information. Paragraph (e) recognizes 

the various acceptable means of 

disclosure; it does not preclude other 

means for satisfying the disclosure 

duties under this final regulation. 

Fiduciaries that meet the requirements 

of paragraphs (c) and (d) will have 

satisfied the duty to make the regular 

and periodic disclosures described in 

paragraph (a) of this section. As 

indicated in the preamble to the 

proposal, the Department believes, as an 

interpretive matter, that ERISA section 

404(a)(1)(A) and (B) impose on 

fiduciaries of all participant-directed 

individual account plans a duty to 

furnish participants and beneficiaries 

information necessary to carry out their 

account management and investment 

responsibilities in an informed manner. 

In the case of plans that elected to 

comply with section 404(c) before the 

applicability of this final rule, the 

requirements of section 404(a)(1)(A) and 

(B) typically would have been satisfied 

by compliance with the disclosure 

requirements set forth at 29 CFR Sec. 

2550.404c–1(b)(2)(i)(B). However, the 

Department expresses no view with 

respect to plans that did not comply 

with section 404(c) and the regulations 

thereunder as to the specific 

information that should have been 

furnished to participants and 

beneficiaries at any time before this 

regulation is finalized and applicable. 

Pursuant to Executive Order 12866, 

the Department evaluated the benefits 

and costs of the final regulation, and 

concludes that the net present value of 

the rule’s benefits is estimated at nearly 

$12.3 billion. The Department estimates 

that the regulation will affect 72 million 

participants in 483,000 participantdirected individual account plans 

containing assets valued at nearly $3.0 

trillion.4 Over the ten-year period 2012– 

2021, the Department estimates that the 

present value of the benefits provided 

by the final rule will be approximately 

$14.9 billion and the present value of 

the costs will be approximately $2.7 

billion.5 A significant benefit of this 

regulation is that it will reduce the 

amount of time participants spend 

collecting fee and expense information 

and organizing the information in a 

format that allows key information to be 

compared; this time savings is estimated 

to total nearly 54 million hours valued 

at nearly $2 billion in 2010 (2010 

dollars). The anticipated cost of the 

regulation is $425 million in 2012 (2010 

dollars), arising from legal compliance 

review, time spent consolidating 

information for participants, creating 

and updating Web sites, preparing and 

distributing annual and quarterly 

disclosures, and material and postage 

costs to distribute the disclosures. A 

more detailed discussion of the need for 

this regulatory action, consideration of 

regulatory alternatives, and assessment 

of benefits and costs is included in 

Section E of this preamble, entitled 

‘‘Regulatory Impact Analysis.’’ 

1. General; Satisfaction of Duty To 

Disclose 

As proposed, the obligation to 

disclose the required information was 

imposed generally on a plan fiduciary 

(paragraph (a) of proposed § 2550.404a– 

5). Commenters, however, requested 

guidance as to which fiduciary is 

responsible for satisfying the duty to 

disclose. The proposal described the 

party responsible for providing 

disclosures as ‘‘a fiduciary (or a person 

or persons designated by the fiduciary 

to act on its behalf)[.]’’ Commenters 

explained that any given plan might 

have many fiduciaries involved in its 

operation and requested clarification as 

to which fiduciary must provide the 

rule’s required disclosures. Accordingly, 

consistent with other disclosure 

obligations under ERISA, the 

Department has clarified in paragraph 

(a) of the final rule that the plan 

administrator, as defined in ERISA 

section 3(16), is responsible for 

complying with the rule’s disclosure 

requirements. 

Paragraph (b) of the final rule, 

consistent with the proposal, addresses 

the disclosure requirements plan 

administrators must satisfy. Paragraph 

(b) has been modified from the proposal 

to clarify, at paragraph (b)(1), that a plan 

administrator will not be liable for the 

completeness and accuracy of 

information used to satisfy these 

disclosure requirements when the plan 

administrator reasonably and in good 

faith relies on information received from 

or provided by a plan service provider 

or the issuer of a designated investment 

alternative. A footnote to the proposal 

included the following statement: 

‘‘[F]iduciaries shall not be liable for their 

reasonable and good faith reliance on 

information furnished by their service 

providers with respect to those 

disclosures required by paragraph 

(d)(1).’’ 6 Although commenters 

generally were supportive of this 

reliance relief for plan administrators 

required to comply with the rule’s 

disclosure requirements, many 

comments asked the Department to 

make this relief more prominent by 

including it in the text of the final rule, 

rather than as a mere footnote to the 

Department’s preamble. The Department 

was persuaded that this relief should be 

more prominent, and the provision 

therefore has been added to the text of 

the final rule. Further, this provision 

has been expanded to enable reliance on 

information received from or provided 

by both service providers to the plan 

and, as applicable, issuers of plan 

designated investment alternatives (e.g., 

mutual funds). 

Some commenters requested that the 

final rule clarify whether IRA-based 

plans are subject to the disclosure rule. 

Commenters argued that IRA-based 

plans under the Internal Revenue Code 

of 1986 (Code) such as Code sections 

408(k) simplified employee pensions 

(SEPs) and 408(p) simple retirement 

accounts (SIMPLEs) are already subject 

to disclosure regimes under the Code 


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7Some commenters asked whether this 

requirement included limitations that are imposed 

at the investment or fund level. The Department 

intends that the disclosure pursuant to this 

paragraph would include only plan-based 

limitations and restrictions on a participant’s ability 

to direct investments or transfer to or from 

designated investment alternatives. To the extent 

any limitations or restrictions are imposed at the 

investment, fund or portfolio level, those 

limitations or restrictions must be described as part 

of the investment-related information required by 

the final rule. See paragraph (d)(1)(iv) of the final 

regulation. 

and relevant securities laws. It also was 

argued that application of the disclosure 

rules would add administrative 

complexity to arrangements that, by 

their very nature, were intended to be 

simple and that complicating 

administration of such plans may serve 

to discourage employers from 

establishing or continuing such 

arrangement for their employees. Taking 

into account the foregoing arguments, as 

well as the fact that participants in IRAbased plans generally have considerable 

flexibility in the choice of their IRA 

provider or the ability to roll over their 

balances to an IRA provider of their 

choice, the Department has determined 

not to extend the application of this rule 

to such plans. To clarify the scope of the 

final rule, a new paragraph (b)(2) has 

been added defining the types of 

arrangements that constitute a ‘‘covered 

individual account plan’’ for purposes of 

the rule. In this regard, paragraph (b)(2) 

provides that a ‘‘covered individual 

account plan’’ is any participantdirected individual account plan, as 

defined in section 3(34) of ERISA, 

except that such term shall not include 

plans involving individual retirement 

accounts or individual retirement 

annuities described in sections 408(k) 

(‘‘simplified employee pension’’) or 

408(p) (‘‘simple retirement account’’) of 

the Internal Revenue Code of 1986 

(Code). 

A few commenters suggested the rule 

be expanded to cover defined 

contribution plans that do not allow for 

participant direction. The Department 

did not adopt this suggestion. While it 

may be appropriate to review the 

disclosure rules applicable to such 

plans, the Department does not believe 

it has sufficient information at this time 

to fully evaluate and address potential 

disclosure gaps in the context of this 

rulemaking. 

One commenter suggested that the 

Department exclude small plans (for 

example those with fewer than 100 

participants) from the scope of the final 

rule. The Department did not adopt this 

suggestion. The Department believes 

that participants in smaller plans face 

the same challenges as participants in 

larger plans when it comes to 

understanding the operations of their 

plans and the investment options 

offered thereunder. For this reason, the 

Department has determined that the 

final rule should apply to covered 

participant-directed individual account 

plans without regard to size. 

Several commenters suggested that 

the Department clarify, and in some 

cases modify, the scope of the proposal 

as to the specific participants and 

beneficiaries of covered plans to which 

the rule applies. The proposed rule 

required disclosures to each participant 

and beneficiary of the plan that 

‘‘pursuant to the terms of the plan, has 

the right to direct the investment of 

assets held in, or contributed to his or 

her individual account.’’ The question 

presented by the commenters was 

whether disclosures must be furnished 

to all eligible employees or only those 

who actually participate in the plan. 

Consistent with the definition of 

‘‘participant’’ under section 3(7) of 

ERISA, disclosures must be made to all 

employees that are eligible to participate 

under the terms of the plan, without 

regard to whether the participant has 

actually become enrolled in the plan. 

One commenter recommended that the 

proposal be modified to require initial 

disclosures to all eligible employees, but 

limit annual disclosures only to those 

that actually enroll, make contributions, 

and direct their investments. The 

Department has not adopted this 

recommendation. The Department 

believes that, with regard to employees 

that have not enrolled in their plan, the 

annual notice will serve as an important 

reminder of their eligibility to 

participate in the plan. With regard to 

notification of beneficiaries, however, 

the obligation to disclose extends only 

to those beneficiaries that, in 

accordance with the terms of the plan, 

have the right to direct the investment 

of assets held in, or contributed to, their 

accounts. Such rights might arise as a 

result of the death of a participant or 

pursuant to a qualified domestic 

relations order. 

2. Plan-Related Information 

As noted above, paragraph (c) of the 

final rule addresses plan-related 

information that must be disclosed to 

participants and beneficiaries. Like the 

proposal, paragraph (c) sets forth three 

general categories of plan-related 

information that must be disclosed to 

participants and beneficiaries—general 

operational and identification 

information (paragraph (c)(1)), 

administrative expenses (paragraph 

(c)(2)), and individual expenses 

(paragraph (c)(3)). The required 

disclosures must be based on the latest 

information available to the plan. 

a. General Operational and 

Identification Information 

Paragraph (c)(1)(i), like the proposal, 

requires that certain operational and 

identification information be disclosed 

to participants and beneficiaries. 

Specifically, this paragraph requires that 

participants and beneficiaries be 

provided: (A) An explanation of the 

circumstances under which participants 

and beneficiaries may give investment 

instructions; (B) An explanation of any 

specified limitations on such 

instructions under the terms of the plan, 

including any restrictions on transfer to 

or from a designated investment 

alternative; 7 (C) A description of or 

reference to plan provisions relating to 

the exercise of voting, tender and 

similar rights appurtenant to an 

investment in a designated investment 

alternative as well as any restrictions on 

such rights; (D) An identification of any 

designated investment alternatives 

offered under the plan; (E) An 

identification of any designated 

investment managers; and (F) A 

description of any ‘‘brokerage windows,’’ 

‘‘self-directed brokerage accounts,’’ or 

similar plan arrangements that enable 

participants and beneficiaries to select 

investments beyond those designated by 

the plan. Subparagraph (F) was added to 

the final rule in response to comments 

requesting a clarification as to what, if 

anything, has to be disclosed about 

brokerage windows and similar 

arrangements that permit participants to 

invest their assets in other than 

designated investment alternatives 

offered by the plan. It should be noted 

that in addition to the general brokerage 

window information required by 

paragraph (F), other provisions of this 

rule require disclosure of any fees and 

expenses that participants will be 

expected to pay when utilizing the 

brokerage window or similar 

arrangement (see paragraph (c)(3)(i)(A)). 

A number of commenters expressed 

concern about the requirement(s) that 

information be furnished to participants 

and beneficiaries ‘‘on or before the date 

of plan eligibility and at least annually 

thereafter.’’ Specifically, the concerns 

focused on the compliance challenges 

posed by this disclosure requirement on 

plans that provide for plan eligibility as 

of the first day of employment, noting 

that employers may not be able to 

furnish the required disclosure in 

advance of employment and, therefore, 

may be required to modify their 

eligibility rules to avoid noncompliance 

with this disclosure obligation. 

Commenters suggested various 


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8Some commenters requested that the 

Department reiterate its position, discussed in the 

preamble to the proposed rule, that administrative 

charges do not need to be broken out into serviceby-service detail on the quarterly statement. The 

Department continues to agree with commenters on 

the proposal and the RFI who believe that such a 

breakdown is not necessary, or particularly useful, 

to participants and beneficiaries; the final rule 

therefore also allows for ‘‘aggregate’’ disclosure of 

administrative expenses, as proposed. See 73 FR 

43014, 43016 (July 23, 2008). 

alternatives, such as requiring 

disclosure on or before enrollment in 

the plan or the first investment. The 

Department believes that the 

commenters make a valid point and, 

accordingly, has modified the rule to 

provide more flexibility. The final rule 

provides in this regard that participants 

and beneficiaries must be furnished the 

required information on or before the 

date on which they can first direct their 

investments. While not requiring 

disclosures as early as the date of plan 

eligibility, the provision does operate to 

ensure that participants are furnished 

the information either before or in 

connection with their first investment 

direction under the plan. The same 

timing issues exists with respect to 

those plan-related disclosures required 

by paragraphs (c)(2)(i)(A), (c)(3)(i)(A) 

and (d)(1) and, therefore, the 

Department has made identical changes 

to the timing requirements of those 

paragraphs in the final rule. 

b. Changes to General Information 

The proposal required in paragraph 

(c)(1)(ii) that participants or 

beneficiaries be furnished, not later than 

30 days after the date of adoption of any 

material change to the general plan 

information described in paragraph 

(c)(1)(i), a description of such change. 

The Department received several 

comments requesting that the timing for 

furnishing a description of such a 

material change be determined with 

reference to the effective date of the 

change, rather than the date of its 

adoption. Commenters noted that the 

adoption date of a change sometimes 

precedes its effective date by as much as 

a year or more, and also that in some 

instances the date of adoption may be 

unclear. Several commenters also 

suggested that the required description 

of the change be furnished at least 30 

days, but not more than 90 days, before 

the effective date of the material change, 

in order to apprise participants and 

beneficiaries of the change close to the 

time that it will be useful to them. In 

addition, questions were raised 

concerning what constitutes a ‘‘material’’ 

change in the required information. 

With regard to the question as to what 

constitutes a ‘‘material’’ change, the 

Department is now of the view that, 

given the significance of the information 

that has to be disclosed under paragraph 

(c)(1)(i), virtually any change in the 

information would be a ‘‘material’’ 

change because of its importance to 

participants and beneficiaries. 

Accordingly, the Department has 

decided to drop the concept of 

‘‘material’’ from the requirement to 

update plan participants and 

beneficiaries of changes in the required 

disclosures. 

The Department also decided to 

amend the timing requirements in 

response to comments on the proposal. 

In this regard, the Department agrees 

with commenters that suggested that 

participants and beneficiaries should be 

notified of plan changes on the earliest 

possible date and, where practical, in 

advance of the effective date of the 

changes. In this regard, paragraph 

(c)(1)(ii) of the final rule provides that 

if there is a change to the information 

described in paragraph (c)(1)(i)(A) 

through (F), a description of such 

change(s) must be furnished to 

participants and beneficiaries at least 30 

days, but not more than 90 days, in 

advance of the effective date of the 

change(s). The final rule, however, also 

recognizes that there may be 

circumstances when changes must be 

made within a time frame that precludes 

compliance with the 30-day advance 

notice requirement, such as the 

immediate elimination of an investment 

option when it is determined to be no 

longer a prudent investment alternative. 

In such cases, the rule requires that 

information be furnished as soon as 

reasonably practicable. 

In connection with the development 

of the final rule, the Department also 

reviewed the information required to be 

disclosed under paragraph (c)(2)(i)(A) 

(relating to administrative expenses) 

and paragraph (c)(3)(i)(A) (relating to 

individual expenses) and concluded 

that an updating rule should apply to 

those disclosures as well, given the 

importance of the required information 

to participants and beneficiaries. These 

new updating requirements appear at 

paragraphs (c)(2)(i)(B) and (c)(3)(i)(B) of 

the final rule. 

c. Administrative Expenses 

Paragraph (c)(2)(i) of the final rule, 

like the proposal, requires that 

participants and beneficiaries be 

provided an explanation of any fees and 

expenses for general plan administrative 

services (e.g., legal, accounting, 

recordkeeping) that may be charged 

against their individual accounts 

(whether by liquidating shares or 

deducting dollars), and the basis on 

which such charges will be allocated 

(pro rata, per capita). The provision 

makes clear that such charges do not 

include charges that are included in the 

annual operating expenses of designated 

investment alternatives. As noted above, 

this paragraph (c)(2) has been modified 

to establish disclosure timing and 

update requirements that conform with 

the requirements of paragraph (c)(1). See 

paragraph (c)(2)(i)(A) and (B). 

Paragraph (c)(2)(ii), also like the 

proposal, requires that expenses 

described in paragraph (c)(2)(i) that are 

actually charged against a participant’s 

or beneficiary’s account be disclosed to 

participants and beneficiaries at least 

quarterly, along with a description of 

the service(s) to which the charge or 

charges relate.8 However, in response to 

commenters’ requests for specificity as 

to which services and charges are 

covered by this quarterly disclosure 

requirement, paragraph (c)(2)(ii)(A) both 

includes an explicit cross reference to 

the fees and expenses for administrative 

services described in paragraph (c)(2)(i) 

and a parenthetical noting that the 

disclosed charges arise from either the 

liquidation of shares or the deduction of 

dollars from individual accounts in 

compliance with paragraph (c)(2)(i)’s 

requirement that such charges are not 

included in the total annual operating 

expense of any designated investment 

alternative. 

In a further effort to bring clarity to 

the disclosures provided to participants 

and beneficiaries, the Department has 

added a new subparagraph (C) to 

paragraph (c)(2)(ii) of the final rule. This 

new subparagraph is intended to 

provide those participants in plans with 

revenue sharing arrangements that serve 

to reduce plan administrative costs with 

a better picture as to how those costs are 

underwritten, at least in part, by fees 

and expenses attendant with investment 

alternatives offered under their plans. 

Specifically, paragraph (c)(2)(ii)(C) 

provides that, if applicable, the 

statement required to be furnished 

pursuant to paragraph (c)(2)(ii), must 

include an explanation that, in addition 

to the expenses reported on the 

statement, some of the plan’s 

administrative expenses for the 

preceding quarter were paid from the 

annual operating expenses of one or 

more of the plan’s designated 

investment alternatives (e.g., through 

revenue sharing arrangements, Rule 

12b–1 fees, sub-transfer agent fees). This 

required statement has been included in 

the final rule in response to many 

comments received by the Department 

on the provision in the proposal that 

administrative expenses must be 

disclosed pursuant to this paragraph 


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64914 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

only ‘‘to the extent not otherwise 

included in investment-related fees and 

expenses[.]’’ Some commenters 

expressed concern that participants and 

beneficiaries may be misled into 

believing that there is little or no 

administrative expense associated with 

their participation in the plan when a 

significant portion of the cost of 

administrative services is actually paid 

out of investment-related charges. Other 

commenters disagreed and believed 

that, because any such administrative 

services would be paid for from the total 

annual operating expenses of the 

designated investment alternatives in 

which participants invest and because 

such annual operating expenses are 

required to be separately disclosed, 

participants and beneficiaries will 

receive comprehensive information 

about the total charges, for 

administration and investment, that will 

be assessed against their accounts. 

These commenters also argue that the 

burden associated with attempting to 

attribute some portion of total annual 

operating expenses to plan 

administrative services would be 

significant and vastly outweigh any 

potential benefit to participants and 

beneficiaries of such attribution. Most 

commenters, however, agreed that it is 

appropriate to inform participants, 

when applicable, that administrative 

expenses are paid from investmentrelated fees and are not reflected in the 

reported administrative expense 

amount. The Department was persuaded 

that some information, even if general, 

would help participants to better 

understand the fees and expenses 

attendant to operating their plan and of 

the fact that some fees and expenses 

might be underwritten by the 

investment alternatives offered by their 

plans. 

Some commenters argued that 

administrative expenses charged to 

participant accounts should be reported 

on an annual, rather than a quarterly, 

basis. These commenters argued that the 

amounts reported as deducted during 

any given quarter have the potential to 

both mislead and confuse participants 

because such amounts are often 

subsequently reduced or restored by 

offsets or credits from revenue sharing 

and similar arrangements as part of 

year-end or periodic reconciliations. 

The commenters further argue that 

eliminating this information from 

quarterly disclosures will not affect the 

information available to participants 

because participants typically have 

access to Web sites where they can 

review the status of their account, 

including charges to their accounts, on 

a daily basis. Other commenters 

supported the quarterly disclosure 

requirement, noting that there is no 

other formal requirement for the 

disclosure of such information to 

participants and beneficiaries on a 

regular basis. After careful consideration 

of the various views on this 

requirement, the Department has 

decided to retain the requirement for 

quarterly disclosures of plan 

administrative expenses. While the 

Department recognizes that some 

participants may have questions 

concerning the debiting of charges and 

crediting of offsets to their accounts 

during the plan year, the Department is 

not persuaded that the potential for 

confusion and questions that might 

result from the requirement outweighs 

the benefits of participants and 

beneficiaries being informed on a 

regular basis of the actual amounts 

taken from (or credited to) their account 

during the quarter and the identification 

of services, albeit general, to which 

those amounts relate. 

d. Individual Expenses 

As noted above, paragraph (c)(3) 

requires the disclosure of those 

expenses charged against a participant’s 

or beneficiary’s account on an 

individual, rather than plan-wide basis. 

Examples of such charges include: Fees 

attendant to the processing of plan loans 

or qualified domestic relations orders; 

fees for investment advice; front or 

back-end loads or sales charges; 

redemption fees; and investment 

management fees attendant to a 

participant’s or beneficiary’s investment 

that are charged directly against the 

individual account of the participant or 

beneficiary, rather than included in the 

annual operating expenses of the 

investment (as might be the case, for 

example, with certain unregistered 

designated investment alternatives, such 

as bank collective investment funds). In 

addition to clarifying changes, 

paragraph (c)(3), like paragraphs (c)(1) 

and (c)(2), incorporates new disclosure 

timing and update requirements, which 

are discussed in detail above. 

A few commenters requested 

clarification about the quarterly 

disclosure requirement for individual 

expenses. These commenters explained 

that some individual expenses currently 

are disclosed by a confirmation 

statement or other similar notice that is 

provided at the time the charge actually 

is assessed to the individual 

participant’s or beneficiary’s account; 

these commenters argued that the 

Department should avoid duplication, 

and potential confusion to participants 

and beneficiaries, that would result 

from requiring that these expenses also 

be disclosed on a quarterly statement. 

The Department does not intend such 

duplicative disclosure; the rule requires 

that this information be provided ‘‘at 

least quarterly,’’ and the Department 

anticipates that actual charges may be 

disclosed more frequently than 

quarterly. To the extent such a charge is 

otherwise disclosed during a particular 

quarter, for example by a confirmation 

statement after a charge is deducted 

from an account, that charge would not 

have to be disclosed again on the 

subsequent quarterly statement. No 

quarterly statement in compliance with 

this paragraph (or with paragraph 

(c)(2)(ii) concerning quarterly disclosure 

of administrative expenses) must be 

furnished if there were no charges to a 

participant’s or beneficiary’s account 

during the preceding quarter. 

e. Disclosures On or Before First 

Investment 

In an effort to clarify the scope of the 

updating requirements and ensure that 

new participants were provided at least 

the same information that had been 

provided to existing participants prior 

to their participation, paragraph 

(d)(1)(v) of the proposal provided, for 

purposes of the disclosure of 

investment-related information to new 

participants, plan administrators could 

satisfy their obligation by furnishing the 

most recent annual disclosure along 

with any required updates furnished to 

participants and beneficiaries. The 

Department received no objections to 

this provision and, accordingly, is 

adopting it as proposed, with the 

exception of a paragraph re-designation 

and changes necessary to conform to the 

new timing requirements applicable to 

the annual disclosures. See paragraph 

(d)(1)(viii) of § 2550.404a–5. A question 

was raised, however, whether a similar 

clarification was needed for the planlevel disclosures required to be 

furnished to new participants and 

beneficiaries under the regulation. The 

Department found no basis for not 

providing similar guidance in the 

context of the required plan-level 

disclosures and, therefore, has added to 

the final rule a new paragraph (c)(4). 

Paragraph (c)(4) provides that for 

purposes of the requirements under 

paragraphs (c)(1)(i), (c)(2)(i)(A), and 

(c)(3)(i)(A) that plan administrators 

furnish information on or before the 

date on which a participant or 

beneficiary can first direct his or her 

investments, plan administrators may 

satisfy their obligations by furnishing to 

the participant or beneficiary the most 

recent annual disclosure furnished to 

participants and beneficiaries pursuant 


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those paragraphs and any changes to the 

information furnished to participants 

and beneficiaries pursuant to 

paragraphs (c)(1)(ii), (c)(2)(i)(B) and 

(c)(3)(i)(B) of the final rule. 

3. Investment-Related Information 

The Department received a number of 

comments relating to the disclosure of 

investment-related information 

pursuant to paragraph (d) of the 

proposal, and the related definitional 

section in paragraph (h). Many of the 

comments raised questions concerning 

the proposed application of mutual 

fund-type disclosures to non-registered 

investment vehicles. The Department 

has made a number of changes to this 

section of the final rule (and the related 

definitional section in paragraph (h)), in 

an effort to address the problems raised 

by the commenters, while, at the same 

time, attempting to maintain a 

reasonably uniform regime for the 

disclosure of investment-related 

information, a disclosure regime that 

would enable participants to compare 

competing mutual fund, insurance and 

banking products on a reasonably 

consistent and uniform basis. In 

considering these issues, the 

Department, in addition to considering 

comments and input from financial 

industry representatives, consulted with 

other appropriate regulators, including 

the Securities and Exchange 

Commission (Commission), the Office of 

the Comptroller of the Currency, and the 

Financial Industry Regulatory Authority 

(FINRA). The Department also 

employed focus groups, as discussed 

above, to learn more about how 

participants make investment decisions 

and whether the Department’s proposed 

Model Comparative Chart would in fact 

assist such decisions. The Department 

believes that the investment-related 

disclosure requirements of the final 

rule, discussed below, strike an 

appropriate balance between 

accommodating, on one hand, the 

increasing innovation and complexity of 

the types of investments that are 

available to plan participants and 

beneficiaries and, on the other hand, 

participants’ and beneficiaries’ need for 

complete, but concise and user-friendly, 

information about their plan investment 

alternatives. 

a. Information To Be Provided 

Automatically 

Paragraph (d)(1) of the final rule, 

consistent with the proposal, describes 

the investment-related information that 

must be provided automatically, with 

respect to each designated investment 

alternative, to participants and 

beneficiaries on or before the date they 

first have the ability to direct their 

investments and at least annually 

thereafter. The specific information that 

must be disclosed pursuant to this 

paragraph is set forth below, as well as 

a discussion of how this required 

information has been modified in 

response to commenters’ concerns. 

Additionally, paragraph (i) of the final 

rule provides special disclosure 

requirements for certain types of 

designated investment alternatives, 

which modify the requirements of 

paragraph (d)(1) of the final. 

b. Identifying Information 

The proposed regulation, in paragraph 

(d)(1)(i), required that certain 

identifying information be furnished 

with respect to each designated 

investment alternative offered under the 

plan. The first required piece of 

information, in subparagraph (A), is the 

name of the designated investment 

alternative. This straight-forward 

requirement did not generate any public 

comment and has been retained in the 

final rule. 

Subparagraph (B) of paragraph 

(d)(1)(i) of the proposal required the 

furnishing of an Internet Web site 

address relating to each designated 

investment alternative. The Web site 

requirements of the final rule, as well as 

related comments on the proposal, are 

discussed below in this preamble under 

the heading ‘‘f. Internet Web site 

address.’’ 

Like the proposal, the final rule, at 

paragraph (d)(1)(i)(B), requires 

identification of the type or category of 

the investment (e.g., money market 

fund, balanced fund (stocks and bonds), 

large-cap stock fund, employer stock 

fund, employer securities). This 

requirement is unchanged from the 

proposal, although the examples of 

types or categories in the parenthetical, 

which are set forth for illustrative 

purposes, have been expanded in 

response to questions from commenters 

about investment alternatives that did 

not clearly fall within the list of 

examples included in the proposal. One 

commenter suggested that fiduciaries 

should be permitted to utilize various 

commercial services to classify the type 

or category of a plan’s designated 

investment alternatives. While the 

Department has not modified the 

proposal in response to this suggestion, 

the Department anticipates that plan 

administrators typically will rely on the 

investment issuer’s classification of the 

type or category of an investment 

alternative. 

Finally, paragraph (d)(1)(i)(D) of the 

proposal, which required disclosure of 

the type of management utilized by the 

investment (e.g., actively managed, 

passively managed), has been 

eliminated from the final rule. Many 

commenters requested that this 

requirement be eliminated, arguing that 

they do not believe this information will 

be useful to most participants and 

beneficiaries; that some funds may not 

clearly fall within either one of these 

two categories, either because they have 

features of both or because neither 

category applies (for example, an 

employer stock fund); and, that it may 

even mislead participants and 

beneficiaries about the risks of a 

particular designated investment 

alternative. Other commenters argued 

that this requirement may be redundant; 

for example, a fund that lists its ‘‘type 

or category’’ as an index fund is by 

definition passively managed. Finally, 

the results of the Department’s focus 

groups support the notion that this 

information is not necessarily helpful, 

and is potentially confusing, to 

participants. One focus group 

participant, for example, stated that 

without knowing what is meant by 

active or passive management, she 

would choose active management 

because it ‘‘sounds’’ better. The 

Department was persuaded by 

commenters that providing this 

information, especially as required in a 

comparative format, may not be 

meaningful to participants and 

beneficiaries. Accordingly, the final rule 

no longer requires plan administrators 

to furnish, as a separate piece of 

identifying information, the type of 

management utilized with respect to a 

designated investment alternative. The 

Department notes that, for participants 

who wish to obtain more information 

about the management of a designated 

investment alternative, the narrative 

description of an investment’s 

objectives or goals, and of the 

investment’s principal strategies and 

principal risks, is likely to convey more 

meaningful and contextual information 

concerning the style of management 

used with respect to a designated 

investment alternative. 

c. Performance Data 

The proposed rule, in paragraph 

(d)(1)(ii), required that performance data 

be disclosed for designated investment 

alternatives with respect to which the 

return is not fixed. Specifically, this 

paragraph required disclosure of the 

average annual total return (percentage) 

of the investment for the following 

periods, if available: 1-year, 5-years, and 

10-years, measured as of the end of the 

applicable calendar year, as well as a 

statement indicating that an 

investment’s past performance is not 


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64916 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

9Now Item 27 of Form N–1A, as revised February 

2010. 

necessarily an indication of how the 

investment will perform in the future. 

This provision, paragraph (d)(1)(ii), is 

being adopted generally as proposed. 

Several commenters raised issues 

regarding the ‘‘if available’’ language, 

suggesting that participants and 

beneficiaries could be deprived of as 

much as nearly five years of valuable 

return information in situations where 

the designated investment alternative 

has been in existence for a period of 

time just shy of the 5- or 10-year marks. 

These commenters noted that 

Commission rules require performance 

for the ‘‘life of the fund’’ to address this 

issue. In order to avoid the information 

gap identified by the commenters, and 

to maintain appropriate consistency 

with Commission requirements, the 

final regulation, at (d)(1)(ii)(A), requires 

disclosure of the average annual total 

return of the investment for 1-, 5-, and 

10-calendar year periods ending on the 

date of the most recently completed 

calendar year (or for the life of the 

designated investment alternative, if 

shorter). 

In the case of designated investment 

alternatives with respect to which the 

return is fixed for the term of the 

investment, paragraph (d)(1)(ii) of the 

proposal required disclosure of both the 

fixed rate of return and the term of the 

investment. While no commenters 

opposed the proposed requirement, 

some commenters did request a 

clarification as to how the disclosure 

requirement applied to contracts with 

respect to which there is no ‘‘term of 

investment.’’ The commenters explain 

that certain contracts, while often 

having a minimum guaranteed rate for 

the life of the contract, permit the fixed 

rate to change upon notice, but never 

below the minimum guaranteed rate. 

One commenter suggested that, for such 

contracts, the pertinent information for 

participants and beneficiaries is the 

most recent rate of return, the minimum 

rate guaranteed under the contract, if 

any, and an explanation that the insurer 

may adjust the rate of return 

prospectively. The Department agrees. 

The most essential information for 

participants who choose to invest in 

fixed investment alternatives is the 

contractual interest rate paid to their 

accounts and the term of the investment 

during which their monies are shielded 

from market price fluctuations and 

reinvestment risks. The Department 

believes that, with respect to such 

contracts, it is particularly important 

that participants and beneficiaries be 

clearly advised of the issuer’s ability to 

modify the rate of return and be able to 

readily determine the most current rate 

of return applicable to such investment. 

In this regard, the Department has 

modified the proposal, at paragraph 

(d)(1)(ii)(B) of the final, to require the 

disclosure of the current rate of return, 

the minimum rate guaranteed under the 

contract or agreement, if any, and a 

statement advising participants and 

beneficiaries that the issuer may adjust 

the rate of return prospectively and how 

to obtain (e.g., telephone or Web site) 

the most recent rate of return 

information available. 

One commenter asked whether 

designated investment alternatives such 

as stable value funds and money market 

mutual funds are to be treated as fixed 

return or variable return investments for 

purposes of the regulation. The fixed 

return provisions of the regulation are 

limited to designated investment 

alternatives 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). Examples of fixed 

return investments include certificates 

of deposit, guaranteed insurance 

contracts, variable annuity fixed 

accounts, and other similar interestbearing contracts from banks or 

insurance companies. While money 

market mutual funds and stable value 

funds generally aim to preserve 

principal, they are not free of 

investment risk to the investor. 

Accordingly, such investments are 

subject to the variable return provisions 

of the regulation, even though they 

routinely hold fixed-return investments. 

Several commenters requested 

clarification on the relationship, if any, 

between the disclosure requirements in 

the proposal and the Securities and 

Exchange Commission’s and FINRA’s 

advertising rules. The primary concern 

of commenters seemed to be in 

connection with the requirement to 

disclose annually the performance data 

specified in paragraph (d)(1)(ii) of the 

proposal and the timeliness 

requirements in the Commission’s 

advertising rules. The Department has 

consulted with the staff of the 

Commission and FINRA on this issue. 

The Commission’s staff has advised that 

it expects to communicate its position to 

the Department in a staff no-action 

letter, which will be issued before the 

applicability date of this final rule. 

FINRA staff has stated that it will apply 

the Commission’s advertising rules in a 

manner that is consistent with the 

Commission’s staff position published 

in the no-action letter. The Department 

and the Commission will, in turn, make 

the letter available to the public on their 

respective Web sites. 

d. Benchmarks 

Paragraph (d)(1)(iii) of the proposal 

required, for each designated 

investment alternative with respect to 

which the return is not fixed, the 

disclosure of ‘‘the name and returns of 

an appropriate broad-based securities 

market index over the 1-year, 5-year, 

and 10-year periods * * *’’ for which 

performance data must be disclosed. 

The proposal also provided that the 

benchmark could not be administered 

by an affiliate of the investment 

provider, its investment adviser, or a 

principal underwriter, unless the index 

is widely recognized and used. 

Some commenters suggested that the 

Department eliminate this requirement, 

while others called for permitting or 

requiring multiple benchmarks for each 

designated investment alternative. Some 

commenters suggested permitting 

composite or customized benchmarks. 

Those commenters who favored an 

ability to include multiple benchmarks 

for each designated investment option 

noted the existence of such flexibility 

under SEC rules, specifically Item 

22(b)(7) of Form N–1A.9 (See, e.g., 

Instruction 6 to Item 22(b)(7), 

encouraging, in addition to a required 

broad-based securities market index, 

narrowly based indexes that reflect the 

market sectors in which a fund invests.) 

Commenters who advocated composite 

benchmarks stated that a fund that 

invests in both stocks and bonds (e.g., 

lifecycle fund or balanced fund) should 

be permitted to compare itself to a 

benchmark consisting of a weighted 

average of both an equities index and a 

bond index. The commenters who 

favored eliminating the benchmark 

requirement stated that certain 

investment strategies are not managed to 

a benchmark, and therefore, providing 

benchmark information could be 

misleading. Supporters of the proposal, 

however, maintained that participants 

would benefit more from having a single 

recognizable benchmark for each 

designated investment alternative under 

the plan, rather than multiple or 

blended indices for each. 

The Department continues to believe 

that appropriate benchmarks may be 

helpful tools for participants to use in 

assessing the various investment 

options available under their plans and, 

therefore, has retained this requirement 

in the final rule. However, benchmarks 

are more likely to be helpful when they 

are not subject to manipulation and are 

recognizable and understandable to the 

average plan participant, as is the case 

with broad-based indices contemplated 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64917 

by Instruction 5 to Item 27(b)(7) of Form 

N–1A. For this reason, the final rule 

retains the proposed requirement that a 

benchmark must be a broad-based 

securities market index and it may not 

be administered by an affiliate of the 

investment issuer, its investment 

adviser, or a principal underwriter, 

unless the index is widely recognized 

and used. The Department, however, 

notes that paragraph (d)(2)(ii) of the 

final regulation permits the disclosure 

of information that is in addition to that 

which is required by this final 

regulation, so long as the additional 

information is not inaccurate or 

misleading. Thus, in the case of 

designated investment alternatives that 

have a mix of equity and fixed income 

exposure (e.g., balanced funds or target 

date funds), a plan administrator may, 

pursuant to paragraph (d)(2)(ii) of the 

final rule, blend the returns of more 

than one appropriate broad-based index 

and present the blended returns along 

with the returns of the required 

benchmark, provided that the blended 

returns proportionally reflect the actual 

equity and fixed-income holdings of the 

designated investment alternative. For 

example, where a balanced fund’s 

equity-to-bond ratio is 60:40, the returns 

of an appropriate bond index and an 

appropriate equity index may be 

blended in the same ratio and presented 

along with the benchmark returns 

mandated by paragraph (d)(1)(iii) of the 

final rule. Presenting blended returns 

that do not proportionally reflect the 

holdings of the designated investment 

alternative would, in the view of the 

Department, be misleading and, 

therefore, not permitted pursuant to 

paragraph (d)(2)(ii) of the final 

regulation. 

e. Fee and Expense Information 

Paragraph (d)(1)(iv) of the proposal 

required disclosure of fee and expense 

information for designated investment 

alternatives. This requirement has been 

retained in the final rule, with a few 

modifications in response to public 

comments. Paragraph (d)(1)(iv) also has 

been restructured so that subparagraph 

(A) addresses the fee and expense 

disclosure requirements for designated 

investment alternatives with respect to 

which the return is not fixed, and 

subparagraph (B) addresses such 

requirements for designated investment 

alternatives with respect to which the 

return is fixed for the term of the 

investment. 

Consistent with the proposal, 

paragraph (d)(1)(iv)(A)(1) requires 

disclosure of the amount and a 

description of each shareholder-type fee 

(fees charged directly against a 

participant’s or beneficiary’s 

investment, such as commissions, sales 

loads, sales charges, deferred sales 

charges, redemption fees, surrender 

charges, exchange fees, account fees, 

and purchase fees). No substantive 

changes were made to this provision 

from that which was proposed. 

Clarifying language, however, was 

added to the existing parenthetical 

language in order to distinguish 

shareholder-type fees from other 

investment-related fees and expenses. 

The new language provides that a fee or 

expense is a shareholder-type fee to the 

extent it is ‘‘not included in the total 

annual operating expenses of any 

designated investment alternative.’’ 

Thus, the key distinction is how the fee 

is ultimately being paid by the 

participant or beneficiary. If the fee or 

expense is charged directly against 

participant’s or beneficiary’s individual 

investment or account, as is typically 

the case with sales loads, account fees, 

and the other items delineated in the 

parenthetical, then the fee or expense is 

to be disclosed as a shareholder-type 

fee. If, on the other hand, the fee or 

expense is paid from the operating 

expenses of a designated investment 

alternative, then the fee or expense is to 

be included in the total annual 

operating expenses of a designated 

investment alternative. The requirement 

to disclose the total annual operating 

expenses of each designated investment 

alternative is discussed below. 

The Department recognizes that in 

some instances there will be an overlap 

in disclosures between shareholder type 

fees described in paragraph 

(d)(1)(iv)(A)(1), and individual expenses 

described in paragraph (c)(3) of the final 

rule, which are discussed in detail 

above under the heading ‘‘d. Individual 

expenses.’’ For example, a front-end 

sales load imposed in connection with 

investing in a specific designated 

investment alternative that is charged 

(either by share or dollar deduction) 

directly against a participant’s or 

beneficiary’s individual account would 

properly be covered by and require 

disclosures under both paragraphs. The 

consequence of this overlap is that 

participants and beneficiaries will not 

only receive general information 

regarding the sales load before 

investing, but pursuant to paragraph 

(c)(3)(ii) of the final rule, will also 

receive a statement after investing 

showing the dollar amount actually 

charged against their individual 

accounts. 

Some commenters asked whether 

only fees and expenses must be 

disclosed, or whether plan 

administrators also should notify 

participants and beneficiaries of other 

limitations or restrictions concerning 

the designated investment alternative, 

such as trading restrictions or 

limitations on how amounts liquidated 

from the designated investment 

alternative may be reinvested. In the 

Department’s view, it is appropriate in 

this context to inform participants and 

beneficiaries of these restrictions and 

limitations so that they are fully aware 

of the consequences of their investment 

decisions. Accordingly, paragraph 

(d)(1)(iv)(A)(1) of the final rule has been 

expanded from the proposal to require 

a description of any restriction or 

limitation that may be applicable to a 

purchase, transfer, or withdrawal of the 

investment in whole or in part (such as 

round trip, equity wash, or other 

restrictions). 

Paragraph (d)(1)(iv)(A)(2) requires 

disclosure of the total annual operating 

expenses of the investment expressed as 

a percentage (e.g., expense ratio), 

calculated in accordance with paragraph 

(h)(5) of the final rule. This requirement 

is unchanged from the proposal, 

although, as discussed below, the 

definition of ‘‘total annual operating 

expenses’’ has been revised in the final 

rule. 

Paragraph (d)(1)(iv)(A)(3) of the final 

rule includes a new requirement for an 

example illustrating the effect in dollars 

of each designated investment 

alternative’s total annual operating 

expenses. Specifically, this paragraph 

requires disclosure of the total annual 

operating expenses of the investment for 

a one-year period expressed as a dollar 

amount for a $1,000 investment 

(assuming no returns and based on the 

total annual operating expenses 

percentage disclosed for paragraph 

(d)(1)(iv)(A)(2)). A significant number of 

commenters felt that a dollar-based 

disclosure would be more useful to 

participants, who cannot always convert 

operating expense ratios into dollars, 

which commenters argue is a more 

helpful way for participants to 

understand the significance of fees. The 

results of the Department’s focus group 

studies also support the notion that 

examples in dollars will help 

participants to better understand how 

fees impact retirement savings. The 

Department was persuaded by the large 

number of commenters supporting 

inclusion of dollar-based disclosure in 

the context of investment fees and, 

accordingly, expanded the requirements 

of the final rule to provide for the 

disclosure of a designated investment 

alternative’s total annual operating 

expenses in dollars. 

Paragraph (d)(1)(iv)(A)(4) of the final 

rule requires a statement indicating that 


emcdonald on DSK2BSOYB1PROD with RULES4
64918 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

10Paragraph (d)(1)(i)(B) of the proposal required 

disclosure of ‘‘supplemental information regarding 

the designated investment alternative, including 

***’’ (emphasis added). Some commenters argued 

that use of the word ‘‘including’’ could be read as 

‘‘including, but not limited to.’’ In that case, plans 

would be uncertain as to whether additional 

information must be provided and, if so, what 

information must be provided. 

fees and expenses are only one of 

several factors that participants and 

beneficiaries should consider when 

making investment decisions. The 

Department did not receive any 

comments opposing this requirement; in 

fact, this required statement is 

consistent with the concern raised by 

commenters that participants and 

beneficiaries should not be encouraged 

to focus ‘‘only’’ on fees and expenses, 

since fee and expense information must 

be considered in context with other 

information about a plan’s designated 

investment alternatives. This required 

statement has been retained, unchanged 

from the proposal. 

Paragraph (d)(1)(iv)(A)(5) of the final 

rule includes a new required statement 

that the cumulative effect of fees and 

expenses can substantially reduce the 

growth of a participant’s or beneficiary’s 

retirement account and that participants 

and beneficiaries can visit the Internet 

Web site of the Employee Benefits 

Security Administration for information 

and an example demonstrating the longterm effect of fees and expenses. This 

statement has been added in response to 

the suggestion of commenters that 

participants and beneficiaries would 

benefit from an understanding that, over 

time, fees and expenses may 

substantially reduce the growth of their 

retirement accounts. 

Finally, paragraph (d)(1)(iv)(B) of the 

final rule provides the fee and expense 

information that must be disclosed for 

designated investment alternatives with 

respect to which the return is fixed for 

the term of the investment. Consistent 

with the proposal, plan administrators 

must disclose the amount and a 

description of any shareholder-type 

fees, and a description of any 

restrictions or limitations that may be 

applicable to a purchase, transfer or 

withdrawal of the investment in whole 

or in part. For examples of fixed-return 

investments, see the discussion above in 

this preamble under the heading ‘‘c. 

Performance data.’’ 

f. Internet Web Site Address 

The proposed rule contained a 

requirement that plan fiduciaries 

provide an ‘‘Internet Web site address 

that is sufficiently specific to lead 

participants and beneficiaries to 

supplemental information regarding the 

designated investment alternative, 

including the name of the investment’s 

issuer or provider, the investment’s 

principal strategies and attendant risks, 

the assets comprising the investment’s 

portfolio, the investment’s portfolio 

turnover, the investment’s performance 

and related fees and expenses[.]’’ 

The Department received a number of 

comments concerning this Web site 

requirement. Some commenters 

supported the requirement, but 

requested clarifications such as who 

would be responsible for maintaining 

the Web site address and whether 

participants and beneficiaries could be 

referred to the Web site of a service 

provider or investment issuer. Other 

commenters argued that the requirement 

should be eliminated because Web site 

information is not currently provided 

for all designated investment 

alternatives in the participant-directed 

plan marketplace; for example, Web site 

information often is not provided for 

bank collective investment funds, 

certain insurance products, and 

employer stock. 

After careful consideration of these 

comments, the Department has decided 

to retain the Web site approach to 

disclosing investment-related 

information. See paragraph (d)(1)(v) of 

the final rule. The Department believes, 

in this regard, that the availability of 

information via a Web site reduces the 

amount of information required to be 

directly provided to participants and 

beneficiaries, without compromising a 

participant’s or beneficiary’s access to 

the additional information. While a 

critical objective of this rulemaking is to 

ensure that all participants and 

beneficiaries in participant-directed 

individual account plans are furnished 

the information they need to make 

informed investment decisions, the 

Department remains sensitive to the 

possibility that too much information 

may only serve to overwhelm, rather 

than inform, participants and 

beneficiaries. The Department believes 

that the Web site approach to disclosure 

strikes an appropriate balance in this 

context, accommodating different levels 

of participant interest in more detailed 

investment-related disclosures. While 

the Department recognizes, based on the 

comments, that the required Web sites 

may not currently be available for all 

investment vehicles offered by 

individual account plans in today’s 

marketplace, the Department is not 

persuaded that the costs and burdens 

attendant to establishing and 

maintaining a Web site that will satisfy 

the disclosure requirements of this final 

rule will outweigh the benefits of 

improved disclosure and ready access to 

more detailed and current information 

by participants and beneficiaries. 

Under the final rule, the 

responsibility for ensuring the 

availability of a Web site address falls 

upon the plan administrator. However, 

whether, and to what extent, the plan 

administrator is responsible for 

establishing and maintaining the Web 

site itself will depend on the 

responsibilities assumed by either the 

issuer of the designated investment 

alternative(s) or a service provider to the 

plan. That is, as provided in paragraph 

(b)(1) of the final rule, a plan 

administrator will not be liable for the 

completeness and accuracy of 

information used to satisfy the 

disclosure requirements of this 

regulation when the plan administrator 

reasonably and in good faith relies on 

information received from or provided 

by a plan service provider or the issuer 

of a designated investment alternative. 

In addition to the general comments 

discussed above, some commenters 

expressed concern about the specific 

items of information required to be 

made available on the Web site. Several 

commenters, for example, asked 

whether the list of items in the proposed 

rule was intended to be exclusive, or 

whether plans may be required, or be 

permitted, to provide additional 

information.10 The final rule, at 

paragraph (d)(1)(v), has been revised to 

make clear that the supplemental 

information identified in the regulation 

is the only information that is required 

to be contained on the Web site; this 

clarification was accomplished by 

deleting the word ‘‘including’’ which 

had been used in the proposed 

regulation before the list of content 

items. Nonetheless, there is nothing in 

this final rule that precludes a plan 

administrator, service provider or the 

issuer of a designated investment 

alternative from including on the Web 

site additional information that may 

assist participants and beneficiaries in 

assessing the appropriateness of the 

designated investment alternative for 

their plan accounts. 

Paragraph (d)(1)(v)(A) of the final 

retains the requirement from the 

proposal that the Web site include the 

name of the investment’s issuer. The 

Department did not receive any 

comments on this provision. 

Paragraph (d)(1)(v)(B) contains a new 

content requirement for supplemental 

information that is required to be 

contained on the Web site. Several 

commenters requested that the 

Department add, as another item of 

supplemental information available at a 

designated investment alternative’s Web 


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11See Item 4(a) and (b) of Securities and 

Exchange Commission Form N–1A or Item 5(c) and 

(e) of Securities and Exchange Commission Form 

N–3. 

12See, e.g., Securities and Exchange Commission 

Form N–1A Item 4(a) (requiring a summary of how 

the mutual fund intends to achieve its investment 

objectives by identifying the fund’s principal 

investment strategies, including the type or types of 

securities in which the fund will principally invest 

and any policy to concentrate in securities issuers 

in a particular industry or group of industries) and 

Item 4(b)(1) (requiring a summary of the principal 

risks of investing in the fund, including risks to 

which the fund’s portfolio as a whole is subject and 

the circumstances reasonably likely to affect 

adversely the fund’s net asset value, yield, or total 

return; Item 4(b)(1) also requires special disclosure 

for money market-type funds, investments sold 

through insured depository institutions, and nondiversified investments). 

13This clarification is consistent with a 

requirement in the Department’s 404(c) regulation, 

prior to its amendment herein, to disclose 

‘‘information relating to the type and diversification 

of assets comprising the portfolio’’). See 29 CFR 

2550.404c–1(b)(2)(i)(B)(1)(ii). 

14Consistent with Instruction 4(c) to Item 13(a) of 

Form N–1A and Instruction 11(e) to Item 4 of Form 

N–3, money market funds (and other investment 

products with similar investment objectives) may 

omit a portfolio turnover rate. 

site, a description of the designated 

investment alternative’s objectives or 

goals. These commenters felt that 

merely disclosing the ‘‘type or category’’ 

of investment, as required by 

subparagraph (d)(1)(i)(C) of the 

proposal, was not sufficient and that 

participants or beneficiaries would 

benefit from a narrative statement of the 

alternative’s basic objectives or goals. 

The Department agrees with these 

commenters that participants and 

beneficiaries should be apprised of a 

designated investment alternative’s 

objectives or goals and that this 

information will be helpful in 

understanding how the alternative’s 

principal strategies are intended to 

achieve those objectives or goals. 

Commenters did not demonstrate that 

requiring this information would be 

problematic or burdensome; rather, it 

seems clear that investment issuers 

generally already disclose this 

information. The final rule has been 

modified from the proposal to explicitly 

require, in paragraph (d)(1)(v)(B), 

disclosure of the investment’s objectives 

or goals in a manner consistent with 

Securities and Exchange Commission 

Form N–1A or N–3, as appropriate. 

Although commenters generally were 

not opposed to the requirement in the 

proposal that the Web site for a 

designated investment alternative 

include information about the 

investment’s ‘‘principal strategies and 

attendant risks,’’ some commenters 

requested clarification as to the nature 

of the information that must be 

disclosed in order to satisfy this 

requirement. For example, some 

commenters asked if the Department 

intended to model this requirement after 

the requirement in securities laws that 

investment companies disclose their 

‘‘principal investment strategies’’ and 

‘‘principal risks.’’ 11 The Department 

believes that the ‘‘strategies’’ and ‘‘risks’’ 

associated with an investment 

alternative should be well-understood 

concepts in the plan investment 

marketplace, and the Department does 

not anticipate that plan administrators 

or the parties providing the Web sites 

will have difficulty in satisfying this 

requirement. In response to the 

commenters, the Department has 

clarified that paragraph (d)(1)(v)(C) of 

the final rule requires disclosure of the 

investment’s ‘‘principal strategies 

(including a general description of the 

types of assets held by the investment) 

and principal risks in a manner 

consistent with Securities and Exchange 

Commission Form N–1A or N–3, as 

appropriate’’ of the designated 

investment alternative. The Department 

believes that the standards for narrative 

disclosure contained in the 

Commission’s requirements are general 

enough that this information can be 

furnished with respect to all designated 

investment alternatives.12

Several commenters requested 

clarification of the requirement in 

paragraph (d)(1)(i)(B) of the proposal to 

disclose the ‘‘assets comprising the 

investment’s portfolio.’’ Specifically, 

commenters asked whether this 

requirement mandates disclosure of 

every individual asset or security held 

by the investment alternative, which 

commenters argue will not be helpful to 

most participants, or, more simply, 

disclosure of the type or types of assets 

or securities held by the investment 

alternative. Some commenters also 

recommended eliminating this 

requirement, since investment 

alternatives that are not subject to 

Commission registration do not 

currently compile and disclose this 

information, and because the burden of 

compiling this information, especially 

for complex investments, would not 

justify its benefit. The Department did 

not intend that the Web site include a 

detailed list of all assets and securities 

that comprise the investment 

alternative’s portfolio. The reference to 

‘‘assets comprising the investment’s 

portfolio’’ has not been included in the 

final rule. In addition, paragraph 

(d)(1)(v)(C) of the final rule, inside the 

parenthetical, now clarifies that a 

discussion of the investment’s principal 

strategies includes ‘‘a general 

description of the types of assets held’’ 

by the investment.13 This narrative 

description is supplemented by more 

specific information that is available on 

request to participants under paragraph 

(d)(4) of the final rule. 

Some commenters raised concerns 

with the proposal’s requirement that the 

Web site include information 

concerning a designated investment 

alternative’s portfolio turnover. These 

commenters questioned what exactly 

must be disclosed about an investment’s 

portfolio turnover; for example, whether 

a ratio or turnover rate would suffice. 

Other commenters recommended 

elimination of the requirement, because 

investment alternatives that are not 

subject to Commission registration are 

not currently required to disclose 

portfolio turnover information. The 

Department was not persuaded that this 

requirement should be eliminated for all 

designated investment alternatives. An 

investment alternative’s portfolio 

turnover indicates the frequency with 

which the investment alternative is 

buying and selling securities. An 

investment that is frequently buying and 

selling securities may be generating 

higher trading costs. Trading costs are 

not included in an alternative’s expense 

ratio, yet the cost of trading on a 

portfolio level does have an effect, in 

some cases a large effect, on the 

alternative’s rate of return. The 

Department, therefore, believes that 

such information may be helpful to 

participants and beneficiaries in 

assessing the appropriateness of their 

investment options. 

While the Department recognizes that 

not all designated investment 

alternatives available to plan 

participants and beneficiaries calculate 

portfolio turnover rates, the Department 

understands that such investment 

alternatives should be able to do so 

without significant difficulty or costs. 

The final rule, at paragraph (d)(1)(v)(D), 

therefore, has been revised to require 

that, unless expressly exempted 

elsewhere in the rule, the information 

on the Web site must include the 

investment’s portfolio turnover rate in a 

manner consistent with Securities and 

Exchange Commission Form N–1A or 

N–3, as appropriate.14 The Department 

has exempted certain designated 

investment alternatives, such as fixedreturn and employer stock alternatives, 

from the portfolio turnover requirement 

where the Department has concluded 

that turnover rates are irrelevant to the 

participants and beneficiaries. See 

paragraph (i) of the final rule for special 


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64920 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

rules for certain designated investment 

alternatives and annuity options. 

A few commenters requested 

clarification about what information 

must be disclosed on the Web site 

concerning ‘‘the investment’s 

performance and related fees and 

expenses’’ as required by paragraph 

(d)(1)(i)(B) of the proposal. Specifically, 

these commenters ask to what extent 

this requirement is redundant given the 

performance and fee and expense 

information that is otherwise required to 

be disclosed on the annual disclosure 

document; if it is not redundant, 

commenters question what additional 

performance and fee and expense 

information must be provided on the 

Web site. The intent of this provision 

was to make available more recent 

information than what was provided to 

participants on an annual basis. In 

responses to these comments, the 

Department has modified the proposal 

to split this requirement into two 

separate provisions and has clarified the 

updating obligation for all supplemental 

information. Paragraph (d)(1)(v)(E) of 

the final rule addresses the performance 

data that must be displayed by reference 

to the return information specified in 

paragraph (d)(1)(ii) and requires that 

such information be updated on at least 

a quarterly basis (as defined in 

paragraph (h)(2) of the final rule), or 

more frequently if required by other 

applicable law. Other than providing 

the revised performance information on 

the Web site in compliance with this 

updating requirement, plan 

administrators are not obligated to 

provide any additional or different 

information concerning an investment’s 

performance. Paragraph (d)(1)(v)(F) of 

the final rule addresses the fee and 

expense information that must be 

displayed by reference to the fee and 

expense information specified in 

paragraph (d)(1)(iv). This information 

must be updated in accordance with the 

general updating requirement for 

supplemental information discussed 

below. Corresponding to the content 

parameters for updating performance 

information, plan administrators are not 

obligated to provide any additional or 

different information concerning an 

investment’s fees and expenses than 

that required by paragraph (d)(1)(iv) of 

the final rule. 

Commenters also requested guidance 

as to how often the Web site 

supplemental information must be 

updated; the proposal did not provide 

an updating requirement. In view of the 

fact that participants will have 

continuing access to Web sites, it is the 

expectation that the information made 

available via the Web site will be 

accurate and updated by the plan 

administrator, service provider or the 

issuer of a designated investment 

alternative as soon as reasonably 

possible following a change, or 

notification thereof. 

Recognizing that some participants 

may not have ready access to the 

information required to be made 

available on an Internet Web site, the 

final rule, at paragraph (d)(2)(i)(C), 

requires that participants and 

beneficiaries be furnished, as part of the 

required comparative format disclosure 

document, information about how to 

request, and obtain free of charge, a 

paper copy of the information required 

to be maintained on a Web site pursuant 

to paragraph (d)(1)(v) or paragraph (i), as 

applicable. 

g. Glossary 

Although not part of the proposed 

rule, a number of commenters suggested 

that participants and beneficiaries 

would benefit from a glossary of 

investment and financial terms relevant 

to the designated investment 

alternatives under the plan. Indeed, the 

lack of a glossary of investment 

terminology in the proposed regulation 

was perceived as a key weakness of the 

proposal by some of these commenters. 

One of these commenters, for example, 

commissioned a nationally 

representative online survey of 2,106 

participants in 401(k) plans to gather 

feedback on the proposal’s model 

comparative chart. A conclusion of that 

survey is that providing clear 

definitions of financial terminology and 

using vocabulary that is not perceived 

as complicated may help to improve 

participants’ understanding of the 

disclosure. ICF’s report to the 

Department following their focus group 

studies further supported the 

commenters and the conclusion of the 

online survey. The Department was 

persuaded that the furnishing of a 

glossary or access to a glossary of terms 

relevant to plan investments would be 

helpful to participants and, accordingly, 

has included such a requirement in the 

final rule. See paragraph (d)(1)(vi). 

Specifically, paragraph (d)(1)(vi) 

provides for the furnishing of a general 

glossary of terms to assist participants 

and beneficiaries in understanding the 

designated investment alternatives, or 

an Internet Web site address that is 

sufficiently specific to provide access to 

such a glossary along with a general 

explanation of the purpose of the 

address. The Department anticipates a 

number of ways to satisfy this 

furnishing requirement. For example, a 

plan administrator could satisfy this 

furnishing requirement either by 

including an appropriate glossary in the 

comparative disclosure document or, in 

lieu thereof, by including an Internet 

Web site address at which such a 

glossary may be accessed. Alternatively, 

the Web site address for each designated 

investment alternative, required 

pursuant paragraphs (d)(1)(v) and (i) of 

the final rule, may contain its own 

glossary of terms relevant to that 

specific alternative, or link to such a 

glossary. 

Some commenters suggested that the 

Department prepare or make available 

such a glossary. At this juncture, the 

Department believes that plan 

administrators, in conjunction with 

their service providers and issuers of 

investment alternatives, are in the best 

position to determine the glossary (or 

glossaries) appropriate for their 

participants, taking into consideration 

the investment options made available 

under the plan. Nonetheless, the 

Department is interested in further 

exploring whether the Department 

should develop or identify general 

investment glossaries that could be 

utilized by plan administrators in 

satisfying their obligations under the 

final rule. Specifically, the Department 

invites interested persons to share their 

views as to what terminology should be 

addressed in a general investment 

glossary and whether, or to what extent, 

such glossaries currently exist that 

could serve as a resource for relatively 

unsophisticated participant-investors. 

Suggestions and views on the 

development and availability of one or 

more such glossaries should be 

addressed to e-ORI@dol.gov, subject: 

Participant Investment Glossary. 

h. Annuity Options 

The Department received a number of 

comments relating to the disclosure of 

information with respect to investment 

products that consist, in whole or in 

part, of annuities or annuitization 

guarantees. These commenters maintain 

that core concepts in the proposal, such 

as ‘‘average annual total return,’’ 

‘‘benchmarks,’’ and ‘‘total annual 

operating expenses,’’ while entirely 

appropriate for designated investment 

alternatives with respect to which 

returns can and do vary, such as mutual 

funds, collective investment funds, and 

portfolio operating companies within 

variable annuity contracts, are irrelevant 

to annuities or annuitization guarantees. 

The commenters, therefore, requested 

that the Department revise the proposal 

to require disclosure of information 

more appropriate to annuity contracts, 

funds or products. Some of the 

commenters emphasized that plan 

administrators need the flexibility to 


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explain the benefits of these products 

which may provide annuities or 

annuitization guarantees along with 

exposure to the equities market and 

requested that the final rule allow for 

such explanations in the disclosure. 

In response to these comments, the 

Department has added two new 

provisions to the final rule. The first 

new provision, at paragraph (d)(1)(vii) 

of the final rule, is intended to address 

commenters’ concerns with annuity 

features that are contained within 

variable annuity contracts, under which 

participants and beneficiaries have a 

right to purchase an annuity with their 

accumulated plan savings at a rate 

specified in the contract (‘‘variable 

annuity’’). The information that must be 

disclosed pursuant to this paragraph 

(d)(1)(vii) for the variable annuity 

complements the investment-related 

information disclosed pursuant to 

paragraph (d)(1) for the related portfolio 

operating companies. Paragraph 

(d)(1)(vii) is applicable to any 

designated investment alternative 

consisting in part of a contract, fund or 

product that affords participants or 

beneficiaries the option to allocate 

contributions toward the future 

purchase of a stream of retirement 

income payments guaranteed by an 

insurance company. When applicable, 

paragraph (d)(1)(vii) of the final rule 

incorporates by cross reference the 

requirements of the second new 

provision, a special rule, at paragraph 

(i)(2)(i) through (vii) of the final 

regulation. This provision requires the 

disclosure of information relating to the 

variable annuity itself to the extent that 

the information is not otherwise 

disclosed pursuant to paragraph 

(d)(1)(iv). Through the combination of 

these two provisions, the Department 

intends for participants and 

beneficiaries to receive comprehensive 

disclosure of investment and annuity 

information pertaining to both portfolio 

operating companies within a variable 

annuity contract and the variable 

annuity itself. The special rule at 

paragraph (i)(2)(i) through (vii) of the 

final regulation is discussed more fully 

below. 

i. Disclosures On or Before First 

Investment 

As discussed above, paragraph 

(d)(1)(v) of the proposal provided, for 

purposes of the disclosure of 

investment-related information to new 

participants, that plan administrators 

could satisfy this obligation by 

furnishing the most recent annual 

disclosure along with any required 

updates furnished to participants and 

beneficiaries. The Department received 

no objections to this provision and, 

accordingly, is adopting it as proposed, 

except that it has been re-designated as 

paragraph (d)(viii) in the final rule and 

modified to conform with the new 

timing requirements (i.e., to reflect the 

change from ‘‘on or before the date of 

plan eligibility’’ to ‘‘on or before the date 

on which the participant or beneficiary 

can first direct his or her investment’’). 

j. Comparative Format Requirement 

Paragraph (d)(2) of the proposed 

regulation provided that the investmentrelated information required pursuant to 

paragraph (d)(1) must be furnished in a 

chart or similar format that is designed 

to facilitate comparison of such 

information for each designated 

investment alternative offered under the 

plan. The Department also included as 

an Appendix to the proposal a Model 

Comparative Chart that could be used to 

satisfy this requirement. Several 

commenters on the proposal specifically 

noted their support for the requirement 

that investment-related information be 

disclosed in a comparative format. 

Further, participants in the 

Department’s focus group studies 

believe that the Model Comparative 

Chart would make it easier to choose 

among a plan’s designated investment 

alternatives; these individuals felt that 

the Chart is an improvement over the 

manner in which plan investment 

information currently is made available 

to them and that the Chart would 

encourage them, in some cases, to 

obtain additional information about 

plan designated investment alternatives. 

The Department has retained this 

requirement in paragraph (d)(2) of the 

final rule, subject to a few minor 

modifications, and has also published 

with the final rule a revised Model 

Comparative Chart which reflects 

conforming changes to the final rule’s 

disclosure requirements. Paragraph 

(d)(2)(i) of the final rule requires that the 

information described in paragraph 

(d)(1) and, if applicable, paragraph (i), 

must be furnished in a chart or similar 

format that is designed to facilitate a 

comparison of such information for each 

designated investment alternative 

available under the plan. This paragraph 

of the final rule also requires that the 

date of the chart be prominently 

displayed. As proposed, the final rule 

requires in paragraphs (d)(2)(i)(A) and 

(B) a statement indicating the name, 

address, and telephone number of the 

plan administrator (or the plan 

administrator’s designee) to contact for 

the provision of the information that 

must be made available upon request 

pursuant to paragraph (d)(4) of the final 

rule and a statement that additional 

investment-related information 

(including more current performance 

information) is available at the listed 

Internet Web site addresses. 

As noted above, a new subparagraph 

(C) has been added to paragraph (d)(2)(i) 

of the final rule. This new subparagraph 

requires that the comparative disclosure 

include information about how 

participants and beneficiaries can 

request, and obtain, free of charge, paper 

copies of the information required to be 

maintained on a Web site pursuant to 

paragraph (d)(1)(v) of the final rule. This 

new disclosure requirement will help to 

ensure that participants and 

beneficiaries who do not have access to 

the Internet, nonetheless, can, if they so 

choose, obtain supplemental 

information contained on the Web sites, 

in order to facilitate a comprehensive 

consideration of the available 

investment choices under the plan. 

Because the final rule includes special 

Web site disclosure rules for certain 

designated investment alternatives and 

annuity options (paragraph (i)(2) for 

annuity options and paragraph (i)(3) for 

fixed-return alternatives), the new the 

subparagraph (C) includes explicit 

references to these special rules in order 

to eliminate any ambiguity as to 

whether the rights provided by new 

subparagraph (C) extend to such 

investment choices. In this regard, the 

Department notes that although 

paragraph (i)(1) contains a special rule 

for qualifying employer securities, 

certain requirements of paragraph 

(d)(1)(v) are not modified by the special 

rule and remain applicable to qualifying 

employer securities; consequently, the 

rights provided by new subparagraph 

(C) extend to qualifying employer 

securities via the reference to paragraph 

(d)(1)(v) in subparagraph (C). 

Paragraph (d)(2)(ii), like the proposal, 

provides that nothing in the final rule 

precludes a plan administrator from 

including additional information that 

the plan administrator determines 

appropriate for such comparisons, 

provided such information is not 

inaccurate or misleading. The 

Department believes that the technical 

concerns raised by commenters on the 

Model Comparative Chart have been 

addressed in revisions to the operative 

provisions of the final rule. 

One procedural question raised by 

commenters, for example on behalf of 

Code section 403(b) plans, was whether 

each issuer of designated investment 

alternatives could prepare its own 

comparative chart for distribution and 

send it directly to participants and 

beneficiaries, such that, for example, a 

participant in a plan with three 

investment issuers would receive three 


emcdonald on DSK2BSOYB1PROD with RULES4
64922 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

15See 29 CFR 2550.404c–1(b)(2)(i)(B)(1)(ix). 

16See 29 CFR 2550.404c–1(b)(2)(i)(B)(2). 

17Also, with regard to ERISA’s general fiduciary 

standards, as noted in the preamble to the proposal, 

73 FR 43014 at 43018, n. 8, it should be noted that 

there may be extraordinary situations when 

fiduciaries will have a disclosure obligation beyond 

those addressed by the final rule. For example, if 

a fiduciary knew that, due to a fraud, information 

contained in a public financial report would 

mislead investors concerning the value of a 

designated investment alternative, the fiduciary 

would have an obligation to take appropriate steps 

to protect the plan’s participants, such as disclosing 

the information or preventing additional 

investments in that alternative by plan participants 

until the relevant information is made public. See 

also Varity Corp. v. Howe, 516 U.S. 489 (1996) (plan 

fiduciary has a duty not to misrepresent to 

participants and beneficiaries material information 

relating to a plan). 

charts, stating that this would greatly 

simplify the plan administrator’s task in 

meeting the comparative format 

requirement. It is the view of the 

Department that nothing in the final 

regulation precludes plan 

administrators from combining multiple 

documents for purposes of satisfying 

their obligation to provide the 

information required by this rule in a 

comparative form. For example, a chart 

could be divided such that one part 

presented stock funds while another 

part presented bond funds, as in the 

Department’s model format. Similarly, a 

chart could group investment 

alternatives by issuer. On the other 

hand, the Department also is of the view 

that permitting individual investment 

issuers, or others, to separately 

distribute comparative charts reflecting 

their particular investment alternatives 

would not be furnishing information in 

a form that would facilitate a 

comparison of the required investment 

information and, therefore, would not 

comply with the requirements of 

paragraph (d)(2). 

k. Information To Be Provided 

Subsequent to Investment 

Paragraph (d)(3) of the final rule 

requires that, when a plan provides for 

the pass-through of voting, tender, and 

similar rights, the plan administrator 

must furnish participants and 

beneficiaries who have invested in a 

designated investment alternative with 

these features any materials about such 

rights that have been provided to the 

plan. This provision, which is 

unchanged from the proposal, is similar 

to the requirement currently applicable 

to ERISA section 404(c) plans.15

l. Information To Be Provided Upon 

Request 

Paragraph (d)(4) of the final rule 

requires a plan administrator to furnish 

certain identified information either 

automatically or upon request by 

participants and beneficiaries, based on 

the latest information available to the 

plan. This provision, which also is 

unchanged from the proposal, is 

modeled on the requirements currently 

applicable to ERISA section 404(c) plans 

with respect to information to be 

furnished upon request.16

4. Form of Disclosure 

Paragraph (e) of the final rule, like the 

proposal, specifically addresses the 

form in which the required disclosures 

may be made. Commenters on the 

proposal generally supported the ability 

of plan administrators to coordinate the 

requirements of this rule with other 

disclosure materials. The Department 

notes that, like the proposal, paragraph 

(e) merely recognizes various acceptable 

means of disclosure; it does not 

preclude other means for satisfying 

disclosure obligations under the final 

rule. 

Specifically, paragraph (e)(1) makes 

clear that plan-related information 

required to be disclosed pursuant to 

paragraphs (c)(1)(i), (c)(2)(i)(A) and 

(c)(3)(i)(A) of this section may be 

provided as part of the plan’s summary 

plan description furnished pursuant to 

ERISA section 102 or as part of a 

pension benefit statement furnished 

pursuant to ERISA section 

105(a)(1)(A)(i), if such summary plan 

description or pension benefit statement 

is furnished at a frequency that 

comports with the time frames 

prescribed by paragraph (c) of this 

section. Paragraph (e)(2) of the final 

rule, like the proposal, makes clear that 

the information required to be disclosed 

pursuant to paragraphs (c)(2)(ii) and 

(c)(3)(ii) may be included as part of a 

pension benefit statement furnished 

pursuant to ERISA section 

105(a)(1)(A)(i). 

Paragraph (e)(3) provides that a plan 

administrator that uses and accurately 

completes the model in the Appendix, 

taking into account each plan’s specific 

provisions and each designated 

investment alternative offered under the 

plan, will be deemed to have satisfied 

the requirements of paragraph (d)(2) of 

this section. 

Paragraph (e)(4) further clarifies that, 

except as otherwise explicitly required 

herein, fees and expenses may be 

expressed in terms of a monetary 

amount, formula, percentage of assets, 

or per capita charge. Finally, paragraph 

(e)(5) generally requires that the 

information required to be prepared by 

the plan administrator for disclosure 

under the regulation must be written in 

a manner calculated to be understood by 

the average plan participant. 

5. Selection and Monitoring 

Paragraph (f) of the final rule 

continues to make clear that nothing in 

the regulation would relieve a fiduciary 

of its responsibilities to prudently select 

and monitor providers of services to the 

plan or designated investment 

alternatives offered under the plan.17

This paragraph is unchanged from the 

proposal. 

6. Manner of Furnishing 

Paragraph (g) of the proposal 

addressed the ‘‘manner of furnishing’’ 

the disclosures required by the 

regulation. Specifically, paragraph (g) of 

the proposal provided that the required 

disclosure shall be furnished in any 

manner consistent with the 

requirements of 29 CFR 2520.104b–1, 

including paragraph (c) of that section 

relating to the use of electronic media. 

This proposal produced significant 

comments. A number of commenters 

recommended that the Department 

expand the permissibility of electronic 

disclosure beyond that currently 

addressed in the Department’s safe 

harbor regulation, at § 2520.104b–1(c). 

They argued that such forms of 

disclosure would be more efficient, less 

burdensome, and less costly for plans 

and, therefore, participants. Other 

commenters cautioned against 

broadening the electronic disclosure 

standards, arguing that many workers 

do not have Internet access or prefer 

paper over electronically disclosed 

materials. Important questions involve 

the extent of the cost savings from 

expanded use of electronic disclosure 

and the number of workers who would 

be disadvantaged from such an 

expansion (which could itself take 

various forms, perhaps including ‘‘opt 

out’’ electronic disclosure). 

In light of these differing views and 

the significance of the issues 

surrounding the use of electronic 

disclosure, the Department has decided 

to reserve paragraph (g) of the regulation 

while further exploring whether, and 

possibly how, to expand or modify the 

standards applicable to the electronic 

distribution of required plan 

disclosures. To ensure a full review of 

the issue, the Department will, in the 

near future, be publishing a Federal 

Register notice requesting public 

comments, views, and data relating to 

the electronic distribution of plan 

information to plan participants and 

beneficiaries. Pending the completion of 

this review and the issuance of further 

guidance, the Department notes that the 

general disclosure regulation at 29 CFR 


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18Now item 26 of Form N–1A, as revised, 

February 2010. 

§ 2520.104b–1 applies to material 

furnished under this regulation, 

including the safe harbor for electronic 

disclosures at paragraph (c) of that 

regulation. It is anticipated, however, 

that resolution of this issue will occur 

in advance of the compliance date for 

this regulation, so as to ensure for 

appropriate notice for plans. 

7. Definitions 

The proposed rule contained, in 

section (h), a series of definitions for 

some of the terms used in the rule. 

These definitions of technical terms 

were intended to assist plan 

administrators, their service providers, 

and issuers of designated investment 

alternatives in complying with the 

requirements of the rule. In response to 

comments and clarifications requested 

by commenters, the Department made 

some additions and modifications to the 

definitions contained in section (h), 

which are discussed below in this 

section. One commenter suggested that 

the Department should address 

potential changes to the cross-references 

contained in the rule’s definitions, 

which refer to rules under the Securities 

and Exchange Commission’s 

jurisdiction, for example by referencing 

the Commission’s Form N–1A. Absent 

further guidance, it is the Department’s 

intention that these cross-references will 

refer, as appropriate, to successor rules 

and instructions. 

The Department also received 

comments requesting that the rule 

define some of the terms used in the 

Model Comparative Chart, but these 

commenters appeared to focus on 

defining terms for the benefit of 

participants and beneficiaries, for 

example suggesting that a glossary or 

other index of terms, with ‘‘plain 

English’’ definitions, be provided. In 

response to these commenters, and in 

response to participants in the 

Department’s focus group studies, who 

similarly supported the inclusion of 

definitions for investment and financial 

terms, the Department, at paragraph 

(d)(1)(vi) of the final rule, now requires 

the furnishing of or access to a general 

glossary of terms appropriate to assist 

participants and beneficiaries in 

understanding their designated 

investment alternatives. This glossary 

requirement is discussed above with the 

other investment-related information 

requirements. 

The Department did not receive any 

comments or questions concerning the 

definitions of ‘‘at least annually 

thereafter’’ or ‘‘at least quarterly;’’ 

accordingly, those phrases continue to 

be defined, as proposed, in the final 

rule. 

a. Average Annual Total Return 

The proposal, in paragraph (h)(2), 

defined ‘‘average annual total return’’ to 

mean the average annual profit or loss 

realized by a designated investment 

alternative at the end of a specified 

period, calculated in the same manner 

as average annual total return is 

calculated under Item 21 of Securities 

and Exchange Commission Form N– 

1A 18 with respect to an open-end 

management investment company 

registered under the Investment 

Company Act of 1940 (1940 Act). In 

general, the commenters strongly 

supported the concept of providing 

participants with this type of 

performance data. However, in response 

to several technical comments as to how 

this definition would be applied to 

products other than those that register 

using the Form N–1A, the final rule, in 

paragraph (h)(3), contains a revised 

definition. As revised, the term ‘‘average 

annual total return’’ means the ‘‘average 

annual compounded rate of return that 

would equate an initial investment in a 

designated investment alternative to the 

ending redeemable value of that 

investment calculated with the before 

tax methods of computation prescribed 

in Securities and Exchange Commission 

Form N–1A, N–3, or N–4, as 

appropriate, except that such method of 

computation may exclude any frontend, deferred or other sales loads that 

are waived for the participants and 

beneficiaries of the covered individual 

account plan.’’ The new references to 

Form N–3 and N–4 are to provide 

additional guidance with respect to 

designated investment alternatives that 

consist of separate accounts offering 

variable annuity contracts which are 

registered under the 1940 Act. The sales 

loads exception responds to 

commenters’ concerns that the proposed 

definition, specifically the reference to 

Item 21 of the Form N–1A (now Item 26 

in Form N–1A, as revised), might result 

in participants and beneficiaries 

receiving inaccurate information about 

actual returns in cases where the 

designated investment alternative 

waives sales loads; under this 

exception, plan administrators may 

disregard any requirement under 

Commission Forms to assume sales 

loads if they are not actually charged to 

plan participants and beneficiaries. The 

use of this definition is intended to 

assure that all participants and 

beneficiaries will, taking into account 

the variety of investments available 

through ERISA plans, receive the most 

uniform and comparable performance 

information available for their 

investment options, without regard to 

whether the designated investment 

alternative is a product registered under 

the 1940 Act. 

b. Designated Investment Alternatives 

Several commenters expressed 

concern with the Department’s 

definition of ‘‘designated investment 

alternatives’’ in paragraph (h)(1) of the 

proposal. Specifically, commenters 

questioned the definition’s exclusion of 

‘‘brokerage windows,’’ ‘‘self-directed 

brokerage accounts,’’ or similar plan 

arrangements that enable participants 

and beneficiaries to select investments 

beyond those designated by the plan. 

Commenters argued that the proposal 

was not clear as to what information 

would in fact have to be disclosed 

concerning participants’ and 

beneficiaries’ investments through such 

an arrangement. The final rule retains 

the proposed definition of ‘‘designated 

investment alternatives,’’ although redesignated as paragraph (h)(4) in the 

final, and therefore continues to exclude 

brokerage windows and similar 

arrangements from the definition. 

However, as discussed earlier, it is 

important that participants and 

beneficiaries understand how brokerage 

windows operate and the expenses 

attendant thereto when they are offered 

as part of the investment platform of a 

plan. For this reason, the final rule 

includes more specific requirements 

than the proposal concerning the 

information that must be disclosed 

about brokerage windows or similar 

arrangements. See paragraph (c)(1)(i)(F) 

of the final rule. 

c. Total Annual Operating Expenses 

The proposed regulation defined the 

term ‘‘total annual operating expenses’’ 

as ‘‘annual operating expenses of the 

designated investment alternative (e.g., 

investment management fees, 

distribution, service, and administrative 

expenses) that reduce the rate of return 

to participants and beneficiaries, 

expressed as a percentage, calculated in 

the same manner as total annual 

operating expenses is calculated under 

Instruction 3 to Item 3 of the 

Commission’s Form N–1A with respect 

to an open-end management investment 

company registered under the 

Investment Company Act of 1940.’’ The 

Department invited comments on what, 

if any, problems the proposed definition 

presented for investment funds and 

products that are not subject to the 1940 

Act and, any suggestions for alternative 

definitions or approaches. 


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64924 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

19The Department intends to achieve as much 

symmetry between registered and unregistered 

designated investment alternatives as is possible. 

For that reason, consistent with Instructions 3(d)(i) 

and 6(a) to Item 3 Form N–1A, paragraph (h)(5)(ii) 

of the final regulation directs the calculation of total 

annual operating expenses before any waivers or 

reimbursements. 

20Brokerage costs are not included in a mutual 

fund’s expense ratio because, under generally 

accepted accounting principles, they are either 

included as part of the cost basis of securities 

purchased or subtracted from the net proceeds of 

securities sold and ultimately are reflected as 

changes in the realized and unrealized gain or loss 

on portfolio securities in the fund’s financial 

statements. See 68 FR 74820. 

Some commenters questioned 

whether it is appropriate for the 

Department to model its disclosure 

requirement for calculating expenses for 

all designated investment alternatives in 

ERISA plans on a mutual fund 

methodology. These commenters 

suggested the Department might instead 

consider developing multiple 

methodologies that take into account the 

unique characteristics of the many 

different types of investment options in 

participant-directed individual account 

plans, particularly those that are not 

registered under the 1940 Act. The 

Department considered this suggestion 

and has accordingly modified the 

expense calculation as discussed more 

fully below. A core objective of the 

regulation is to ensure that participants 

receive uniform and reliable 

information about their plan’s 

investment options whether or not such 

options are registered or unregistered 

under Commission requirements. The 

Department believes that the final rule’s 

revised definition will achieve this 

result and produce a comparable 

expense calculation across the different 

types of investment options offered 

under ERISA plans. 

Specifically, one commenter, 

representing the insurance industry, 

noted that certain insurance products 

are required to be registered under the 

Securities Act of 1933, 1940 Act, or both 

and that such registrants must file their 

registration statements on the 

Commission’s Forms N–3 or N–4. The 

commenter pointed out that both of 

these forms set forth a methodology for 

reporting the total annual expenses of 

the insurance product. This commenter 

suggested that the Department should 

consider utilizing these established 

methodologies with respect to 

designated investment alternatives 

offered through variable annuity 

contracts, rather than the methodology 

in the Commission’s Form N–1A, where 

appropriate, in order to reduce direct 

and indirect compliance costs. The 

Department reviewed the methodologies 

in the Forms N–3 and N–4 and 

concluded that while they require 

substantially the same methodology as 

the Form N–1A, the suggested 

methodologies and language offer more 

precision with respect to certain annual 

expenses unique to variable annuity 

contracts (‘‘mortality and expense risk 

fees’’), which are not addressed in the 

Form N–1A. Therefore, paragraph 

(h)(5)(i) of the final rule has been 

revised to accommodate this 

commenter’s request. 

Other commenters, representing the 

banking industry, were concerned that 

the proposed definition with its reliance 

on Commission standards may not work 

well when applied to a designated 

investment alternative that consists of a 

bank collective investment fund because 

these alternatives typically are not 

registered under the 1940 Act. These 

commenters stated that, unlike a mutual 

fund, a bank collective investment fund 

is not required to deduct all of its 

operating expenses from the fund’s 

assets, and may instead charge some or 

all of its operating expenses directly to 

the plans investing in the fund. These 

commenters asserted that the proposed 

definition would not capture such 

expenses and emphasized their 

unfamiliarity with the required expense 

calculation as well as its impact on bank 

collective investment funds. The 

Department found these comments 

persuasive and, in the final rule, added 

paragraph (h)(5)(ii), a separate definition 

of total annual operating expenses for 

these unregistered alternatives. The 

Department believes that this new 

definition will produce an expense 

calculation that is substantially the 

same as the expense calculation for 

registered alternatives while capturing 

the different ways that unregistered 

alternatives charge plans. 

Paragraph (h)(5)(ii) of the final rule 

defines the term ‘‘total annual operating 

expenses’’ as ‘‘the sum of the fees and 

expenses described in paragraphs 

(h)(5)(ii)(A) through (C) of this section 

before waivers and reimbursements, for 

the alternative’s most recently 

completed fiscal year, expressed as a 

percentage of the alternative’s average 

net asset value for that year.’’ 19

Paragraph (h)(5)(ii)(A) requires the 

inclusion of all ‘‘management fees as 

described in the Securities and 

Exchange Commission Form N–1A that 

reduce the alternative’s rate of return.’’ 

Paragraph (h)(5)(ii)(B) requires the 

inclusion of any ‘‘distribution and/or 

servicing fees as described in the 

Securities and Exchange Commission 

Form N–1A that reduce the alternative’s 

rate of return.’’ Paragraph (h)(5)(ii)(C) 

requires the inclusion of any ‘‘other fees 

or expenses not included in 

subparagraph (A) or (B) that reduce the 

alternative’s rate of return’’ such as 

externally negotiated investment 

management fees charged by bank 

collective investment funds, but 

excludes ‘‘brokerage costs as described 

in Item 21 of Securities and Exchange 

Commission Form N–1A.’’ 20

The following example illustrates the 

requirements of paragraphs (h)(5)(ii) of 

the final rule. Plan A offers Designated 

Investment Alternative One (DIA 1) 

which invests $125 million in bank 

collective investment fund XYZ, an 

unregistered investment alternative, 

with assets of $1.2 billion. XYZ 

investment management fees of .22% 

are deducted directly from the fund’s 

assets. Additional investment 

management fees of XYZ of .16% are 

invoiced directly to Plan A, which pays 

the expense and then proportionately 

reduces the value of the shares of Plan 

A participants and beneficiaries who are 

invested in DIA 1. Recordkeeping 

expenses of XYZ of $15,000 are 

invoiced directly to Plan A which 

allocates this charge proportionally to 

the accounts of Plan A participants and 

beneficiaries that are invested in DIA 1. 

XYZ also charges a servicing fee of .10% 

for marketing materials it makes 

available to Plan A participants and 

beneficiaries. These fees are deducted 

directly from the fund’s assets. 

The provisions of paragraph (h)(5)(ii) 

of the final rule require these four 

expenses to be included in the total 

annual operating expenses of DIA 1 

because they reduce the alternative’s 

rate of return to participants and 

beneficiaries. In other words, the sum of 

these expenses is subtracted from the 

alternative’s gross returns, which 

indirectly reduces the value of a 

participant’s investment in DIA 1. In 

this example, the total annual operating 

expenses of DIA 1 are the sum of these 

four expenses or .492% (represented as 

.49% after rounding to the nearest 

hundredth of a percent). The investment 

management fee of .22% and the 

servicing fee of .10% are included by 

virtue of paragraph (h)(5)(ii)(A) and 

paragraph (h)(5)(ii)(B), respectively. The 

additional investment management fee 

of .16% is included by virtue of 

paragraph (h)(5)(ii)(C), and so is the 

recordkeeping fee of .012% (calculated 

as: $15,000/$125,000,000). Thus, the 

annual cost to the participants and 

beneficiaries who invest in DIA 1 is 

$4.92 for every $1,000 invested. 

Under paragraph (h)(5)(ii) of the final 

rule, if a fee or expense does not reduce 

a designated investment alternative’s 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64925 

21 Davis, James Allan; Smith, Tom W.; and 

Marsden, Peter V. General social surveys, 1972– 

2006: cumulative codebook/Principal Investigator, 

James A. Davis; Director and Co-Principal 

Investigator, Tom W. Smith; Co-Principal 

Investigator, Peter V. Marsden.—Chicago: National 

Opinion Research Center, 2007. 2,552 pp., 28 cm.— 

(National Data Program for the Social Sciences 

Series, no. 18). 

rate of return, the fee or expense is not 

to be included in the total annual 

operating expense of that alternative. 

Thus, if the recordkeeping expenses of 

$15,000 in the above example were paid 

from plan assets by liquidating shares of 

DIA 1 from participants’ accounts, 

rather than reducing the value of their 

shares, the total annual operating 

expenses of DIA 1 would be .48% rather 

than .492%. In such circumstances, the 

recordkeeping fee would instead be 

covered by paragraph (c)(3) of the final 

regulation, not paragraph (h)(5)(ii), and 

would have to be disclosed on the 

statement required by paragraph 

(c)(3)(ii) of the final regulation. 

8. Special Rules for Certain Designated 

Investment Alternatives 

Many commenters expressed concern 

that the framework of the proposed 

regulation as it related to investmentrelated information could not be 

meaningfully applied to certain types of 

investment options. Specifically, these 

commenters argued that many of the 

pieces of information that the proposal 

mandates must be disclosed do not 

apply to certain designated investment 

alternatives, such as employer securities 

or investments that include annuity or 

annuitization guarantee features, and 

that it would be difficult to disclose the 

unique characteristics of these 

investment alternatives within the 

framework of the proposal. Accordingly, 

the Department expanded the final rule 

to include special rules, described 

below, to address these concerns and 

require that plan administrators and 

their service providers disclose relevant 

information concerning these 

investment options. 

a. Special Rules for Designated 

Investment Alternatives That Consist of 

Employer Securities 

Several commenters stated that 

investments in employer securities 

should warrant separate treatment from 

other designated investment alternatives 

under the final rule because many of the 

required investment-related disclosures 

fail to correspond with investment 

characteristics of company stock. Some 

commenters even argued that 

investments in employer securities 

should be completely excluded from the 

definition of designated investment 

alternatives. Another commenter 

claimed that the proposal would create 

a cause of action under ERISA section 

502 for disclosure regulated by the 

securities laws, permitting litigants to 

evade the provisions of the Private 

Securities Litigation Reform Act of 1995 

(‘‘PSLRA’’) and the Securities Litigation 

Uniform Standards Act of 1998 

(‘‘SLUSA’’). However, in the 

Department’s view, this rule does 

nothing to impair the disclosure 

requirements of the securities laws, 

which remain in full force and effect. 

Causes of action under ERISA section 

502 are limited to remedying violations 

of ERISA and plan provisions. This 

section does not allow plaintiffs to bring 

suits for violations of securities law or 

with respect to securities not belonging 

to an ERISA plan. Plaintiffs bringing 

suit for violations of the securities laws 

continue to be subject to the PSLRA and 

SLUSA. 

The Department has been persuaded 

to modify several aspects of the 

proposal for investments in employer 

securities rather than creating a 

complete exclusion from the 

investment-related disclosures. The 

Department has rejected a complete 

exclusion under the final rule because, 

as stated by one commenter to the 

proposal, 20 million Americans invest 

in stock in their companies through 

401(k) plans, based on the 2006 General 

Social Survey.21 The Department’s 5500 

data for 2007 indicates that there are 

approximately 72.2 million participants 

in individual account plans, of whom 

17 million were participants in plans 

that offered employer securities. In 

terms of magnitude, this means 

approximately one fourth of all 

participants in individual account plans 

could have invested in company stock. 

The Department believes that these 

participants and beneficiaries are 

entitled to the investment-related 

information for employer securities 

required by paragraph (d) as modified 

under paragraph (i) of the final rule. 

Consequently, the Department has 

developed a special provision for 

investments in, or primarily in, 

employer securities as defined in 

section 407 of ERISA, and has also 

exempted these investments from 

certain aspects of the final rule. In 

making these modifications to the 

proposal, the Department recognized 

that while certain designated 

investment alternatives consist 

primarily of investments in employer 

securities that are held as shares, other 

alternatives that invest primarily in 

employer securities may also hold cash 

management investments for liquidity 

purposes, so that participants and 

beneficiaries acquire units of 

participation in a fund (i.e., a unitized 

fund) rather than actual shares when 

they allocate their contributions to this 

investment alternative. 

With regard to the supplemental 

information that must be provided to 

participants and beneficiaries through 

an Internet Web site address, the 

Department has modified the proposed 

rule to exempt these qualifying 

employer securities from the 

requirements of paragraph (d)(1)(v)(C) 

concerning the disclosure of an 

investment’s principal strategies and 

risks, and instead is requiring an 

explanation under paragraph (i)(1)(i) of 

the final rule as to the importance of a 

well-balanced and diversified 

investment portfolio. The Department 

expects that plan administrators will 

use the language provided in the 

Department’s Field Assistance Bulletin 

2006–03 (FAB 2006–03) to satisfy this 

requirement. The FAB language 

provides: ‘‘To help achieve long-term 

retirement security, you should give 

careful consideration to the benefits of 

a well-balanced and diversified 

investment portfolio. Spreading your 

assets among different types of 

investments can help you achieve a 

favorable rate of return, while 

minimizing your overall risk of losing 

money. This is because market or other 

economic conditions that cause one 

category of assets, or one particular 

security, to perform very well often 

cause another asset category, or another 

particular security to perform poorly. If 

you invest more than 20% of your 

retirement savings in any one company 

or industry, your savings may not be 

properly diversified. Although 

diversification is not a guarantee against 

loss, it is an effective strategy to help 

you manage investment risk.’’ 

As stated in paragraph (i)(1)(ii) of the 

final rule, the Department is also 

exempting these qualifying employer 

securities from the Internet Web site 

requirements relating to portfolio 

turnover required under paragraph 

(d)(1)(v)(D). 

Many commenters also pointed to the 

proposal’s fee and expense information 

requirement, which is preserved in 

paragraph (d)(1)(iv)(A)(2) of the final 

rule, to disclose an investment’s total 

annual operating expenses, expressed as 

a percentage, as problematic; 

essentially, these commenters 

maintained that an expense ratio is 

irrelevant or non-calculable for 

investments consisting primarily of 

employer securities. The Department 

has considered these comments and has 

exempted, in paragraph (i)(1)(iv) of the 

final rule, qualifying employer 


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securities from the requirement to 

disclose an expense ratio, provided such 

designated investment alternative is not 

a unitized fund. As a corollary to this 

exemption, these investments are also 

relieved, under paragraphs (i)(1)(iii) and 

(v), respectively, of the final rule, from 

the requirements of paragraph 

(d)(1)(iv)(A)(2) relating to fee and 

expense information and the 

requirements of paragraph 

(d)(1)(iv)(A)(3) relating to the expense 

ratio expressed as a dollar amount per 

$1,000 invested. 

Some commenters expressed concern 

with the requirement that such 

investments disclose performance data 

expressed as average annual total return 

for specified periods. The Department 

has determined to modify the definition 

of average annual total return, which is 

otherwise applicable under paragraph 

(h)(3) of the final rule, for qualifying 

employer securities that are publicly 

traded on a national exchange or 

generally recognized market, provided 

such designated investment alternative 

is not a unitized fund, in paragraph 

(i)(1)(vi) of the final rule. For this 

purpose, average annual total return is 

defined in paragraph (i)(1)(vi)(B) to 

mean the change in value of an 

investment in one share of stock on an 

annualized basis over a 1, 5, or 10 year 

period, assuming dividend 

reinvestment; such a return 

measurement is commonly referred to as 

total shareholder return. This return is 

calculated by taking the sum of the 

dividends paid during the measurement 

period, plus the difference between a 

stock price (consistent with section 

3(18) of ERISA) at the end and the 

beginning of the measurement period 

divided by the stock price at the 

beginning of the measurement period. 

For example, and ignoring the 

reinvestment of dividends for 

simplicity, if a share is $100 at the 

beginning of the measurement period 

and $115 at the close, and dividends 

paid totaled $5 over the period, the 

disclosed return would be 20% (5 + 115 

¥ 100/100). 

Similarly, in paragraph (i)(1)(vi)(C) of 

the final rule, the Department is 

modifying the definition of average 

annual total return for qualifying 

employer securities that are not publicly 

traded on a national exchange or 

generally recognized market, provided 

such designated investment alternative 

is not a unitized fund, to require 

disclosure of return information 

calculated using principles similar to 

those for the return calculation of 

publicly traded securities under 

paragraph (i)(1)(vi)(B). The Department 

anticipates that in many cases dividends 

will not have been paid on such 

securities and that the plan 

administrators will use Form 5500 plan 

valuation data in calculating this return. 

The new reference to ERISA section 

3(18) expresses the Department’s intent 

that the ‘‘stock price’’ used in these 

calculations be consistent with the fair 

market value methodologies that the 

plan administrator is already using 

under current law with respect to the 

value of employer stock held by the 

plan. 

b. Special Rules for Annuities 

As discussed above, the Department, 

in response to comments, has made two 

changes to the final rule to better ensure 

the disclosure of both investment and 

annuity related information to plan 

participants and beneficiaries. These 

changes appear in the final rule at 

paragraphs (d)(1)(vii) and (i)(2). 

Paragraph (i)(2) of the final rule sets 

forth the information that must be 

disclosed about annuity options. 

Paragraph (i)(2) applies to any 

designated investment alternative 

consisting of a contract, fund or product 

that affords participants or beneficiaries 

the option to allocate contributions 

toward the current purchase of a stream 

of retirement income payments 

guaranteed by an insurance company. 

Paragraph (i)(2) addresses commenters’ 

concerns with stand-alone annuity 

options under which current participant 

contributions purchase a fixed-dollar 

stream of income commencing at a 

future point in time, typically at 

retirement age (‘‘fixed-deferred 

annuity’’). Paragraph (d)(1)(vii), as 

discussed more fully above, addresses 

commenters’ concerns with annuity 

options that are contained within 

variable annuity contracts, under which 

participants and beneficiaries have a 

right to purchase an annuity with their 

accumulated plan savings at a rate 

specified in the contract (‘‘variable 

annuity’’). Moreover as noted above, the 

requirements in paragraph (i)(2) of the 

final rule explicitly apply to variable 

annuities as required by the cross 

reference in paragraph (d)(1)(vii) of the 

final rule. 

When applicable, the paragraph (i)(2) 

special rule provides that the plan 

administrator must, in lieu of the 

investment-related information 

described in paragraph (d)(1)(i) through 

(vi) of the final rule, provide each 

participant or beneficiary basic 

information about the benefits and costs 

of the annuity, as well as an Internet 

Web site address to lead participants 

and beneficiaries to additional 

information. Since both variable and 

fixed-deferred annuities are subject to 

the comparative format requirement in 

paragraph (d)(2) of the final rule, the 

plan administrator must furnish the 

content information described in 

paragraph (i)(2)(i) through (vi) of this 

special rule in a comparative chart or 

similar format. The Department believes 

that maintaining the comparative chart 

requirement will enable participants to 

undertake a comparison of annuity 

options when a plan includes two or 

more annuity options as designated 

investment alternatives. 

c. Special Web Site Rules for FixedReturn Investments 

As discussed above, the proposal, in 

paragraph (d)(1)(i)(B), required 

disclosure of an Internet Web site for 

each designated investment alternative 

offered under the plan. In response to 

concerns about this Web site 

requirement, which were discussed 

earlier in this preamble, the final rule, 

at paragraphs (d)(1)(v)(A) through (F), 

has been revised to clarify the specific 

items of information that must be made 

available at the required Web site 

address. In developing these revisions, 

however, the Department concluded 

that many of the revised content 

requirements in paragraphs (d)(1)(v)(A) 

through (F) simply do not apply to 

designated investment alternatives with 

respect to which the return is fixed for 

the term of the investment, e.g., 

portfolio turnover rate. The final rule, 

therefore, includes special rules that 

clarify and limit the information that 

that must be made available at the 

required Web site address for each 

designated investment alternative with 

respect to which the return is fixed for 

the term of the investment. These 

special rules, at paragraph (i)(3) of the 

final regulation, require disclosure of, 

among other things, name of the 

investment’s issuer; objectives or goals 

(e.g., to provide stability of principal 

and guarantee a minimum rate of 

interest); performance data updated on 

at least a quarterly basis (or more 

frequently if required by other 

applicable law); and fee and expense 

information. 

d. Special Rules for Target Date or 

Similar Funds 

The Department intends to publish a 

separate notice of proposed rulemaking 

that would supplement the otherwise 

applicable disclosures in this rule for 

designated investment alternatives that 

are target date-type funds. Accordingly, 

the Department has reserved paragraph 

(i)(4) for inclusion of such guidance. 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64927 

22See also 57 FR 46906, n. 27 (preamble to 

§ 2550.404c–1) (Oct. 13, 1992). 

C. Final Amendment to § 2550.404c–1 

This notice also includes a final 

amendment to the regulation under 

section 404(c) of ERISA, 29 CFR 

2550.404c–1. This amendment generally 

is unchanged from the proposal, except 

for the minor modification discussed 

below. This amendment to section 

2550.404c–1(b), (c), and (f) integrates 

the disclosure requirements in the 

amended section 404(c) regulation with 

the disclosure requirements in the final 

regulation section 2550.404a–5 to avoid 

having different disclosure rules for 

plans intended to comply with the 

ERISA section 404(c) requirements. 

Similar to the proposal, this amendment 

eliminates references to disclosures that 

are now encompassed in section 

2550.404a–5 and incorporates in 

paragraph (b)(2)(i)(B)(2) of the 404(c) 

regulation a cross-reference to the final 

rule, thereby establishing a uniform 

disclosure framework for all participantdirected individual account plans. 

The final 404(c) regulation has been 

modified in one respect from the 

proposal. Specifically, the Department 

eliminated the reference to 

‘‘[i]dentification of any designated 

investment managers’’ previously 

required in paragraph (b)(2)(i)(B)(2) of 

the proposed amendment. Commenters 

noted that identification of designated 

investment managers also was required 

pursuant to paragraph (c)(1)(i)(E) of 

proposed section 2550.404a–5. The 

Department did not intend to create a 

duplicative requirement and has 

therefore eliminated the requirement 

from the 404(c) regulation; 

identification of any designated 

investment managers will be continue to 

be required for 404(c) plans because 

(pursuant to paragraph (b)(2)(i)(B)(2) of 

the final 404(c) regulation, published 

herein) such plans must satisfy all of the 

disclosure requirements of the new 

regulation under section 404(a), which 

includes identification of any 

designated investment managers. 

Finally, as discussed further in the 

preamble to the proposal, at 73 FR 

43018, the Department reiterates its 

view that a fiduciary breach or an 

investment loss in connection with the 

plan’s selection or monitoring of a 

designated investment alternative is not 

afforded relief under section 404(c) 

because it is not the result of a 

participant’s or beneficiary’s exercise of 

control.22 The Department has added, in 

paragraph (d)(2)(iv) of the final 404(c) 

amendment, a statement that ‘‘paragraph 

(d)(2)(i) of this section does not serve to 

relieve a fiduciary from its duty to 

prudently select and monitor any 

designated investment manager or 

designated investment alternative 

offered under the plan.’’ 

D. Effective and Applicability Dates; 

Transition Issues 

A significant number of commenters 

expressed concern about the 

establishment of an effective date that 

would not allow plans sufficient time to 

review and implement the new 

disclosure requirements. Commenters 

suggested that the Department should 

allow affected persons twelve to 

eighteen months to revise their 

recordkeeping and other systems to 

ensure that the required information is 

being captured and to prepare all of the 

necessary disclosure materials, 

including any coordination of these new 

requirements with existing disclosures. 

In an effort to balance the importance of 

the required information to plan 

participants with the practical burdens 

and costs attendant to compliance with 

a new disclosure regime, the 

Department is adopting these final rules 

with a 60-day effective date, but 

deferring the application of the new 

rules for at least 12 months. In this 

regard, the final rule will be applicable 

as of the beginning of the first plan year 

which starts on or after the first day of 

the thirteenth month following the date 

of publication. The Department believes 

that the delayed applicability date will 

afford plans sufficient time to ensure an 

efficient and effective implementation 

of the new rules. See paragraph (j)(1) 

and (2). 

The Department also provided 

transition relief, in paragraph (j)(3) of 

the final rule, to assist parties in 

complying with the final rule. 

Specifically, paragraph (j)(3)(i) provides 

that notwithstanding the effective and 

applicability dates for the final rule, the 

initial disclosures required on or before 

the date on which a participant or 

beneficiary can first direct his or her 

investment must be furnished no later 

than 60 days after the rule’s 

applicability date to participants and 

beneficiaries who had the right to direct 

the investment of assets held in, or 

contributed to, their individual 

accounts, on the applicability date. 

Representatives of the banking 

industry indicated that transitional 

relief from the requirement to disclose 

5- and 10-year performance may be 

needed for some plans that contain 

unregistered bank products as 

designated investment alternatives, if 

the final regulation were to adopt the 

‘‘total annual operating expenses’’ and 

‘‘average annual total return’’ definitions 

set forth in paragraph (h) of the 

proposed regulation. This is because the 

methodologies behind these definitions 

depend on certain data that neither 

plans nor bank funds were compelled to 

maintain before this final rule. 

Since the final rule contains 

definitions similar to those in the 

proposal, the Department was 

persuaded that transitional relief is 

necessary. The final regulation, at 

paragraph (j)(3)(ii), therefore, provides 

that for plan years beginning before 

October 2021, if a plan administrator 

reasonably determines that it does not 

have the information on expenses 

attributable to the plan that is necessary 

to calculate, in accordance with 

paragraph (h)(3), the 5-year and 10-year 

average annual total returns for a 

designated investment alternative that is 

not registered under the Investment 

Company Act of 1940, the plan 

administrator may use a reasonable 

estimate of such expenses. For this 

purpose, the plan administrator may use 

the most recently reported total annual 

operating expenses of the designated 

investment alternative as a substitute for 

the actual annual expenses during the 5- 

year and 10-year periods if the plan 

administrator reasonably determines 

that doing so will result in a reasonably 

accurate estimate of the average annual 

total returns. Nothing in this paragraph 

(j)(3)(ii) requires disclosure of returns 

for periods before the commencement of 

the alternative. 

E. Regulatory Impact Analysis 

As discussed earlier in this preamble, 

this final rule establishes a uniform 

basic disclosure regime for participantdirected individual account plans. 

Many of the disclosures required by the 

final rule are similar to those required 

for participant-directed individual 

account plans that currently comply 

with ERISA section 404(c) and the 

Department’s regulations issued 

thereunder. The Department is 

uncertain regarding the information that 

is provided to participants in plans that 

are not ERISA section 404(c) compliant. 

Therefore, for purposes of this 

regulatory impact analysis (RIA), the 

Department assumes that the final rule’s 

requirements are new for plans that are 

not ERISA section 404(c) compliant. 

Based on the foregoing assumptions, 

the Department estimates that the 

average incremental costs and benefits 

for participants in ERISA section 404(c) 

compliant plans will be smaller than for 

those plans that are not. Also, 

participants in ERISA section 404(c) 

compliant plans or plans providing 

similar information only will receive an 

incremental benefit from the rule’s new 

disclosure requirements, because they 


emcdonald on DSK2BSOYB1PROD with RULES4
64928 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

23U.S. General Accounting Office, Private 

Pensions: Information That Sponsors and 

Participants Need to Understand 401(k) Plan Fees, 

p. 15, fn 20. This report may be accessed at http:// 

www.gao.gov/new.items/d08222t.pdf. 

already receive some of the information 

required to be disclosed under the final 

rule. 

1. Executive Order 12866 Statement 

Under Executive Order 12866, the 

Department must determine whether a 

regulatory action is ‘‘significant’’ and 

therefore subject to the requirements of 

the Executive Order and subject to 

review by the Office of Management and 

Budget (OMB). Under section 3(f) of the 

Executive Order, a ‘‘significant 

regulatory action’’ is an action that is 

likely to result in a rule (1) having an 

effect on the economy of $100 million 

or more in any one year, or adversely 

and materially affecting a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local or Tribal 

governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. The Department has determined 

that this action is ‘‘economically 

significant’’ under section 3(f)(1) 

because it is likely to have an effect on 

the economy of more than $100 million 

in any one year. 

Accordingly, the Department has 

undertaken, as described below, an 

analysis of the costs and benefits of the 

final regulation. The Department 

continues to believe that the final 

regulation’s benefits justify its costs. 

The present value of the benefits over 

the ten-year period 2012–2021 is 

expected to be about $14.9 billion, with 

a low estimate of $7.2 billion and a high 

estimate of $29.9 billion. The present 

value of the costs over the same time 

period is expected to be $2.7 billion, 

with a low estimate of $2.0 billion and 

a high estimate of $3.3 billion. Overall, 

the Department estimates that the final 

regulation will generate a net present 

value (or net present benefit) of almost 

$12.3 billion. Table 1 shows the 

annualized monetized benefits and cost 

of the regulations and also provides a 

summary of the benefits and costs. The 

Department also expects the regulation 

to produce substantial additional 

benefits, in the form of improved 

investment decisions, but the 

Department was not able to quantify this 

effect. 

TABLE 1—ACCOUNTING TABLE

Primary 

estimate 

Low 

estimate 

High 

estimate Year dollar Discount rate 

Period 

covered 

Benefits: 

Annualized ................................................................ 1,986.1 952.3 3,973.9 2010 7% 2012–2021 

Monetized ($millions/year) ........................................ 1,986.1 952.3 3,973.9 2010 3 2012–2021 

Explanation of Monetized Benefits ........................... The regulation’s disclosure requirements are expected to reduce participants’ time 

otherwise used for searching for fee and other investment information. 

Qualitative ................................................................. The Department expects the regulation to produce substantial additional benefits, in 

the form of improved investment decisions, but the Department was not able to 

quantify this effect. 

Costs: 

Annualized ................................................................ 353.8 265.5 442.2 2010 7 2012–2021 

Monetized ($millions/year) ........................................ 352.3 264.9 439.7 2010 3 2012–2021 

Explanation of Monetized Costs ............................... Plans are likely to incur administrative burdens and costs in order to comply with the 

requirements of the regulation. The quantified cost estimate includes costs due to 

legal review of the regulation, consolidation of fee information, creation and maintenance of a Web site, record keeping, production and distribution of disclosures, and 

material and postage costs. 

2. Need for Regulatory Action 

Understanding and comparing 

investment options available in a 401(k) 

plan can be complicated and confusing 

for many participants. The magnitude of 

complexity and confusion may be 

defined by reference to the number of 

available investment options and the 

materials utilized for communicating 

investment-related information. 

Moreover, the process of gathering and 

comparing information may itself be 

time consuming. For example, the U.S. 

Government Accountability Office 

noted in a recent report that ‘‘it is hard 

for participants to make comparisons 

across investment options because they 

have to piece together the fees that they 

pay, and assessing fees across 

investment options can be difficult 

because data are not typically presented 

in a single document that facilitates 

comparison.’’ 23

The final rule’s new disclosure 

requirements will help a large number 

of plan participants by placing 

investment-related information in a 

format that facilitates comparison of 

investment alternatives. This simplified 

format will make it easier and less time 

consuming for participants to find and 

compare investment-related 

information. As a result, plan 

participants should make better 

investment decisions which will 

enhance their retirement income 

security. 

Table 2 below shows the number of 

entities affected by the rule. According 

to the 2007 Form 5500 data, the latest 

complete data available, approximately 

318,000 participant-directed individual 

account plans covering over 58.2 

million participants reported 

compliance with ERISA 404(c). 

Approximately 165,000 participantdirected individual account plans 

covering about 13.9 million participants 

reported that they are not ERISA section 

404(c) compliant. In total, the rule will 

impact 483,000 participant-directed 

individual account plans covering 72 

million participants. 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64929 

24Employee Benefit Research Institute Issue Brief 

#304, April 2007. The survey found that 73 percent 

of workers saving for retirement used written 

material received at work as a source of information 

when making retirement savings and investment 

decisions. 

25The survey notes: ‘‘In theory, each sample of 

1,252 yields a statistical precision of plus or minus 

3 percentage points (with 95 percent certainty) of 

what the results would be if all Americans age 25 

and older were surveyed with complete accuracy. 

There are other possible sources of error in all 

surveys, however, that may be more serious than 

theoretical calculations of sampling error. These 

include refusals to be interviewed and other forms 

of nonresponse, the effects of question wording and 

question order, and screening. While attempts are 

made to minimize these factors, it is impossible to 

quantify the errors that may result from them.’’ 

26See 73 FR 49895 (August 22, 2008) and 73 FR 

49924 (August 22, 2008). 

TABLE 2—NUMBER OF AFFECTED

ENTITIES

Plans: 

Number of 404(c) Compliant Plans ....................... 318,000 

Number of Non-404(c) 

Compliant Plans ............ 165,000 

Number of Participantdirected Plans ............ 483,000 

Participants: 

404(c) Plans ...................... 58,195,000 

Non-404(c) Plans .............. 13,916,000 

Number of Participants 

in Participant-directed 

Plans .......................... 72,111,000 

Note: The displayed numbers are rounded 

and therefore may not add up to the totals. 

3. Benefits 

The Department believes the final rule 

will provide two primary benefits: (1) 

Reduced time for plan participants to 

collect investment-related information 

and organize it into a format that allows 

the information to be compared; and (2) 

improved investment results for plan 

participants due to the enhanced 

disclosures available to them. Each 

benefit is discussed in further detail 

below; however, the Department only 

was able to quantify the search time 

reduction benefit. 

a. Reduction in Participant Search Time 

As discussed above, the Department 

assumes that the final rule’s new 

disclosure requirements will benefit 

plan participants by reducing the time 

they spend searching for and compiling 

fee and expense information into a 

comparative format. In the RIA of the 

proposal, the Department estimated that 

29 percent of all participants would 

experience time savings due to the 

easier access to information and the 

unified format. However, a commenter 

pointed out that the Department 

significantly underestimated the 

number of participants that will 

experience time savings. The 

commenter suggested that all 

participants who believe that fee, 

expense and performance information is 

important for making investment 

decisions and read materials provided 

to them most likely will experience time 

savings. The commenter suggested using 

a result from the EBRI’s 2007 Retirement 

Confidence Survey 24 which indicates 

that 73 percent (plus or minus 3 

percent) of workers saving for 

retirement used written materials 

received at work as a source of 

information when making retirement 

savings and investment decisions.25 The 

Department agrees with the commenter 

and has revised its estimates to reflect 

that out of the 72 million participants 

affected by the rule, 70 to 76 percent, or 

nearly 50 to 55 million participants, will 

benefit from reduced search costs. 

Although the Department sought to 

anchor its analysis on empirical 

evidence, there are a number of 

variables that are subject to uncertainty. 

In particular, although the Department 

is confident that the new disclosure 

format will reduce search costs, the 

Department does not have empirical 

evidence on the magnitude of these 

savings. Search time savings will vary 

widely depending on the type of 

investment options available through 

the plan, the completeness of baseline 

routine voluntary disclosures, the 

participant’s sophistication, among 

other factors. To illustrate the potential 

benefits, the Department assumes that 

participants who are not receiving 

ERISA section 404(c) compliant 

disclosures, on average, will save oneand-a-half hours, while participants 

receiving such disclosures will save one 

hour on average. The Department also 

provides a range assuming half the time 

savings on the low and double the time 

savings on the high end. 

The benefits estimate uses an average 

wage of $37 for private sector workers 

participating in a pension plan to 

estimate how much the average 

participants would value the time 

saved. It is based on hourly wages from 

Panel 4 of the 2004 wave from the 

Survey of Income Program Participation 

(SIPP) and on wage growth data for 

private-sector workers that participate 

in a pension plan with individual 

accounts from the Bureau of Labor 

Statistics (BLS). In the proposal the 

Department had additionally adjusted 

the wage rate to account for the 

difference that plan participants 

attribute to leisure versus work time. 

The Department received a comment 

that the estimate used may not have 

been representative of participants’ 

value of leisure time and suggested that 

the Department simply use the average 

wage rate. The Department agrees and 

for the purpose of estimating a dollar 

value of the time uses an average wage 

rate of about $37. 

These assumptions result in annual 

time savings of approximately 26 to 112 

million hours valued at $1.0 to $4.0 

billion in 2012. The total present value 

of this benefit is $7.2 to $29.9 billion 

using a seven percent discount rate. 

b. Reduction in Fees and Expenses 

By reducing participants’ time 

required to collect information and 

organize fee and performance 

information, the final rule should 

increase the amount of investmentrelated information participants 

consider and the attention devoted to 

and efficiency of such consideration. 

This will help participants pick 

appropriate investment options that will 

provide the best value to them. 

Moreover, the increased transparency 

could strengthen competition between 

investment products and drive down 

fees. 

In its RIA of the proposal, the 

Department estimated that fees and 

expenses are higher than necessary by 

11.3 basis points on average. Some 

commenters on the proposal, as well as 

some commenters on the Department’s 

proposed exemptions relating to the 

provision of investment advice by a 

fiduciary advisor to participants and 

beneficiaries in participant-directed 

individual account plans and 

beneficiaries of individual retirement 

accounts,26 dispute this estimate. The 

commenters point to evidence that the 

pricing of investment products and 

related services is competitive and 

efficient, and contend that there is no 

credible evidence to the contrary. 

The commenters raised several 

specific challenges to the Department’s 

analysis. First, they contend that the 

Department’s estimate relies 

inappropriately on dispersion in mutual 

fund expenses as evidence that such 

expenses are sometimes higher than 

necessary and as a basis for estimating 

the degree to which this is so. 

Dispersion in expenses reflects 

differences among the investment 

products or the services bundled with 

them, the commenters say, and therefore 

such dispersion is consistent with 

competitive, efficient pricing. Second, 

the commenters argue that the analysis 

draws incorrect inferences about fees 

and expenses in DC plans. The analysis 

overlooks the role of DC plan fiduciaries 


emcdonald on DSK2BSOYB1PROD with RULES4
64930 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

27See e.g., James J. Choi et al., Why Does the Law 

of One Price Fail? An Experiment on Index Mutual 

Funds, National Bureau of Economic Research 

Working Paper W12261 (May 2006); Jeff Dominitz 

et al., How Do Mutual Funds Fees Affect Investor 

Choices? Evidence from Survey Experiments (May 

2008) (unpublished, on file with the Department of 

Labor); and John Turner & Sophie Korczyk, Pension 

Participant Knowledge About Plan Fees, AARP Pub 

ID: DD–105 (Nov. 2004). Commenters point out that 

net flows are concentrated in mutual funds with 

low expenses. However it is unclear whether this 

reflects investor fee sensitivity or brand name 

recognition and successful marketing by large, 

established funds whose low fees are attributable to 

economies of scale. 

28Sebastian Mu ̈ller & Martin Weber, Financial 

Literacy and Mutual Fund Investments: Who Buys 

Actively Managed Funds?, Social Science Research 

Network Abstract 1093305 (Feb. 14, 2008) find that 

more financially literate investors pay lower frontend loads but similar management fees, and suggest 

that investors who know about management fees 

appear not to care about them. Jeff Dominitz et al., 

How Do Mutual Funds Fees Affect Investor Choices? 

Evidence from Survey Experiments (May 2008) 

(unpublished, on file with the Department of Labor) 

find that financially literate individuals are better 

able to estimate fees, and better estimates are 

associated with more optimal investment choices. 

Brad M. Barber et al., Out of Sight, Out of Mind, 

The Effects of Expenses on Mutual Fund Flows, 

Journal of Business, Volume 79, Number 6, 2095– 

2119 (2005) find that repeat investors are more 

sensitive to load fees than expense ratios, but 

commenters point out that this finding may be an 

artifact of industry load setting practices. 

29Mark Grinblatt et al., Are Mutual Fund Fees 

Competitive? What IQ–Related Behavior Tells Us, 

Social Science Research Network Abstract 1087120 

(Nov. 2007) find that investors with different IQs 

pay similar fees, which ‘‘suggests that fees are set 

competitively.’’ 

30 John P. Freeman & Stewart L. Brown, Mutual 

Fund Advisory Fees: The Cost of Conflicts of 

Interest, The Journal of Corporate Law, Volume 26, 

609–673 (Spring 2001) found that the price paid by 

mutual funds for equity fund management is higher 

than that paid by pension funds. Based on this and 

other evidence they argue that mutual fund fees are 

often excessive. John C. Coates & R. Glenn Hubbard, 

Competition in the Mutual Fund Industry: Evidence 

and Implications for Policy, Social Science 

Research Network Abstract 1005426 (Aug. 2007) 

challenge Freeman and Brown’s methods and 

conclusions, arguing that these differences in prices 

are attributable to differences in services for which 

Freeman and Brown did not account. They offer 

evidence that fees are competitive. Alicia H. 

Munnell et al., Investment Returns: Defined 

Benefits vs. 401(k) Plans, Center for Retirement 

Research Issue Brief Number 52 (Sept. 2006) find 

higher returns in DB plans than in DC plans and 

offer that ‘‘part of the explanation may rest with 

higher fees’’ that are paid by DC plan participants. 

Rob Bauer & Rik G.P. Frehen, The Performance of 

U.S. Pension Funds, Social Science Research 

Network Abstract 965388 (Jan. 2008) find that DC 

and DB plans both perform close to benchmarks 

while mutual funds underperform, and point to 

hidden costs in mutual funds as the most likely 

reason. Diane Del Guercio & Paula A. Tkac, The 

Determinants of the Flow of Funds of Managed 

Portfolios: Mutual Funds vs. Pension Funds, The 

Journal of Financial and Quantitative Analysis, 

Volume 37, Number 4, 523–557 (Dec. 2002) find 

that ‘‘in contrast to mutual fund investors, pension 

clients punish poorly performing managers by 

withdrawing assets under management and do not 

flock disproportionately to recent winners.’’ 

31 Guo Ying Luo, Mutual Fund Fee-Setting, 

Market Structure and Mark-Ups, Economica, 

Volume 69, Number 274, 245–271 (May 2002) 

exploits differences in market concentration across 

different narrow mutual funds categories, and finds 

that mark-ups average 30 percent of fees across all 

categories of no load funds and more than 70 

percent across load funds (assuming a 5-year 

holding period). 

32The literature also attributes much expense 

dispersion to differences in the cost of managing 

different types of funds. For example, active equity 

management is more expensive than passive and 

management of foreign or small cap equity funds is 

more expensive than management of large cap 

domestic equity funds. Investors therefore might 

optimally diversify across funds with different 

levels of investment management expense. Some 

studies question whether active management 

delivers observable financial benefits 

commensurate to the associate expense. For 

example, Kenneth R. French, The Cost of Active 

Investing, Social Science Research Network 

Abstract 1105775 (Apr. 2008) finds that investors 

spend 0.67 percent of aggregate U.S. stock market 

value each year searching for superior return, and 

characterizes this as society’s cost of price 

discovery. 

33Both of these hypotheses are also consistent 

with literature finding a negative link between 

sophistication and expenses. 

in choosing reasonably priced 

investments and relies too much on 

research that examined retail rather than 

DC plan experience, they say. Third, the 

commenters highlight what they 

maintain are technical flaws in some of 

the research that the Department cited 

as supporting the conclusion that fees 

and expenses are sometimes higher than 

necessary, and they take issue with the 

Department’s interpretation of this 

research. 

In response to these commenters, the 

Department undertook to refine and 

strengthen its analysis. First, the 

Department agrees that the RIA of the 

proposal relied too heavily on mere 

dispersion of fees and expenses as a 

basis for estimating whether and to what 

degree they might be higher than 

necessary. The estimate that they are on 

average 11.3 basis points higher than 

necessary lacks adequate basis and 

should be disregarded. Second, the 

Department agrees that fees and 

expenses paid by DC plan participants 

can differ from those paid by retail 

investors. Any evidence of higher than 

necessary expenses in the retail sector 

might suggest similar circumstances in 

DC plans, but would not demonstrate it. 

Third, the Department reviewed 

available research literature in light of 

the commenters, and refined its analysis 

and conclusions accordingly, as 

summarized immediately below. 

Expense Sensitivity—Surveys and 

studies strongly suggest gaps in 

awareness of and sensitivity to 

expenses.27 Other studies consider 

whether investors with different levels 

of sophistication make different 

decisions about fees. If more 

sophisticated investors are more 

sensitive to fees, less sophisticated ones 

might be paying more than would be 

optimal. Alternatively, they might be 

paying more in order to obtain 

sophisticated help. Much literature 

suggests a negative relationship between 

sophistication and expenses paid,28 but 

some does not.29 Overall this literature 

leaves open the question of whether 

investment prices are sometimes 

inefficiently high, but suggests that even 

if prices are efficient investors may 

make poor purchasing decisions. The 

Department believes that many 

individual investors, including DC plan 

participants, historically have not 

factored expenses optimally into their 

investment choices. 

Sector Differences—Some studies 

lend insight to the question of whether 

investment prices are efficient by 

comparing prices paid or performance 

in different market segments.30 The 

Department believes that taken together, 

this literature suggests that there are 

unexplained differences in prices and 

performance across sectors but fails to 

demonstrate conclusively whether such 

differences are systematically 

attributable to inefficiently high 

investment prices. 

Market Power—At least one study 

suggests that mutual funds may wield 

market power to mark up prices to 

inefficient levels.31

What Expenses Buy—A number of 

studies consider the degree to which 

expense dispersion is a function of 

product features and bundled services, 

and if it is, whether that dispersion is 

justified by differences in observable 

attendant financial benefits such as 

performance. Some of this literature also 

considers the degree to which investors 

choose investments where expenses are 

so justified. In the Department’s view 

this literature taken together suggests 

that a substantial portion of expense 

dispersion is attributable to distribution 

expenses, including compensation of 

intermediaries and advertising.32 It casts 

doubt on whether such expenses are 

duly offset by observable financial 

benefits. Most studies are consistent 

with the possibility that such expenses 

are at least partly offset by unobserved 

benefits such as reduced search costs 

and other support for novice and 

unsophisticated investors, but most are 

also consistent with the possibility that 

some expenses are not so offset and that 

investors, especially unsophisticated 

ones, sometimes pay inefficiently high 

prices.33 The authors of some studies 

expressly interpret their failure to 

identify offsetting financial benefits as 

evidence that prices are inefficiently 

high. Some suggest that conflicted 

intermediaries may serve their own and 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64931 

34The following is a sampling of findings and 

interpretations reported in various studies that the 

Department reviewed. The Department observes 

that some of these studies have been published in 

peer-reviewed journals, while others have not. 

Some are working papers subject to later revision. 

Some research is visibly supported by industry or 

other interests, and some may be independent. Very 

little of this research separately examines DC plan 

investing. Nearly all of it examines mutual fund 

markets to the exclusion of certain competing 

insurance company or bank products. Some of it 

examines foreign experience. The Department 

believes it must be cautious in drawing inferences 

from this research as to whether investment prices 

paid by participants are efficient. 

Daniel B. Bergstresser et al., Assessing the Costs 

and Benefits of Brokers in the Mutual Fund 

Industry, Social Science Research Network Abstract 

616981 (Sept. 2007) find that investors who pay to 

purchase funds via intermediaries realize inferior 

returns, and say this result is consistent with either 

intangible benefits for investors or inefficiently high 

prices due to conflicts. 

Ralph Bluethgen et al., Financial Advice and 

Individual Investors’ Portfolios, Social Science 

Research Network Abstract 968197 (Mar. 2008) find 

that advisers (who are mostly compensated by 

commission) improve diversification and allocation 

across classes while increasing fees and turnover. 

They say these findings are consistent with ‘‘honest 

advice.’’ 

Susan Christoffersen et al., The Economics of 

Mutual-Fund Brokerage: Evidence from the Cross 

Section of Investment Channels, Science Research 

Network Abstract 687522 (Dec. 2005) identify some 

financial benefits reaped by investors who pay to 

invest through intermediaries. 

Sean Collins, Fees and Expenses of Mutual 

Funds, 2006, Investment Company Institute 

Research Fundamentals, Volume 16, Number 2 

(June 2007) reports that mutual fund fees and 

expenses are declining. 

Sean Collins, Are S&P 500 Index Mutual Funds 

Commodities?, Investment Company Institute 

Perspective, Volume 11, Number 3 (Aug. 2005) 

argues that S&P 500 index funds are not uniform 

commodities. For example, they are distributed in 

different ways. He finds that 91 percent of the 

variation in these funds’ expense ratios can be 

explained by a combination of fund asset size, 

investor account size, fee waivers and separate fees, 

and investor advice that is bundled into expense 

ratios. He argues that these funds competitively 

pass economies of scale along to investors, and 

reports that assets and flows are concentrated in 

low-cost funds. 

Henrik Cronqvist, Advertising and Portfolio 

Choice, Social Science Research Network Abstract 

920693 (July 26, 2006) finds that fund advertising 

steers investors toward ‘‘portfolios with higher fees, 

more risk, more active management, more ‘hot’ 

sectors, and more home bias.’’ He suggests that 

‘‘with the use of advertising, funds can differentiate 

themselves and therefore charge investors higher 

fees than the lowest-cost supplier in the industry.’’ 

Daniel N. Deli, Mutual Fund Advisory Contracts: 

An Empirical Investigation, The Journal of Finance, 

Volume 57, Number 1, 109–133 (Feb. 2002) finds 

that differences in investment advisers’ marginal 

compensation reflect differences in their marginal 

product, difficulty in measuring adviser 

performance, control environments, and scale 

economies. Based on this finding, he suggests that 

investment prices are efficient and recommends 

caution in any regulatory effort to influence such 

prices. 

Edwin J. Elton et al., Are Investors Rational? 

Choices Among Index Funds, The Journal of 

Finance, Volume 59, Number 1, 261–288 (Feb. 

2004) find that flows into high expense (and 

therefore predictably low performance) S&P 500 

index mutual funds are higher than would be 

expected in an efficient market. They conclude that 

because investors are not perfectly informed and 

rational, inferior products can prosper. 

Commenters, however, contend that because the 

authors scaled flows by fund size and smaller funds 

have higher expenses, these findings exaggerate the 

degree to which flows are directed to high expense 

funds. 

Javier Gil-Bazo & Pablo Ruiz-Verdu ́, Yet Another 

Puzzle? Relation Between Price and Performance in 

the Mutual Fund Industry, Social Science Research 

Network Abstract 947448 (March 2007) find that 

‘‘funds with worse before-fee performance charge 

higher fees.’’ They hypothesize that lower 

performing funds lose sophisticated investors to 

higher performing funds, then are left with 

relatively unsophisticated investors who are not as 

responsive to price. 

John A. Haslem et al., Performance and 

Characteristics of Actively Managed Retail Equity 

Mutual Funds with Diverse Expense Ratios, 

Financial Services Review, Volume 17, Number 1, 

49–68 (2008) find that funds with lower expenses 

have superior returns. John A. Haslem et al., 

Identification and Performance of Equity Mutual 

Funds with High Management Fees and Expense 

Ratios, Journal of Investing, Volume 16, Number 2 

(2007) find that certain performance measures vary 

negatively with fees and, on that basis, suggest that 

mutual funds do not compete strongly on price and 

that expenses are too high. 

Sarah Holden & Michael Hadley, The Economics 

of Providing 401(k) Plans: Services, Fees and 

Expenses 2006, Investment Company Institute 

Research Fundamentals, Volume 16, Number 4 

(Sept. 2007) report that 401(k) mutual fund 

investors tend to pay lower than average expenses 

and that 401(k) assets are concentrated in low cost 

funds. 

Ali Hortacsu & Chad Syverson, Product 

Differentiation, Search Costs, and Competition in 

the Mutual Fund Industry: A Case Study of S&P 500 

Index Funds, Quarterly Journal of Economics, 403 

(May 2004) document dispersion in S&P 500 Index 

Fund expense ratios, and report that low-cost funds 

have a dominant, but falling, market share. They 

conclude that an influx of novice investors who 

must defray search costs explains dispersion in 

expenses and flows to high expense funds. 

Todd Houge & Jay W. Wellman, The Use and 

Abuse of Mutual Fund Expenses, Social Science 

Research Network Abstract 880463 (Jan. 2006) find 

that load funds charge higher 12b–1 and 

management fees. They attribute this to abusive 

market segmentation that extracts excessive fees 

from unsophisticated investors. 

Giuliano Iannotta & Marco Navone, Search Costs 

and Mutual Fund Fee Dispersion, Social Science 

Research Network Abstract 1231843 (Aug. 2008) 

analyze the effect of search costs on mutual fund 

fees with data on broad U.S. domestic equity funds. 

They estimate the portion of the expense ratio that 

is not justified by the quality of service provided, 

by the cost structure of the investment company, or 

by the specificities of the clientele served by the 

fund and find that its dispersion is lower for highly 

visible funds and for funds that invest heavily in 

marketing. In the case of the U.S. mutual fund 

market, they argue, the dispersion of this residual 

demonstrates the extent to which some firms can 

charge a ‘‘non-marginal’’ (that is higher than 

competitive) price. 

Marc M. Kramer, The Influence of Financial 

Advice on Individual Investor Portfolio 

Performance, Social Science Research Network 

Abstract 1144702 (Mar. 2008) finds that advised 

investors take less risk and thereby reap lower 

returns. Risk-adjusted performance is similar. 

Adjusting further for investor characteristics, 

advised investors perform slightly worse. 

Erik R. Sirri & Peter Tufano, Costly Search and 

Mutual Fund Flows, The Journal of Finance, 

Volume 53, Number 5, 1589–1622 (Oct. 1998) find 

that investors are ‘‘fee sensitive in that lower-fee 

funds and funds that reduce fees grow faster.’’ 

Investors’ fee sensitivity is not symmetric, however. 

Edward Tower & Wei Zheng, Ranking Mutual 

Fund Families: Minimum Expenses and Maximum 

Loads as Markers for Moral Turpitude, Social 

Science Research Network Abstract 1265103 (Sept. 

2008) find a negative relationship between expense 

ratios and gross performance. 

The Division of Investment Management: Report 

on Mutual Fund Fees and Expenses, U.S. Securities 

and Exchange Commission (Dec. 2000), at http:// 

www.sec.gov/news/studies/feestudy.htm describes 

mutual fund fees and expenses and identifies major 

factors that influence fee levels but does not assess 

whether prices are efficient. 

Xinge Zhao, The Role of Brokers and Financial 

Advisors Behind Investment Into Load Funds, 

China Europe International Business School 

Working Paper (Dec. 2005), at http:// 

www.ceibs.edu/faculty/zxinge/brokerrole-zhao.pdf 

finds that funds with higher loads receive higher 

flows, and suggests that conflicted intermediaries 

enrich themselves at investors’ expense. 

35 It is possible that the converse could sometimes 

occur: Participants might fail to buy efficiently 

priced products and services whose marginal cost 

lags the associated marginal benefit to them. In that 

case advice, by correcting this error, might lead to 

higher expenses, but would still improve welfare. 

Because research suggests that participants are 

insensitive to fees rather than excessively sensitive 

to them the Department believes that this converse 

situation is likely to be rare. 

fund managers’ interests, thereby 

generating inefficiently high profits for 

either or both. Others disagree, believing 

that investors efficiently derive a 

combination of financial and intangible 

benefits for their expense dollars.34

In light of this literature and public 

commenters, the Department believes 

that the available research provides an 

insufficient basis to confidently 

determine whether or to what degree 

participants pay inefficiently high 

investment prices. Market conditions 

that may lead to inefficiently high 

prices—namely imperfect information, 

search costs and investor behavioral 

biases—certainly exist in the retail IRA 

market and likely exist to some degree 

in particular segments of the DC plan 

market. The Department believes there 

is a strong possibility that at least some 

participants pay inefficiently high 

investment prices. If so, the Department 

would expect these actions to reduce 

that inefficiency. This would increase 

participants’ welfare by transferring 

surplus from producers of investment 

products and services to them and by 

reducing dead weight loss. The 

Department additionally believes that 

even where investment prices are 

efficient, participants often make bad 

investment decisions with respect to 

expenses—that is, they buy investment 

products and services whose marginal 

cost exceed the associated marginal 

benefit to them.35 The Department 

expects these actions to reduce such 

investment errors, improving 

participant and societal welfare. 

However, the Department has no basis 


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36These comments on the RFI can be found under 

http://www.dol.gov/ebsa/regs/cmtfeedisclosures.html. 

37Comments on the proposal can be found under 

http://www.dol.gov/ebsa/regs/cmtfiduciaryrequirements.html. 

38The Department’s estimate of these costs are 

highly uncertain, discussed in more detail in the 

Uncertainty section, reflecting especially 

uncertainty about the average time plans will spend 

on performing their task. 

39For purposes of this analysis the Department 

assumes that these costs are borne by plans, even 

though they might be initially incurred by service 

providers. 

40The Department did not account for additional 

paper costs, given that no additional pages need be 

added as long as this information is included as 

part of the quarterly benefit statement. 

41This number also includes a small update of 

the in-house wage rate for a financial professional. 

42The Department lacks representative survey 

information on the number of plans that have a Web 

site, but believes that an average rate of 50 percent 

is reasonable. In estimating this rate, the 

Department has taken into account that plans that 

offer only non-mutual fund options might not have 

Web sites currently and that plans that offer a 

combination of mutual funds and non-mutual fund 

investment options are less likely to have Web sites 

than plans offering only mutual funds. In addition, 

commenters estimated that about half of plans use 

a third party administrator or independent record 

keeper. Due to this uncertainty, the Department’s 

estimate of the resulting costs is also highly 

uncertain. 

43The hourly labor cost of an IT professional is 

assumed to be $70. 

on which to quantify such errors or 

improvements. 

In addition to the benefits that 

participants will derive from the 

disclosure of investment-related 

information in a comparative format, 

they also will benefit from a 

retrospective disclosure of plan 

administrative fees actually charged to 

their accounts in the prior quarter. 

Previous RFI comments from participant 

advocates, plan sponsors and service 

providers support such a disclosure 

requirement.36 However, one comment 

to the contrary on behalf of service 

providers was received by the 

Department in response to the proposal. 

The commenter expressed concern that 

‘‘the value of quarterly statements to the 

participant does not justify the cost of 

providing the data.’’ 37 The Department 

continues to believe, as it did in 

connection with the proposal, that 

participants who are trying to plan for 

retirement are entitled to a 

comprehensive disclosure that includes 

not only information about fee and 

expenses that may occur depending on 

investment options selected, but also 

information on other fees that were 

actually assessed against their accounts 

in the previous quarter. Information 

about actual charges to participants’ 

accounts may, among other things, help 

participants understand their current 

reported account balance, detect errors 

in prior charges by the plan, handle 

general household budgeting and 

retirement planning, and insure that the 

charges are reasonable. In addition, this 

information already should be available 

in some form as part of ordinary plan 

recordkeeping that tracks participant 

account balances. 

4. Costs 

The Department estimates that the 

regulation may result in the following 

additional administrative burdens and 

costs 38 for plans (or plan sponsors).39

a. Costs Due to Upfront Review and 

Updating of Plan Documents 

In the RIA of the proposal, the 

Department estimated costs of about 

$30.3 million for participant-directed 

individual accounts plans to review the 

regulation upfront and to prepare the 

disclosures. Using updated in-house 

labor rates for professional and clerical 

employees, the Department has 

increased the estimated costs to about 

$35.0 million in 2012. Costs to update 

plan documents to take into account 

plan changes, such as new investment 

alternatives, changes in general plan 

administrative expenses, and changes in 

individual expenses are estimated to be 

approximately $20.3 million in 

subsequent years. 

b. Costs Due to Production of Quarterly 

Dollar Amount Disclosures 

The final regulation will require plan 

administrators to send out disclosures 

about administrative charges to 

participants’ accounts and engage in 

recordkeeping on both a plan-wide as 

well as a participant-specific basis. The 

Department estimates that the cost to 

produce the actual dollar disclosure is 

approximately $30.5 million for 2012 40

and $10.7 million in subsequent years. 

c. Costs Due to Assembling Required 

Information for Chart and Web Site 

Additional administrative burdens 

and costs are likely to arise because of 

the need for plans to consolidate 

information from more than one source 

to prepare the required comparative 

chart. In the proposal, the Department 

estimated that it takes a person with a 

financial background about one hour 

per plan to consolidate the information 

from multiple sources for the 

comparative chart. The Department 

acknowledges that some plans with 

non-mutual fund designated investment 

alternatives may require more time to 

prepare the required information for the 

chart and the Web site. Therefore, the 

Department has quintupled the time 

estimate to five hours per plan, on 

average, for the first year and 

quadrupled the time estimate to four 

hours per plan, on average, for 

subsequent years. This results in 

estimated costs for the consolidation of 

fee information from multiple sources of 

approximately $151.5 million in 2012 

and $121.2 million in subsequent 

years.41

d. Costs Due to the Web Site 

Requirement 

The regulation does not require plans 

to create and maintain a Web site. 

Rather, paragraph (d)(1)(v) of the rule 

requires plan administrators to disclose 

on the required comparative chart an 

Internet Web site address that is 

sufficiently specific to lead participants 

to supplemental information about each 

investment option offered under the 

plan. The Department received 

comments that many non-mutual fund 

products may not presently maintain a 

Web site, therefore additional costs will 

be incurred. In response to these 

comments, the Department has 

quantified the cost of creating and 

maintaining a Web site, below as an 

upper bound. 

For purposes of quantifying the cost 

of creating and maintaining a Web site, 

the Department assumes that about 50 

percent of plans, or employers 

sponsoring such plans, already maintain 

a Web site where plan information may 

be found.42 For these plans, some 

information will likely be required to be 

added to existing Web sites, which will 

have to be updated periodically. The 

Department assumes that 241,000 plans, 

or employers sponsoring such plans, 

already maintain Web sites with planrelated information and that for each 

such plan on average, an IT professional 

will spend one hour updating the Web 

site for the required information. In 

addition, the Department assumes that 

the plan will update the information 

about three additional times during the 

year, which will require one-half hour 

of an IT professional’s time for each 

update. The estimated 241,000 plans 

that do not currently maintain a Web 

site with plan information will require, 

on average, two hours of an IT 

professional’s time to create a basic Web 

site and one-half hour to update the 

information on the Web site three times 

in the first year.43 In addition, the 

241,000 plans presently without Web 

sites will have to rent server space. This 

is estimated to cost plans, on average, 

$240 a year, resulting in an aggregate 

cost of $159.4 million in the first year 

to create and update Web sites. 

In subsequent years, only new plans 

will incur the cost of developing a Web 


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44As in the RIA of the proposal, this section does 

not include distribution or material costs for the 

disclosures of administrative fees charged to 

participants’ accounts as the Department assumes 

that this information can be included as part of the 

quarterly benefit statement. 

45Some of this information is already required for 

404(c) compliant plans and by the Department’s 

Qualified Default Investment Alternative regulation. 

In addition, a large majority of plans voluntarily 

provide this information to its participants. As a 

result, the Department estimates that only 577,000 

participants will receive this information for the 

first time because of the final regulation, and 38% 

percent of participants will receive the information 

electronically. 

46The survey defines small employers as those 

having up to 100 full-time workers. Other reasons 

small employers do not offer a retirement plan are 

that workers prefer wages or other benefits, that a 

large portion of employees are seasonal, part-time, 

or high turnover, and that revenue is too low or 

uncertain. See http://www.ebri.org/surveys/sers for 

more detail. 

47 It also is possible that rather than discouraging 

employers from sponsoring or continuing to 

sponsor a retirement plan, increased administrative 

burden could instead influence some employers to 

offer less investment options in their participantdirected individual account plans. 

site. Existing plans are assumed to 

update the information on the Web site 

four times per year requiring one-half 

hour of an IT professional’s time for 

each update. Plans also will incur server 

space rental cost estimated at $240 per 

plan, resulting in a total cost in each 

subsequent year of $142.6 million. 

e. Costs of Distribution and Materials for 

Disclosures 

The final rule’s required disclosures, 

as well as any materials the plan 

receives regarding voting, tender or 

similar rights (‘‘pass-through materials’’), 

are usually sent to plan participants on 

an annual or quarterly basis.44 Using 

updated in-house wage rates, this leads 

to an estimate of about $39.2 million in 

labor costs.45 Plans will also bear 

materials and postage costs of about 

$9.0 million in 2012. The Department 

believes that plans have pass-through 

materials readily available for 

participants who must receive such 

disclosures; therefore, it has attributed 

no cost to gather this information. 

In total, the Department estimates that 

in 2012, participant-directed individual 

account plans will incur increased 

administrative costs of approximately 

$424.6 million. 

f. Discouragement of Some Employers 

From Sponsoring a Retirement Plan 

Increased administrative burdens may 

discourage some employers, particularly 

small employers, from sponsoring a 

retirement plan. For small plan 

sponsors, the administrative burden is 

felt disproportionately because of their 

limited resources. Small business 

owners who do not have the resources 

to analyze plan fees or to hire an analyst 

may be discouraged from offering a plan 

at all. 

Regulatory burden is one among many 

reasons small businesses do not to 

sponsor a retirement plan. According to 

the 2000, 2001, and 2002 Employee 

Benefit Research Institute (EBRI)’s Small 

Employer Retirement Surveys, about 2.7 

percent of small employers cited ‘‘too 

many government regulations’’ as the 

most important reason they do not offer 

a retirement plan.46 A commenter on the 

proposed rule supported this assertion, 

but did not provide a specific estimate 

of its impact. Due to very limited data 

on this issue, the Department is not able 

to quantify its impact.47

g. Summary of Costs 

The quantified total costs are shown 

in Table 3 below. Column (A) reports 

the estimated costs of up-front review of 

the regulation, Column (B) reports the 

costs to update plan documents, and 

Column (C) reports the cost to produce 

quarterly dollar amounts for 

administrative fees charged to 

participant accounts. The cost to 

assemble the required information, 

create and update Web sites, and 

associated distribution and material 

costs are reported in columns (D), (E), 

(F) and (G). The total present value of 

these costs is estimated at $2.7 billion 

over the ten year period 2012 to 2021. 

As discussed in more detail in the 

uncertainty section below, a range of 

possible cost estimates was constructed 

by decreasing and increasing key cost 

assumptions by 50 percent. This led to 

a range for the cost estimates of $2.0 to 

$3.3 million. 

TABLE 3—TOTAL DISCOUNTED COSTS OF PROPOSAL REPORTED IN $MILLIONS/YEAR

Year Up-front 

review cost 

Update plan 

documents 

Production 

of quarterly 

dollar 

amount 

disclosures 

Assembling 

the required 

chart and 

Web site 

information 

Creation/ 

updating of 

Web site 

Distribution 

materials 

costs 

Staff cost to 

distribute 

disclosures 

Total costs 

(A) (B) (C) (D) (E) (F) (G) A+B+C+D+E+F+G 

2012 ....................... 35.0 0.0 30.5 151.5 159.4 9.0 39.2 424.6 

2013 ....................... 5.1 13.8 10.0 113.3 133.3 8.4 36.6 320.5 

2014 ....................... 4.8 12.9 9.3 105.9 124.6 7.9 34.2 299.6 

2015 ....................... 4.5 12.1 8.7 99.0 116.4 7.4 32.0 280.0 

2016 ....................... 4.2 11.3 8.1 92.5 108.8 6.9 29.9 261.7 

2017 ....................... 3.9 10.5 7.6 86.4 101.7 6.4 27.9 244.5 

2018 ....................... 3.7 9.8 7.1 80.8 95.0 6.0 26.1 228.5 

2019 ....................... 3.4 9.2 6.6 75.5 88.8 5.6 24.4 213.6 

2020 ....................... 3.2 8.6 6.2 70.6 83.0 5.2 22.8 199.6 

2021 ....................... 3.0 8.0 5.8 65.9 77.6 4.9 21.3 186.6 

Total with 7% 

Discounting .. .................... .................... .................... .................... .................... .................... .................... 2,659.2 

Total with 3% 

Discounting .. .................... .................... .................... .................... .................... .................... .................... 3,095.1 

Note: The displayed numbers are rounded and therefore may not add up to the totals. 

h. Uncertainty in the Cost Estimates 

Although the Department made 

adjustments to the analysis in response 

to comments, the Department remains 

uncertain regarding the exact magnitude 

of the costs of these changes. The 

variables with the most uncertainty in 

the cost estimates are: 


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64934 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

48The clerical time to distribute disclosures 

remains unchanged in this sensitivity analysis. 

• The time required for legal 

professionals, clerical professionals 48

and accountants to perform their tasks; 

• The cost to obtain the actual dollar 

amounts of participant’s administrative 

and individual expenses; and 

• The labor cost to create and 

maintain Web sites. 

To estimate the influence of these 

variables on the analysis, the 

Department re-estimated the costs of the 

final regulation under different 

assumptions for these uncertain 

variables. Increasing the variables of 

concern by 25 percent resulted in a 

present value of $3.0 billion. Increasing 

the variables by 50 percent resulted in 

a present value of $3.3 billion. 

Increasing the key variables by 75 

percent results in a $3.6 billion present 

value for the final regulation. 

5. Net Benefits 

As the analysis above shows, our low 

end benefit estimate of $7.2 billion 

exceeds our high end cost estimate of 

$3.3 billion. Thus, the Department 

remains highly confident in its 

conclusion expressed in the RIA for the 

proposal that increased fee disclosure 

can induce changes in participant 

behavior and reductions in plan fees. 

Several public comments on the 

proposal reinforce these conclusions. 

6. Comments and Revisions 

The Department received several 

comments questioning various 

assumptions on which its estimates of 

the benefits were based and suggesting 

that it had underestimated the costs of 

the proposal. In response to these 

comments, as discussed above, the 

Department reevaluated the quantified 

benefits resulting from a reduction of 

fees and increased its estimate of the 

costs to account for the creation and 

updating of Web sites and the 

complexity of retrieving the information 

needed to produce the comparative 

chart and obtain required supplemental 

information. In addition, the 

Department updated its estimates of 

labor costs. 

7. Alternatives 

In formulating this final rule, the 

Department considered several 

alternative approaches, which are 

discussed in detail in the RIA of the 

proposal. The Department did not adopt 

any of the alternatives discussed in the 

RIA of the proposal, because it did not 

receive any sufficiently persuasive 

comments suggesting that it should. 

Some commenters suggested 

alternatives the Department had not 

considered. For example, a commenter 

suggested that plans should be allowed 

to provide supplemental information 

required to be disclosed by the rule in 

a written document rather than on a 

Web site, because many companies do 

not have access to a Web site. Another, 

commenter asked the Department to 

clarify whether the proposal applies to 

IRAs that provide for employer 

contributions—that is, ‘‘Simplified 

Employee Pension Retirement Account’’ 

(SEP) and ‘‘Savings Incentive Match 

Plan for Employees’’ (SIMPLE) plans. 

The Department did not adopt the first 

commenter’s suggestion, but it did 

clarify in the final rule that SEP and 

SIMPLE IRAs are excluded from the 

rule. The Department’s decisions 

regarding these regulatory alternatives 

are discussed earlier in this preamble. 

8. 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. At the 

proposed rule stage, the Department 

prepared an initial RFA analysis, 

because it did not have enough 

information to certify that the rule 

would not have a significant effect on a 

substantial number of small entities, 

although the Department stated that it 

considered it unlikely that the proposed 

rule would significantly affect such 

entities. 

In connection with the final rule, the 

Department has prepared a final RFA in 

compliance with section 604 of the 

RFA. For purposes of this analysis, 

EBSA continues to consider a small 

entity to be an employee benefit plan 

with fewer than 100 participants. The 

basis of this definition is found in 

section 104(a)(2) of ERISA, which 

permits the Secretary to prescribe 

simplified annual reports for pension 

plans that cover fewer than 100 

participants. The Department used this 

standard in the proposed rule and 

consulted with the Small Business 

Administration Office of Advocacy 

concerning its use of this standard for 

RFA purposes and requested public 

comments on this issue. The 

Department did not receive any 

comments that addressed its use of the 

participant count standard. 

The following subsections address 

specific requirements of the RFA. 

a. Need for and Objectives of the Rule 

With the proliferation of participantdirected individual account plans, such 

as 401(k) plans, which afford 

participants and beneficiaries the 

opportunity to direct the investment of 

all or a portion of the assets held in their 

individual plan accounts, participants 

and beneficiaries are increasingly 

responsible for making their own 

retirement savings decisions. This 

increased responsibility has led to a 

growing concern that participants and 

beneficiaries may not have access to, or 

if accessible, may not be considering 

information critical to making informed 

decisions about the management of their 

accounts, particularly information on 

investment choices, including attendant 

fees and expenses. This rule requires 

participants and beneficiaries to be 

provided investment-related 

information in a form that encourages 

and facilitates a comparative review 

among investment options. The 

Department believes that the rule will 

provide beneficial information to 

participants and beneficiaries that will 

allow them to make informed decisions 

with regard to investing assets in their 

individual accounts. 

The reasons for and objectives of this 

final regulation are discussed in detail 

in Section A of this preamble, 

‘‘Background,’’ and in section ‘‘Need for 

Regulatory Action’’ of the Regulatory 

Impact Analysis (RIA) above. The legal 

basis for the rule is set forth in the 

‘‘Authority’’ section of this preamble, 

below. 

b. Public Comments 

A public comment on the proposed 

rule suggested that the Department 

underestimated the cost to small service 

providers to comply with the proposed 

rule. Specifically, the commenter stated 

that the Department underestimated the 

time required for an attorney or other 

legal professional to review the rule and 

the disclosures, and the hourly rate for 

an attorney to perform this service. In 

response to the first comment, the 

Department would like to clarify that 

the time estimate for legal review is an 

average estimate spread across all plans 

that must comply with the rule and is 

not the time estimate that is applicable 

only to small plans. With regard to the 

second issue, the Department would 

like to clarify that the estimated hourly 

wage rate is not a billable rate; it is an 

in-house wage rate that includes profit 

or overhead and is based on the 

National Occupational Employment 

Survey (May 2008, Bureau of Labor 

Statistics) and the Employment Cost 

Index (June, 2009, Bureau of Labor 


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Statistics), which is the most reliable 

data the Department has to support its 

cost estimates. The commenter also 

stated that the Department 

underestimated the time small plan 

sponsors will have to spend gathering 

information to comply with the 

disclosure requirements of the final 

rule. As further discussed under the 

Cost section of the RIA, the Department 

has increased its estimate of the hours 

it will to take to gather and consolidate 

information required for the disclosure 

from one hour to four hours. 

Finally, the commenter implored the 

Department to apply a delayed effective 

date for small plans of at least one year 

following the effective date for large 

plans in order to allow such plans to 

develop the systems necessary to 

comply with the disclosure 

requirements of the final rule. While the 

Department did not adopt the 

commenter’s suggestion, as stated above 

in the preamble, the Department has set 

January 1, 2012, as the applicability date 

for calendar year plans to comply with 

the rule, which should provide plans 

with sufficient time to develop the 

necessary systems for compliance. 

c. Affected Small Entities 

The Department estimates that the 

final rule will apply to approximately 

419,000 small plans covering 

approximately 9.5 million participants. 

d. Estimating Compliance Requirements 

for Small Entities/Plans 

The Department continues to believe 

that the effects of this final rule will be 

to increase retirement savings by 

providing participants and beneficiaries 

with enhanced information about their 

plans, which is expected to allow them 

to make more informed investment 

decisions. The Department also believes 

that small plans will benefit from the 

rule, because it will clarify the 

information that must be disclosed to 

plan participants in order for plan 

fiduciaries to meet their fiduciary duty 

under ERISA. 

While small and large plans will incur 

administrative costs due to the final 

rule, these costs are reasonable 

compared to the benefits and will 

probably be borne by the participants 

who will also receive the benefits under 

the rule. From industry comments, the 

Department inferred that participants in 

larger plans, more often than 

participants in smaller plans, have 

access to needed investment 

information. The Department continues 

to believe that participants in small 

plans need as much information about 

their plan investments as participants in 

larger plans. 

Assuming that the plan incurs the 

average costs for all disclosure activities 

that are considered in the RIA section 

above, the following calculation 

illustrates how large the costs of the 

disclosures would be for a very small 

plan (one-participant plan). As can be 

seen in Table 4, the total cost of 

compliance for a one-participant plan 

amounts to less than $873 in the first 

year and less than that amount in the 

subsequent years. The costs in 2012 

include a review cost of about $73 per 

plan (one-half hour of a legal 

professional’s time plus one-half hour of 

a clerical professional’s time), labor 

costs of $314 for consolidating the 

information for the comparative chart 

(five hours), costs of, on average, $485 

for the creation and maintenance of a 

Web site, $0.40 per participant for 

recordkeeping and disclosure of 

information, additional annual labor 

cost for distribution of $0.90 in section 

404(c) compliant plans or plans that 

already provide similar information 

($1.50 in plans that do not already 

provide section 404(c) compliant or 

similar information), and material and 

postage costs of $0.15 in 404(c) 

compliant plans or plans that already 

provide similar information ($2.40 in 

plans that do not already provide 

section 404(c) compliant or similar 

information). 

These cost estimates should be 

considered an estimate of the upper 

bound on plan expenses. To the extent 

that small plans rely on third party 

administrators or independent record 

keepers that have economies of scale, 

plan costs could be lower. To the extent 

that plans use record keepers that 

already provide plan Web sites changes 

by the record keeper to comply with the 

final rule will likely impose few, if any, 

additional costs for plans. In addition, if 

plans use investment alternatives like 

mutual funds that already provide much 

of the required information, Web site 

costs would be less, as would the cost 

to gather information for the Web site 

and the comparative chart. 

Small plans may be able to find lower 

cost options to comply with the rule. If, 

for example, server space for the Web 

site is provided by the service provider 

at almost no cost and the plan is not 

required to spend as much time 

gathering the required information 

because it chose plan options for which 

the information is more readily 

available, a one-participant plan could 

experience first year costs of $310 and 

$240 in subsequent years. 

TABLE 4—COSTS FOR ONE-PARTICIPANT PLAN (UNDISCOUNTED) 

Type of cost 

404(c) plans and plans with 

similar information 

Non-404(c) plans without 

similar information 

Initial year Subsequent 

year Initial year Subsequent year 

Plan Review ..................................................................................................... 73 36 73 36 

Consolidation of Information ............................................................................ 314 251 314 251 

Cost of Web site .............................................................................................. 485 380 486 381 

Actual Dollar Disclosure .................................................................................. 0.40 0.15 0.40 0.15 

Labor Cost for Distribution ............................................................................... 0.90 0.90 1.50 1.50 

Material Cost .................................................................................................... 0.15 0.15 2.40 2.40 

Total .......................................................................................................... $873 $669 $876 $672 

The displayed numbers are rounded and therefore may not add up to the totals. 

e. Duplicative, Overlapping, and 

Conflicting Rules 

ERISA section 404(c) and the 

regulations thereunder contain 

disclosure requirements for plan 

fiduciaries of certain participantdirected account plans that are to some 

extent similar to the ones that are 

contained in the proposed regulation. 

As explained in more detail in the 

Background section of this preamble, 

the Department amended the 

regulations under section 404(c) in 

order to establish a uniform set of basic 

disclosure requirements and to ensure 


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64936 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

that all participants and beneficiaries in 

participant-directed individual account 

plans have access to the same 

investment-related information. 

In addition, the Department has 

consulted with the Securities and 

Exchange Commission to avoid 

duplicative, overlapping, or conflicting 

requirements. The Department is 

unaware of any additional relevant 

Federal rules for small plans that 

duplicate, overlap, or conflict with this 

final rule. 

9. Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3506(c)(2)), the 

proposed rule solicited comments on 

the information collections included 

therein. The Department also submitted 

an information collection request (ICR) 

to OMB in accordance with 44 U.S.C. 

3507(d), contemporaneously with the 

publication of the proposal for OMB’s 

review. No public comments were 

received that specifically address the 

paperwork burden analysis of the 

information collections. 

The Department submitted an ICR to 

OMB for its request of a new 

information collection. OMB approved 

the ICR on October 5, 2010, under OMB 

Control Number 1210–0090, which will 

expire on October 31, 2013. 

The final rule requires plan- and 

investment-related fee and expense 

information to be disclosed to 

participants and beneficiaries in 

participant-directed individual account 

plans. This ICR pertains to two 

categories of information that are 

required to be disclosed: ‘‘Plan-related’’ 

and ‘‘investment-related’’ information. 

The information collection provisions of 

the rule are intended to ensure that 

fiduciaries provide participants and 

beneficiaries with sufficient information 

regarding plan fees and expenses and 

designated investment alternatives to 

make informed decisions regarding the 

management of their individual 

accounts. The calculation of the 

estimated hour and cost burden of the 

ICR were discussed in detail in the 

proposed rule and are summarized 

below. 

The Department estimates that 

disclosing and distributing plan- and 

investment-related information to 

participants and beneficiaries as 

required by the rule will require 

approximately 6.6 million burden hours 

with an equivalent cost of 

approximately $347 million and a cost 

burden of approximately $221 million 

in the first year. In each subsequent 

year, the total labor burden hours are 

estimated to be approximately 5.5 

million hours with an equivalent cost of 

approximately $275 million and the cost 

burden is estimated at approximately 

$201 million per year. 

The Department’s estimate of the total 

burden in the final rule has increased 

from the proposal due to four factors: (1) 

Counts of plans and participants were 

updated to account for more recent data; 

(2) wage rates were updated to account 

for more recent data; (3) the hour and 

cost burden associated with creating 

and maintaining a Web site to comply 

with the regulatory requirements was 

added; and (4) the estimate of the 

average hour burden to gather 

information for the comparative chart 

and Web site was increased. The first 

two changes resulted only in a slightly 

higher burden, while the other two 

changes increased the burden 

significantly as discussed in more detail 

below. 

Increased burden due to Web site 

requirement: The estimated burden 

includes 1.4 million burden hours ($101 

million in equivalent costs) in the first 

year, and 1.1 million burden hours ($76 

million equivalent costs) in subsequent 

years for plans to engage an information 

technology professional to comply with 

the rule’s requirement for plans to 

provide a Web site to disclose 

supplemental information to 

participants and beneficiaries. The 

estimated annual cost of the Web site is 

approximately $116 million. This hour 

and cost burden associated with 

providing a plan Web site was not 

estimated at the proposed rule stage. 

Increased burden due to increase in 

average hour burden estimate of 

gathering information for the 

comparative chart and Web site: The 

estimated burden reported above also 

includes 1.9 million in added burden 

hours in the first year ($121 million in 

added equivalent costs) to consolidate 

information from multiple sources for 

the comparative chart and Web site. In 

the proposal, the Department estimated 

that this requirement could take, on 

average, one hour per plan; in response 

to comments, the final RIA uses an 

estimate of five hours, on average, per 

plan in the first year, and four hours, on 

average in subsequent years. 

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection 

(Request for new OMB Control 

Number). 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Titles: Fiduciary Requirements for 

Disclosure in Participant-Directed 

Individual Account Plans. 

Affected Public: Business or other forprofit, not-for-profit institutions. 

Estimated Number of Respondents: 

483,000. 

Estimated Number of Annual 

Responses: 738,207,000. 

Frequency of Response: Initially, 

Annually, Upon Request, Updating. 

Estimated Total Annual Burden 

Hours: 6,583,000 hours in the first year; 

5,520,000 in each subsequent year. 

Estimated Total Annual Burden Cost: 

$221,040,000 for the first year; 

$201,225,000 for each subsequent year. 

10. 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. 

11. 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. 

12. 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 

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. 

List of Subjects in 29 CFR Part 2550 

Employee benefit plans, Fiduciaries, 

Investments, Pensions, Disclosure, 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64937 

Reporting and recordkeeping 

requirements, and Securities. 

■ For the reasons set forth in the 

preamble, the Department is amending 

Subchapter F, Part 2550 of Title 29 of 

the Code of Federal Regulations as 

follows: 

Subchapter F—Fiduciary 

Responsibility Under the Employee 

Retirement Income Security Act of 1974 

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

■ 1. The authority citation for part 2550 

continues to read as follows: 

Authority: 29 U.S.C. 1135; sec. 657, Pub. 

L. 107–16, 115 Stat.38; and Secretary of 

Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 

3, 2003). Sec. 2550.401b–1 also issued under 

sec. 102, Reorganization Plan No. 4 of 1978, 

43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 

Comp. 332, effective Dec. 31, 1978, 44 FR 

1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. 

Sec. 2550.401c–1 also issued under 29 U.S.C. 

1101. Sections 2550.404c–1 and 2550.404c– 

5 also issued under 29 U.S.C. 1104. Sec. 

2550.407c–3 also issued under 29 U.S.C. 

1107. Sec. 2550.408b–1 also issued under 29 

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

Reorganization Plan No. 4 of 1978, 3 CFR, 

1978 Comp. p. 332, effective Dec. 31, 1978, 

44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 

Comp. 332. Sec. 2550.412–1 also issued 

under 29 U.S.C. 1112. 

■ 2. Add § 2550.404a–5 to read as 

follows: 

§ 2550.404a–5 Fiduciary requirements for 

disclosure in participant-directed individual 

account plans. 

(a) General. The investment of plan 

assets is a fiduciary act governed by the 

fiduciary standards of section 

404(a)(1)(A) and (B) of the Employee 

Retirement Income Security Act of 1974, 

as amended (ERISA), 29 U.S.C. 1001 et 

seq. (all section references herein are 

references to ERISA unless otherwise 

indicated). Pursuant to section 

404(a)(1)(A) and (B), fiduciaries must 

discharge their duties with respect to 

the plan prudently and solely in the 

interest of participants and 

beneficiaries. When the documents and 

instruments governing an individual 

account plan, described in paragraph 

(b)(2) of this section, provide for the 

allocation of investment responsibilities 

to participants or beneficiaries, the plan 

administrator, as defined in section 

3(16), must take steps to ensure, 

consistent with section 404(a)(1)(A) and 

(B), that such participants and 

beneficiaries, on a regular and periodic 

basis, are made aware of their rights and 

responsibilities with respect to the 

investment of assets held in, or 

contributed to, their accounts and are 

provided sufficient information 

regarding the plan, including fees and 

expenses, and regarding designated 

investment alternatives, including fees 

and expenses attendant thereto, to make 

informed decisions with regard to the 

management of their individual 

accounts. 

(b) Satisfaction of duty to disclose. (1) 

In general. The plan administrator of a 

covered individual account plan must 

comply with the disclosure 

requirements set forth in paragraphs (c) 

and (d) of this section with respect to 

each participant or beneficiary that, 

pursuant to the terms of the plan, has 

the right to direct the investment of 

assets held in, or contributed to, his or 

her individual account. Compliance 

with paragraphs (c) and (d) of this 

section will satisfy the duty to make the 

regular and periodic disclosures 

described in paragraph (a) of this 

section, provided that the information 

contained in such disclosures is 

complete and accurate. A plan 

administrator will not be liable for the 

completeness and accuracy of 

information used to satisfy these 

disclosure requirements when the plan 

administrator reasonably and in good 

faith relies on information received from 

or provided by a plan service provider 

or the issuer of a designated investment 

alternative. 

(2) Covered individual account plan. 

For purposes of paragraph (b)(1) of this 

section, a ‘‘covered individual account 

plan’’ is any participant-directed 

individual account plan as defined in 

section 3(34) of ERISA, except that such 

term shall not include plans involving 

individual retirement accounts or 

individual retirement annuities 

described in sections 408(k) (‘‘simplified 

employee pension’’) or 408(p) (‘‘simple 

retirement account’’) of the Internal 

Revenue Code of 1986. 

(c) Disclosure of plan-related 

information. A plan administrator (or 

person designated by the plan 

administrator to act on its behalf) shall 

provide to each participant or 

beneficiary the plan-related information 

described in paragraphs (c)(1) through 

(4) of this section, based on the latest 

information available to the plan. 

(1) General. (i) On or before the date 

on which a participant or beneficiary 

can first direct his or her investments 

and at least annually thereafter: 

(A) An explanation of the 

circumstances under which participants 

and beneficiaries may give investment 

instructions; 

(B) An explanation of any specified 

limitations on such instructions under 

the terms of the plan, including any 

restrictions on transfer to or from a 

designated investment alternative; 

(C) A description of or reference to 

plan provisions relating to the exercise 

of voting, tender and similar rights 

appurtenant to an investment in a 

designated investment alternative as 

well as any restrictions on such rights; 

(D) An identification of any 

designated investment alternatives 

offered under the plan; 

(E) An identification of any 

designated investment managers; and 

(F) A description of any ‘‘brokerage 

windows,’’ ‘‘self-directed brokerage 

accounts,’’ or similar plan arrangements 

that enable participants and 

beneficiaries to select investments 

beyond those designated by the plan. 

(ii) If there is a change to the 

information described in paragraph 

(c)(1)(i)(A) through (F) of this section, 

each participant and beneficiary must 

be furnished a description of such 

change at least 30 days, but not more 

than 90 days, in advance of the effective 

date of such change, unless the inability 

to provide such advance notice is due 

to events that were unforeseeable or 

circumstances beyond the control of the 

plan administrator, in which case notice 

of such change must be furnished as 

soon as reasonably practicable. 

(2) Administrative expenses. (i)(A) On 

or before the date on which a 

participant or beneficiary can first direct 

his or her investments and at least 

annually thereafter, an explanation of 

any fees and expenses for general plan 

administrative services (e.g., legal, 

accounting, recordkeeping), which may 

be charged against the individual 

accounts of participants and 

beneficiaries and are not reflected in the 

total annual operating expenses of any 

designated investment alternative, as 

well as the basis on which such charges 

will be allocated (e.g., pro rata, per 

capita) to, or affect the balance of, each 

individual account. 

(B) If there is a change to the 

information described in paragraph 

(c)(2)(i)(A) of this section, each 

participant and beneficiary must be 

furnished a description of such change 

at least 30 days, but not more than 90 

days, in advance of the effective date of 

such change, unless the inability to 

provide such advance notice is due to 

events that were unforeseeable or 

circumstances beyond the control of the 

plan administrator, in which case notice 

of such change must be furnished as 

soon as reasonably practicable. 

(ii) At least quarterly, a statement that 

includes: 

(A) The dollar amount of the fees and 

expenses described in paragraph 

(c)(2)(i)(A) of this section that are 


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64938 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

actually charged (whether by liquidating 

shares or deducting dollars) during the 

preceding quarter to the participant’s or 

beneficiary’s account for such services; 

(B) A description of the services to 

which the charges relate (e.g., plan 

administration, including 

recordkeeping, legal, accounting 

services); and 

(C) If applicable, an explanation that, 

in addition to the fees and expenses 

disclosed pursuant to paragraph 

(c)(2)(ii) of this section, some of the 

plan’s administrative expenses for the 

preceding quarter were paid from the 

total annual operating expenses of one 

or more of the plan’s designated 

investment alternatives (e.g., through 

revenue sharing arrangements, Rule 

12b–1 fees, sub-transfer agent fees). 

(3) Individual expenses. (i)(A) On or 

before the date on which a participant 

or beneficiary can first direct his or her 

investments and at least annually 

thereafter, an explanation of any fees 

and expenses that may be charged 

against the individual account of a 

participant or beneficiary on an 

individual, rather than on a plan-wide, 

basis (e.g., fees attendant to processing 

plan loans or qualified domestic 

relations orders, fees for investment 

advice, fees for brokerage windows, 

commissions, front- or back-end loads 

or sales charges, redemption fees, 

transfer fees and similar expenses, and 

optional rider charges in annuity 

contracts) and which are not reflected in 

the total annual operating expenses of 

any designated investment alternative. 

(B) If there is a change to the 

information described in paragraph 

(c)(3)(i)(A) of this section, each 

participant and beneficiary must be 

furnished a description of such change 

at least 30 days, but not more than 90 

days, in advance of the effective date of 

such change, unless the inability to 

provide such advance notice is due to 

events that were unforeseeable or 

circumstances beyond the control of the 

plan administrator, in which case notice 

of such change must be furnished as 

soon as reasonably practicable. 

(ii) At least quarterly, a statement that 

includes: 

(A) The dollar amount of the fees and 

expenses described in paragraph 

(c)(3)(i)(A) of this section that are 

actually charged (whether by liquidating 

shares or deducting dollars) during the 

preceding quarter to the participant’s or 

beneficiary’s account for individual 

services; and 

(B) A description of the services to 

which the charges relate (e.g., loan 

processing fee). 

(4) Disclosures on or before first 

investment. The requirements of 

paragraphs (c)(1)(i), (c)(2)(i)(A), 

(c)(3)(i)(A) of this section to furnish 

information on or before the date on 

which a participant or beneficiary can 

first direct his or her investments may 

be satisfied by furnishing to the 

participant or beneficiary the most 

recent annual disclosure furnished to 

participants and beneficiaries pursuant 

those paragraphs and any updates to the 

information furnished to participants 

and beneficiaries pursuant to 

paragraphs (c)(1)(ii), (c)(2)(i)(B) and 

(c)(3)(i)(B) of this section. 

(d) Disclosure of investment-related 

information. The plan administrator (or 

person designated by the plan 

administrator to act on its behalf), based 

on the latest information available to the 

plan, shall: 

(1) Information to be provided 

automatically. Except as provided in 

paragraph (i) of this section, furnish to 

each participant or beneficiary on or 

before the date on which he or she can 

first direct his or her investments and at 

least annually thereafter, the following 

information with respect to each 

designated investment alternative 

offered under the plan— 

(i) Identifying information. Such 

information shall include: 

(A) The name of each designated 

investment alternative; and 

(B) The type or category of the 

investment (e.g., money market fund, 

balanced fund (stocks and bonds), largecap stock fund, employer stock fund, 

employer securities). 

(ii) Performance data. (A) For 

designated investment alternatives with 

respect to which the return is not fixed, 

the average annual total return of the 

investment for 1-, 5-, and 10-calendar 

year periods (or for the life of the 

alternative, if shorter) ending on the 

date of the most recently completed 

calendar year; as well as a statement 

indicating that an investment’s past 

performance is not necessarily an 

indication of how the investment will 

perform in the future; and 

(B) For designated investment 

alternatives with respect to which the 

return is fixed or stated for the term of 

the investment, both the fixed or stated 

annual rate of return and the term of the 

investment. If, with respect to such a 

designated investment alternative, the 

issuer reserves the right to adjust the 

fixed or stated rate of return 

prospectively during the term of the 

contract or agreement, the current rate 

of return, the minimum rate guaranteed 

under the contract, if any, and a 

statement advising participants and 

beneficiaries that the issuer may adjust 

the rate of return prospectively and how 

to obtain (e.g., telephone or Web site) 

the most recent rate of return required 

under this section. 

(iii) Benchmarks. For designated 

investment alternatives with respect to 

which the return is not fixed, the name 

and returns of an appropriate broadbased securities market index over the 

1-, 5-, and 10-calendar year periods (or 

for the life of the alternative, if shorter) 

comparable to the performance data 

periods provided under paragraph 

(d)(1)(ii)(A) of this section, and which is 

not administered by an affiliate of the 

investment issuer, its investment 

adviser, or a principal underwriter, 

unless the index is widely recognized 

and used. 

(iv) Fee and expense information. (A) 

For designated investment alternatives 

with respect to which the return is not 

fixed: 

(1) The amount and a description of 

each shareholder-type fee (fees charged 

directly against a participant’s or 

beneficiary’s investment, such as 

commissions, sales loads, sales charges, 

deferred sales charges, redemption fees, 

surrender charges, exchange fees, 

account fees, and purchase fees, which 

are not included in the total annual 

operating expenses of any designated 

investment alternative) and a 

description of any restriction or 

limitation that may be applicable to a 

purchase, transfer, or withdrawal of the 

investment in whole or in part (such as 

round trip, equity wash, or other 

restrictions); 

(2) The total annual operating 

expenses of the investment expressed as 

a percentage (i.e., expense ratio), 

calculated in accordance with paragraph 

(h)(5) of this section; 

(3) The total annual operating 

expenses of the investment for a oneyear period expressed as a dollar 

amount for a $1,000 investment 

(assuming no returns and based on the 

percentage described in paragraph 

(d)(1)(iv)(A)(2) of this section); 

(4) A statement indicating that fees 

and expenses are only one of several 

factors that participants and 

beneficiaries should consider when 

making investment decisions; and 

(5) A statement that the cumulative 

effect of fees and expenses can 

substantially reduce the growth of a 

participant’s or beneficiary’s retirement 

account and that participants and 

beneficiaries can visit the Employee 

Benefit Security Administration’s Web 

site for an example demonstrating the 

long-term effect of fees and expenses. 

(B) For designated investment 

alternatives with respect to which the 

return is fixed for the term of the 

investment, the amount and a 

description of any shareholder-type fees 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64939 

and a description of any restriction or 

limitation that may be applicable to a 

purchase, transfer or withdrawal of the 

investment in whole or in part. 

(v) Internet Web site address. An 

Internet Web site address that is 

sufficiently specific to provide 

participants and beneficiaries access to 

the following information regarding the 

designated investment alternative: 

(A) The name of the alternative’s 

issuer; 

(B) The alternative’s objectives or 

goals in a manner consistent with 

Securities and Exchange Commission 

Form N–1A or N–3, as appropriate; 

(C) The alternative’s principal 

strategies (including a general 

description of the types of assets held by 

the investment) and principal risks in a 

manner consistent with Securities and 

Exchange Commission Form N–1A or 

N–3, as appropriate; 

(D) The alternative’s portfolio 

turnover rate in a manner consistent 

with Securities and Exchange 

Commission Form N–1A or N–3, as 

appropriate; 

(E) The alternative’s performance data 

described in paragraph (d)(1)(ii) of this 

section updated on at least a quarterly 

basis, or more frequently if required by 

other applicable law; and 

(F) The alternative’s fee and expense 

information described in paragraph 

(d)(1)(iv) of this section. 

(vi) Glossary. A general glossary of 

terms to assist participants and 

beneficiaries in understanding the 

designated investment alternatives, or 

an Internet Web site address that is 

sufficiently specific to provide access to 

such a glossary along with a general 

explanation of the purpose of the 

address. 

(vii) Annuity options. If a designated 

investment alternative is part of a 

contract, fund or product that permits 

participants or beneficiaries to allocate 

contributions toward the future 

purchase of a stream of retirement 

income payments guaranteed by an 

insurance company, the information set 

forth in paragraph (i)(2)(i) through 

(i)(2)(vii) of this section with respect to 

the annuity option, to the extent such 

information is not otherwise included in 

investment-related fees and expenses 

described in paragraph (d)(1)(iv). 

(viii) Disclosures on or before first 

investment. The requirement in 

paragraph (d)(1) of this section to 

provide information to a participant or 

beneficiary on or before the date on 

which the participant or beneficiary can 

first direct his or her investments may 

be satisfied by furnishing to the 

participant or beneficiary the most 

recent annual disclosure furnished to 

participants and beneficiaries pursuant 

to paragraph (d)(1) of this section. 

(2) Comparative format. (i) Furnish 

the information described in paragraph 

(d)(1) and, if applicable, paragraph (i) of 

this section in a chart or similar format 

that is designed to facilitate a 

comparison of such information for each 

designated investment alternative 

available under the plan and 

prominently displays the date, and that 

includes: 

(A) A statement indicating the name, 

address, and telephone number of the 

plan administrator (or a person or 

persons designated by the plan 

administrator to act on its behalf) to 

contact for the provision of the 

information required by paragraph (d)(4) 

of this section; 

(B) A statement that additional 

investment-related information 

(including more current performance 

information) is available at the listed 

Internet Web site addresses (see 

paragraph (d)(1)(v) of this section); and 

(C) A statement explaining how to 

request and obtain, free of charge, paper 

copies of the information required to be 

made available on a Web site pursuant 

to paragraph (d)(1)(v), paragraph 

(i)(2)(vi), relating to annuity options, or 

paragraph (i)(3), relating to fixed-return 

investments, of this section. 

(ii) Nothing in this section shall 

preclude a plan administrator from 

including additional information that 

the plan administrator determines 

appropriate for such comparisons, 

provided such information is not 

inaccurate or misleading. 

(3) Information to be provided 

subsequent to investment. Furnish to 

each investing participant or 

beneficiary, subsequent to an 

investment in a designated investment 

alternative, any materials provided to 

the plan relating to the exercise of 

voting, tender and similar rights 

appurtenant to the investment, to the 

extent that such rights are passed 

through to such participant or 

beneficiary under the terms of the plan. 

(4) Information to be provided upon 

request. Furnish to each participant or 

beneficiary, either at the times specified 

in paragraph (d)(1), or upon request, the 

following information relating to 

designated investment alternatives— 

(i) Copies of prospectuses (or, 

alternatively, any short-form or 

summary prospectus, the form of which 

has been approved by the Securities and 

Exchange Commission) for the 

disclosure of information to investors by 

entities registered under either the 

Securities Act of 1933 or the Investment 

Company Act of 1940, or similar 

documents relating to designated 

investment alternatives that are 

provided by entities that are not 

registered under either of these Acts; 

(ii) Copies of any financial statements 

or reports, such as statements of 

additional information and shareholder 

reports, and of any other similar 

materials relating to the plan’s 

designated investment alternatives, to 

the extent such materials are provided 

to the plan; 

(iii) A statement of the value of a 

share or unit of each designated 

investment alternative as well as the 

date of the valuation; and 

(iv) A list of the assets comprising the 

portfolio of each designated investment 

alternative which constitute plan assets 

within the meaning of 29 CFR 2510.3– 

101 and the value of each such asset (or 

the proportion of the investment which 

it comprises). 

(e) Form of disclosure. (1) The 

information required to be disclosed 

pursuant to paragraphs (c)(1)(i), 

(c)(2)(i)(A), and (c)(3)(i)(A) of this 

section may be provided as part of the 

plan’s summary plan description 

furnished pursuant to ERISA section 

102 or as part of a pension benefit 

statement furnished pursuant to ERISA 

section 105(a)(1)(A)(i), if such summary 

plan description or pension benefit 

statement is furnished at a frequency 

that comports with paragraph (c)(1)(i) of 

this section. 

(2) The information required to be 

disclosed pursuant to paragraphs 

(c)(2)(ii) and (c)(3)(ii) of this section may 

be included as part of a pension benefit 

statement furnished pursuant to ERISA 

section 105(a)(1)(A)(i). 

(3) A plan administrator that uses and 

accurately completes the model in the 

Appendix, taking into account each 

designated investment alternative 

offered under the plan, will be deemed 

to have satisfied the requirements of 

paragraph (d)(2) of this section. 

(4) Except as otherwise explicitly 

required herein, fees and expenses may 

be expressed in terms of a monetary 

amount, formula, percentage of assets, 

or per capita charge. 

(5) The information required to be 

prepared by the plan administrator for 

disclosure under this section shall be 

written in a manner calculated to be 

understood by the average plan 

participant. 

(f) Selection and monitoring. Nothing 

herein is intended to relieve a fiduciary 

from its duty to prudently select and 

monitor providers of services to the plan 

or designated investment alternatives 

offered under the plan. 

(g) Manner of furnishing. Reserved. 

(h) Definitions. For purposes of this 

section, the term— 


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(1) At least annually thereafter means 

at least once in any 12-month period, 

without regard to whether the plan 

operates on a calendar or fiscal year 

basis. 

(2) At least quarterly means at least 

once in any 3-month period, without 

regard to whether the plan operates on 

a calendar or fiscal year basis. 

(3) Average annual total return means 

the average annual compounded rate of 

return that would equate an initial 

investment in a designated investment 

alternative to the ending redeemable 

value of that investment calculated with 

the before tax methods of computation 

prescribed in Securities and Exchange 

Commission Form N–1A, N–3, or N–4, 

as appropriate, except that such method 

of computation may exclude any frontend, deferred or other sales loads that 

are waived for the participants and 

beneficiaries of the covered individual 

account plan. 

(4) Designated investment alternative 

means any investment alternative 

designated by the plan into which 

participants and beneficiaries may 

direct the investment of assets held in, 

or contributed to, their individual 

accounts. The term ‘‘designated 

investment 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 plan. 

(5) Total annual operating expenses 

means: 

(i) In the case of a designated 

investment alternative that is registered 

under the Investment Company Act of 

1940, the annual operating expenses 

and other asset-based charges before 

waivers and reimbursements (e.g., 

investment management fees, 

distribution fees, service fees, 

administrative expenses, separate 

account expenses, mortality and 

expense risk fees) that reduce the 

alternative’s rate of return, expressed as 

a percentage, calculated in accordance 

with the required Securities and 

Exchange Commission form, e.g., Form 

N–1A (open-end management 

investment companies) or Form N–3 or 

N–4 (separate accounts offering variable 

annuity contracts); or 

(ii) In the case of a designated 

investment alternative that is not 

registered under the Investment 

Company Act of 1940, the sum of the 

fees and expenses described in 

paragraphs (h)(5)(ii)(A) through (C) of 

this section before waivers and 

reimbursements, for the alternative’s 

most recently completed fiscal year, 

expressed as a percentage of the 

alternative’s average net asset value for 

that year— 

(A) Management fees as described in 

the Securities and Exchange 

Commission Form N–1A that reduce the 

alternative’s rate of return, 

(B) Distribution and/or servicing fees 

as described in the Securities and 

Exchange Commission Form N–1A that 

reduce the alternative’s rate of return, 

and 

(C) Any other fees or expenses not 

included in paragraphs (h)(5)(ii)(A) or 

(B) of this section that reduce the 

alternative’s rate of return (e.g., 

externally negotiated fees, custodial 

expenses, legal expenses, accounting 

expenses, transfer agent expenses, 

recordkeeping fees, administrative fees, 

separate account expenses, mortality 

and expense risk fees), excluding 

brokerage costs described in Item 21 of 

Securities and Exchange Commission 

Form N–1A. 

(i) Special rules. The rules set forth in 

this paragraph apply solely for purposes 

of paragraph (d)(1) of this section. 

(1) Qualifying employer securities. In 

the case of designated investment 

alternatives designed to invest in, or 

primarily in, qualifying employer 

securities, within the meaning of section 

407 of ERISA, the following rules shall 

apply— 

(i) In lieu of the requirements of 

paragraph (d)(1)(v)(C) of this section 

(relating to principal strategies and 

principal risks), provide an explanation 

of the importance of a well-balanced 

and diversified investment portfolio. 

(ii) The requirements of paragraph 

(d)(1)(v)(D) of this section (relating to 

portfolio turnover rate) do not apply to 

such designated investment alternatives. 

(iii) The requirements of paragraph 

(d)(1)(v)(F) of this section (relating to fee 

and expense information) do not apply 

to such designated investment 

alternatives, unless the designated 

investment alternative is a fund with 

respect to which participants or 

beneficiaries acquire units of 

participation, rather than actual shares, 

in exchange for their investment. 

(iv) The requirements of paragraph 

(d)(1)(iv)(A)(2) of this section (relating 

to total annual operating expenses 

expressed as a percentage) do not apply 

to such designated investment 

alternatives, unless the designated 

investment alternative is a fund with 

respect to which participants or 

beneficiaries acquire units of 

participation, rather than actual shares, 

in exchange for their investment. 

(v) The requirements of paragraph 

(d)(1)(iv)(A)(3) of this section (relating 

to total annual operating expenses 

expressed as a dollar amount per $1,000 

invested) do not apply to such 

designated investment alternatives, 

unless the designated investment 

alternative is a fund with respect to 

which participants or beneficiaries 

acquire units of participation, rather 

than actual shares, in exchange for their 

investment. 

(vi)(A) With respect to the 

requirement in paragraph (d)(1)(ii)(A) of 

this section (relating to performance 

data for 1-, 5-, and 10-year periods), the 

definition of ‘‘average annual total 

return’’ as defined in paragraph 

(i)(1)(vi)(B) of this section shall apply to 

such designated investment alternatives 

in lieu of the definition in paragraph 

(h)(3) of this section if the qualifying 

employer securities are publicly traded 

on a national exchange or generally 

recognized market and the designated 

investment alternative is not a fund 

with respect to which participants or 

beneficiaries acquire units of 

participation, rather than actual shares, 

in exchange for their investment. 

(B) The term ‘‘average annual total 

return’’ means the change in value of an 

investment in one share of stock on an 

annualized basis over a specified 

period, calculated by taking the sum of 

the dividends paid during the 

measurement period, assuming 

reinvestment, plus the difference 

between the stock price (consistent with 

ERISA section 3(18)) at the end and at 

the beginning of the measurement 

period, and dividing by the stock price 

at the beginning of the measurement 

period; reinvestment of dividends is 

assumed to be in stock at market prices 

at approximately the same time actual 

dividends are paid. 

(C) The definition of ‘‘average annual 

total return’’ in paragraph (i)(1)(vi)(B) of 

this section shall apply to such 

designated investment alternatives 

consisting of employer securities that 

are not publicly traded on a national 

exchange or generally recognized 

market, unless the designated 

investment alternative is a fund with 

respect to which participants or 

beneficiaries acquire units of 

participation, rather than actual shares, 

in exchange for their investment. 

Changes in value shall be calculated 

using principles similar to those set 

forth in paragraph (i)(1)(vi)(B) of this 

section. 

(2) Annuity options. In the case of a 

designated investment alternative that is 

a contract, fund or product that permits 

participants or beneficiaries to allocate 

contributions toward the current 

purchase of a stream of retirement 

income payments guaranteed by an 

insurance company, the plan 

administrator shall, in lieu of the 


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information required by paragraphs 

(d)(1)(i) through (d)(1)(v), provide each 

participant or beneficiary the following 

information with respect to each such 

option: 

(i) The name of the contract, fund or 

product; 

(ii) The option’s objectives or goals 

(e.g., to provide a stream of fixed 

retirement income payments for life); 

(iii) The benefits and factors that 

determine the price (e.g., age, interest 

rates, form of distribution) of the 

guaranteed income payments; 

(iv) Any limitations on the ability of 

a participant or beneficiary to withdraw 

or transfer amounts allocated to the 

option (e.g., lock-ups) and any fees or 

charges applicable to such withdrawals 

or transfers; 

(v) Any fees that will reduce the value 

of amounts allocated by participants or 

beneficiaries to the option, such as 

surrender charges, market value 

adjustments, and administrative fees; 

(vi) A statement that guarantees of an 

insurance company are subject to its 

long-term financial strength and claimspaying ability; and 

(vii) An Internet Web site address that 

is sufficiently specific to provide 

participants and beneficiaries access to 

the following information— 

(A) The name of the option’s issuer 

and of the contract, fund or product; 

(B) Description of the option’s 

objectives or goals; 

(C) Description of the option’s 

distribution alternatives/guaranteed 

income payments (e.g., payments for 

life, payments for a specified term, joint 

and survivor payments, optional rider 

payments), including any limitations on 

the right of a participant or beneficiary 

to receive such payments; 

(D) Description of costs and/or factors 

taken into account in determining the 

price of benefits under an option’s 

distribution alternatives/guaranteed 

income payments (e.g., age, interest 

rates, other annuitization assumptions); 

(E) Description of any limitations on 

the right of a participant or beneficiary 

to withdraw or transfer amounts 

allocated to the option and any fees or 

charges applicable to a withdrawal or 

transfer; and 

(F) Description of any fees that will 

reduce the value of amounts allocated 

by participants or beneficiaries to the 

option (e.g., surrender charges, market 

value adjustments, administrative fees). 

(3) Fixed-return investments. In the 

case of a designated investment 

alternative with respect to which the 

return is fixed for the term of the 

investment, the plan administrator 

shall, in lieu of complying with the 

requirements of paragraph (d)(1)(v) of 

this section, provide an Internet Web 

site address that is sufficiently specific 

to provide participants and beneficiaries 

access to the following information— 

(i) The name of the alternative’s 

issuer; 

(ii) The alternatives objectives or goals 

(e.g., to provide stability of principal 

and guarantee a minimum rate of 

return); 

(iii) The alternative’s performance 

data described in paragraph (d)(1)(ii)(B) 

of this section updated on at least a 

quarterly basis, or more frequently if 

required by other applicable law; 

(iv) The alternative’s fee and expense 

information described in paragraph 

(d)(1)(iv)(B) of this section. 

(4) Target date or similar funds. 

Reserved. 

(j) Dates. (1) Effective date. This 

section shall be effective on December 

20, 2010. 

(2) Applicability date. This section 

shall apply to covered individual 

account plans for plan years beginning 

on or after November 1, 2011. 

(3) Transitional rules. (i) 

Notwithstanding paragraphs (b), (c) and 

(d) of this section, the initial disclosures 

required on or before the date on which 

a participant or beneficiary can first 

direct his or her investment must be 

furnished no later than 60 days after 

such applicability date to participants or 

beneficiaries who had the right to direct 

the investment of assets held in, or 

contributed to, their individual account 

on the applicability date. 

(ii) For plan years beginning before 

October 1, 2021, if a plan administrator 

reasonably and in good faith determines 

that it does not have the information on 

expenses attributable to the plan that is 

necessary to calculate, in accordance 

with paragraph (h)(3) of this section, the 

5-year and 10-year average annual total 

returns for a designated investment 

alternative that is not registered under 

the Investment Company Act of 1940, 

the plan administrator may use a 

reasonable estimate of such expenses or 

the plan administrator may use the most 

recently reported total annual operating 

expenses of the designated investment 

alternative as a substitute for such 

expenses. When a plan administrator 

uses a reasonable estimate or the most 

recently reported total annual operating 

expenses as a substitute for actual 

expenses pursuant to this paragraph, the 

administrator shall inform participants 

of the basis on which the returns were 

determined. Nothing in this section 

requires disclosure of returns for 

periods before the inception of a 

designated investment alternative. 

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BILLING CODE 4510–29–C 


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■ 3. In § 2550.404c–1 revise (b)(2)(i)(B), 

(c)(1)(ii), and (f)(1), and add (d)(2)(iv) to 

read as follows: 

§ 2550.404c–1 ERISA section 404(c) plans. 

* * * * * 

(b) * * * 

(2) * * * 

(i) * * * 

(B) The participant or beneficiary is 

provided or has the opportunity to 

obtain sufficient information to make 

informed investment decisions with 

regard to investment alternatives 

available under the plan, and incidents 

of ownership appurtenant to such 

investments. For purposes of this 

paragraph, a participant or beneficiary 

will be considered to have sufficient 

information if the participant or 

beneficiary is provided by an identified 

plan fiduciary (or a person or persons 

designated by the plan fiduciary to act 

on his behalf): 

(1) An explanation that the plan is 

intended to constitute a plan described 

in section 404(c) of the Employee 

Retirement Income Security Act, and 29 

CFR 2550.404c–1, and that the 

fiduciaries of the plan may be relieved 

of liability for any losses which are the 

direct and necessary result of 

investment instructions given by such 

participant or beneficiary; 

(2) The information required pursuant 

to 29 CFR 2550.404a–5; and 

(3) In the case of plans which offer an 

investment alternative which is 

designed to permit a participant or 

beneficiary to directly or indirectly 

acquire or sell any employer security 

(employer security alternative), a 

description of the procedures 

established to provide for the 

confidentiality of information relating to 

the purchase, holding and sale of 

employer securities, and the exercise of 

voting, tender and similar rights, by 

participants and beneficiaries, and the 

name, address and phone number of the 

plan fiduciary responsible for 

monitoring compliance with the 

procedures (see paragraphs 

(d)(2)(ii)(E)(4)(vii), (viii) and (ix) of this 

section). 

* * * * * 

(c) * * * 

(1) * * * 

(ii) For purposes of sections 404(c)(1) 

and 404(c)(2) of the Act and paragraphs 

(a) and (d) of this section, a participant 

or beneficiary will be deemed to have 

exercised control with respect to voting, 

tender or similar rights appurtenant to 

the participant’s or beneficiary’s 

ownership interest in an investment 

alternative, provided that the 

participant’s or beneficiary’s investment 

in the investment alternative was itself 

the result of an exercise of control; the 

participant or beneficiary was provided 

a reasonable opportunity to give 

instruction with respect to such 

incidents of ownership, including the 

provision of the information described 

in 29 CFR 2550.404a–5(d)(3); and the 

participant or beneficiary has not failed 

to exercise control by reason of the 

circumstances described in paragraph 

(c)(2) with respect to such incidents of 

ownership. 

* * * * * 

(d) * * * 

(2) * * * 

(iv) Paragraph (d)(2)(i) does not serve 

to relieve a fiduciary from its duty to 

prudently select and monitor any 

service provider or designated 

investment alternative offered under the 

plan. 

* * * * * 

(f) * * * 

(1) Plan A is an individual account 

plan described in section 3(34) of the 

Act. The plan states that a plan 

participant or beneficiary may direct the 

plan administrator to invest any portion 

of his individual account in a particular 

diversified equity fund managed by an 

entity which is not affiliated with the 

plan sponsor, or any other asset 

administratively feasible for the plan to 

hold. However, the plan provides that 

the plan administrator will not 

implement certain listed instructions for 

which plan fiduciaries would not be 

relieved of liability under section 404(c) 

(see paragraph (d)(2)(ii) of this section). 

Plan participants and beneficiaries are 

permitted to give investment 

instructions during the first week of 

each month with respect to the equity 

fund and at any time with respect to 

other investments. The plan 

administrator of Plan A provides each 

participant and beneficiary with the 

information described in paragraph 

(b)(2)(i)(B) of this section, including the 

information that must be provided on or 

before the date on which a participant 

or beneficiary can first direct his or her 

investments and at least annually 

thereafter pursuant to 29 CFR 

2550.404a–5, and provides updated 

information in the event of any change 

in the information provided. 

Subsequent to any investment by a 

participant or beneficiary, the plan 

administrator forwards to the investing 

participant or beneficiary any materials 

provided to the plan relating to the 

exercise of voting, tender or similar 

rights attendant to ownership of an 

interest in such investment (see 

paragraph (b)(2)(i)(B)(3) of this section 

and 29 CFR 2550.404a–5(d)(3)). Upon 

request, the plan administrator provides 

each participant or beneficiary with 

copies of any prospectuses (or similar 

documents relating to designated 

investment alternatives that are 

provided by entities that are not 

registered under the Securities Act of 

1933 or the Investment Company Act of 

1940), financial statements and reports, 

and any other materials relating to the 

designated investment alternatives 

available under the plan in accordance 

with 29 CFR 2550.404a–5(d)(4)(i) 

through (iv). Also upon request, the 

plan administrator provides each 

participant and beneficiary with other 

information required by 29 CFR 

2550.404a–5(d)(4) with respect to the 

equity fund, which is a designated 

investment alternative, including a 

statement of the value of a share or unit 

of the participant’s or beneficiary’s 

interest in the equity fund and the date 

of the valuation. Plan A meets the 

requirements of paragraph (b)(2)(i)(B) of 

this section regarding the provision of 

investment information. 

* * * * * 

Signed at Washington, DC, this 7th day of 

October 2010. 

Phyllis C. Borzi, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2010–25725 Filed 10–14–10; 12:45 pm] 

BILLING CODE 4510–29–P 


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