Friday, 

July 16, 2010 

Part III 

Department of Labor 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

Reasonable Contract or Arrangement 

Under Section 408(b)(2)—Fee Disclosure; 

Interim Final Rule 


jlentini on DSKJ8SOYB1PROD with RULES3
41600 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

1See, e.g., Field Assistance Bulletin 2002–3 

(November 5, 2002), Advisory Opinions 97–16A 

(May 22, 1997) and 97–15A (May 22, 1997), 

http://www.dol.gov/ebsa/publications/ 

undrstndgrtrmnt.html, and http://www.dol.gov/ 

ebsa/newsroom/fs053105.html. 

2The Department also implemented changes to 

the information required to be reported concerning 

service provider compensation as part of the Form 

5500 Annual Report. These changes to Schedule C 

of the Form 5500 complement the interim final rule 

under ERISA section 408(b)(2) in assuring that plan 

fiduciaries have the information they need to 

monitor their service providers consistent with 

their duties under ERISA section 404(a)(1). See 72 

FR 64731; see also frequently asked questions on 

Schedule C, at http://www.dol.gov/ebsa/faqs/faqsch-C-supplement.html and http://www.dol.gov/ 

ebsa/faqs/faq_scheduleC.html. 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB08 

Reasonable Contract or Arrangement 

Under Section 408(b)(2)—Fee 

Disclosure 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Interim final rule with request 

for comments. 

SUMMARY: This document contains an 

interim final regulation under the 

Employee Retirement Income Security 

Act of 1974 (ERISA or the Act) requiring 

that certain service providers to 

employee pension benefit plans disclose 

information to assist plan fiduciaries in 

assessing the reasonableness of 

contracts or arrangements, including the 

reasonableness of the service providers’ 

compensation and potential conflicts of 

interest that may affect the service 

providers’ performance. These 

disclosure requirements are established 

as part of a statutory exemption from 

ERISA’s prohibited transaction 

provisions. This regulation will affect 

employee pension benefit plan sponsors 

and fiduciaries and certain service 

providers to such plans. Interested 

persons are invited to submit comments 

on the interim final regulation for 

consideration by the Department of 

Labor. 

DATES: Effective date. This interim final 

rule is effective on July 16, 2011. 

Comment date. Written comments on 

the interim final rule must be received 

by August 30, 2010. 

ADDRESSES: To facilitate the receipt and 

processing of comments, EBSA 

encourages interested persons to submit 

their comments electronically to 

e-ORI@dol.gov, or by using the Federal 

eRulemaking portal http:// 

www.regulations.gov (following 

instructions for submission of 

comments). Persons submitting 

comments electronically are encouraged 

not to submit paper copies. Persons 

interested in submitting comments on 

paper should send or deliver their 

comments (preferably three copies) to: 

Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration, Room N–5655, 

U.S. Department of Labor, 200 

Constitution Avenue, NW., Washington, 

DC 20210, Attention: 408(b)(2) Interim 

Final Rule. All comments will be 

available to the public, without charge, 

online at http://www.regulations.gov 

and http://www.dol.gov/ebsa, and at the 

Public Disclosure Room, Employee 

Benefits Security Administration, U.S. 

Department of Labor, Room N–1513, 

200 Constitution Avenue, NW., 

Washington, DC 20210. 

FOR FURTHER INFORMATION CONTACT: For 

further information on the interim final 

regulation, contact Allison Wielobob or 

Fil Williams, Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration, (202) 693– 

8510. This is not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

1. General 

In recent years, there have been a 

number of changes in the way services 

are provided to employee benefit plans 

and in the way service providers are 

compensated. Many of these changes 

may have improved efficiency and 

reduced the costs of administrative 

services and benefits for plans and their 

participants. However, the complexity 

resulting from these changes also has 

made it more difficult for plan sponsors 

and fiduciaries to understand what 

service providers actually are paid for 

the specific services rendered. 

Despite these complexities, section 

404(a)(1) of ERISA requires plan 

fiduciaries, when selecting or 

monitoring service providers and plan 

investments, to act prudently and solely 

in the interest of the plan’s participants 

and beneficiaries and for the exclusive 

purpose of providing benefits and 

defraying reasonable expenses of 

administering the plan. Fundamental to 

a plan fiduciary’s ability to discharge 

these obligations is the availability of 

information sufficient to enable the plan 

fiduciary to make informed decisions 

about the services, the costs, and the 

service provider. Although the 

Department of Labor (Department) has 

issued technical guidance and 

compliance assistance materials relating 

to the obligations of plan fiduciaries in 

selecting and monitoring service 

providers,1 the Department continues to 

believe that, given plan fiduciaries’ need 

for complete and accurate information 

about compensation and revenue 

sharing, both plan fiduciaries and 

service providers would benefit from 

regulatory guidance in this area. For this 

reason, the Department published a 

notice of proposed rulemaking in the 

Federal Register (72 FR 70988) on 

December 13, 2007. On the same day, 

the Department also published a 

proposed class exemption from the 

restrictions of section 406(a)(1)(C) of 

ERISA in the Federal Register (72 FR 

70893). The Department proposed the 

exemption on its own motion pursuant 

to section 408(a) of the Act, and in 

accordance with the procedures set 

forth in 29 CFR part 2570, subpart B (55 

FR 32836, August 10, 1990). 

2. Public Comments on Proposed 

Regulation and Class Exemption 

The Department’s proposal required 

that reasonable contracts and 

arrangements between employee benefit 

plans and certain providers of services 

to such plans include specified 

information to assist plan fiduciaries in 

assessing the reasonableness of the 

compensation paid for services and the 

conflicts of interest that may affect a 

service provider’s performance of 

services. The proposal also was 

designed to assist plan fiduciaries and 

administrators in obtaining the 

information they need from service 

providers to satisfy their reporting and 

disclosure obligations.2 Interested 

persons were invited to submit 

comments on the proposal. In response 

to this invitation, the Department 

received over 100 written comments on 

the proposed regulation and class 

exemption from a variety of parties, 

including plan sponsors and fiduciaries, 

plan service providers, financial 

institutions, and employee benefit plan 

and participant industry 

representatives. These comments are 

available for review under ‘‘Public 

Comments’’ on the ‘‘Laws & Regulations’’ 

page of the Department’s Employee 

Benefits Security Administration Web 

site at http://www.dol.gov/ebsa. 

Due to the large number of public 

comments received, the importance of 

this regulatory initiative, and its 

potentially significant effects on the 

provision of services to employee 

benefit plans, the Department held a 

public hearing on March 31 and April 

1, 2008, in order to further develop the 

public record and the Department’s 

understanding of the issues raised in the 


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3See 29 CFR 2550.408b–2. 4Available at http://www.whitehouse.gov/omb/ 

circulars/a004/a-4.pdf. 

public comments. As a result of the 

public hearing, the Department received 

a significant number of additional 

comments to supplement the public 

record for this regulatory initiative. 

These supplemental materials also are 

available for review on the Department’s 

Web site. 

Set forth below is an overview of the 

interim final regulation and the public 

comments received on the proposal and 

during the Department’s public hearing. 

B. Overview of Interim Final 

Regulation Under ERISA Section 

408(b)(2) and Public Comments 

The Department’s interim final 

regulation (for simplicity, the interim 

final regulation also is referred to herein 

as the final regulation) retains the basic 

structure of the proposal by requiring 

that covered service providers satisfy 

certain disclosure requirements in order 

to qualify for the statutory exemption 

for services under ERISA section 

408(b)(2). The furnishing of goods, 

services, or facilities between a plan and 

a party in interest to the plan generally 

is prohibited under section 406(a)(1)(C) 

of ERISA. As a result, a service 

relationship between a plan and a 

service provider would constitute a 

prohibited transaction, because any 

person providing services to the plan is 

defined by ERISA to be a ‘‘party in 

interest’’ to the plan. However, section 

408(b)(2) of ERISA exempts certain 

arrangements between plans and service 

providers that otherwise would be 

prohibited transactions under section 

406 of ERISA. Specifically, section 

408(b)(2) provides relief from ERISA’s 

prohibited transaction rules for service 

contracts or arrangements between a 

plan and a party in interest if the 

contract or arrangement is reasonable, 

the services are necessary for the 

establishment or operation of the plan, 

and no more than reasonable 

compensation is paid for the services. 

Regulations issued by the Department 

clarify each of these conditions to the 

exemption.3

This rule amends the regulation under 

ERISA section 408(b)(2) to clarify the 

meaning of a ‘‘reasonable’’ contract or 

arrangement for covered plans. 

Currently, the regulation at 29 CFR 

2550.408b-2(c) states only that a 

contract or arrangement is not 

reasonable unless it permits the plan to 

terminate without penalty on reasonably 

short notice. The final regulation 

establishes a requirement under section 

408(b)(2) that, in order for certain 

contracts or arrangements for services to 

be reasonable, the covered service 

provider must disclose specified 

information to a responsible plan 

fiduciary, defined as a fiduciary with 

authority to cause the plan to enter into, 

or extend or renew, a contract or 

arrangement for the provision of 

services to the plan. The specific 

disclosure requirements are described in 

more detail below. 

The final regulation differs from the 

proposal in a number of significant 

respects, each discussed in this rule. 

First, unlike the proposal, the final rule 

does not require a formal written 

contract or arrangement delineating the 

disclosure obligations, even though the 

disclosures must be made in writing. 

The final rule focuses instead on the 

substance of the disclosure that must be 

provided. Second, the final rule treats 

separately pension and welfare plans. 

Paragraph (c)(1) of the rule published 

today provides disclosure requirements 

applicable to contracts or arrangements 

with pension plans. The Department 

reserves paragraph (c)(2) of the rule for 

future guidance on disclosure with 

respect to welfare plans. 

Third, the final rule modifies the 

categories of service providers that must 

comply with the disclosure 

requirements, including fiduciaries, 

investment advisers, and recordkeepers 

or brokers who make investment 

alternatives available to a plan. It also 

applies to providers of other specified 

services who receive either ‘‘indirect 

compensation’’ (generally from sources 

other than the plan or plan sponsor) or 

certain types of payments from affiliates 

and subcontractors. The final rule 

includes in its definition of ‘‘covered 

service providers’’ fiduciaries to 

investment vehicles that hold plan 

assets and in which a covered plan has 

a direct equity investment. However, the 

definition makes clear that furnishing 

non-fiduciary services to such vehicles, 

or services to vehicles that do not hold 

plan assets will not cause a person to be 

a covered service provider. In addition, 

the regulation requires fiduciaries to 

plan asset investment vehicles in which 

plans make direct equity investments, as 

well as parties that offer designated 

investment alternatives to a participantdirected individual account plan as part 

of a platform, to furnish investmentrelated compensation information. 

Fourth, the final rule, unlike the 

proposal, does not contain specific 

narrative conflict of interest disclosure 

provisions, but rather relies on full 

disclosure of the circumstances under 

which the covered service provider will 

be receiving compensation from parties 

other than the plan (or plan sponsor), 

the identification of such parties, and 

the compensation that is expected to be 

received. As discussed below, the 

Department is persuaded that plan 

fiduciaries will be in a better position to 

assess potential conflicts of interest by 

reviewing these specific parties and the 

actual or expected compensation to be 

received from such parties. Fifth, the 

final rule includes a new provision 

requiring that certain providers of 

multiple services disclose separately the 

cost to the covered plan of 

recordkeeping services. Sixth, the final 

rule specifically addresses the 

application of the requirements of the 

regulation to section 4975 of the Internal 

Revenue Code (the Code). And, lastly, 

the exemptive relief for plan sponsors or 

other responsible plan fiduciaries, 

originally proposed as a separate 

exemption, is now incorporated into the 

final rule for ease of reference and 

consideration by interested parties. A 

more detailed discussion of the final 

rule, including these changes, is set 

forth below. 

As required by Executive Order 

12866, the Department evaluated the 

benefits and costs of this final rule. The 

Department believes that mandatory 

proactive disclosure will reduce sponsor 

information costs, discourage harmful 

conflicts, and enhance service value. 

Additional benefits will flow from the 

Department’s enhanced ability to 

redress abuse. Although the benefits are 

difficult to quantify, the Department is 

confident they more than justify the 

cost. The Department estimated costs for 

the rule over a ten-year time frame for 

purposes of this analysis and used 

information from the quantitative 

characterization of the service provider 

market presented below as a basis for 

these cost estimates. This 

characterization did not account for all 

service providers, but it does provide 

information on the segments of the 

service provider industry that are likely 

to be most affected by the rule (i.e., 

those with contracts listed on the Form 

5500). In addition to the costs to service 

providers, the Department also 

considered, and discusses below, the 

potential costs to plans. 

In accordance with OMB Circular A– 

4,4 Table 1 below depicts an accounting 

statement showing the Department’s 

assessment of the benefits and costs 

associated with this regulatory action. 


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5A few commenters suggested that the 

Department not extend the final rule to small plans 

(for example, those with less than 100 participants). 

The Department was not persuaded that any policy 

rationale exists for excluding small plans. 

TABLE 1—ACCOUNTING TABLE

Category Primary 

estimate Year dollar Discount rate Period covered 

Benefits 

Annualized Monetized ($millions/year) ............................................................ Not Quantified. 

Qualitative: The final regulation will increase the amount of information that service providers disclose to plan fiduciaries. Non-quantified benefits 

include information cost savings, discouraging harmful conflicts of interest, service value improvements through improved decisions and 

value, better enforcement tools to redress abuse, and harmonization with other EBSA rules and programs. 

Costs 

Annualized Monetized ($millions/year) ............................................................ 58.7 2010 7% 2011–2020 

54.3 2010 3% 2011–2020 

Qualitative: Costs include costs for service providers to perform compliance review and implementation, for disclosure of general, investment-related, and additional requested information, for responsible plan fiduciaries to request additional information from service providers to comply 

with the exemption and to prepare notices to DOL if the service provider fails to comply with the request. 

Transfers .......................................................................................................... Not Applicable. 

A more detailed discussion of the 

need for this regulatory action, 

consideration of regulatory alternatives, 

and assessment of benefits and costs are 

included in Section K—‘‘Regulatory 

Impact Analysis’’ below. 

1. General 

The final regulation, like the proposal, 

amends paragraph (c) of § 2550.408b–2 

by moving, without change, the current 

provisions of paragraph (c) to a newly 

designated paragraph (c)(3) and adding 

new paragraphs (c)(1) and (2) to address 

the disclosure requirements applicable 

to a ‘‘reasonable contract or 

arrangement.’’ Paragraph (c)(1) describes 

the disclosure requirements for pension 

plans. Paragraph (c)(2) has been 

reserved for future guidance concerning 

the disclosure requirements for welfare 

plans. 

The general paragraph of the final 

rule, paragraph (c)(1)(i), provides that 

no contract or arrangement for services 

between a covered plan and a covered 

service provider, nor any extension or 

renewal, is reasonable within the 

meaning of ERISA section 408(b)(2) and 

this regulation unless the requirements 

of the regulation are satisfied. The terms 

‘‘covered plan’’ and ‘‘covered service 

provider’’ are defined in paragraph 

(c)(1)(ii) and (iii), respectively. The 

general paragraph also provides that the 

regulation’s disclosure requirements are 

independent of a fiduciary’s obligations 

under section 404 of ERISA. 

2. Scope—Covered Plans 

Paragraph (c)(1)(ii) defines a ‘‘covered 

plan’’ to mean an employee pension 

benefit plan or a pension plan within 

the meaning of ERISA section 3(2)(A) 

(and not described in ERISA section 

4(b)), except that such term shall not 

include a ‘‘simplified employee 

pension’’ described in section 408(k) of 

the Code, a ‘‘simple retirement account’’ 

described in section 408(p) of the Code, 

an individual retirement account 

described in section 408(a) of the Code, 

or an individual retirement annuity 

described in section 408(b) of the Code. 

Under the proposal, all employee 

benefit plans subject to Title I of ERISA, 

including employee pension benefit 

plans and welfare benefit plans, were 

subject to the regulation’s disclosure 

requirements. The Department received 

many comments and heard testimony 

from parties concerned about the 

implications of subjecting defined 

benefit plans, welfare benefit plans, and 

individual retirement accounts (IRAs) to 

the regulation.5

Commenters questioned the 

proposal’s application to defined benefit 

plans for a variety of reasons, suggesting 

that the Department consider separate 

guidance for defined benefit plans. 

Commenters argued that sponsors of 

defined benefit plans and their service 

providers have only recently joined the 

public policy discussion regarding fee 

disclosure for retirement plans. They 

believe that a thorough examination of 

the issues that affect defined benefit 

plans is warranted before disclosure 

rules apply with respect to their service 

providers. 

In advocating for separate rules for 

defined benefit plans, some commenters 

focused on the differences in the legal 

structures of defined benefit plans and 

defined contribution plans. In addition, 

commenters noted that services are 

provided to defined benefit plans in 

ways that are materially different than 

they are for defined contribution plans. 

Other commenters noted that employers 

have incentives to monitor and 

negotiate service provider fees and 

expenses for defined benefit plans, 

because these plans primarily rely on 

employer contributions; excessive fees 

and expenses would make it more 

expensive for the employer to fund 

promised benefits. In contrast, defined 

contribution plans are funded primarily 

by employee contributions, and 

employers may pass on up to 100 

percent of plan costs to employees. 

After careful review of the comments, 

the Department is not persuaded that 

the information fiduciaries of defined 

benefit plans need to make informed 

decisions about their service providers 

is fundamentally different from the 

information fiduciaries of defined 

contribution plans need to make 

informed decisions. Nor is the 

Department persuaded that the service 

provider relationships between the two 

types of plans are so different as to 

justify exclusion of defined benefit 

plans from the regulation’s disclosure 

requirements. Moreover, the Department 

does not believe that compliance with 

the disclosure requirements, 

particularly as modified from the 

proposal, will present any unreasonable 

compliance burdens for service 

providers to defined benefit plans. For 

these reasons, the final rule, like the 

proposal, applies to contracts and 

arrangements with covered service 

providers to both defined contribution 

and defined benefit plans. 

The Department also received many 

comments concerning the applicability 

of the proposal to welfare benefit plans. 

Many commenters recommended their 

exclusion from the scope of the final 


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6 49 FR 13208 (Apr. 3, 1984); amended at 71 FR 

5887 (Feb. 3, 2006) (providing prohibited 

transaction relief for service arrangements and 

related plan transactions involving insurance agents 

and brokers, pension consultants, insurance and 

investment companies, and investment company 

principal underwriters; for example, PTE 84–24 

permits these parties to place insurance products 

with plans when they are fiduciaries, or affiliated 

with fiduciaries, to the plans if certain conditions 

are met). 

rule. Some commenters believe that the 

Department’s rationales for the 

proposed rule apply to pension plans 

but not to welfare benefit plans. Other 

commenters maintain that, if the 

Department creates a disclosure regime 

for welfare benefit plan service 

providers, it should be promulgated 

separately. 

Commenters articulated specific 

concerns relating to welfare benefit 

plans, including the potential for 

negative effects on the insurance 

industry, which, they argue, is highly 

regulated by State laws. Many 

commenters asserted that, considering 

the high level of State regulation, 

subjecting welfare benefit plans to the 

disclosure regulation would be 

unnecessary and redundant because the 

disclosures contemplated in the 

regulation are already made available to 

plan fiduciaries through State regulatory 

processes. Other commenters pointed 

out that most State insurance laws do 

not require the types of disclosures 

addressed under the proposed rule and 

even where such State laws exist, they 

are loosely enforced. Still others 

asserted that there are ‘‘transparency 

problems’’ in general in the health and 

welfare industry. 

Some commenters expressed views 

relating to prohibited transaction 

exemption (PTE) 84–24,6 which they 

indicated is often misinterpreted and 

improperly utilized by service providers 

to suit their purposes. Those in favor of 

subjecting welfare benefit plans to the 

regulation said that it would eliminate 

the limitations of PTE 84–24. Other 

commenters asserted that PTE 84–24 

has worked well and that welfare 

benefit plans should be allowed to 

continue without the impact of new 

disclosure obligations under the 

proposal. 

Still other commenters addressed 

specific concerns of pharmacy benefit 

managers (PBMs), which are 

intermediaries between drug 

manufacturers and health insurance 

plans. They believe that the reasons for 

disclosure discussed in the preamble to 

the proposed rule are inapplicable to 

PBMs. According to some commenters, 

the Federal Trade Commission has 

thoroughly evaluated the industry, 

finding that market forces provide 

sufficient information to plan 

fiduciaries and that excessive 

mandatory disclosure could weaken 

competition, such that the proposed 

regulation would negatively affect the 

delivery of prescription drugs to plan 

beneficiaries. Other commenters 

disputed the idea that PBMs should not 

be subject to the regulation, arguing that 

the discounts and rebates they received 

from drug companies were examples of 

undisclosed indirect compensation. 

Commenters offering this point of view 

did not present any further official 

comment or testimony at the public 

hearing. 

In spite of these arguments, the 

Department believes that fiduciaries and 

service providers to welfare benefit 

plans would benefit from regulatory 

guidance in this area for the same 

reasons that apply to defined 

contribution plans and defined benefit 

plans. However, the Department is 

persuaded, based on the public 

comment and hearing testimony, that 

there are significant differences between 

service and compensation arrangements 

of welfare plans and those involving 

pension plans and that the Department 

should develop separate, and more 

specifically tailored, disclosure 

requirements under ERISA section 

408(b)(2) for welfare benefit plans. 

Accordingly, the interim final rule 

published today includes a new 

paragraph (c)(2), which has been 

reserved for a comprehensive disclosure 

framework applicable to ‘‘reasonable’’ 

contracts or arrangements for services to 

welfare plans to be developed by the 

Department. The Department notes, 

however, that in the meantime, ERISA 

section 404(a) continues to obligate 

fiduciaries to obtain and consider 

information relating to the cost of plan 

services and potential conflicts of 

interest presented by such service 

arrangements. 

Several commenters requested 

clarification regarding the regulation’s 

application to IRAs or similar accounts. 

In some cases, commenters argued that 

the Department should exclude such 

accounts, as well as other plans that are 

not subject to Title I of ERISA, from the 

scope of the final regulation. The 

commenters observed that there are 

significant categories of arrangements 

that are subject to the prohibited 

transaction provisions of section 4975 of 

the Code, but not those of ERISA, and 

that do not have a fiduciary overseeing 

the plan. The comments asserted that 

owners of IRAs and other individual 

arrangements are more like individual 

plan participants than plan fiduciaries 

and that it would be inappropriate to 

impose the service provider-to-plan 

disclosure requirements in the context 

of non-ERISA arrangements. In contrast 

to participant-directed individual 

account plans, which typically offer a 

limited number of investment options, 

many IRAs offer a large number of 

investment options, such as brokerage 

accounts with essentially unlimited 

choices. Providing the disclosures set 

forth in the proposal could be quite 

burdensome and costly as a result. 

These costs, commenters argue, may 

drive service providers to limit the 

number of investment choices available 

in IRAs. In addition, some commenters 

pointed out that, under securities laws, 

the IRA accountholder is treated as the 

actual owner of the securities held in 

his or her IRA and is entitled to all 

securities law disclosures in the same 

manner as if the accountholder owned 

those securities directly. In contrast, 

with ERISA-covered plans, disclosure 

obligations under the securities laws 

extend only to the plan itself, not to 

individual plan participants. 

The Department does not believe that 

IRAs should be subject to the final rule, 

which is designed with fiduciaries of 

employee benefit plans in mind. An IRA 

account-holder is responsible only for 

his or her own plan’s security and asset 

accumulation. They should not be held 

to the same fiduciary duties to 

scrutinize and monitor plan service 

providers and their total compensation 

as are plan sponsors and other 

fiduciaries of pension plans under Title 

I of ERISA, who are responsible for 

protecting the retirement security of 

greater numbers of plan participants. 

Moreover, IRAs generally are marketed 

alongside other personal investment 

vehicles. Imposing the regulation’s 

disclosure regime on IRAs could 

increase the costs associated with IRAs 

relative to similar vehicles that are not 

covered by the regulation. Therefore, 

although the final rule cross references 

the parallel provisions of section 4975 

of the Code, paragraph (c)(1)(ii) provides 

explicitly that IRAs and certain other 

accounts and plans are not covered 

plans for purposes of the rule. 

3. Scope—Covered Service Providers 

The categories of service providers 

covered by the final rule, in paragraph 

(c)(1)(iii), vary slightly from those 

described in the proposal. The proposed 

regulation generally included service 

providers falling into one of the 

following categories: (1) Fiduciary 

service providers, whether under ERISA 

or under the Investment Advisers Act of 

1940; (2) service providers that will 

perform banking, consulting, custodial, 

insurance, investment advisory, 

investment management, recordkeeping, 


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7See 29 CFR 2510.3–101. 

or third party administration services 

for the plan; or (3) service providers that 

will receive indirect compensation in 

connection with providing accounting, 

actuarial, appraisal, auditing, legal, or 

valuation services to the plan. The 

Department believed that these service 

arrangements, and their associated 

compensation structures, were the most 

likely to give rise to conflicts of interest. 

The Department received a number of 

comments requesting clarification as to 

which entities were intended to be 

‘‘service providers’’ for purposes of the 

proposal, both in terms of which service 

providers are responsible for complying 

with the proposal’s written contract 

requirement, and who is considered a 

service provider such that their 

compensation and conflict of interest 

information must be disclosed to the 

responsible plan fiduciary. Some 

commenters argued that the proposal’s 

disclosure requirements should be 

limited to service providers that deal 

directly with employee benefit plans, or 

that customarily are in contractual 

privity with the plan, and questioned 

the application of the rule to indirect 

service providers. These commenters 

were concerned that the proposed rule 

appears to apply, potentially without 

limit, to ‘‘indirect’’ service providers, for 

example a service provider to a direct 

service provider, or a service provider to 

an investment provider or mutual fund 

company; in some cases, they argue, the 

services provided by these indirect 

providers bear little or no relation to the 

particular plan service arrangement in 

question. For example, commenters 

questioned whether the proposed 

disclosure requirements would apply to 

a copy service, if a plan recordkeeper 

subcontracts with that copy service to 

perform administrative functions for 

both the recordkeeper and its plan 

clients, or to legal counsel to a 

registered investment company, when 

counsel’s role is limited to ensuring that 

the company complies generally with 

applicable securities laws. 

In connection with their request that 

the Department clarify whether 

providers of services to a plan service 

provider, or to an investment provider, 

are themselves service providers to the 

plan for purposes of the disclosure 

requirements of the proposed rule, some 

commenters note that confusion on this 

issue may stem from language of the 

proposed rule that adopted the view 

taken by the Department as to who is a 

‘‘service provider’’ for purposes of 

reporting service provider compensation 

on the recent Form 5500, Schedule C, 

revisions. The new Schedule C 

reporting requirements are not limited 

to information concerning the 

compensation of persons with direct 

service provider relationships to a plan 

but also include compensation 

information regarding persons who 

provide services to investment vehicles 

in which plans invest. Commenters 

questioned whether a similar position is 

appropriate in the context of a 

prohibited transaction for which relief is 

obtained under section 408(b)(2). 

Other commenters raised concerns 

about the proposal insofar as it was 

interpreted as raising technical issues 

under the Department’s plan asset 

guidance.7 For example, several 

commenters questioned whether and 

how the proposed disclosure 

requirements would apply to service 

providers to ‘‘non-plan asset’’ vehicles, 

an issue that often arises in the context 

of plan investments. For instance, 

commenters observed that mutual 

funds, real estate operating companies, 

venture capital operating companies, 

and private equity funds that do not 

have significant equity participation by 

‘‘benefit plan investors’’ (i.e., 25% or 

more of any class of equity interest held 

by such investors) are not plan asset 

vehicles, and thus managers of these 

entities are not ERISA fiduciaries. These 

commenters argued that the proposed 

disclosure requirements also should not 

apply to any person who is providing 

services to a non-plan asset vehicle. 

The Department believes that the 

definition of covered service provider 

contained in the final rule addresses the 

ambiguities raised by the commenters 

and reflects the Department’s intent to 

focus on contracts or arrangements 

between covered plans and fiduciaries, 

platform providers and other specified 

service providers dealing directly with 

covered plans who may receive indirect 

compensation or certain compensation 

from related parties. The Department 

notes that the parties that must be 

reported as service providers for 

Schedule C purposes will not 

necessarily be the same as the parties 

that will be covered service providers 

for purposes of this rule. 

The Department continues to believe 

that requiring every service provider to 

a plan to satisfy the disclosure 

requirements of this regulation may not 

be appropriate or yield helpful 

information to plan fiduciaries. The 

Department also believes that certain 

service providers, because of the nature 

of the services that they provide to 

pension plans, the potential influence 

they have on plan fiduciaries’ decisions 

and on the plan services that they 

ultimately will provide, or the 

complexity of their compensation 

arrangements, must provide 

comprehensive information to plan 

fiduciaries about the compensation that 

they will be paid for their services. The 

Department is sensitive to the technical 

and practical issues raised by 

commenters about how the scope of this 

rule will be applied to various parties in 

the employee benefit plan industry. The 

Department also agrees with 

commenters that service providers and 

plan fiduciaries would benefit from 

more certainty as to whether any 

particular service contract or 

arrangement will be required to comply 

with this rule. The Department believes 

that the interim final rule, in terms of 

defining the service providers covered 

by the rule, responds to the concerns of 

these commenters. However, the 

Department welcomes comments from 

interested persons who continue to have 

concerns about the scope of service 

providers covered by the interim final 

rule. 

Paragraph (c)(1)(iii) of the final rule 

defines the term ‘‘covered service 

provider.’’ Among other changes, the 

final rule establishes a $1,000 threshold 

for service providers otherwise coming 

within the definition of a covered 

service provider (regardless of whether 

the threshold is met by compensation 

received by the covered service 

provider, an affiliate, or a subcontractor 

that is performing one or more of the 

services to be provided under the 

contract or arrangement with the 

covered plan). A ‘‘covered service 

provider’’ is a service provider that 

enters into a contract or arrangement 

with the covered plan and reasonably 

expects to receive $1,000 or more in 

compensation, direct or indirect, to be 

received in connection with providing 

one or more specified services. The 

Department included the $1,000 

threshold in response to commenters’ 

request that the final rule exclude 

contracts or arrangements that involve 

de minimis amounts of compensation. 

In these circumstances, the Department 

is persuaded that the parties to these 

relatively small service contracts or 

arrangements may not need to provide 

the detailed disclosures required under 

this rule in order to ensure that plan 

fiduciaries have the information they 

need to make informed decisions about 

the services and cost of the services to 

be provided. Commenters did not 

suggest a particular minimum amount 

for such contracts or arrangements, but 

the Department believes that $1,000 is a 

reasonable threshold amount to address 

their concerns. As this is an interim 

final rule, the Department welcomes 


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8To the extent a service provider is a ‘‘dual 

registrant’’ (i.e., an investment adviser registered 

under the Advisers Act and a broker-dealer 

registered under the Securities Exchange Act of 

1934, as amended), the service provider would be 

a covered service provider under paragraph 

(c)(1)(iii)(A)(3) only when acting as an investment 

adviser to a covered plan, and not when acting 

merely as a broker-dealer to such plan. However, 

broker-dealers to covered plans may be covered 

service providers under paragraph (c)(1)(iii)(B) or 

(C), as discussed further below. 

additional input from commenters on 

our decision. 

The types of service providers 

covered by the final regulation fall into 

three categories, and each category is 

discussed below. A service provider 

may be a covered service provider under 

the final rule even if some or all of the 

services provided pursuant to the 

contract or arrangement are performed 

by affiliates of the covered service 

provider or subcontractors. Further, as 

noted in paragraph (c)(1)(iii)(D)(1), 

service providers do not become 

‘‘covered service providers’’ solely as a 

result of services that they perform in 

their capacity as an affiliate of the 

covered service provider or a 

subcontractor. 

The first category of covered service 

providers, in paragraph (c)(1)(iii)(A), 

includes those providing services as an 

ERISA fiduciary or as an investment 

adviser registered under either the 

Investment Advisers Act of 1940 

(Advisers Act) or any State law. This 

category is split into three subsections. 

Subparagraph (1) includes ERISA 

fiduciaries providing services directly to 

the covered plan. 

Subparagraph (2) includes ERISA 

fiduciaries providing services to an 

investment contract, product, or entity 

that holds plan assets and in which the 

covered plan has a direct equity 

investment. These service providers are 

ERISA fiduciaries by virtue of providing 

services to a plan asset investment 

vehicle, rather than providing services 

directly to the covered plan. The 

Department placed these fiduciaries of 

plan asset vehicles in a separate 

subcategory because, under the final 

rule, these fiduciaries have an 

additional obligation to disclose 

compensation information about the 

investment vehicle for which they serve 

as a fiduciary. 

This subcategory includes fiduciaries 

to the initial-level investment vehicle in 

which the covered plan makes a direct 

equity investment and which holds plan 

assets. However, it does not include 

fiduciaries to that initial vehicle’s 

underlying investments, even though 

such down-level investment vehicles 

also may hold ‘‘plan assets.’’ The 

determination of whether an investment 

contract, product, or entity holds ‘‘plan 

assets’’ is made under sections 3(42) and 

401 of ERISA and the regulation at 29 

CFR 2510.3–101. The regulation uses 

the term ‘‘direct equity investment’’ to 

distinguish the covered plan’s initiallevel investment in an investment 

contract, product, or entity from 

investments made by such initial-level 

contract, product or entity in which the 

plan invests, without regard to whether 

the underlying, second-tier investment 

vehicles hold plans assets. Specifically, 

the regulation provides that a direct 

equity investment does not include 

investments made by the investment 

contract, product, or entity in which the 

covered plan invests. 

Subparagraph (3) includes investment 

advisers providing services directly to 

the covered plan. This provision has 

been modified from the proposal to 

require disclosure from an investment 

adviser ‘‘registered’’ under either the 

Advisers Act or State law, rather than a 

‘‘fiduciary’’ under the Advisers Act. 

The Department received a number of 

comments concerning the requirement 

to identify services as ‘‘fiduciary’’ 

services under ERISA or the Advisers 

Act. In general, commenters argued that 

whether such services will be provided 

may be unclear, given the facts-andcircumstances nature of fiduciary status 

under section 3(21) of ERISA, creating 

an unnecessary level of uncertainty for 

both plan fiduciaries and service 

providers in terms of compliance with 

the regulation. Commenters also argued 

that by including fiduciaries under the 

Advisers Act, the proposal included 

advisers that may not be registered 

under the Advisers Act, thereby adding 

a degree of uncertainty as to which 

service providers might be covered by 

the rule. Other commenters argued that 

plan sponsors may be confused as to 

whether a particular service provider is 

acting as a fiduciary under ERISA or as 

a fiduciary under the Advisers Act. The 

Department believes that the 

modifications reflected in paragraph 

(c)(1)(iii)(A) of the final rule respond to 

these concerns. The Department 

continues to believe, however, that it is 

important for plan fiduciaries to know 

whether a party will be providing or 

reasonably expects to provide services 

to the plan as an ERISA fiduciary or as 

a registered investment adviser.8 See 

paragraph (c)(1)(iv)(B) relating to the 

requirement that this status be disclosed 

to the responsible plan fiduciary. 

The second category of covered 

service providers, in paragraph 

(c)(1)(iii)(B), includes providers of 

recordkeeping services or brokerage 

services to a covered plan that is an 

individual account plan (under ERISA 

section 3(34)) and that permits 

participants and beneficiaries to direct 

the investment of their accounts, if one 

or more designated investment 

alternatives will be made available (e.g., 

through a platform or similar 

mechanism) in connection with such 

recordkeeping services or brokerage 

services. This category encompasses 

recordkeepers and brokers that offer, as 

part of their contract or arrangement, a 

platform of investment options, or a 

similar mechanism, to a participantdirected individual account plan. This 

category also encompasses service 

providers who provide recordkeeping or 

brokerage services that include 

designated investment alternatives 

independently selected by the 

responsible plan fiduciary and which 

are later added to the covered plan’s 

platform. Under the proposal, these 

service providers had no disclosure 

obligations beyond those directly 

relating to the services they were 

providing as recordkeepers or brokers 

for the plan. Under the interim final 

rule, however, covered service providers 

in this category, as discussed later, must 

disclose to the responsible plan 

fiduciary compensation information 

regarding each of the designated 

investment alternatives for which they 

provide recordkeeping or brokerage 

services. See paragraphs (c)(1)(iii)(B) 

and (c)(1)(iv)(G). The term ‘‘designated 

investment alternative’’ is defined in 

paragraph (c)(1)(viii)(C), discussed 

below. 

The third category of covered service 

providers, in paragraph (c)(1)(iii)(C), 

includes those providing specified 

services to the covered plan when the 

covered service provider (or an affiliate 

or a subcontractor) reasonably expects 

to receive ‘‘indirect’’ compensation or 

certain payments from related parties. 

As discussed below, the terms 

‘‘affiliate’’, ‘‘indirect compensation,’’ and 

‘‘subcontractor’’ are defined in paragraph 

(c)(1)(viii) of the final regulation. The 

services included in this category are 

accounting, auditing, actuarial, 

appraisal, banking, consulting (i.e., 

consulting related to the development or 

implementation of investment policies 

or objectives, or the selection or 

monitoring of service providers or plan 

investments), custodial, insurance, 

investment advisory (for plan or 

participants), legal, recordkeeping, 

securities or other investment brokerage, 

third party administration, or valuation 

services provided to the covered plan. 

The services in the final rule’s third 

category generally are the same as those 

in the proposal. However, whether or 

not these services will cause a service 

provider to be a covered service 


jlentini on DSKJ8SOYB1PROD with RULES3
41606 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

9See, e.g., Field Assistance Bulletin 2002–3 

(November 5, 2002), Advisory Opinion 97–15A 

(May 22, 1997), Advisory Opinion 97–16A (May 22, 

1997), Understanding Retirement Plans Fees and 

Expenses, (http://www.dol.gov/ebsa/publications/ 

undrstndgrtrmnt.html.), and Selection and 

Monitoring Pension Consultants—Tips for Plan 

Fiduciaries, (http://www.dol.gov/ebsa/newsroom/ 

fs053105.html.) 

provider under the rule depends upon 

the expectation by the covered service 

provider, its affiliate, or a subcontractor 

of receiving certain types of 

compensation, namely indirect 

compensation or compensation paid by 

related parties. A few commenters asked 

the Department to define the types of 

services referenced in the proposal. 

Although the Department understands 

that there may be, in some instances, 

subtle differences in how employee 

benefits services are described and, 

therefore, some clarification may be 

helpful, the Department also is 

concerned that too much specificity 

may have the undesirable effect of 

narrowing the application of the 

regulation solely on the basis of an 

overly technical definition. The 

Department believes that the financial 

industry and employee benefits 

community have a reasonable 

understanding of the services referenced 

in the regulation and that any remaining 

ambiguity will not result in undue 

burdens attendant to compliance with 

the final rule. 

Nonetheless, the Department, in 

response to commenters, has attempted 

to narrow the scope of the term 

‘‘consulting’’ by adding a parenthetical 

clarifying that ‘‘consulting’’ as used in 

the final regulation is consulting related 

to the development or implementation 

of investment policies or objectives, or 

the selection or monitoring of service 

providers or plan investments. Also, it 

should be noted that investment 

advisory services are included in both 

the first and third categories of covered 

service providers, but the investment 

advisers who are covered in each 

category may be different. The first 

category includes only registered 

investment advisers, even if they receive 

only direct compensation from the 

covered plan. The third category 

includes investment advisers that 

reasonably expect to receive 

compensation that is indirect or paid 

from related parties, whether or not they 

are registered investment advisers. 

Paragraph (c)(1)(iii)(D) of the final 

regulation clarifies that, 

notwithstanding the preceding 

categories of ‘‘covered service 

providers,’’ no person or entity is a 

‘‘covered service provider’’ solely by 

providing services (1) as an affiliate or 

a subcontractor that is performing one 

or more of the services to be provided 

under the contract or arrangement with 

the covered plan (see paragraph 

(c)(1)(iii)(D)(1)), or (2) to an investment 

contract, product, or entity in which the 

covered plan invests, regardless of 

whether or not the investment contract, 

product, or entity holds assets of the 

covered plan, other than services as a 

fiduciary described in paragraph 

(c)(1)(iii)(A)(2) (see paragraph 

(c)(1)(iii)(D)(2)). In other words, 

paragraph (c)(1)(iii)(D)(1) clarifies that 

the concept of a ‘‘covered service 

provider’’ captures only the party 

directly responsible to the covered plan 

for the provision of services under the 

contract or arrangement, even though 

some or all of such services may be 

performed by an affiliate or 

subcontractor. In the view of the 

Department, the service provider 

directly responsible to the plan for the 

provision of services is the appropriate 

party to ensure that the required 

disclosures under the regulation are 

made. Paragraph (c)(1)(iii)(D) addresses 

the possibility of multiple disclosure 

obligations with respect to the same 

services. 

Paragraph (c)(1)(iii)(D)(2) further 

clarifies that, other than providers of 

fiduciary services to an investment 

contract, product, or entity holding plan 

assets with respect to which the covered 

plan has a direct equity investment 

(described above), the term ‘‘covered 

service provider’’ does not include a 

mere provider of services to an 

investment contract, product, or entity 

(regardless of whether or not the 

investment contract, product, or entity 

holds assets of the covered plan). 

The Department believes that these 

clarifications resolve much of the 

uncertainty raised by commenters about 

the intended application of the proposal 

in the context of plan investments. 

Other than a fiduciary described in 

paragraph (c)(1)(iii)(A)(2), service 

providers that only provide nonfiduciary administrative, legal or other 

services to an investment vehicle, even 

one holding plan assets, are not covered 

service providers. For example, a 

recordkeeper servicing a collective 

investment fund is not a covered service 

provider to a plan investing in the fund 

merely because the fund holds plan 

assets. On the other hand, if that same 

recordkeeper provides services directly 

to a covered plan and receives indirect 

compensation or certain compensation 

from related parties, then it would be a 

covered service provider. Its covered 

status, however, would derive from the 

services it provides directly to the plan, 

not to the collective investment fund. A 

similar analysis would apply to an 

investment vehicle that does not hold 

plan assets, such as a registered 

investment company. 

4. Contracts or Arrangements Not 

Covered by Interim Final Regulation 

The Department notes that some 

contracts or arrangements will fall 

outside the scope of the final regulation 

because they do not involve a ‘‘covered 

plan’’ and a ‘‘covered service provider.’’ 

ERISA nonetheless requires such 

contracts or arrangements to be 

‘‘reasonable’’ in order to satisfy the 

ERISA section 408(b)(2) statutory 

exemption. ERISA section 404(a) also 

obligates plan fiduciaries to obtain and 

carefully consider information 

necessary to assess the services to be 

provided to the plan, the reasonableness 

of the fees and expenses being paid for 

such services, and potential conflicts of 

interest that might affect the quality of 

the provided services.9

5. Initial Disclosure Requirements 

a. Overview of Initial Disclosure 

Requirements; Request for Comments on 

Format Requirement for Initial 

Disclosures 

The proposed regulation would have 

required that the terms of the contract 

or arrangement for services between the 

covered plan and the covered service 

provider be in writing and that the 

writing delineate the specific disclosure 

obligations of the covered service 

provider under the regulation. The 

Department received a number of 

comments on the requirement that 

contracts and arrangements, as well as 

the disclosure obligations thereunder, 

must be in writing. Many commenters 

argued that such written documents are 

not used with respect to the provision 

of many services and that requiring 

formal written contracts adds 

complexity and costs, as well as 

potentially raising concerns under State 

contract law, without affecting the 

quality of such services. For example, 

these points were made by providers of 

insurance products and services, who 

explained that any amendments to their 

contracts, which are approved and 

regulated by State insurance agencies, 

would have to be submitted to such 

agencies; this would be a lengthy and 

burdensome process with an outcome 

that is not within the service providers’ 

control. 

While the interim final rule continues 

to require that the responsible plan 

fiduciary be furnished the required 

disclosures in writing, the rule does not 

require that a formal contract or 

arrangement itself be in writing or that 

any representations concerning the 


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10For ease of reference, the interim final 

regulation refers only to ‘‘compensation’’ and not 

‘‘compensation or fees’’ or ‘‘compensation and fees.’’ 

Given the broad definition of ‘‘compensation’’ 

contained in the final regulation, the Department 

does not intend any substantive distinction by 

changing from the phrase ‘‘compensation or fees’’ or 

‘‘compensation and fees’’ to the term 

‘‘compensation.’’ 

specific obligations of the service 

provider be included in such written 

contract or arrangement. The 

Department is persuaded that, given the 

varying relationships between plans and 

their service providers, requiring such a 

formal contract or arrangement in every 

instance may result in unnecessary 

burdens, complexity, and costs. The 

Department continues to believe, 

however, that setting forth a covered 

service provider’s disclosure obligations 

under the regulation in writing 

generally will help ensure that both the 

responsible plan fiduciary and the 

service provider clearly understand 

their respective responsibilities for 

purposes of compliance with the 

statutory exemption. 

As discussed above, neither the 

proposal nor the interim final rule 

requires the covered service provider to 

make disclosures in any particular 

manner or format. Further, the preamble 

to the proposal specifically noted that 

the covered service provider could 

disclose using different documents from 

separate sources as long as the 

documents, collectively, contained all of 

the required information. Commenters 

on the proposal disagreed as to whether 

or not this would lead to an effective 

presentation to responsible plan 

fiduciaries, especially those for small 

plans. Commenters also disagreed as to 

the anticipated costs and burdens 

associated with more stringent format 

requirements and the extent to which 

those costs would be absorbed by 

service providers or passed through to 

plans, and therefore potentially to 

participants and beneficiaries. Some 

commenters encouraged the Department 

to retain its flexible approach, arguing 

that it is best left to the parties to service 

contracts or arrangements to determine 

the optimal way to fulfill the 

substantive disclosure requirements. 

Other commenters encouraged the 

Department to adopt a model form for 

disclosure or to otherwise mandate that 

the required information be conveyed in 

a summary or consolidated fashion, 

arguing that this would lead to more 

consistency in the way that information 

is disclosed and make it easier for 

responsible plan fiduciaries to review 

and analyze information received from 

plan service providers. 

At this time, the Department has not 

determined whether it is feasible, as 

part of this regulation, to provide 

specific and meaningful standards for 

the format in which the required 

information must be disclosed, given 

the large variety of plan service 

arrangements that are covered by the 

interim final regulation and the 

variation in the way service providers 

currently disclose information to plan 

fiduciaries. The Department is 

persuaded that plan fiduciaries may 

benefit from increased uniformity in the 

way that information is presented to 

them. However, the Department does 

not want to unnecessarily increase the 

cost and burden for service providers to 

furnish required information, especially 

to the extent such cost may be passed 

along to plan participants and 

beneficiaries, unless it is clear that the 

benefit to plan fiduciaries outweighs 

such cost and burden. If the Department 

is convinced that the benefits would 

outweigh the costs, the final regulation 

may be revised. Specifically, the 

Department is considering adding a 

requirement that covered service 

providers furnish a ‘‘summary’’ 

disclosure statement, for example 

limited to one or two pages, that would 

include key information intended to 

provide an overview for the responsible 

plan fiduciary of the information 

required to be disclosed. The summary 

also would be required to include a 

roadmap for the plan fiduciary 

describing where to find the more 

detailed elements of the disclosures 

required by the regulation. 

To assist the Department in its 

decision whether to include such a 

requirement in the final rule, interested 

persons are encouraged to submit 

comments on three issues: first, the 

likely cost and burden to covered 

service providers, and to any other 

parties, of complying with such a 

requirement; second, the anticipated 

benefits to responsible plan fiduciaries, 

whether due to time savings, cost 

savings, or other factors, of including a 

summary disclosure statement; and 

third, how to most effectively construct 

the requirement for a summary 

disclosure statement to ensure both its 

feasibility and its usefulness in helping 

the Department achieve its objectives. 

As to the substance of the information 

required to be disclosed, the proposal 

generally required the disclosure of 

information intended to assist plan 

fiduciaries in understanding the 

services that will be furnished and in 

assessing the reasonableness of the 

compensation, direct and indirect, that 

the service provider would receive in 

connection with the provision of such 

services. The proposal also required the 

disclosure of specific information 

intended to assist plan fiduciaries in 

assessing any real or potential conflicts 

of interest that may affect the quality of 

the services to be provided. As 

discussed above, the proposal did not 

require that the information be 

furnished in any particular format. 

While the proposal did require that the 

required disclosures be furnished in 

advance of entering into a contract or 

arrangement, along with a 

representation that all of the required 

disclosures had been furnished to the 

responsible fiduciary, the proposal did 

not designate any specific time period 

for making such advance disclosure. 

The proposal broadly defined 

compensation or fees 10 to include 

money and any other thing of monetary 

value received by the service provider 

or its affiliates in connection with the 

services provided to the plan or the 

financial products in which assets are 

invested. As noted, the proposal 

required the disclosure of both direct 

and indirect compensation, the latter 

including fees that the service provider 

receives from parties other than the 

plan, the plan sponsor, or the service 

provider. Service providers also would 

have been required to disclose 

compensation received by their affiliates 

from third parties. The proposal also 

addressed the manner in which 

compensation could be disclosed, 

permitting the use of formulas, 

references to a percentage of the plan’s 

assets, or per capita charges. 

With regard to the disclosure of 

compensation generally, the proposal 

contained a special rule for providers of 

multiple services (commonly referred to 

as ‘‘bundles’’ of services). In the case of 

bundled service arrangements, the 

proposal required only that the provider 

of the bundle make the prescribed 

disclosures. In such instances, the 

bundled service provider would be 

required to disclose information 

concerning all of the services to be 

provided in the bundle, regardless of 

who actually performs the service. 

Further, the bundled provider would be 

required to disclose the aggregate direct 

compensation that will be paid for the 

bundle, as well as all indirect 

compensation that will be received by 

the service provider, or its affiliates or 

subcontractors within the bundle, from 

third parties. The preamble explained 

that generally the bundled provider 

would be required to break down the 

aggregate compensation among the 

individual services comprising the 

bundle only when the compensation 

was separately charged against the 

plan’s investment (such as management 

fees and 12b–1 fees) or was set on a 


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transaction basis (such as finder’s fees 

and brokerage commissions). 

While the Department retained many 

of the disclosure concepts of the 

proposal, the interim final rule contains 

a number of changes made in response 

to issues raised by commenters. 

Paragraph (c)(1)(iv) of the final rule 

describes the initial disclosure 

requirements that must be satisfied, in 

writing, by the covered service provider; 

paragraph (c)(1)(v) describes the timing 

requirements applicable to the initial 

disclosures and when changes to the 

initial disclosures must be furnished; 

paragraph (c)(1)(vi) describes the 

requirement that a covered service 

provider disclose information requested 

by the responsible plan fiduciary or 

covered plan administrator to comply 

with ERISA’s reporting and disclosure 

requirements; and paragraph (c)(1)(vii) 

addresses inadvertent errors and 

omissions in disclosing the required 

information. 

b. Description of Services 

Paragraph (c)(1)(iv)(A) requires a 

description of the services to be 

provided to the covered plan pursuant 

to the contract or arrangement, but not 

including non-fiduciary services 

described in paragraph (c)(1)(iii)(D)(2). 

In other words, for purposes of this 

disclosure, ‘‘services’’ to the covered 

plan do not include services described 

in paragraph (c)(1)(iii)(D)(2), e.g., 

services provided by non-fiduciary 

service providers to investment vehicles 

holding plan assets. Thus, in the case of 

a person that is a covered service 

provider by reason of paragraph 

(c)(1)(iii)(A)(2), paragraph (c)(1)(iv) 

would require a description of services 

provided as a fiduciary to the 

investment vehicle that holds plan 

assets and in which the covered plan 

has a direct equity investment. 

Some commenters requested guidance 

as to the level of detail necessary when 

describing the services. For example, 

commenters asked whether general 

descriptions of the services would be 

acceptable, or whether detailed and 

itemized descriptions must be provided. 

It is the view of the Department that the 

level of detail required to adequately 

describe the services to be provided 

pursuant to a contract or arrangement 

will vary depending on the needs of the 

responsible plan fiduciary. 

In certain instances, it may be well 

understood that a particular service 

necessarily encompasses, among other 

things, a variety of sub-services such 

that a description of the sub-services is 

unnecessary. For example, plan 

fiduciaries may understand that the 

execution of securities transactions 

includes, but is not limited to, 

valuation, safekeeping, posting of 

income, clearing and settling 

transactions, and reporting transactions, 

thereby eliminating the need to describe 

such sub-services. In an effort to clarify 

the flexibility inherent in this disclosure 

requirement, the final rule omits the 

word ‘‘all’’ from the required description 

of services. 

Ultimately, though, the responsible 

plan fiduciary must, under sections 404 

and 408(b)(2) of ERISA, decide whether 

it has enough information about the 

services to be provided pursuant to the 

contract or arrangement to determine 

whether the cost of such services to the 

plan is reasonable. Accordingly, if a 

particular description of services 

provided by a covered service provider 

lacks sufficient detail to enable the 

responsible plan fiduciary to determine 

whether the compensation to be 

received for such services is reasonable, 

the responsible plan fiduciary must 

request additional information 

concerning those services. 

There is one provision of the interim 

final rule that includes a more specific 

standard for the level of detail that must 

be furnished when describing the 

provision of recordkeeping services in 

specified circumstances. See section 

(c)(1)(iv)(D)(2), discussed below. 

c. Status of Covered Service Providers, 

Affiliates, and Subcontractors 

Paragraph (c)(1)(iv)(B) of the 

regulation requires, if applicable, a 

statement that the covered service 

provider, an affiliate, or a subcontractor 

will provide, or reasonably expects to 

provide, services pursuant to the 

contract or arrangement directly to the 

covered plan (or to an investment 

vehicle that holds plan assets and in 

which the covered plan has a direct 

equity investment) as a fiduciary; and, 

if applicable, a statement that the 

covered service provider, an affiliate, or 

a subcontractor will provide, or 

reasonably expects to provide, services 

pursuant to the contract or arrangement 

directly to the covered plan as an 

investment adviser registered under 

either the Advisers Act or any State law. 

Thus, if a service provider will, or 

reasonably expects to, provide services 

as both a fiduciary and a registered 

investment adviser, the statement must 

reflect both of these roles. While the 

proposal contained a similar disclosure 

requirement, the requirement contained 

in the final rule reflects changes that are 

intended to address concerns raised by 

commenters. 

Commenters on the proposal 

expressed concern that, given the 

factual nature of fiduciary status under 

ERISA, this requirement added a level 

of uncertainty to the statutory 

exemption. Commenters also expressed 

concern that disclosing fiduciary status 

by virtue of being an investment adviser 

involved similar uncertainties and, in 

addition, would only serve to confuse 

plan fiduciaries regarding the nature of 

the services that the plan would receive. 

As discussed above, the Department 

continues to believe that plan 

fiduciaries should understand whether a 

service provider will provide, or 

reasonably expects to provide, services 

as an ERISA fiduciary or services as a 

registered investment adviser in light of 

their heightened level of responsibility 

under ERISA and the Advisers Act, 

respectively. The Department, however, 

believes that the final disclosure 

provision addresses the concerns of the 

commenters. First, the final provision 

only requires disclosure if the provider 

will or reasonably expects to be 

providing services as a fiduciary or 

registered investment adviser. Service 

providers do not have to indicate that 

they will not be providing such services. 

Second, the disclosure with respect to 

services as an investment adviser is 

required only for investment advisers 

who are registered under the Advisers 

Act or any State law, thereby providing 

a degree of certainty as to who must 

make the required disclosure. The final 

provision does not require investment 

advisers to identify their services as 

‘‘fiduciary services.’’ 

d. Disclosure of Compensation 

The Department received a number of 

comments on the compensation 

disclosure requirements of the proposal. 

Many of the commenters expressed 

concern about the parties for whom 

compensation might have to be reported 

under the proposal, such as providers of 

services to mutual funds and other 

investment products in which a plan 

might invest, and the increased level of 

complexity attendant to more detailed 

levels of disclosure generally. The 

Department believes that many of the 

issues raised by commenters in this area 

have been addressed in the final 

regulation by more specifically defining 

the parties that would be treated as 

‘‘covered service providers’’ for purposes 

of the disclosure requirements. 

The compensation disclosure 

requirements of the final rule are set 

forth at paragraph (c)(1)(iv)(C). While 

structured differently than the proposal, 

the final rule retains many of the same 

concepts of the proposal with respect to 

what types of compensation have to be 

disclosed for purposes of a reasonable 

contract or arrangement. The 

compensation disclosure requirement of 


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11This definition, therefore, excludes from the 

term ‘‘direct’’ compensation any compensation 

received from a plan asset vehicle in which the 

covered plan has a direct equity investment. 

the final rule is divided into four 

subparagraphs to more clearly describe 

the compensation information that must 

be disclosed. 

Paragraph (c)(1)(iv)(C)(1) requires a 

description of all direct compensation, 

as defined in paragraph (c)(1)(viii)(B)(1), 

either in the aggregate or by service, that 

the covered service provider, an 

affiliate, or a subcontractor reasonably 

expects to receive in connection with 

the services described in paragraph 

(c)(1)(iv)(A). For purposes of the 

regulation, ‘‘direct’’ compensation is 

compensation received directly from the 

covered plan.11

This requirement to disclose direct 

compensation generally follows the 

requirement of the proposal, with a 

clarifying change. A number of 

commenters on the proposal questioned 

whether the proposal’s definition of 

compensation, which referred to 

payments received ‘‘directly from the 

plan or plan sponsor’’ was intended to 

subject to ERISA section 408(b)(2) 

payments for services made solely by 

the plan sponsor and not out of plan 

assets,. The proposal’s reference to 

payments received from plan sponsors 

was intended to distinguish direct 

compensation from indirect 

compensation. As reflected above, the 

final regulation omits the reference to 

the plan sponsor, so as to avoid the 

confusion raised by commenters. The 

final rule also clarifies that a covered 

service provider generally may disclose 

the direct compensation received from 

the plan either as a total for all services 

(i.e., in the aggregate) or on an itemized, 

service-by-service basis. The 

Department continues to believe as a 

general matter that a fiduciary who 

understands the services the covered 

service provider is providing pursuant 

to the contract or arrangement and their 

aggregate cost is in a position to 

compare services and costs consistent 

with its obligations under sections 404 

and 408(b)(2) of ERISA, and to 

determine the reasonableness of 

compensation paid for such services in 

the aggregate. There is one exception to 

this rule, discussed below, for the 

disclosure of certain compensation 

received in connection with 

recordkeeping services. See section 

(c)(1)(iv)(D) of the final rule. 

Finally, in response to the concerns of 

some commenters about whether a 

failure to disclose unexpected 

compensation would result in a 

prohibited transaction by reason of 

losing relief under section 408(b)(2), the 

final rule requires disclosure only of 

compensation that the service provider, 

an affiliate, or a subcontractor 

‘‘reasonably expects’’ to receive in 

connection with the services. 

Paragraph (c)(1)(iv)(C)(2) of the final 

regulation provides for the disclosure of 

indirect compensation. Specifically, it 

requires a description of all indirect 

compensation (as defined in paragraph 

(c)(1)(viii)(B)(2)) that the covered service 

provider (or an affiliate or a 

subcontractor) reasonably expects to 

receive in connection with the services 

to be provided pursuant to the contract 

or arrangement. The rule also requires 

the covered service provider to identify 

the services for which the indirect 

compensation will be received and the 

payer of the indirect compensation. For 

purposes of the final regulation, 

‘‘indirect’’ compensation is 

compensation received from any source 

other than the covered plan, the plan 

sponsor, the covered service provider, 

an affiliate, or a subcontractor (if the 

subcontractor receives such 

compensation in connection with 

services performed under the 

subcontractor’s contract or arrangement 

with the covered service provider). See 

section (c)(1)(viii)(B)(2) of the final rule. 

The proposal defined compensation 

or fees as ‘‘indirect’’ if received from any 

source other than the plan, the plan 

sponsor, or the covered service 

provider. The substance of the final rule 

with regard to disclosure of indirect 

compensation is similar to the proposed 

rule, but has been expanded to require 

disclosure of not only the indirect 

compensation that a covered service 

provider expects to receive, as 

proposed, but also identification of the 

services for which the indirect 

compensation will be received and 

identification of the payer of the 

indirect compensation. 

Paragraph (c)(1)(iv)(C)(3) of the final 

rule provides specific guidance for 

when compensation paid among related 

parties, i.e., among the covered service 

provider, its affiliates, and 

subcontractors, must be disclosed. The 

covered service provider must 

separately disclose such compensation 

if it is set on a transaction basis (e.g., 

commissions, soft dollars, finder’s fees 

or other similar incentive compensation 

based on business placed or retained) or 

is charged directly against the covered 

plan’s investment and reflected in the 

net value of the investment (e.g., Rule 

12b–1 fees). The final rule also requires 

the covered service provider to identify 

the services for which such 

compensation will be paid, the payers 

and recipients of such compensation, 

and the status of each payer or recipient 

as an affiliate or a subcontractor. Under 

this paragraph (c)(1)(iv)(C)(3) of the final 

rule, compensation must be disclosed 

regardless of whether such 

compensation also is disclosed under 

paragraph (c)(1)(iv)(C)(1) or (2) (direct 

and indirect compensation) or 

(c)(1)(iv)(F) or (G) (investment 

disclosures). This provision does not 

apply to compensation received by an 

employee from his or her employer on 

account of work performed by the 

employee. Unless described in 

paragraph (c)(1)(iv)(C)(3) or elsewhere 

in the final rule, compensation paid 

among these related parties need not be 

disclosed. Such payments affect only 

how compensation is allocated among 

the parties and generally do not affect 

the total costs of services to the plan. 

Thus, the final rule responds to 

commenters’ concerns that when 

services are provided by multiple 

parties and priced as a package, the 

covered service provider is not required 

to create an artificial allocation of 

compensation for services among the 

parties. However, if compensation is 

paid among related parties in the 

specific circumstances described in this 

paragraph (c)(1)(iv)(C)(3), the 

Department does not consider such 

compensation to be based on artificial 

methods, such as would be the case 

when allocations are driven by 

bookkeeping, tax, or other 

considerations of the related parties. 

The disclosure of indirect 

compensation and certain compensation 

paid among related parties serves two 

purposes. First, the disclosures are 

intended to enable plan fiduciaries to 

better assess the reasonableness of the 

compensation paid for services to the 

plan by taking into account all of the 

compensation being received in 

connection with such services. Second, 

the disclosures are intended to enable 

plan fiduciaries to assess actual or 

potential conflicts of interest that may 

impact the quality of services provided 

to the plan. 

The proposed rule required the 

covered service provider to furnish to 

plan fiduciaries specific information 

relating to conflicts of interest (see 

§ 2550.408b–2(c)(1)(iii)(C) through (F), 

at 72 FR 71005). These provisions 

would have required disclosure of, 

among other things, information 

concerning: whether the service 

provider expects to participate in any 

transactions entered into with the plan; 

material financial relationships with 

certain parties related to the provision 

of services to the plan; whether the 

service provider will be able to 

unilaterally affect its own compensation 


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41610 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

in connection with its provision of 

services; whether the service provider 

has policies or procedures that address 

actual or potential conflicts and, if so, 

an explanation of such policies and 

procedures. 

A number of commenters expressed 

concern about the scope of the 

proposal’s conflict of interest 

disclosures and the ultimate usefulness 

of the information to responsible plan 

fiduciaries in evaluating potential 

conflicts. Specifically, commenters 

asserted that the requirements, as 

proposed, were too broad, pointing out 

that having to disclose, in addition to 

actual conflicts, all potential conflicts, 

would create a potentially limitless, and 

therefore extraordinarily burdensome, 

requirement for service providers. 

Without a clear definition of what kinds 

of relationships may constitute a 

conflict and without knowing what 

other parties a covered plan may be 

engaging for other services, commenters 

argued such disclosure would be nearly 

impossible. Further, commenters 

pointed out that service providers likely 

would over-disclose in order to avoid a 

prohibited transaction, thus inundating 

plan fiduciaries with excessive, 

potentially confusing, and ultimately 

meaningless information. Commenters 

also requested additional guidance as to 

what would be a ‘‘material’’ relationship 

and argued that ambiguity surrounding 

this term would lead to inconsistent 

disclosures among various service 

providers. 

Finally, the proposal required a 

covered service provider to disclose its 

ability to affect its own compensation. 

Commenters pointed out that ERISA’s 

prohibited transaction rules preclude 

fiduciary service providers from 

engaging in such activity. They also 

noted that, to the extent that a service 

provider is not a fiduciary, exercising 

such discretion over its compensation 

likely would constitute a fiduciary act 

resulting in a separate prohibited 

transaction. 

As an alternative to the disclosure 

regime of the proposed regulation, some 

commenters suggested that a better 

indicator of the existence and 

significance of a conflict of interest is 

information about the amounts and 

sources of compensation that service 

providers expect to receive in 

connection with the services provided 

to the plan. After careful consideration 

of the comments regarding the proposed 

requirement for narrative descriptions of 

conflicts of interest, the Department 

agrees that the final regulation’s more 

detailed disclosure of compensation 

arrangements, particularly the 

additional information concerning the 

receipt of indirect compensation and 

compensation paid among related 

parties, will provide clearer and more 

meaningful information to the 

responsible plan fiduciaries about 

potential conflicts of interest than the 

narrative description of such conflicts 

required by the proposal. Accordingly, 

the final rule does not require the 

narrative disclosures about potential 

conflicts that were contained in the 

proposed regulation. Rather, the final 

rule requires that in conjunction with 

the description of the indirect 

compensation being received by the 

covered service provider (or an affiliate 

or subcontractor) in connection with the 

services provided to the plan, the 

covered service provider must disclose 

the services to which the indirect 

compensation relates and the payer of 

the compensation. Covered service 

providers similarly must identify the 

source and recipient of certain 

compensation paid among related 

parties, and the services to which such 

compensation relates. The Department 

believes that compliance with these 

disclosure requirements will ensure that 

fiduciaries have meaningful information 

with which to assess potential conflicts 

of interest on the part of their service 

providers. 

Paragraph (c)(1)(iv)(C)(4), also 

consistent with the proposal, requires 

the covered service provider to describe 

compensation that the covered service 

provider, an affiliate, or a subcontractor 

reasonably expects to receive in 

connection with termination of the 

contract or arrangement, and how any 

prepaid amounts will be calculated and 

refunded upon such termination. This 

provision, however, has been modified 

slightly from the proposal in an effort to 

clarify the requirement. Some 

commenters on the proposal expressed 

a general concern that fees and charges 

associated with contract terminations 

are not currently disclosed, as well as a 

specific concern that the proposed 

regulation was not clear as to whether 

disclosure of these fees and charges was 

required. In an effort to eliminate any 

ambiguity concerning the requirement 

to disclose such information, the 

requirement has been set forth in a 

separate paragraph of the final 

regulation. 

e. Disclosures Regarding Recordkeeping 

Services 

The final rule also includes a 

requirement concerning specific 

disclosures for recordkeeping services, 

which was not included in the proposal. 

Paragraph (c)(1)(iv)(D) provides that, if 

recordkeeping services will be provided 

to the covered plan, the covered service 

provider must furnish a description of 

all direct and indirect compensation 

that the covered service provider, an 

affiliate, or a subcontractor reasonably 

expects to receive in connection with 

such recordkeeping services. In 

addition, if the covered service provider 

reasonably expects recordkeeping 

services to be provided, in whole or in 

part, without explicit compensation for 

such recordkeeping services, or when 

compensation for recordkeeping 

services is offset or rebated based on 

other compensation received by the 

covered service provider, an affiliate, or 

a subcontractor, the covered service 

provider must furnish a reasonable and 

good faith estimate of the cost to the 

covered plan of such recordkeeping 

services. The covered service provider 

must explain the methodology and 

assumptions used to prepare the 

estimate and describe in detail the 

recordkeeping services that will be 

provided to the covered plan. The 

estimate shall take into account, as 

applicable, the rates that the covered 

service provider, an affiliate, or a 

subcontractor would charge to, or be 

paid by, third parties, or the prevailing 

market rates charged, for similar 

recordkeeping services for a similar plan 

with a similar number of covered 

participants and beneficiaries. 

The addition of this provision to the 

final rule reflects the Department’s 

belief that information relating to 

recordkeeping services and the costs to 

covered plans of those services should 

be disclosed to responsible plan 

fiduciaries in a meaningful way. The 

availability of information sufficient to 

enable the plan fiduciary to make 

informed decisions about the costs of 

recordkeeping is fundamental to a 

responsible plan fiduciary’s ability to 

satisfy its ERISA obligations. Especially 

in complicated service arrangements 

when a variety of services, including 

recordkeeping services, are provided to 

the covered plan and may be paid for 

through charges at the plan investment 

level or through revenue sharing, it is 

sometimes difficult for a plan fiduciary 

to determine the portion of aggregate 

charges that will be applied to 

recordkeeping services. The Department 

believes that requiring such information 

to be separately disclosed will better 

enable fiduciaries to make informed 

evaluations of a covered plan’s 

recordkeeping costs. To the extent 

recordkeeping costs will not be covered 

by relatively straightforward direct or 

indirect compensation received by plan 

service providers, and to accommodate 

industry variation in how recordkeeping 

costs are otherwise absorbed by plan 


jlentini on DSKJ8SOYB1PROD with RULES3
Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 41611 

service providers and investment-level 

charges, the Department included a 

standard for estimating recordkeeping 

costs in paragraph (c)(1)(iv)(D)(2). A 

covered service provider cannot avoid 

providing an estimate required by 

paragraph (c)(1)(iv)(D)(2) merely by 

disclosing a de minimis amount of 

direct or indirect compensation for 

recordkeeping under paragraph 

(c)(1)(iv)(D)(1) when such amount has 

no relationship to the cost of such 

services. In such instances, a covered 

service provider would be required 

under the final rule to provide an 

estimate pursuant to paragraph 

(c)(1)(iv)(D)(2) to reasonably reflect the 

cost to the covered plan of 

recordkeeping services. The Department 

believes these estimates, which must be 

reasonable and made in good faith by 

the covered service provider, will help 

responsible plan fiduciaries compare 

recordkeeping costs among a variety of 

service providers and service 

arrangements. 

f. Manner of Receipt of Compensation 

Paragraph (c)(1)(iv)(E) of the final 

rule, consistent with the proposal, 

requires a description of the manner in 

which the compensation described in 

paragraphs (c)(1)(iv)(C) and (D) will be 

received, such as whether the covered 

plan will be billed or the compensation 

will be deducted directly from the 

covered plan’s account(s) or 

investments. 

g. Investment Disclosure—Fiduciary 

Services and Recordkeeping and 

Brokerage Services 

The definition of compensation under 

the proposal was very broad and 

encompassed not only the 

compensation and fees received by 

service providers, but also 

compensation attendant to plan 

investments and investment options. 

Disclosures concerning investmentrelated compensation (i.e., investment 

management and similar fees charged 

against investment returns) are 

particularly significant in that they 

typically constitute a large portion of 

the total expenses incurred by a plan 

and its participants. These disclosures 

may directly impact the cost of plan 

services as a result of revenue sharing 

and similar arrangements between the 

issuer of a particular investment 

product and plan service providers. 

Understanding the fees and expenses 

attendant to plan investments is 

particularly significant for fiduciaries of 

individual account plans that permit 

participant and beneficiaries to direct 

their own investments, because it is 

those fiduciaries who ultimately select 

the plan’s investment options and upon 

whom the participants and beneficiaries 

depend to make informed choices 

concerning their investments. Because 

investment-related fees and expenses 

can dramatically reduce the retirement 

savings of participants and 

beneficiaries, plan fiduciaries must 

carefully assess investment fees and 

expenses, among other factors, in 

selecting investment options to be made 

available in participant-directed 

individual account plans. 

The Department received a number of 

comments concerning the disclosure of 

investment-related compensation. Most 

of the comments focused on what 

information should be disclosed and by 

whom it should be disclosed. The final 

regulation addresses the major issues 

raised by commenters through changes 

to the scope of the term ‘‘covered service 

provider.’’ For example, the concerns 

relating to uncertainty as to whether 

issuers of investment products, and 

certain service providers to those issuers 

or products, are themselves covered 

service providers for purposes of the 

regulation have been addressed by 

clarifying who does not constitute a 

‘‘covered service provider’’ in the final 

rule. See above discussion relating to 

paragraph (c)(1)(iii)(D) of the final rule. 

Other comments expressed concern 

about some of the terminology used in 

the proposal. For example, one 

commenter expressed the view that the 

proposal left unclear whether a 

component of a charge called an 

‘‘investment management fee’’ that 

actually pays recordkeeping or other 

non-management costs is required to be 

separately disclosed. The commenter 

explained that some service providers 

construe ‘‘revenue sharing’’ which 

would be required to be disclosed to 

include only the items specified in the 

preamble to the proposal, 

notwithstanding that there may be 

components of an expense ratio that 

actually pay for non-investment 

management services. Other 

commenters favorably characterized the 

proposal’s definition of fees and 

expenses as comprehensive. Again, 

many of these commenters’ concerns are 

addressed by the revisions reflected in 

the final rule concerning who does (and 

who does not) constitute a ‘‘covered 

service provider.’’ The Department also 

believes that the final rule’s 

requirements, discussed below, 

establish clear standards as to what 

information concerning plan 

investments must be disclosed and by 

whom such information must be 

disclosed. 

As discussed above, the final rule 

defines the term ‘‘covered service 

provider’’ to include fiduciaries to 

certain investment vehicles holding 

plan assets (paragraph (c)(1)(iii)(A)(2)) 

and providers of recordkeeping and 

brokerage services to a participantdirected individual account plan if they 

make available one or more designated 

investment alternatives for the covered 

plan (paragraph (c)(1)(iii)(B)). In 

addition to imposing an obligation to 

disclose compensation information 

concerning the services they provide 

(i.e., as a fiduciary or as a recordkeeper 

or broker), the final rule requires these 

covered service providers to disclose 

compensation information concerning 

the investments with respect to which 

they are a fiduciary or provide 

recordkeeping or brokerage services 

pursuant to the contract or arrangement 

with the covered plan. After careful 

consideration of all of the comments, 

the Department concluded that these 

service providers, because they have a 

relationship with both the investment 

vehicles and the covered plan, are in the 

best position to ensure that responsible 

plan fiduciaries have the information 

they need about the investments 

represented by the covered service 

provider. These investment-related 

disclosures are described in paragraphs 

(c)(1)(iv)(F) and (G) of the final rule and 

are not limited as to who will receive 

such investment-related compensation. 

The Department also notes that ERISA 

section 404(a) obligates plan fiduciaries 

who invest in vehicles holding plan 

assets (paragraph (c)(1)(iii)(A)(2)) to 

consider the effect on the plan’s rate of 

return of fees and expenses associated 

with that vehicle’s underlying 

investments, including any lower tiered 

entity in which the plan asset vehicle 

invests. 

Paragraph (c)(1)(iv)(F) sets forth the 

investment-related disclosure 

obligations of fiduciaries to investment 

vehicles holding plan assets. These 

covered service providers (as described 

in paragraph (c)(1)(iii)(A)(2)) must 

provide, with respect to each 

investment contract, product, or entity 

that holds plan assets and in which the 

covered plan has a direct equity 

investment, the following information, 

unless such information is disclosed to 

the responsible plan fiduciary by a 

covered service provider described in 

paragraph (c)(1)(iii)(B) (recordkeeping 

and brokerage services): (i) a description 

of any compensation that will be 

charged directly against the amount 

invested in connection with the 

acquisition, sale, transfer of, or 

withdrawal from the investment 

contract, product, or entity (e.g., sales 

loads, sales charges, deferred sales 


jlentini on DSKJ8SOYB1PROD with RULES3
41612 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

charges, redemption fees, surrender 

charges, exchange fees, account fees, 

and purchase fees); (ii) a description of 

the annual operating expenses (e.g., 

expense ratio) if the return is not fixed; 

and (iii) a description of any ongoing 

expenses in addition to annual 

operating expenses (e.g., wrap fees, 

mortality and expense fees). 

Paragraph (c)(1)(iv)(G) requires 

disclosure of the same investmentrelated compensation information 

described above from recordkeepers and 

brokers that make available investment 

alternatives for participant-directed 

individual account plans. This 

information must be provided with 

respect to each designated investment 

alternative for which recordkeeping or 

brokerage services will be provided 

pursuant to the contract or arrangement 

with the covered plan. Paragraph 

(c)(1)(viii)(C), discussed below, defines 

the term ‘‘designated investment 

alternative’’ for purposes of the final 

rule. 

The Department recognizes that 

recordkeepers and brokers, unlike 

fiduciaries to investment vehicles 

holding plan assets, are not directly 

involved in the day-to-day management 

of the investment vehicles they 

represent, but rather, merely serve as 

intermediaries between plans and the 

issuers of these investment vehicles for 

purposes of furnishing such 

information; the final rule limits their 

liability under the regulation for the 

completeness and accuracy of the 

disclosed information. Specifically, 

paragraph (c)(1)(iv)(G)(2) of the final 

rule provides that a covered service 

provider may comply with this 

investment-related disclosure 

requirement if the covered service 

provider provides to the responsible 

plan fiduciary current disclosure 

materials of the issuer of the designated 

investment alternative that include the 

information described in this paragraph, 

provided that such issuer is not an 

affiliate, the disclosure materials are 

regulated by a State or federal agency, 

and the covered service provider does 

not know that the materials are 

incomplete or inaccurate. 

h. Timing of Initial Disclosure 

Requirements; Changes 

With regard to the timing of the 

required disclosures, the proposed 

regulation required that service 

contracts or arrangements include a 

representation by the service provider 

that all required information was 

provided to the responsible plan 

fiduciary before the contract or 

arrangement was entered into. This 

requirement was intended to ensure that 

the responsible plan fiduciary had the 

opportunity to consider all required 

disclosures before entering into a 

contract or arrangement with a service 

provider. The Department did not 

specify any time frame for this 

disclosure, believing it was best left to 

the responsible plan fiduciary and its 

potential service providers to work out 

the amount of time, prior to entering 

into the contract or arrangement, that 

the responsible plan fiduciary would 

need to review the disclosures. Some 

commenters suggested that the final 

regulation provide a more specific 

timeframe for the disclosures. However, 

the Department continues to believe that 

the flexibility described in the proposed 

regulation is appropriate and that the 

parties to the contract or arrangement 

can determine what is reasonable; 

accordingly, the Department did not 

adopt the suggestion. 

Consistent with the proposal, the final 

rule, at paragraph (c)(1)(v), requires that 

a covered service provider provide the 

initial disclosures required by paragraph 

(c)(1)(iv), discussed above, to the 

responsible plan fiduciary reasonably in 

advance of the date the contract or 

arrangement is entered into, extended or 

renewed. The final rule, however, 

contains an exception for certain 

persons who become covered service 

providers within the meaning of 

paragraph (c)(1)(iii)(A)(2) of the final 

rule subsequent to a plan’s investment 

in an investment vehicle. This situation 

would arise when a plan invests in an 

investment vehicle that, at the time of 

the plan’s investment, does not hold 

plan assets, but that subsequently, for 

reasons such as another plan’s 

investment in the vehicle, is determined 

to hold plan assets, thereby causing a 

fiduciary to such vehicle to be a covered 

service provider pursuant to paragraph 

(c)(1)(iii)(A)(2). To accommodate such 

instances, the final rule provides that 

such a fiduciary service provider must 

disclose the information required by 

paragraph (c)(1)(iv) as soon as 

practicable, but not later than 30 days 

from the date on which the service 

provider knows that such investment 

contract, product or entity holds plan 

assets. 

The final rule also includes a special 

timing provision for disclosure related 

to recordkeeping and brokerage services 

pursuant to paragraph (c)(1)(iv)(G). 

Information described in paragraph 

(c)(1)(iv)(G) relating to any investment 

alternative that is not designated at the 

time the contract or arrangement is 

entered into must be disclosed as soon 

as practicable, but not later than the 

date on which the investment 

alternative is designated by the 

responsible plan fiduciary. 

In addition to requiring that certain 

information be disclosed to responsible 

plan fiduciaries before the parties enter 

into, or extend or renew, a contract or 

arrangement, the proposal included an 

ongoing obligation for the service 

provider to disclose to the responsible 

plan fiduciary any material change to 

the required information not later than 

30 days from the date on which the 

service provider acquired knowledge of 

the change. A number of commenters 

requested additional guidance on what 

would be considered a ‘‘material’’ 

change. Some of the commenters’ 

concerns related to the potential breadth 

of disclosures required by the proposal, 

with commenters expressing concern as 

to whether 30 days would provide 

sufficient time to identify material 

changes, especially in the context of 

packaged or bundled services that may 

involve parties other than the 

contracting service provider. Some 

commenters, especially large 

institutions with multiple affiliations, 

argued that 30 days was not enough 

time to discover changes to information 

relating to all of their business units or 

affiliates. Commenters also asserted that 

this requirement would result in 

voluminous, costly, and inefficient 

monitoring of disclosures, as well as 

potential ‘‘over-disclosure’’ of all 

changes to the extent it is not clear 

whether a particular change is material. 

Finally, commenters argued that 

disputes may result between various 

parties as to the beginning date for the 

30-day compliance period, which may 

be subjective. Commenters suggested 

alternative approaches, for example 

defining materiality for this purpose, 

extending the 30-day period, or 

requiring an annual updating of all 

information in lieu of periodic 

disclosure of material changes. In 

response to these comments, the 

Department has made a number of 

changes. 

Specifically, paragraph (c)(1)(v)(B) of 

the final rule requires that a covered 

service provider disclose a change (as 

opposed to a ‘‘material’’ change) to the 

initial information required to be 

disclosed pursuant to paragraphs 

(c)(1)(iv) as soon as practicable, but not 

later than 60 days from the date on 

which the covered service provider is 

informed of such change, unless such 

disclosure is precluded due to 

extraordinary circumstances beyond the 

covered service provider’s control, in 

which case the information must be 

disclosed as soon as practicable. The 

Department was persuaded by 

commenters’ concerns that it may take 


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12Nothing in the final rule or this preamble 

relieves a service provider from other obligations or 

limitations under ERISA, for example other 

prohibited transactions or, in the case of service 

providers that are ERISA fiduciaries, the restrictions 

of ERISA sections 404 or 406(b). See, e.g., Advisory 

Opinion 97–16A (May 22, 1997) (the Department 

stated that, in the context of a service provider who 

retains some authority over the investment options 

selected by plans by deleting or substituting, in its 

own discretion, certain unrelated mutual funds, a 

plan fiduciary must be provided advance notice of 

the change, including disclosure of fee information, 

and must be afforded a reasonable amount of time 

in which to accept or reject the change). 

more than 30 days to accurately identify 

and disclose changes to information that 

previously was disclosed, especially in 

the context of large institutions with 

multiple affiliates. However, the 

Department does not believe that a 

covered service provider should have an 

unlimited period of time to disclose 

changes to the responsible plan 

fiduciary; a certain level of timeliness 

and efficiency is expected in the 

marketplace, and covered service 

providers should be in a position to 

ensure that the information they 

disclose to responsible plan fiduciaries 

about the services they are providing 

and the compensation they are receiving 

continues to be accurate. Therefore, 

disclosure of changes must be made as 

soon as practicable, but not later than 60 

days from the date on which the 

covered service provider knows of such 

change unless such disclosure is 

precluded due to extraordinary 

circumstances beyond the covered 

service provider’s control, in which case 

the information must be disclosed as 

soon as practicable. 

The Department also eliminated the 

concept of materiality, persuaded by 

commenters that, without more specific 

definition, this standard would not add 

to a covered service provider’s 

understanding of what types of changes 

must be disclosed. Accordingly, if 

information previously disclosed to a 

responsible plan fiduciary changes, the 

responsible plan fiduciary must be 

notified. The Department believes that a 

responsible plan fiduciary should be 

made aware if any change occurs, for 

example, in the services that the 

covered service provider will be 

providing for the plan, the fiduciary 

status of the service provider, or the 

compensation that the service provider 

will be paid.12

i. Reporting and Disclosure Information; 

Timing 

Paragraph (c)(1)(vi) of the final rule 

addresses the obligations of the covered 

service provider to provide, upon 

request of the responsible plan fiduciary 

or plan administrator, any other 

information relating to the 

compensation received in connection 

with the contract or arrangement that is 

required for the covered plan to comply 

with the reporting and disclosure 

requirements of Title I of ERISA and the 

regulations, forms and schedules issued 

thereunder. This provision is very 

similar to the proposal. A few 

commenters asked the Department to 

provide that only ‘‘reasonable’’ requests 

from the responsible plan fiduciary or 

plan administrator must be 

accommodated under this provision. 

The Department did not include this 

concept in the final rule, because it did 

not want to create issues as to the 

‘‘reasonableness’’ of a particular request. 

The Department believes that the final 

rule minimizes the potential for abuse 

by restricting covered service provider’s 

disclosure obligation to information that 

is ‘‘required’’ for the covered plan to 

comply with its reporting and 

disclosure obligations. Commenters also 

requested guidance from the 

Department that the responsible plan 

fiduciary or plan administrator may not 

request that this information be 

disclosed or presented in any particular 

format. The Department expects that the 

covered service provider will furnish 

the information in a manner that 

enables effective use of the information 

to satisfy ERISA’s Title I reporting and 

disclosure requirements; no further 

obligation should be inferred from this 

requirement. 

Finally, a few commenters asked that 

the Department clarify that this 

disclosure obligation was limited to 

information specifically required by a 

responsible plan fiduciary or plan 

administrator to complete a Form 5500 

annual report. The Department declined 

to accept this suggestion; the 

Department expects that this provision 

will require service providers to 

disclose information that is necessary in 

order to comply with ERISA’s reporting 

and disclosure obligations in 

circumstances other than the Form 5500 

annual report, for example in making 

required disclosures concerning plan 

and investment fees and expenses to 

participants and beneficiaries. The 

Department notes that this is not a 

limitless obligation; the rule limits this 

provision to information relating to the 

contract or arrangement, and the 

compensation received thereunder, that 

is ‘‘required’’ for the covered plan to 

comply with the reporting and 

disclosure obligations of Title I. 

The proposal required that the service 

provider disclose information requested 

by the responsible plan fiduciary or 

plan administrator in order to comply 

with ERISA’s reporting and disclosure 

obligations, but did not specify any time 

frame for the service provider to 

respond to such a request. Some 

commenters requested additional 

guidance concerning when the covered 

service provider would be obligated to 

provide such information. In response, 

the Department added a new timing 

requirement in paragraph (c)(1)(vi)(B) of 

the final rule. A covered service 

provider must disclose the requested 

information not later than 30 days 

following receipt of a written request 

from the responsible plan fiduciary or 

covered plan administrator, unless such 

disclosure is precluded due to 

extraordinary circumstances beyond the 

covered service provider’s control, in 

which case the information must be 

disclosed as soon as practicable. The 

Department believes that this provision 

will provide more specificity to the 

parties in complying with this 

disclosure requirement, but also 

accommodate the practical reality that a 

covered service provider may, because 

of extraordinary matters beyond its 

control, be unable to satisfy the general 

standard. 

j. Disclosure Errors 

The proposed regulation did not 

provide specific relief for disclosure 

errors or omissions by service providers. 

As a result, many commenters argued 

that the final regulation should be 

revised to include such relief for service 

providers in certain circumstances. 

Many commenters argued that 

inadvertent mistakes are inevitable, in 

spite of the best efforts of all involved, 

and that it would be inappropriate for 

a service provider to be subject to a 

prohibited transaction in these 

circumstances. These commenters 

believed that, under the proposal, a 

prohibited transaction would result if 

any error, no matter how small, existed 

in the detailed disclosures required by 

the rule. Commenters felt this risk was 

especially significant in the case of a 

package of services involving multiple 

service providers. These commenters 

asserted that, with required information 

coming from different, and in some 

cases unrelated, parties, the likelihood 

of ‘‘innocent’’ mistakes increases. 

Commenters were not comforted by the 

proposal’s limitation that information 

must be provided ‘‘to the best of the 

service provider’s knowledge,’’ because 

in some cases, such as a typographical 

error, the service provider may ‘‘know’’ 

that the information is inaccurate. 

Further, commenters argued that these 

errors would not be covered by the 

material change provision in the 

proposal, because many minor errors 

would not be material. Finally, 

commenters noted that the material 


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13See Voluntary Fiduciary Correction Program 

Under the Employee Retirement Income Security 

Act of 1974, Adoption of Updated Program, 71 FR 

20262 (April 19, 2006). 

14Some commenters raised concerns with 

language in the preamble to the proposed regulation 

which seemed to imply that formulas, percentages, 

or per capita charges could be used only if it was 

not possible to disclose in terms of a monetary 

amount. The Department did not intend this 

interpretation; as stated in the final rule, there are 

alternatively acceptable formats for disclosing 

compensation to a responsible plan fiduciary, so 

long as the description sufficiently permits 

evaluation of the reasonableness of such 

compensation. 

change provision focused on disclosing 

information when changes occur during 

the term of the contract and not on 

information that was incorrect at the 

time the contract was entered into. 

Commenters proposed various 

solutions, such as providing a cure 

period to allow for correction of minor 

or inadvertent errors or, alternatively, 

revising the rule to require only 

‘‘reasonable’’ or ‘‘good faith’’ compliance 

with its disclosure obligations. Other 

commenters suggested that a correction 

mechanism could be permitted through 

the Department’s Voluntary Fiduciary 

Correction (VFC) Program 13 or that 

relief could be provided through an 

expansion of the proposed class 

exemption. 

The Department was persuaded by 

commenters that relief should be 

provided so that certain inadvertent 

errors and omissions do not result in a 

prohibited transaction. Accordingly, 

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

provides that no contract or 

arrangement will fail to be reasonable 

under the regulation solely because the 

covered service provider, acting in good 

faith and with reasonable diligence, 

makes an error or omission in disclosing 

the information required by the 

regulation. However, the covered 

service provider must disclose the 

correct information as soon as 

practicable, but not later than 30 days 

from the date on which the covered 

service provider knows of such error or 

omission. 

The Department notes that the class 

exemption, included as part of this 

regulation (paragraph (c)(1)(ix)), is 

meant to address situations in which a 

responsible plan fiduciary discovers an 

error or other deficiency in the 

disclosure. Paragraph (c)(1)(vii) is meant 

to provide the parties an opportunity to 

avoid a prohibited transaction by 

addressing errors up front. Once a 

prohibited transaction has occurred, the 

responsible plan fiduciary will need to 

rely on the relief provided by the class 

exemption, discussed below. 

6. Definitions 

Paragraph (c)(1)(viii) of the final rule 

defines the terms ‘‘affiliate,’’ 

‘‘compensation,’’ ‘‘designated investment 

alternative,’’ ‘‘recordkeeping services,’’ 

‘‘responsible plan fiduciary,’’ and 

‘‘subcontractor.’’ 

Specifically, paragraph (c)(1)(viii)(A) 

provides that a person’s or entity’s 

‘‘affiliate’’ directly or indirectly (through 

one or more intermediaries) controls, is 

controlled by, or is under common 

control with such person or entity; or is 

an officer, director, or employee of, or 

partner in, such person or entity. The 

rule also provides that unless otherwise 

specified, an ‘‘affiliate’’ in paragraph 

(c)(1) refers to an affiliate of the covered 

service provider. This definition 

essentially is unchanged from the 

proposal, except that the definition no 

longer includes the concept of an 

‘‘agent’’ of the covered service provider. 

The Department was persuaded by 

commenters that the notion of an 

‘‘agent’’ of the covered service provider 

is unclear, overly broad, and not 

consistent with commonly understood 

‘‘affiliate’’ arrangements. To the extent 

some commenters were concerned that 

this term might pull subcontractors of a 

covered service provider into affiliated 

status, the Department notes that the 

final rule specifically addresses the role 

of a covered service provider’s 

subcontractors elsewhere. 

Paragraph (c)(1)(viii)(B) defines 

‘‘compensation’’ for purposes of the final 

rule as anything of monetary value 

(such as money, gifts, awards, and 

trips), but does not include nonmonetary compensation valued at $250 

or less, in the aggregate, during the term 

of the contract or arrangement. This is 

slightly different from the proposal, 

which did not include the $250 de 

minimis rule. The Department added 

this provision in response to suggestions 

from a number of comments concerning 

the cost and burden of tracking 

insignificant non-monetary gifts. 

The definition of ‘‘compensation’’ 

includes descriptions of both ‘‘direct’’ 

and ‘‘indirect’’ compensation. 

Subparagraph (1) defines ‘‘direct’’ 

compensation as compensation received 

directly from the covered plan. 

Subparagraph (2) defines ‘‘indirect’’ 

compensation as compensation received 

from any source other than the covered 

plan, the plan sponsor, the covered 

service provider, an affiliate, or a 

subcontractor, if the subcontractor 

receives such compensation in 

connection with services performed 

under the subcontractor’s contract or 

arrangement described in the definition 

of subcontractor contained in paragraph 

(c)(1)(viii)(F). 

Subparagraph (3) provides that, for 

purposes of the regulation, a description 

or an estimate of compensation may be 

expressed as a monetary amount, 

formula, percentage of the covered 

plan’s assets, or a per capita charge for 

each participant or beneficiary or, if the 

compensation cannot reasonably be 

expressed in such terms, by any other 

reasonable method.14 In this regard, any 

description or estimate must contain 

sufficient information to permit 

evaluation of the reasonableness of the 

compensation. This provision is slightly 

modified from the proposal, because the 

final rule also provides that when 

compensation cannot reasonably be 

expressed in terms of amounts, formulae 

or percentages, any other reasonable 

method may be used (subject to the 

general requirement that the description 

of compensation must contain sufficient 

information to permit evaluation of the 

reasonableness of such compensation). 

This standard was modified in part in 

response to commenters’ concern that 

some types of compensation could not 

necessarily be expressed in a monetary 

amount, formula, percentage of the 

plan’s assets, or a per capita charge. The 

Department continues to prefer 

disclosure in terms of a monetary 

amount, formula, percentage of the 

plan’s assets, or a per capita charge; 

however, the Department is persuaded 

that in situations when it is not feasible 

to disclose compensation in such terms, 

covered service providers should be 

able to use another reasonable method 

to do so. 

Paragraph (c)(1)(viii)(C) defines a 

‘‘designated investment alternative’’ as 

any investment alternative designated 

by a fiduciary into which participants 

and beneficiaries may direct the 

investment of assets held in, or 

contributed to, their individual 

accounts. The term ‘‘designated 

investment alternative’’ does not include 

brokerage windows, self-directed 

brokerage accounts, or similar plan 

arrangements that enable participants 

and beneficiaries to select investments 

beyond those specifically designated. 

This definition is consistent with the 

definition used by the Department for 

purposes of defining ‘‘designated 

investment alternative’’ in its proposed 

participant-level fee disclosure 

regulation (see proposed § 2550.404a– 

5(h)(1), 73 FR 43041). 

Paragraph (c)(1)(viii)(D) defines 

‘‘recordkeeping services’’ as including 

services related to plan administration 

and monitoring of plan and participant 

and beneficiary transactions such as 

enrollment, payroll deductions and 


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contributions, offering designated 

investment alternatives and other 

covered plan investments, loans, 

withdrawals and distributions. It also 

provides that ‘‘recordkeeping services’’ 

includes the maintenance of covered 

plan and participant and beneficiary 

accounts, records, and statements. This 

broad definition of recordkeeping is 

intended to provide basic parameters to 

ensure that providers of recordkeeping 

services understand when they will be 

covered by paragraph (c)(1)(iii)(B) when 

they also make designated investment 

alternatives available to the covered 

plan. 

Paragraph (c)(1)(viii)(E) defines a 

‘‘responsible plan fiduciary’’ as a 

fiduciary with authority to cause the 

covered plan to enter into, or extend or 

renew, the contact or arrangement. This 

is consistent with use of the phrase 

‘‘responsible plan fiduciary’’ in the 

Department’s proposal, except that for 

ease of reference it has been separately 

included in the definitions section. 

Paragraph (c)(1)(viii)(F) defines a 

‘‘subcontractor’’ as any person or entity 

(or an affiliate of such person or entity) 

that is not an affiliate of the covered 

service provider and that, pursuant to a 

contract or arrangement with the 

covered service provider or an affiliate, 

reasonably expects to receive $1,000 or 

more in compensation for performing 

one or more services described in 

paragraph (c)(1)(iii)(A) through (C) of 

the regulation provided for by the 

contract or arrangement with the 

covered plan. The Department added 

this concept to the final rule in order to 

clarify that, in certain instances, a 

covered service provider will be 

required to report compensation 

received by a subcontractor to the 

covered service provider or an affiliate. 

For example, if a ‘‘covered service 

provider’’ that contracts with a plan to 

provide recordkeeping in turn 

subcontracts to outsource all or part of 

those services to another party, then that 

party is a ‘‘subcontractor,’’ because it is 

carrying out some or all of the covered 

service provider’s obligations under the 

contract or arrangement with the 

covered plan. In certain cases, the 

covered service provider may have to 

disclose compensation received by this 

subcontractor. 

C. Class Exemption 

The class exemption from the 

restrictions of ERISA section 

406(a)(1)(C) was proposed by the 

Department separately from the 

proposed regulation. It was intended to 

relieve a responsible plan fiduciary from 

engaging in a prohibited transaction 

under certain circumstances when the 

requirements of the regulation have not 

been met. The Department received five 

separate public comments in response 

to the invitation for comments 

contained in the notice of pendency 

relating to the proposed class 

exemption, in addition to comments 

that were made as part of information 

received from the public on the 

proposed regulation. This section 

discusses these comments and 

modifications that have been made to 

the final class exemption, which now is 

being granted and included as section 

(c)(1)(ix) of the final rule. 

1. Comments on Proposed Class 

Exemption 

A few commenters requested that the 

proposed class exemption be expanded 

to protect service providers from 

potential excise taxes under the Code. 

Specifically, these commenters wanted 

the class exemption to cover service 

providers that are responsible for 

making the rule’s required disclosures 

in certain circumstances: For example, 

when disclosure is made on behalf of a 

third party, and the service provider, 

acting as a conduit, either does not 

receive the requested information from 

the third party, or it is later discovered 

that the information received from the 

third party was erroneous; when an 

inadvertent error is made in providing 

the responsible plan fiduciary with the 

detailed information required by the 

proposal, for example, some of the 

narrative information about conflicts of 

interest, commenters argued, was 

vaguely described or overly broad; or 

when a responsible plan fiduciary fails 

to execute a service contract or 

arrangement. The Department has 

determined not to extend specific 

prohibited transaction exemption relief 

from the prohibitions of section 406(a) 

to covered service providers in the same 

way that the final class exemption 

covers responsible plan fiduciaries who 

attempt to address a service provider’s 

disclosure failure. However, the 

Department notes that the final rule 

clarifies that execution of a formal 

‘‘contract’’ is not required, and gives 

covered service providers more 

opportunities to address disclosure 

failures, such as errors and omissions. 

The final rule also provides covered 

service providers with relief for ‘‘passing 

through’’ certain regulated disclosure 

materials that include information 

concerning plan-designated investment 

alternatives. 

One commenter suggested that the 

proposed class exemption be expanded 

to cover prohibited transactions 

described under section 406(a)(1)(D) of 

ERISA. Section 406(a)(1)(D) prohibits 

the transfer to, or use by or for the 

benefit of, a party in interest, of any 

assets of the plan. The commenter stated 

that if the statutory exemption under 

section 408(b)(2) is temporarily 

unavailable for a particular service 

arrangement, but the covered service 

provider continues to be engaged by the 

plan to provide necessary services and 

receives payments, section 406(a)(1)(D) 

would be violated if plan assets are used 

to compensate the covered service 

provider during such time. The 

Department modified the operative 

language of the final class exemption to 

provide relief from section 406(a)(1)(D) 

to cover, among other things, situations 

when a responsible plan fiduciary 

decides to continue a service 

arrangement with a covered service 

provider, and to continue paying such 

covered service provider’s fees, during 

periods when the parties are attempting 

to cure a disclosure failure by the 

covered service provider pursuant to the 

conditions of this exemption. 

Other commenters observed that the 

proposed class exemption would apply 

if the responsible plan fiduciary 

unknowingly enters into a service 

contract that does not satisfy the 

disclosure obligations of the regulation, 

provided that certain conditions are 

met. The proposal required the 

responsible plan fiduciary to request the 

missing information, in writing, from 

the service provider, and the covered 

service provider would have been 

deemed to have failed to satisfy its 

disclosure obligations if it did not 

provide the information requested by 

the responsible plan fiduciary within 90 

days. In this regard, the commenters 

requested that a satisfactory and timely 

service provider response to the 90-day 

request be deemed to satisfy the 

disclosure requirements and that the 

proposed class exemption be revised to 

provide relief in such instances. One 

commenter stated that a service 

provider should not be treated as failing 

to comply with a responsible plan 

fiduciary’s request for information, for 

purposes of the exemption, merely 

because the covered service provider is 

unable to complete a response within 90 

days of the request, despite good faith 

efforts on the part of the service 

provider to obtain such information. 

The Department has determined that, 

under the exemption, a responsible plan 

fiduciary should not be permitted to 

give a covered service provider an 

unlimited amount of time to address a 

disclosure failure. Like the proposal, the 

final exemption requires that disclosure 

failures be addressed by the parties 

within specific timeframes. Under the 

final exemption, if the covered service 


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15As with any exemption from ERISA’s 

prohibited transaction provisions, the party seeking 

to avail itself of the relief provided by the 

exemption has the burden of demonstrating 

compliance with the conditions of the exemption. 

16The notice requirement does not relieve a plan 

administrator of the obligation to report a 

prohibited transaction in accordance with the 

instructions to the Annual Report Form 5500 Series, 

without regard to whether the covered service 

provider furnishes information in response to the 

fiduciary’s request. 

provider fails to comply with a 

responsible plan fiduciary’s written 

request within 90 days of the date of 

that request, the fiduciary must notify 

the Department of the service provider’s 

disclosure failure within a specified 

time period (i.e., 30 days). At such time, 

the responsible plan fiduciary will be 

covered by the exemption. The covered 

service provider will continue to be 

engaging in a non-exempt prohibited 

transaction until such time as the 

service arrangement is terminated or the 

disclosure failure is cured. Once a 

service provider’s disclosure failure has 

been cured and the contract or 

arrangement complies with all of the 

other conditions of the Department’s 

regulations at 29 CFR 2550.408b–2, or 

the contract or arrangement is 

terminated, it is the view of the 

Department that the prohibited 

transaction will cease. Thus, covered 

service providers will not be liable for 

excise taxes under Code section 4975 for 

any period following the date on which 

the disclosure failure is cured or the 

contract or arrangement is terminated. 

Further, some commenters requested 

that the Department extend the 

proposed 30-day time period for a 

responsible plan fiduciary to notify the 

Department of a covered service 

provider’s failure to disclose. One 

commenter argued that many plan 

fiduciary committees do not meet on a 

monthly basis, and it may be difficult 

for responsible plan fiduciaries to make 

final determinations about retention of 

covered service providers within a 30- 

day period. The Department did not 

extend this time period in the final class 

exemption, which continues to require 

that notice to the Department be made 

not later than 30 days following the 

earlier of the covered service provider’s 

refusal to furnish the requested 

information or end of the 90-day period 

following the responsible plan 

fiduciary’s written request. 

Finally, one commenter suggested 

that the exemption should only require 

responsible plan fiduciaries to notify the 

Department of a disclosure failure in 

specific instances, such as when a 

disclosure failure is made by plan 

service providers who are ERISA 

fiduciaries, or when the disclosure 

failure relates specifically to 

information about a service provider’s 

fees or other compensation. This 

approach has not been adopted. The 

Department believes that all disclosures 

required under the final regulation by 

all covered service providers are 

relevant for purposes of a responsible 

plan fiduciary’s duty to provide notice 

to the Department of a service provider’s 

failure to correct or address such 

failures in a timely fashion. 

2. Description of the Final Class 

Exemption 

The class exemption is set forth in the 

final regulation in paragraph (c)(1)(ix). 

The Department incorporated the 

exemptive relief into the final regulation 

in order to facilitate reference by 

interested persons. The specific 

conditions applicable to covered 

transactions are described in this 

paragraph. These conditions require, 

among other things, a responsible plan 

fiduciary to notify the Department 

under certain circumstances of a 

covered service provider’s failure to 

comply with its disclosure obligations. 

These conditions also set forth the 

timing, content and other requirements 

applicable to the notice required to be 

filed with the Department by the 

responsible plan fiduciary.15

The exemption provides relief from 

the restrictions of section 406(a)(1)(C) 

and (D) of ERISA to a responsible plan 

fiduciary, notwithstanding any failure 

by a covered service provider to comply 

with its disclosure obligations, provided 

that the conditions set forth in 

paragraph (c)(1)(ix)(A) through (G) are 

met. 

Paragraph (c)(1)(ix)(A) of the 

regulation requires that the responsible 

plan fiduciary did not know that the 

covered service provider failed or would 

fail to make required disclosures and 

reasonably believed that the covered 

service provider disclosed the 

information required by the final rule. 

This condition is intended to reinforce 

the principle that the plan fiduciary 

must have entered into, and thereafter 

continued, an arrangement for services 

with a reasonable belief that the covered 

service provider met, and would 

continue to meet, the requirements of 

the final rule and without knowing of 

the covered service provider’s 

disclosure failures. 

Paragraph (c)(1)(ix)(B) of the 

regulation requires that, upon 

discovering that the covered service 

provider failed to disclose the required 

information, the responsible plan 

fiduciary must request in writing that 

the covered service provider furnish 

such information. If the covered service 

provider fails to comply with the 

responsible plan fiduciary’s written 

request within 90 days, paragraph 

(c)(1)(ix)(C) requires that the responsible 

plan fiduciary notify the Department. 

The Department believes that this 

condition, along with a covered service 

provider’s exposure to excise tax 

liability under the Code, will provide 

covered service providers with a 

sufficient incentive to address 

disclosure failures within a reasonable 

time.16

Paragraph (c)(1)(ix)(D) through (F) of 

the regulation sets forth the content, 

timing, and other requirements 

applicable to notifying the Department 

of a covered service provider’s failure to 

meet its disclosure obligations. 

Paragraph (c)(1)(ix)(D) states that the 

notice to the Department must contain 

the following information: (1) The name 

of the covered plan; (2) the plan number 

used for the plan’s Annual Report; (3) 

the plan sponsor’s name, address, and 

EIN; (4) the name, address and 

telephone number of the responsible 

plan fiduciary; (5) the name, address, 

phone number, and, if known, EIN of 

the covered service provider; (6) a 

description of the services provided to 

the covered plan; (7) a description of the 

information that the covered service 

provider failed to disclose; (8) the date 

on which such information was 

requested in writing from the covered 

service provider; and (9) a statement as 

to whether the covered service provider 

continues to provide services to the 

covered plan. 

Paragraph (c)(1)(ix)(E) provides that 

the responsible plan fiduciary shall file 

a notice with the Department not later 

than 30 days following the earlier of: (1) 

the covered service provider’s refusal to 

furnish the requested information; or (2) 

the date which is 90 days after the date 

the written request referred to in 

paragraph (c)(1)(ix)(B)(1) is made. In 

this context, a covered service 

provider’s refusal to provide 

information to the responsible plan 

fiduciary, following such fiduciary’s 

written request, would constitute a 

covered service provider’s failure to 

meet its disclosure obligations prior to 

the end of the 90-day period. 

Paragraph (c)(1)(ix)(F) provides that 

the notice should be sent to the U.S. 

Department of Labor, Employee Benefits 

Security Administration, Office of 

Enforcement, 200 Constitution Ave., 

NW., Suite 600, Washington, DC 20210. 

Such a notice may also be sent 

electronically to: OEDelinquentSPnotice@dol.gov. The 

Department has developed a sample 


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Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 41617 

17The Code also includes rules relating to 

statutory relief applicable to transactions between a 

plan and a service provider. See generally Code 

section 4975. 

notice that will facilitate compliance 

with the notification requirement; this 

sample notice will be available on the 

Department’s Web site at: http:// 

www.dol.gov/ebsa/DelinquentService

ProviderDisclosureNotice.doc. 

Finally, paragraph (c)(1)(ix)(G) of the 

regulation provides that, following the 

responsible plan fiduciary’s discovery 

that the covered service provider failed 

to disclose required information, the 

fiduciary shall determine whether to 

terminate or continue the contract or 

arrangement with such service provider. 

In making such a determination, the 

responsible plan fiduciary shall evaluate 

the nature of the failure, the availability, 

qualifications and costs of potential 

replacement service providers, and the 

covered service provider’s response to 

notification of the failure. However, the 

provisions contained in paragraph 

(c)(1)(ix)(G) do not abrogate or 

supersede the duties imposed upon a 

responsible plan fiduciary by section 

404(a) of ERISA, which would also 

require the fiduciary to consider what 

steps to take in response to the covered 

service provider’s nondisclosure. 

D. Preemption of State Law 

Paragraph (c)(1)(x) of the regulation 

states that the regulation does not 

supersede any State law that governs 

disclosures by parties that provide 

services to covered plans, except to the 

extent that such law prevents 

application of the regulation. The 

Department understands that the service 

provider relationship with the plan may 

be subject to a variety of State laws, 

such as contract, tax, consumer 

protection, and other laws. The 

Department’s regulation is not intended 

to supersede any of these State laws, 

which may require disclosures by 

parties that provide services described 

in the regulation, except to the extent 

that compliance with such State law 

would make compliance with this 

regulation impossible or would 

otherwise conflict with one of the 

regulation’s protections. 

Paragraph (c)(1)(x) of the regulation 

addresses only the preemptive effect of 

the regulation itself, and does not speak 

to any preemptive effect that ERISA 

Title I generally, or ERISA section 514 

specifically, may have on State laws that 

regulate parties that provide services to 

employee benefit plans. A State law that 

requires disclosures in connection with 

services or service provider contract or 

arrangements, regardless of whether the 

services are provided directly to an 

ERISA plan or other entity, generally 

would not be viewed by the Department 

as ‘‘relating to’’ employee benefit plans 

within the meaning of ERISA section 

514 or as otherwise preempted by Title 

I of ERISA. 

E. Application of Section 4975 of the 

Internal Revenue Code 

Code section 4975(d)(2) contains a 

provision that is parallel to ERISA 

section 408(b)(2). Several commenters 

questioned the interplay of the proposal 

and section 4975 of the Code. These 

commenters explained that this 

interplay was unclear, because the 

proposal did not explicitly include 

corresponding amendments to the 

regulations under Code section 4975. 

Commenters generally sought 

clarification in this regard, asserting 

their belief that the Department has 

authority to issue guidance under Code 

section 4975(d)(2) and should confirm 

that compliance with the regulation will 

be required for a covered service 

provider to avoid the excise taxes 

imposed by Code section 4975. 

The Department added paragraph 

(c)(1)(xi) of the interim final regulation 

to clarify this issue. This paragraph 

provides that, in accordance with the 

transfer of authority of the Secretary of 

the Treasury to promulgate regulations 

of the type published herein to the 

Secretary of Labor, pursuant to section 

102 of the Reorganization Plan No. 4 of 

1978, 5 U.S.C. App. 214 (2000 ed.), 

which was effective December 31, 1978, 

under the final regulation, all references 

to section 408(b)(2) of the ERISA and 

the regulations thereunder should be 

read to include reference to the parallel 

provisions of section 4975(d)(2) of the 

Code and the regulations thereunder. 

If a covered service provider to a 

covered plan fails to disclose the 

information required by the final rule, 

then the contract or arrangement will 

not be ‘‘reasonable.’’ Therefore, the 

service contract or arrangement will not 

qualify for the relief from ERISA’s 

prohibited transaction rules provided by 

section 408(b)(2). The resulting 

prohibited transaction will have 

consequences for both the responsible 

plan fiduciary and the service provider. 

The responsible plan fiduciary, by 

causing the transaction, will have 

violated ERISA section 406(a)(1)(C) and 

(D). The service provider, as a 

‘‘disqualified person’’ under the Code’s 

prohibited transaction rules, will be 

subject to the excise taxes that result 

from the service provider’s participation 

in a prohibited transaction under Code 

section 4975.17

The Department continues to believe 

that the application of an excise tax will 

provide incentives for all parties to 

service contracts or arrangements to 

cooperate in exchanging the disclosures 

required by the final regulation. 

However, as noted above, the 

Department does not believe that an 

otherwise diligent plan fiduciary should 

be penalized as a result of a failure on 

the part of service provider to make the 

required disclosure, thus the final 

regulation includes the exemptive relief 

described above (see paragraph (c)(1)(ix) 

of the interim final rule). 

F. Effective Date 

Many commenters expressed concern 

with the Department’s proposal that the 

final regulation and class exemption 

would be effective 90 days after their 

publication in the Federal Register. 

Commenters suggested that these 

effective dates should be extended to as 

much as 12 months or longer following 

publication to allow service providers 

sufficient time re-negotiate with their 

clients, to make appropriate 

amendments to their service contracts 

and disclosure materials, and to make 

other necessary changes to their 

business practices, for example, revising 

any recordkeeping or other systems to 

ensure that the appropriate information 

is captured. Otherwise, commenters 

stated, there may be many compliance 

failures in the first year following the 

effective date of the regulation and class 

exemption. Commenters also suggested 

that the Department clarify whether the 

rule’s disclosure obligations will apply 

only to contracts entered into (or 

extended or renewed) after the effective 

date of the final regulation. 

In response to these concerns, the 

Department revised the date by which 

the interim final rule will apply to the 

disclosures required for a compliant 

contract or arrangement. Specifically, 

the rule will be effective one year after 

the date of its publication in the Federal 

Register. This modification is intended 

to accommodate concerns raised by 

commenters as to the cost and burden 

associated with transitioning current 

and future service contracts or 

arrangements to satisfy the requirements 

of the interim final rule. As of the 

effective date, all contracts or 

arrangements for services that fall 

within the scope of the interim final 

rule must comply with the interim final 

rule. Thus, the disclosures for new 

contracts or arrangements that are 

entered into on or after the effective date 

must satisfy the rule. In addition, 

contracts or arrangements that were 

entered into prior to that date must 

comply with the rule as of the effective 

date. The Department believes that 

interested persons will have sufficient 


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time to address the requirements of the 

interim final rule and establish 

procedures to ensure compliance with 

both the regulation and, if necessary, the 

class exemption. 

G. Welfare Plan Disclosure—Reserved 

As explained above in the section 

entitled ‘‘Scope—Covered Plans,’’ the 

Department is reserving paragraph (c)(2) 

of the interim final rule for a 

comprehensive disclosure framework 

applicable to ‘‘reasonable’’ contracts or 

arrangements for welfare plans to be 

developed by the Department. The 

Department believes that fiduciaries and 

service providers to welfare benefit 

plans would benefit from regulatory 

guidance in this area for the same 

reasons that apply to defined 

contribution plans and defined benefit 

plans. However, the Department is 

persuaded that there are significant 

differences between service and 

compensation arrangements of welfare 

plans and those involving pension plans 

and that the Department should develop 

separate, and more specifically tailored, 

disclosure requirements under ERISA 

section 408(b)(2) for welfare benefit 

plans. 

H. Existing Requirement Concerning 

Termination of Contract or 

Arrangement 

The Department did not propose any 

changes to the existing requirements 

addressing termination of contracts or 

arrangements for purposes of section 

408(b)(2) (see 29 CFR 2550.408b–2(c)); 

however, the Department did invite 

comments from the public as to any 

issues relating to this requirement. In 

response to this invitation, one 

commenter suggested that the 

Department more definitively delineate 

time frames for service contracts or 

notice provisions, for example, by 

requiring that contracts be no more than 

one year in length or requiring at least 

60 days notice for termination. The 

Department did not accept this 

suggestion, because the Department 

believes that such specific judgments 

are best left to the responsible plan 

fiduciaries contracting for services to 

ascertain the most appropriate term for 

their contracts and an appropriate 

notice period for termination. An 

acceptable time frame in one set of 

circumstances would not necessarily 

work in another, and the Department 

does not believe a mandate in this 

context is appropriate. 

Other commenters raised questions as 

to whether certain fees and market value 

adjustments, generally associated with 

insurance or insurance-type services 

and investments, constitute ‘‘penalties’’ 

for purposes of this paragraph of the 

regulation. The regulation provides 

specifically that ‘‘a minimal fee in a 

service contract which is charged to 

allow recoupment of reasonable start-up 

costs is not a penalty.’’ The Department 

believes that questions as to whether, 

for any particular contract, the charges 

for contract termination are in fact 

‘‘penalties,’’ rather than a service 

provider’s recoupment of reasonable 

start-up costs, are inherently factual 

questions; accordingly, the Department 

did not amend the rule in response to 

these comments. After consideration of 

all of the comments on paragraph (c)(2) 

of the proposal, the Department has 

determined to adopt that paragraph, 

without change, in the interim final 

rule, except that this provision has been 

moved to a new paragraph (c)(3) of the 

interim final rule. 

I. Effect on Other Statutory and 

Administrative Exemptions 

A number of commenters requested 

clarification of the effect of the 

Department’s proposed regulation on 

statutory and administrative exemptions 

that already are in place. Comments on 

these issues were received from 

industry groups that represent banks, 

insurance companies and broker-dealers 

for securities and other financial 

instruments, as well as from financial 

institutions. According to the 

commenters, the affected financial firms 

provide services to all types of plans, 

including many large plans, and that 

prohibited transaction issues are raised 

not only with service arrangements but 

with specific financial transactions 

occurring in the ordinary course of their 

business. These transactions often 

require reliance upon one or more 

prohibited transaction exemptions, 

some of which are periodically 

amended to reflect current industry 

practices. Commenters generally did not 

address how the proposal would affect 

plan service arrangements that rely on 

existing statutory exemptions. However, 

a few commenters asserted that they 

would not be subject to the disclosure 

requirements under the regulation 

because they are relying on other 

statutory exemptions to avoid 

prohibited transactions under ERISA 

section 406. 

The Department is expressing no view 

at this time on the relationship of this 

interim final rule to existing statutory 

and administrative exemptions. The 

Department will, however, be reviewing 

these issues in the future on a case-bycase and exemption-by-exemption basis. 

J. Justification for Interim Final 

Rulemaking; Request for Comments 

Following the Department’s careful 

review of the extensive public record on 

this regulatory initiative, including over 

100 comments on the proposal and 

many supplemental materials furnished 

in connection with the Department’s 

public hearing on this initiative, the 

regulation published today in this 

Notice contains a number of provisions 

that differ significantly from the 

proposal. The Department believes that 

this regulation addresses the many 

technical concerns raised with respect 

to the proposal and clarifies with 

sufficient specificity the nature of the 

required disclosure obligations and the 

parties that must comply with such 

obligations. However, in view of the 

importance of this initiative, and the 

potentially significant effects that the 

final regulation and class exemption 

may have on plan fiduciaries and 

service providers, the Department 

decided to publish this regulation as an 

interim final regulation. 

The Department invites comments 

from interested persons on all aspects of 

the interim final regulation, in 

accordance with the instructions for 

submitting comments described above 

in the ADDRESSES section of this Notice. 

K. Regulatory Impact Analysis 

1. Background 

Compensation arrangements in the 

market for retirement plan services are 

complex. Payments from third parties 

and among service providers can create 

conflicts of interest between providers 

and their clients. For example, a 401(k) 

plan vendor may receive ‘‘revenue 

sharing’’ from a mutual fund that it 

makes available to clients. A consultant 

may receive a ‘‘finder’s fee’’ from an 

investment adviser it recommends to 

clients. Such compensation 

arrangements and the conflicts they 

create are myriad and largely hidden 

from view. Their opacity obscures the 

true cost of plan services and allows 

harmful conflicts to persist in the 

market. Plans may pay more than they 

realize for products and services that 

unbeknownst to them are tainted by 

conflicts. Meanwhile service providers 

may reap excess profits. 

Under ERISA, fiduciaries have a duty 

to consider a service provider’s 

compensation from all sources, but 

service providers are not obligated to 

disclose compensation from other 

sources. This interim final rule would 

require service providers to proactively 

disclose such arrangements to plan 

clients. 


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18See e.g., ERISA Advisory Council on Employee 

Welfare and Pension Benefit Plans, Report of The 

Working Group on Plan Fees and Reporting on 

Form 5500 (Nov. 10, 2004), at http://www.dol.gov/ 

ebsa/publications/AC_111804_report.html. 

19See e.g., U.S. Securities and Exchange 

Commission, Office of Compliance Inspections and 

Examinations, Staff Report Concerning 

Examinations of Select Pension Consultants (May 

2005). 

20See e.g., GAO, Increased Reliance on 401(k) 

Plans Calls for Better Information on Fees, Private 

Pensions Report (March 6, 2007), at http:// 

www.gao.gov/new.items/d07530t.pdf. 

21See e.g., GAO, Conflicts of Interest Involving 

High Risk of Terminated Plans Pose Enforcement 

Challenges, Defined Benefit Pension Report (June 

2007), at http://www.gao.gov/new.items/ 

d07703.pdf. 

22See e.g., GAO, Changes Needed to Provide 

401(k) Plan Participants and the Department of 

Labor Better Information on Fees, Private Pensions 

Report (Nov. 2006), at http://www.gao.gov/ 

new.items/d0721.pdf. 

23See e.g., Deloitte, 401(k) Benchmarking Survey 

2008 Edition. 

24See e.g., Chatham Partners, Looking Beneath 

the Surface: Plan Sponsor Perspectives on Fee 

Disclosure (February 2008). 25Public comments on the proposed rule may be 

found at: http://www.dol.gov/ebsa/regs/cmt408(b)(2)-combined.html. 

2. The Need for Regulatory Action 

To the extent that plan fiduciaries are 

unable to obtain relevant compensation 

information, or unable to use it to 

choose among service providers in a 

manner that upholds their fiduciary 

duty, a failure exists in the market for 

services for employee benefit plans. The 

market for retirement plan services is 

characterized by acute information 

asymmetry. The information costs of 

plan service providers are far lower than 

their clients’. Vendors are specialists in 

the design of their products, services, 

and compensation arrangements, and 

are continually engaged in marketing to 

plan sponsors. Plan sponsors often lack 

this degree of specialization. Even very 

large, relatively sophisticated plan 

sponsors shop for services only 

periodically, generally once every three 

to five years. Smaller, less sophisticated 

plan sponsors face still higher 

information costs. As a result, vendors 

are able to maintain an information 

advantage over their plan sponsor 

clients. 

Vendors have a strong incentive to 

use their information advantage to 

distort market outcomes in their own 

favor. Current ERISA rules hold plan 

sponsors rather than vendors 

accountable for evaluating the cost and 

quality of plan services. And vendors 

can reap excess profit by concealing 

indirect compensation (and attendant 

conflicts of interest) from clients, 

thereby making their prices appear 

lower and their product quality higher. 

Consider one typical arrangement: A 

pension consultant receives a finder’s 

fee from an investment adviser when he 

recommends that adviser to a plan 

sponsor. The plan sponsor does not 

know that the consultant is receiving 

the finder’s fee—an expense the plan 

bears indirectly. The plan sponsor relies 

on the consultant to evaluate the quality 

of the adviser’s services, but does not 

know that the consultant’s 

recommendation and evaluation are 

subject to a conflict of interest. 

The Department has identified 

evidence that information gaps exist in 

certain circumstances and that these 

gaps may distort market results. For 

example: 

• An Advisory Council established 

under ERISA to advise the Secretary of 

Labor found that ‘‘the lack of 

transparency in this area has led to an 

inefficient market where it is extremely 

difficult for the plan sponsor to 

determine either the absolute level of 

fees, or the flow of fees, i.e., who is 

getting paid what.’’ 18

• The Securities and Exchange 

Commission found that pension 

consultants ‘‘typically’’ do not disclose 

to clients that they receive 

compensation from the same money 

managers that they may recommend, 

and recommended that pension 

consultants adopt ‘‘policies and 

procedures to ensure that all disclosures 

required to fulfill fiduciary obligations 

are provided to prospective and existing 

advisory clients, particularly regarding 

material conflicts of interest [which 

should] ensure adequate disclosure 

regarding the consultant’s 

compensation.’’ 19

• According to GAO, ‘‘[s]pecific fees 

that are ‘hidden’ may mask the 

existence of a conflict of interest * * * 

If the plan sponsors do not know that a 

third party is receiving these fees, they 

cannot monitor them, evaluate the 

worthiness of the compensation in view 

of services rendered, and take action as 

needed.’’ 20 GAO found that defined 

benefit (DB) pension plans using 

consultants with SEC-identified 

undisclosed conflicts earned returns 130 

basis points lower than the others.21

GAO recommended that Congress 

‘‘consider amending ERISA to explicitly 

require that 401(k) service providers 

disclose to plan sponsors the 

compensation that providers receive 

from other service providers.’’ 22

• Many DC retirement plan sponsors 

have ‘‘difficulty’’ obtaining a clear 

understanding of total administrative 

fees charged (13 percent), a clear 

explanation of the normal fund 

operating expenses of the funds in the 

plan (9 percent), a clear description of 

all the revenue sharing arrangements 

that the recordkeeper has with the 

mutual funds included in the plan (13 

percent), and what it costs the provider 

to administer the plan (20 percent).23

Many are ‘‘dissatisfied’’ with the degree 

to which fees are transparent (18 

percent) and the degree to which 

revenue sharing is disclosed (22 

percent); 23 percent feel that their 

retirement plan provider(s)’ current 

level of fee disclosure does not meet 

their needs as a plan sponsor.24 While 

most fiduciaries may think they have all 

the information they need, there could 

be information they are lacking and are 

not aware of. This disclosure will make 

sure fiduciaries are receiving the 

information the Department believes 

they need to fulfill their fiduciary duty 

under ERISA. 

• One comment 25 received by DOL 

on the proposed 408(b)(2) regulation 

notes ‘‘the difficulty that plan sponsors 

encounter in the defined contribution 

plan marketplace in obtaining 

comparable information on the charges 

to be incurred for the same or similar 

services.’’ Another commented that 

‘‘Sponsors * * * must expend 

significant time and effort comparing 

fees among providers because of varying 

formats and service models as well as 

unique fee structures associated with 

different investment vehicles. By 

moving toward a more uniform standard 

of fee disclosure, the Department’s 

initiative * * * will reduce the time 

and effort spent by plan sponsors 

assembling and comparing price 

information, and * * * will help 

facilitate apples-to-apples comparisons 

of different service models and 

investment products.’’ A third 

commenter stated that ‘‘plan expense 

and fee information is often scattered, 

difficult to access, or nonexistent * * * 

Plan fiduciaries should know whether 

their plan’s service providers have 

potential conflicts of interest.’’ 

Under current rules, a large, 

sophisticated plan sponsor may be able 

to uncover adequate information to 

optimize his purchase, if the value he 

expects to reap is sufficient to offset his 

information cost. The sophisticated plan 

sponsor’s cost to uncover the 

information is likely to be far higher 

than would be the vendor’s cost to 

disclose it. A smaller or less 

sophisticated plan sponsor cannot 

economically uncover such 

information—the value he stands to gain 

will not offset his information cost. A 

regulatory action to mandate proactive 

disclosure will lower information costs 

for plan sponsors who currently actively 

seek this information. In addition, to the 

extent the information provided is 


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41620 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

readily usable the disclosure will help 

facilitate more informed, optimal 

purchases. 

3. Executive Order 12866 Statement 

Under Executive Order 12866, the 

Department must determine whether a 

regulatory action is ‘‘significant’’ and, 

therefore, subject to the requirements of 

the Executive Order and review by the 

Office of Management and Budget 

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

Executive Order, a ‘‘significant 

regulatory action’’ is an action that is 

likely to result in a rule (1) Having an 

effect on the economy of $100 million 

or more in any one year, or adversely 

and materially affecting a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local or tribal 

governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. The Department has determined 

that this action is ‘‘economically 

significant’’ under section 3(f)(1) 

because it is likely to have an effect on 

the economy of $100 million or more in 

any one year. 

4. Regulatory Alternatives 

Executive Order 12866 requires an 

economically significant regulation to 

include an assessment of the costs and 

benefits of potentially effective and 

reasonably feasible alternatives to a 

planned regulation, and an explanation 

of why the planned regulatory action is 

preferable to the identified potential 

alternatives. The Department considered 

but rejected a number of alternative 

approaches to correct the market failure 

and redress abuses. 

Covering Welfare Benefit Plans: The 

Department considered applying the 

interim final rule to welfare benefit 

plans, because it believes fiduciaries 

and service providers to such plans 

would benefit from regulatory guidance 

in this area. However, the Department is 

persuaded, based on the public 

comment and hearing testimony, that 

there are significant differences between 

service and compensation arrangements 

of welfare plans and those involving 

pension plans and that the Department 

should develop separate, and more 

specifically tailored, disclosure 

requirements under ERISA section 

408(b)(2) for welfare benefit plans. 

Accordingly, the interim final rule 

includes a new paragraph (c)(2), which 

has been reserved for a comprehensive 

disclosure framework applicable to 

‘‘reasonable’’ contracts or arrangements 

for welfare plans to be developed by the 

Department. 

Covering IRAs: The IRA and 

employment-based retirement plan 

markets are very different from one 

another. In the IRA market, decisions 

are made by consumers rather than plan 

sponsors acting in a fiduciary capacity, 

and the disclosures appropriate for the 

latter may not be appropriate for the 

former. 

More Extensive Disclosure: Applying 

disclosure requirements to arrangements 

where compensation is less than $1,000, 

requiring a comprehensive line-item 

breakdown of the price of bundled 

services, or requiring disclosures to be 

part of formal written contracts might 

not produce benefits that would justify 

the associated cost. 

Directing Mandate at Fiduciaries: A 

mandate directed solely at fiduciaries 

would diverge little from current law. 

Such a mandate would merely create a 

brighter line of obligation for the 

fiduciary without empowering him to 

satisfy that obligation; perpetuate the 

information asymmetry, therefore not 

correcting the market failure; and would 

not equip the Department to redress 

service provider abuses. 

Requiring Disclosure only on 

Demand: Requiring disclosure only on 

demand rather than proactively might 

correct the current market failure and 

equip the Department to redress abuse. 

However, disclosure-on-demand would 

have serious unintended adverse 

consequences, particularly for plan 

fiduciaries: 

• Once fiduciaries are legally 

empowered to obtain full disclosure of 

indirect compensation arrangements, 

failure to do so would almost certainly 

constitute a fiduciary breach. This sets 

a trap for the unwary fiduciary. The 

unsophisticated fiduciary is better 

served by a proactive disclosure that 

serves as both a notice of his duty and 

a means to discharge his obligation. 

• The cost of disclosure-on-demand 

could turn out to be higher than the cost 

of proactive disclosure. For example, it 

would now include the cost to plan 

sponsors of making the requests—as 

well as their cost of determining what 

to ask. Also the number of disclosures 

might be higher under a disclosure-ondemand system than under a proactive 

disclosure system. All fiduciaries would 

have a duty to request disclosure, so 

perhaps nearly all would, and many 

fiduciaries might ask in increments for 

information that would have been 

consolidated into a single proactive 

disclosure under a proactive disclosure 

system, therefore multiplying the total 

number of disclosures. The Department 

has not developed a cost estimate for 

disclosure-on-demand, but it is likely 

that such an estimate would be as high 

as, or higher than, the Department’s 

estimate for proactive disclosure. 

• Disclosure-on-demand would also 

fail to educate unsophisticated 

fiduciaries who might not request full 

disclosure. Proactive disclosure might 

raise awareness for some 

unsophisticated fiduciaries. 

Requiring a Summary Disclosure: The 

Department is persuaded that plan 

fiduciaries may benefit from increased 

uniformity in the way that information 

is presented to them. The Department 

considered adding a requirement that 

covered service providers furnish a 

‘‘summary’’ disclosure statement, for 

example limited to one or two pages, 

that would include key information 

intended to provide an overview for the 

responsible plan fiduciary of the 

information required to be disclosed. 

The summary also would be required to 

include a roadmap for the plan fiduciary 

describing where to find the more 

detailed elements of the disclosures 

required by the regulation. However, the 

Department did not implement this 

requirement as part of the interim final 

rule, because it did not want to 

unnecessarily increase the cost and 

burden for service providers to furnish 

required information, especially to the 

extent such cost may be passed along to 

plan participants and beneficiaries, 

unless it is clear that the benefit to plan 

fiduciaries outweighs such cost and 

burden. 

As stated earlier in this preamble, the 

Department is considering amending the 

rule in the future to include a summary 

disclosure requirement. To assist the 

Department in its decision regarding 

whether to include such a requirement 

in the final rule, interested persons are 

encouraged to submit comments 

regarding the potential costs and time 

burden necessary for covered service 

providers, and any other parties, to 

comply with such a requirement, the 

anticipated benefits to responsible plan 

fiduciaries of including a summary 

disclosure requirement (such as time 

and cost savings), and how to most 

effectively design a summary disclosure 

statement to ensure both its feasibility 

and usefulness in helping the 

Department achieve its objectives. If the 

Department is convinced that the 

benefits would outweigh the costs, the 

final regulation may be revised. 


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26Small pension plans are plans with generally 

less than 100 participants, as specified in the Form 

5500 instructions. 

27Plan sponsors and/or plan participants may 

also be indirectly affected. 

28 In order to provide a reasonable estimate, 

service providers with reported type codes 

corresponding to contract administrator, 

administration, brokerage (real estate), brokerage 

(stocks, bonds, commodities), consulting (general), 

custodial (securities), insurance agents and brokers, 

investment management, recordkeeping, trustee 

(individual), trustee (corporate) and investment 

evaluations were assumed to provide covered 

services. 

29While in general small plans are not required 

to file a Schedule C, some voluntarily file. Looking 

at Schedule C filings by small plans, the 

Department verified that most small plans reporting 

data on Schedule C used the same group of service 

providers as larger plans. 

30See http://www.dol.gov/ebsa/regs/cmt408(b)(2)-combined.html. 

31Available at http://www.whitehouse.gov/omb/

circulars/a004/a-4.pdf. 

Chosen Alternative: The Department 

considered, and ultimately has adopted, 

a rule requiring that, in order for a 

contract or arrangement to be 

reasonable, certain categories of service 

providers must disclose specified 

information to responsible plan 

fiduciaries. The rule generally covers 

typical plan service providers including 

fiduciary service providers and 

providers furnishing accounting, 

actuarial, appraisal, auditing, banking, 

consulting, custodial, insurance, 

investment advisory, legal, 

recordkeeping, securities or other 

investment brokerage, third party 

administration, or valuation services. 

The Department believes this framework 

will yield the information that plan 

fiduciaries need in order to assess the 

reasonableness of compensation paid for 

services from these service providers 

and their potential conflicts of interest. 

Absent the regulation, such information 

may be difficult to obtain. The 

Department believes that the interim 

final rule provides the largest benefit 

among the alternatives, while also 

limiting costs. 

5. Affected Entities and Other 

Assumptions 

According to 2006 Form 5500 filings, 

there exist nearly 49,000 defined benefit 

pension plans with over 42 million 

participants and almost 646,000 defined 

contribution pension plans with 

approximately 80 million participants. 

Out of these pension plans, about 

37,000 are small defined benefit plans 

and 576,000 small individual account 

plans.26 Most of the pension plans, 

approximately 462,000, are participant 

directed individual account plans. 

The interim final regulation applies to 

contracts or arrangements between plan 

fiduciaries and service providers as 

fully discussed in Section B., 1., 

above.27 In order to estimate the number 

of covered service providers and the 

number of service provider-plan 

arrangements, the Department has used 

data from plan year 2006 submissions of 

the Form 5500 and its Schedule C. 

In general, only plans with 100 or 

more participants that have made 

payments to a service provider of at 

least $5,000 are required to file the Form 

5500 Schedule C. These plans are also 

required to report the type of services 

provided by each service provider. The 

Department counted the service 

providers most likely to provide the 

covered services.28 In total, there were 

nearly 9,900 unique covered service 

providers reported in the Form 5500 

Schedule C data, almost 1,000 of which 

reported receiving $1 million or more in 

compensation. 

The Department acknowledges that 

this estimate may be imprecise. On the 

one hand, some of these service 

providers may not be covered service 

providers if they do not meet all the 

above specified requirements, but with 

the limited Schedule C data it is not 

possible to further refine this group. On 

the other hand, small plans generally do 

not have to fill out Schedule C which 

would underestimate the number of 

covered service providers if a 

substantial number of them service only 

small plans. However, the Department 

believes that most small plans use the 

same service providers as large plans 

and therefore the estimate based on the 

Schedule C filings by large plans is 

acceptable.29

Schedule C data was also used to 

count the number of covered planservice provider arrangements. On 

average, defined benefit plans employ 

more covered service providers per plan 

than defined contribution plans, and 

large plans use more covered service 

providers per plan than small plans. In 

total, the Department estimates that 

defined benefit plans have over 119,000 

arrangements with covered service 

providers, while defined contribution 

plans have over 780,000 arrangements. 

A substantial part of the cost of the 

final regulation depends on the means 

of disclosures between covered service 

providers and plan fiduciaries. Paper 

disclosures involve much higher costs 

than electronic disclosures. Thus, as at 

least one trade group commented, the 

industry is interested in taking 

advantage of electronic disclosure, if at 

all possible.30 This conclusion seems 

plausible as most covered service 

providers are sophisticated entities and 

by the nature of their services are 

electronically savvy, as are most plan 

fiduciaries. Unaware of any contrary 

comments, the Department assumes that 

about 50 percent of disclosures between 

service providers and plan fiduciaries 

are delivered only in electronic format. 

6. Benefits 

Mandatory proactive disclosure will 

reduce sponsor information costs, 

discourage harmful conflicts, and 

enhance service value. Additional 

benefits will flow from the Department’s 

enhanced ability to redress abuse. 

Although the benefits are difficult to 

quantify, the Department is confident 

they more than justify the cost. In 

accordance with OMB Circular A–4,31

Table 2 below depicts an accounting 

statement showing the Department’s 

assessment of the benefits and costs 

associated with this regulatory action. 

TABLE 2—ACCOUNTING TABLE

Category Primary 

estimate Year dollar Discount rate Period covered 

Benefits 

Annualized Monetized ($millions/year) ............................................................ Not Quantified. 

Qualitative: The final regulation will increase the amount of information that service providers disclose to plan fiduciaries. Non-quantified benefits 

include information cost savings, discouraging harmful conflicts of interest, service value improvements through improved decisions and 

value, better enforcement tools to redress abuse, and harmonization with other EBSA rules and programs. 

Costs 

Annualized Monetized ($millions/year) ............................................................ 58.7 2010 7% 2011–2020 


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32As discussed above, many surveyed DC 

retirement plan sponsors (13%) have ‘‘difficulty’’ 

obtaining key information. This percent is used as 

a proxy for the percent of plan fiduciaries that 

would experience time savings from mandatory 

disclosure. We do not have concrete data regarding 

whether the plan sponsors obtained the information 

or the time/resources expended, because the survey 

did not collect this information. However, ERISA 

requires fiduciaries to obtain the information. 

33This estimate uses the average labor rate of a 

financial manager as a proxy for a plan fiduciary’s 

labor rate. 

34See e.g., Deloitte, 401(k) Benchmarking Survey 

2008 Edition. 

35See e.g., Chatham Partners, Looking Beneath 

the Surface: Plan Sponsor Perspectives on Fee 

Disclosure (2008). 

TABLE 2—ACCOUNTING TABLE—Continued 

Category Primary 

estimate Year dollar Discount rate Period covered 

54.3 2010 3% 2011–2020 

Qualitative: Costs include costs for service providers to perform compliance review and implementation, for disclosure of general, investment-related, and additional requested information, for responsible plan fiduciaries to request additional information from service providers to comply 

with the exemption and to prepare notices to DOL if the service provider fails to comply with the request. 

Transfers .......................................................................................................... Not Applicable. 

a. Information Cost Savings 

The record establishing the need for 

this regulatory action (see above) 

documents that plan sponsors’ 

information cost is higher than vendors’, 

and that many sponsors now expend 

substantial resources to acquire 

information. Mandatory proactive 

disclosure will make the information 

fiduciaries need available to them at 

lower acquisition cost. 

For sponsors in these circumstances, 

mandatory, proactive, comprehensive 

disclosure will reduce the difficulty in 

obtaining the needed information. These 

sponsors will have the same information 

as before but will acquire it less 

expensively. For example, if 13 

percent 32 of estimated 695,000 pension 

plans had a plan fiduciary that 

experienced a one hour drop in the time 

needed to obtain the needed 

information at an hourly labor rate 33 of 

$107 the value of time saved annually 

could be $9.7 million. 

b. Acquisition of Critical Information 

As discussed above, many surveyed 

DC retirement plan sponsors are 

‘‘dissatisfied’’ with the level of 

transparency—23 percent flatly say the 

current level of fee disclosure does not 

meet their needs. These sponsors will 

now acquire critical information that 

was previously inaccessible or too 

costly to obtain. Currently, some plan 

sponsors may simply fail to seek critical 

information. Mandatory, proactive 

disclosure will help these sponsors 

understand and satisfy their fiduciary 

obligations. For those who otherwise 

would not know what questions to ask, 

or what information to consider, the 

disclosure provides the map. This 

additional information will help 

facilitate better decisions as discussed 

in the next two sections. 

c. Discouraging Harmful Conflicts 

Indirect compensation arrangements 

can be either harmful or beneficial. 

Transparency will help drive harmful 

conflicts from the marketplace while 

sustaining arrangements that are 

beneficial for plans. 

Harmful arrangements generally are 

those that are tainted by unmitigated 

conflicts. A plan’s service providers 

may strike deals that profit one another 

at the plan’s expense. Such 

arrangements may thrive in the 

shadows, but tend to wither in sunlight. 

These arrangements exist today in the 

market for plan services precisely 

because information asymmetries 

obscure them. Mandatory proactive 

disclosure will reduce the asymmetry, 

creating a sunnier climate that is less 

friendly to harmful arrangements. 

Beneficial arrangements generally are 

those in which a plan’s service 

providers, in competition to provide the 

best value to the plan, enter into 

transactions among themselves that 

leverage their respective comparative 

advantages to deliver higher quality or 

lower cost for the plan. Such 

arrangements are now evident in the 

segment of the plan services that works 

best—namely, the very large plan 

segment. There are numerous examples 

where large plan sponsors, after 

thoroughly evaluating the quality and 

compensation structures of competing 

vendors, choose service arrangements 

that involve indirect compensation. 

Transparency is a bedrock of such 

arrangements. For example, some 

arrangements establish formulas 

whereby the fees the sponsor pays to a 

service provider will be reduced as a 

function of the indirect compensation 

the provider receives. Mandatory, 

proactive disclosure will be friendly to 

such arrangements because sunlight will 

reveal their superiority to harmful 

arrangements. 

d. Service Value Improvements 

Fiduciaries armed with more 

complete information can make 

informed purchases and thereby derive 

better value for plans. More complete 

information is a benefit of mandatory 

disclosure that will depend sequentially 

on three variables: The extent of gaps in 

critical information, the extent to which 

closing these gaps will improve 

fiduciary decisions, and the degree to 

which improved decisions will improve 

value. 

Information Gaps: Plan sponsors need 

comprehensive information on service 

provider compensation in order to 

discharge their fiduciary duty and 

secure good value for their plans and 

participants. However, only 57 percent 

of sponsors report that their service 

provider discloses revenue sharing 

agreements and investment offsets with 

both alliances and their own proprietary 

funds.34 About one-quarter of sponsors 

are not familiar with revenue sharing 

arrangements between their investment 

managers and retirement plan providers 

(26 percent) and compensation 

arrangements between retirement plan 

providers and the intermediary involved 

in the plan (25 percent) (familiarity was 

lower among sponsors of smaller 

plans).35 These findings suggest that 

gaps in critical information are large and 

widespread. Some sponsors who lack 

critical information are aware of the 

problem and poised to use the 

information effectively once it is more 

accessible. Others are less aware, but 

proactive disclosure will raise 

awareness for some of these sponsors. 

Improved Decisions: To secure better 

value, fiduciaries must factor newly 

available critical information 

appropriately into their purchasing 

decisions. Eighty-four percent of 

sponsors say they will use fee related 

information supplied by their retirement 

plan provider(s) to fulfill their fiduciary 

responsibilities. Sixty-four percent say 


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36See id. 

37See e.g., Hewitt, Hot Topics in Retirement, 

2008. 

38See e.g., Deloitte, 401(k) Benchmarking Survey 

2008 Edition. 

39Examples include: Daniel B. Bergstresser et al., 

Assessing the Costs and Benefits of Brokers in the 

Mutual Fund Industry, Social Science Research 

Network Abstract 616981 (Sept. 2007). Mercer 

Bullard et al., Investor Timing and Fund 

Distribution Channels, Social Science Research 

Network Abstract 1070545 (Dec. 2007). Xinge Zhao, 

The Role of Brokers and Financial Advisors Behind 

Investment Into Load Funds, China Europe 

International Business School Working Paper (Dec. 

2005), at http://www.ceibs.edu/faculty/zxinge/ 

brokerrole-zhao.pdf. 

40For a more detailed explanation see the 

discussion in Section 9 ‘‘Uncertainty’’. 

41 Investment Company Institute. Research 

Fundamentals, Vol. 16, No. 4, September 2007. 

42 GAO report, ‘‘Private Pensions: Conflicts of 

Interest Can Affect Defined Benefit and Defined 

Contribution Plans’’, GAO–090–503T, March 24, 

2009. 

they will use it to examine their existing 

fee structure. Commonly cited top 

concerns regarding fee disclosures 

include that a lack of disclosure causes 

higher plan expenses (45 percent) and 

may lead to legal action by participants 

(46 percent).36 Eighty-two percent of 

sponsors are very (55 percent) or 

somewhat (27 percent) likely to review 

DC fund expenses and revenue sharing 

in 2008.37 These findings suggest that 

many fiduciaries are prepared to factor 

newly available information on service 

provider compensation into their 

decisions. 

Improved Value: The value of 

decisions fiduciaries make can improve 

only if the current decisions made 

produce value that is less than optimal. 

Research literature provides evidence 

that the current value of decisions 

fiduciaries make is often less than 

optimal, and that the suboptimal value 

is associated with undisclosed 

compensation arrangements that may 

pose conflicts. As noted above, a recent 

GAO study links undisclosed conflicts 

with 130 basis points of 

underperformance in DB plans. 

Seventeen percent of DC plan sponsors 

negotiate and receive fee credits for 

revenue sharing or investment offsets 

that exceed their service providers’ 

costs.38 Many others may use this 

information to negotiate lower direct fee 

payments. A variety of academic studies 

further support the hypothesis that 

conflicts often erode the value provided 

to DC plans by mutual funds and their 

distribution channels.39

Overall, the evidence suggests that the 

value of fiduciary decision-making will 

improve once fiduciaries are apprised of 

and consider service providers’ indirect 

compensation sources. 

While the improvement in the value 

of fiduciary decision-making is difficult 

to quantify, the Department believes 

that it has the potential to be very large. 

If just 16 percent of all plan assets 

realize a fall of just 0.6 basis point 

(0.006 percent of plan assets), the 

savings would exceed the costs of the 

rule, which is estimated at $408 million 

over 10 years.40 As noted above, 

substantially more than 10 percent of 

fiduciaries report difficulty or 

dissatisfaction with current fee 

disclosure. At the same time, one basis 

point is a very small fraction of a typical 

plan’s expenses—for example, 

according to the Investment Company 

Institute, more than one-half of 401(k) 

stock mutual fund assets are in funds 

with expense ratios between 50 and 100 

basis points, nearly one-fourth are in 

funds with higher expenses.41 In 

addition, GAO’s study linking 

undisclosed conflicts with 130 basis 

points of underperformance suggests 

that value can be improved via service 

quality as well as price.42 Viewed in this 

context, the Department is confident 

that the potential for improved value of 

fiduciary decision-making from 

mandatory proactive disclosure is 

substantial. 

e. Preventing and Redressing Abuse 

As previously stated, the Department 

believes that the application of an excise 

tax will provide incentives for all 

parties to service contracts or 

arrangements to cooperate in 

exchanging the disclosures required by 

the final regulation. However, if there 

continues to be abusive conduct by 

rogue service providers such as 

misrepresentation of compensation 

arrangements and attendant conflicts, 

this rule mandating disclosure will 

equip the Department to better redress 

such abuse. Enhanced enforcement will 

deter abuse, thereby directly benefiting 

potential victims, and will promote 

confidence and thereby encourage 

sponsors to offer plans. 

The regulation requiring proactive 

disclosure encourages compliance in 

three related ways: 

• If the service provider fails to 

provide the specific information 

required by the regulation, it is subject 

to the imposition of an excise tax by the 

Internal Revenue Service. Thus, there is 

a direct sanction against the service 

provider for giving false, misleading, or 

insufficient statements to plan 

fiduciaries. 

• The regulation specifies the 

disclosure that fiduciaries must obtain 

to avoid a prohibited transaction, and 

ensures that they will receive the 

information because of the 

consequences to the service provider of 

non-disclosure (imposition of the excise 

tax). 

• Because the regulation creates a 

roadmap for disclosure, it will be much 

easier for the courts, the Department, 

and regulated parties to determine 

whether they have complied with the 

law. In the event of non-compliance, 

there are clear enforcement 

consequences for both the plan 

fiduciary and the service provider. 

7. Harmonization With Other Rules and 

Programs 

The Department pursues a 

comprehensive program of enforcement 

and compliance assistance (including 

outreach and education) to ensure that 

fiduciaries understand and properly 

discharge their duties under ERISA, at 

reasonable cost. 

• The Department educates plan 

fiduciaries about their obligations under 

ERISA by conducting numerous 

educational and outreach activities, 

such as a nationwide series of 33 

seminars presented to date as part of the 

Department’s campaign entitled ‘‘Getting 

It Right—Know Your Fiduciary 

Responsibilities,’’ which includes a 

discussion of the importance of 

selecting plan service providers and the 

role of fee and compensation 

considerations. 

• The Department also makes a 

variety of materials available on its Web 

site to educate plan fiduciaries about 

service provider fees and relationships, 

including its 401(k) Plan Fee Disclosure 

worksheet, a publication entitled 

‘‘Understanding Retirement Plan Fees 

and Expenses,’’ and, in coordination 

with the Securities and Exchange 

Commission, a series of tips concerning 

fees and conflicts of interest for plan 

fiduciaries to use when selecting 

pension consultants. 

ERISA’s standards of fiduciary 

conduct already obligate fiduciaries to 

obtain and consider adequate 

information. They are liable for any plan 

losses attributable to their failure to do 

so. This rule harmonizes the prohibited 

transaction rules with the fiduciary 

rules, so fiduciaries, in addition to being 

obligated to obtain and consider such 

information, are also equipped to do so 

at minimum cost. 

8. Costs 

The Department estimated costs for 

the rule over the ten-year time frame for 

purposes of this analysis and used 

information from the quantitative 

characterization of the service provider 

market presented above as a basis for 

these cost estimates. This 

characterization did not account for all 

service providers, but it does provide 


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information on the segments of the 

service provider industry that are likely 

to be most affected by the rule (i.e., 

those who service pension plans). In 

addition to the costs to service 

providers, the Department also 

considered, and discusses below, the 

potential costs to plans. 

a. Costs for Service Providers 

Compliance Review and 

Implementation: Most of the cost of the 

rule will be imposed on plan service 

providers. Covered service providers 

will need to review the rule, evaluate 

whether their current disclosure 

practices comply with its requirements, 

and, if not, determine how their 

disclosure practices must be changed to 

be compliant. The Department projected 

this as a cost incurred in 2011, the year 

in which the rule takes effect. 

Although all affected service 

providers are assumed to incur these 

initial costs, it is likely that service 

providers with complex fee 

arrangements and conflicts of interest 

would require more time to comply. The 

Department assumes that the number of 

service providers with more complex 

arrangements can be approximated by 

the number of unique service providers 

who are reported on the Schedule C as 

having received $1 million or more in 

compensation (nearly 1,000 service 

providers). 

The Department assumes that covered 

service providers with complex 

arrangements will require on average 24 

hours of legal professional time at a cost 

of approximately $119 per hour and on 

average 80 hours of financial 

professional time at a cost of almost $63 

per hour to comply with the rule. Noncomplex service providers would 

require only three hours of legal 

professional time and 13 hours of 

financial professional time. Using the 

number of unique service providers 

identified in the quantitative analysis 

presented above (nearly 10,000 service 

providers), this cost is estimated to be 

about $17.9 million. 

The Department also has estimated 

the initial compliance review and 

implementation costs for service 

providers newly entering the market 

(‘‘new service providers’’) to provide 

services to plans (either for the first time 

or by re-entry) beginning in 2012 and 

each year thereafter. Based on data from 

the 2005 and 2006 Form 5500, the 

Department assumes that about eight 

percent of all service providers will be 

new in each year subsequent to 2011, 

and that these service providers will 

incur the same compliance review and 

implementation costs as existing service 

providers. Based on the foregoing, the 

Department estimates that new service 

providers will incur costs of 

approximately $1.5 million in 2012 and 

thereafter. Estimates are reported in 

Table 3. 

TABLE 3—COMPLIANCE REVIEW AND IMPLEMENTATION

Year Number of 

entities 

Legal professional hours 

required 

Hourly labor 

cost for legal 

professional 

(in 2010 

dollars) 

Financial 

professional 

hours required 

Hourly labor 

cost for 

financial 

professional 

(in 2010 

dollars) 

Yearly 

undiscounted 

costs 

(A) (B) (C) (D) (E) A*(B*C+D*E) 

2011 ........................ Plans .................. 695,000 ........................ $119 1 $63 $43,625,000 

Non-Complex 

Service Providers.

9,000 3 119 13 63 10,403,000 

Complex Service 

Providers.

1,000 24 119 80 63 7,511,000 

2012 ........................ Plans .................. 94,000 ........................ 119 1 63 5,911,000 

Non-Complex 

Service Providers.

700 3 119 13 63 867,000 

Complex Service 

Providers.

100 24 119 80 63 626,000 

Total for 2011 ............................................................................................................................................................................... 61,539,000 

Total for 2012 ............................................................................................................................................................................... 7,404,000 

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

Initial Disclosure: As discussed above, 

covered service providers also must 

develop or update their current 

disclosure materials to comply with the 

regulatory requirements. Paragraph 

(c)(1)(iv)(A) through (E) of the rule 

requires service providers to provide an 

initial disclosure to a responsible plan 

fiduciary. Generally, under paragraph 

(c)(1)(v)(A) of the rule, this disclosure 

must be made reasonably in advance of 

when a contract is entered into, 

extended, or renewed. The Department 

assumes that service providers will 

create an initial disclosure that can be 

used for all plans and customize this 

document by adding individualized 

information for each plan. This activity 

includes developing formulae and 

algorithms to present or estimate direct 

and indirect compensation that will be 

applied in a pro forma projection for 

each plan with which the provider will 

contract. It also includes making a 

reasonable and good faith estimate of 

the cost to provide recordkeeping 

services to a covered plan if the covered 

service provider reasonably expects to 

provide recordkeeping services without 

explicit compensation or when 

compensation for recordkeeping is 

subject to an offset or rebate for such 

services as required by paragraph 

(c)(1)(iv)(D)(2). The Department assumes 

that the majority of this cost would be 

incurred by service providers in 2011 

and that one hour of a legal 

professional’s time and 45 minutes of a 

financial professional’s time will be 

required to prepare the general 

disclosure for each plan. Based on the 

foregoing, the Department estimates that 

the cost to develop the general 

disclosure in 2011 will be almost $75 

million. 

In 2012 and subsequent years, the 

regulation will cause additional 

disclosures to be made between covered 


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43 Generally, service providers are required to 

disclose any change to investment-related 

information as soon as practicable, but not later 

than 60 days from the date on which the covered 

service provider is informed of such change. 

plans and service providers for any new 

contracts and arrangements. The 

Department does not have information 

on the number of new arrangements in 

a year; therefore, the Department used 

the percentage of plans that are new 

plans, about 14 percent, as a proxy for 

the percentage of new arrangements in 

a year. This results in almost 122,000 

new arrangements every year. The 

Department assumes that half of the 

responsible plan fiduciaries in these 

arrangements would receive the 

required information even without the 

regulation enacted. The Department 

estimates that preparing the disclosures 

for new arrangements will require one 

hour of a legal professional’s time and 

45 minutes of a financial profession’s 

time. Based on the foregoing, the cost of 

preparing these disclosures in year 2012 

and thereafter will be almost $23 

million. 

Paragraph (c)(1)(vi) requires service 

providers to provide any other 

information relating to compensation 

received in connection with the contract 

or arrangement that is required for the 

covered plan to comply with the 

reporting and disclosure requirements 

of Title I of ERISA and the regulations, 

forms, and schedules issued thereunder 

upon the request of responsible plan 

fiduciaries or plan administrators of 

covered plans. The Department is not 

aware of a basis for determining the 

number of requests that responsible 

plan fiduciaries or plan administrators 

will make; therefore, it assumes that 

approximately ten percent (almost 

45,000) of responsible plan fiduciaries 

will request additional information 

annually. The Department further 

assumes that service providers will 

already have this information available, 

as it is required to comply with other 

legal requirements. Therefore, the 

Department estimates that it will take 

clerical staff two minutes per request at 

an hourly labor cost of approximately 

$26 to prepare the information. Based 

on the foregoing, the Department 

estimates that the annual cost to 

disclose information upon request will 

total almost $39,000 as shown in Table 

3. 

Paragraph (c)(1)(v)(B) generally 

requires service providers to disclose 

any changes to the general information 

as soon as practicable, but no later than 

60 days from the date the covered 

service provider is informed of such 

change. The Department assumes that 

one-half hour of legal professional time 

and one-third hour of a financial 

professional time will be required to 

update the disclosures. The Department 

also assumes that changes in plan 

disclosures will occur at least once 

every three years, because plans 

normally conduct requests for proposal 

(RFPs) from service providers at least 

once every three to five years. If it is 

assumed that an equal number of plans 

conduct an RFP in any given year, then 

approximately 35 percent of 

arrangements will require an updated 

disclosure every year. In addition, half 

of these plans would already have 

updated the information without the 

regulation for a total of approximately 

157,000 updates to the general 

information. Based on the foregoing, the 

Department estimates that the cost of 

updating the disclosure of general 

information will total about $13 million 

a year as shown in Table 4. 

In total, the cost of the disclosure of 

the general information will be almost 

$75 million in 2011 and almost $23 

million in each subsequent year as 

shown in Table 4. 

TABLE 4—DISCLOSURE OF GENERAL INFORMATION

Year Number of 

arrangements 

Professional 

hours 

Professional 

hourly labor 

cost 

Professional 

hours 

Total yearly 

cost 

(A) (B) (C) (D) A*B*C 

2011: 

Initial Disclosure: Legal ................................................. 450,000 1 $119 450,000 $53,539,000 

Initial Disclosure: Financial ........................................... 450,000 0.75 63 337,000 21,189,000 

2012: 

Initial Disclosure: Legal ................................................. 61,000 1.00 119 61,000 7,254,000 

Initial Disclosure: Financial ........................................... 61,000 0.75 63 46,000 2,871,000 

Disclosure of Changes: Legal ...................................... 157,000 0.50 119 79,000 9,369,000 

Disclosure of Changes: Financial ................................. 157,000 0.33 63 52,000 3,296,000 

All Years: 

Information Upon Request ............................................ 45,000 0.03 26 1,500 39,000 

Total for 2011 ............................................................... 74,767,000 

Total for 2012 ............................................................... 22,830,000 

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

Investment Disclosure: As discussed 

in section B.,5.,g., above, paragraphs 

(c)(1)(iv)(F) and (G) generally require 

fiduciaries of certain investment 

vehicles holding plan assets (described 

in paragraph (c)(1)(iii)(A)(2)) and 

providers of recordkeeping and 

brokerage services to a participantdirected individual account plan 

(without regard to whether they expect 

to receive indirect compensation), if 

they make available one or more 

designated investment alternatives for 

the covered plan (described in 

paragraph (c)(1)(iii)(B) (‘‘platform 

providers’’)), to disclose investmentrelated fee and expense information. 

This information generally must be 

disclosed to the responsible plan 

fiduciary reasonably in advance of the 

date the contract or arrangement is 

entered into, extended or renewed.43

Paragraph (c)(1)(iv)(G)(2) allows covered 

platform providers to satisfy this 

disclosure requirement by providing 

current disclosure materials of the 

issuer of the designated investment 

alternative to the responsible plan 

fiduciary that include the required 

information, provided that the issuer is 

not an affiliate of the platform provider, 

the disclosure materials are regulated by 

a State or Federal agency, and the 

covered service provider does not know 

that the materials are incomplete or 

inaccurate. 

The cost of disclosing investmentrelated compensation information will 

be attributable primarily to time spent 

gathering the required information. 


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However, much of this cost will be 

reduced because, as discussed above, 

the rule allows platform providers to 

satisfy this requirement by passing 

through information to the responsible 

plan fiduciary. Based on the foregoing, 

the Department assumes that 

preparation of investment-related 

compensation and fee information will 

require one-half hour of financial 

professional time for each of the 

individual account plans. As mentioned 

above, it is assumed that 50 percent of 

these disclosures already occur; 

therefore, the costs for approximately 

231,000 disclosures are calculated, 

resulting in costs of approximately $7.3 

million (see Table 5). 

In addition, service providers must 

disclose changes to investment 

information. The Department assumes 

that service providers will have to 

disclose investment information 

changes to each responsible plan 

fiduciary at least once per year due to 

the regulation, resulting in about 

200,000 disclosures. This notification is 

expected to require one-half hour of 

financial professional time to prepare. 

Further, it is assumed that 14 percent 

(over 31,000) of arrangements will be 

new in a year and require the initial 

investment disclosure. Based on the 

foregoing, the Department estimates that 

reporting the required investment 

related information in years 2012 and 

later will cost approximately $7.3 

million annually as shown in Table 5. 

TABLE 5—PREPARATION OF DISCLOSURE OF INVESTMENT INFORMATION

Number of 

plans 

Professional 

hours 

Professional 

hourly labor 

cost 

Total professional hours Total yearly 

cost 

(A) (B) (C) (D) A*B*C 

2011 Initial Disclosure .......................................................... 231,000 0.5 $63 116,000 $7,255,000 

2012 Initial Disclosure .......................................................... 31,000 0.5 63 116,000 983,000 

Disclosure of Changes ......................................................... 200,000 0.5 63 100,000 6,272,000 

Total for 2011 ............................................................... ........................ ........................ ........................ ........................ 7,255,000 

Total for 2012 ............................................................... ........................ ........................ ........................ ........................ 7,255,000 

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

b. Costs to Plans 

ERISA requires plan fiduciaries, when 

selecting or monitoring service 

providers, to act prudently and solely in 

the interest of the plan’s participants 

and beneficiaries and for the exclusive 

purpose of providing benefits and 

defraying reasonable expenses of 

administering the plan. Fundamental to 

a fiduciary’s ability to discharge these 

obligations is the availability of 

information sufficient to enable the plan 

fiduciary to make informed decisions 

about the services, the costs, and the 

service provider. The rule will assist 

plan fiduciaries in this area by requiring 

service providers to make specified 

complete and accurate disclosures in 

order to benefit from the section 

408(b)(2) statutory exemption. 

The Department estimates the 

responsible plan fiduciaries will need 

one hour to ensure compliance with the 

rule; therefore, the cost of the review is 

expected to be approximately $43.6 

million in 2011 as reported in Table 3. 

Starting in 2012 and each year 

thereafter, responsible plan fiduciaries 

of new plans will have to familiarize 

themselves with the rule to ensure their 

compliance . Based on data from the 

2005 and 2006 Form 5500, the 

Department estimates that 14 percent of 

plans will be new each year. The 

Department assumes that responsible 

plan fiduciaries of new plans will have 

the same costs as fiduciaries of existing 

plans. Therefore, the cost of the review 

for fiduciaries of new plans is estimated 

to be $5.9 million annually for years 

2012 and thereafter as shown in Table 

2. 

c. Cost of Exemption for Responsible 

Plan Fiduciary 

The final class exemption contained 

in paragraph of (c)(1)(ix) of the rule 

provides relief from the restrictions of 

ERISA section 406(a)(1)(C) and (D) for 

plan fiduciaries that enter into a 

contract with service providers upon a 

mistaken belief that they have received 

all of the disclosures required by the 

interim final rule. Upon discovering that 

a covered service provider failed to 

disclose all of the required information, 

the responsible plan fiduciary must take 

reasonable steps to obtain such 

information, including requesting in 

writing that the covered service 

provider furnish the information in 

order to rely on the exemption and 

notify the Department if the service 

provider fails to comply with the 

written request within 90 days. 

While the Department has no basis for 

estimating the percentage of 

arrangements where a responsible plan 

fiduciary will not receive all of the 

required disclosures from a covered 

service provider, the Department 

assumes that 10 percent of arrangements 

(approximately 69,000) may experience 

a failure that will require the 

responsible plan fiduciary to send a 

notice to the service provider in 2011. 

In 2012 and thereafter, the number of 

requests for missing information is 

expected to decrease to 5 percent of 

arrangements (about 35,000). The 

Department estimates that one-half hour 

of a financial professional’s time will be 

required to prepare the request for the 

undisclosed information. Table 6 

reports the cost of preparing the 

disclosure to be almost $2.2 million in 

2011 and approximately $1.1 million 

annually in the subsequent years. 

TABLE 6—NOTICE TO SERVICE PROVIDERS

Year Requests for additional information Hours per request Hourly labor cost Total hours Total cost 

(A) (B) (C) (D) A*B*C 

2011 ........................ 69,000 0.5 $63 35,000 $2,181,000 

2012 ........................ 35,000 0.5 63 17,000 1,091,000 

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


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The Department further assumes that 

service providers may not respond to 10 

percent of the requests for undisclosed 

information within 90 days, which will 

result in the responsible plan fiduciary 

preparing and sending a notice to the 

Department. The Department estimates 

that one-half hour of a financial 

professional’s time will be required to 

prepare the notice. As shown in Table 

7 below, almost 7,000 notices will be 

sent in 2011 at a cost of approximately 

$218,000, and in the subsequent years, 

over 3,400 notices will be sent annually 

at a cost of approximately $109,000. 

TABLE 7—NOTICE TO DOL 

Year Number of 

notices to DOL Hours per notice Hourly labor cost Total hours Total cost 

(A) (B) (C) (D) A*B*C 

2011 ............................................................................. 7,000 0.5 $63 3,500 $218,000 

2012 ............................................................................. 3,500 0.5 63 1,700 109,000 

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

d. Paper and Mailing Costs 

The Department assumes that clerical 

staff will prepare all of the required 

notices and disclosures for distribution 

and that 50 percent of the disclosures 

will be sent electronically at no cost. 

Table 8 displays for each type of 

disclosure the number of notices that 

will be sent, the required amount of 

clerical time, and the annual cost of 

preparation. 

TABLE 8—PREPARATION COSTS

Number of 

notices 

Percent not sent 

electronically Clerical hours Clerical hourly labor cost Total cost 

(A) (B) (C) (D) A*B*C*D 

Initial Disclosure: 2011 ..................................................... 450,000 50 1/30 $26 $196,000 

Initial Disclosure: 2012 ..................................................... 61,000 50 1/30 26 27,000 

Information Upon Request ............................................... 45,000 50 1/30 26 20,000 

Disclosure of Changes to Initial Disclosure ..................... 157,000 50 1/30 26 69,000 

Investment Disclosure: 2011 * ......................................... 231,000 50 17/30 26 1,711,000 

Investment Disclosure: 2012 * ......................................... 31,000 50 17/30 26 232,000 

Disclosure of Changes to Investment Disclosure ............ 200,000 50 1/30 26 87,000 

Request for Additional Information for Exemption: 2011 69,000 50 1/60 26 15,000 

Request for Additional Information for Exemption: 2012 35,000 50 1/60 26 8,000 

Prepare Notice to DOL: 2011 .......................................... 7,000 50 1/60 26 1,500 

Prepare Notice to DOL: 2012 .......................................... 3,500 50 1/60 26 800 

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

* The estimate assumes 2 minutes per investment to prepare the disclosure. Plans have on average 17 investments. 

Table 9 reports the printing and 

postage costs associated with each 

required notice and disclosure. The 

Department assumes that 50 percent of 

the disclosures will be sent 

electronically at no cost, and that the 

cost of printing and paper for the 

remaining 50 percent of documents is 5 

cents per page. 

TABLE 9—MAILING COSTS

Number of 

notices 

Percent not sent 

electronically 

(percent) 

Pages Cost per page Postage Total costs 

(A) (B) (C) (D) (E) A*B*(C*D+E) 

Initial Disclosure: 2011 ......................... 450,000 50 8 $0.05 0.44 $189,000 

Initial Disclosure: 2012 ......................... 61,000 50 8 0.05 0.44 26,000 

Information Upon Request ................... 45,000 50 10 0.05 0.44 21,000 

Disclosure of Changes to Initial Disclosure ................................................... 157,000 50 4 0.05 0.44 50,000 

Investment Disclosure: 2011* .............. 231,000 50 510 0.05 10.35 4,141,000 

Investment Disclosure: 2012* .............. 31,000 50 510 0.05 10.35 561,000 

Disclosure of Changes to Investment 

Disclosure ......................................... 200,000 50 2 0.05 0.44 54,000 

Request for Additional Information for 

Exemption: 2011 .............................. 69,000 50 2 0.05 0.44 19,000 

Request for Additional Information for 

Exemption: 2012 .............................. 35,000 50 2 0.05 0.44 9,000 

Prepare Notice to DOL: 2011 .............. 7,000 50 2 0.05 0.44 2,000 

Prepare Notice to DOL: 2012 .............. 3,000 50 2 0.05 0.44 1,000 

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

* The number of pages is 17*30, which is the average number of investments in a plan times 30 pages per investment disclosure. 


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44This assumption was developed in light of 

evidence presented in Brad M. Barber et al., Out of 

Sight, Out of Mind, The Effects of Expenses on 

Mutual Fund Flows, Journal of Business, Volume 

79, Number 6 2095, 2095–2119 (2005); James J. Choi 

et al., Why Does the Law of One Price Fail? An 

Experiment on Index Mutual Funds, National 

Bureau of Economic Research Working Paper 

W12261 (May 2006); Deloitte Financial Advisory 

Services LLP, Fees and Revenue Sharing in Defined 

Contribution Retirement Plans (Dec. 6, 2007) 

(unpublished, on file with the Department of 

Labor); Edwin J. Elton et al., Are Investors Rational? 

Choices Among Index Funds, Social Science 

Research Network Abstract 340482 (June 2002); and 

Sarah Holden & Michael Hadley, The Economics of 

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

2006, Investment Company Institute Research 

Fundamentals, Volume 16, Number 4 (Sept. 2007). 

This estimate of excess expense does not take into 

account less visible expenses such as mutual funds’ 

internal transaction costs (including explicit 

brokerage commissions and implicit trading costs), 

which are sometimes larger than funds’ expense 

ratios. See, e.g., Jason Karceski et al., Portfolio 

Transactions Costs at U.S. Equity Mutual Funds, 

University of Florida Working Paper (2004), at 

http://thefloat.typepad.com/the_float/files/ 

2004_zag_study_on_mutual_fund_

trading_costs.pdf. 

As shown in Table 10, total costs for 

service providers and plan sponsors add 

up to about $152.5 million for the year 

2011. 

TABLE 10—TOTAL DISCOUNTED COSTS OF PROPOSAL

Year Cost of legal 

review 

Cost of general information disclosure Cost of investment information disclosure Cost of qualifying for exemption 

Total costs 

(A) (B) (C) (D) A+B+C+D 

2011 ..................................................................................... $61,539,000 $75,312,000 $13,248,000 $2,437,000 $152,535,000 

2012 ..................................................................................... 6,919,000 21,534,000 7,653,000 1,139,000 37,245,000 

2013 ..................................................................................... 6,467,000 20,125,000 7,152,000 1,064,000 34,808,000 

2014 ..................................................................................... 6,044,000 18,809,000 6,685,000 995,000 32,531,000 

2015 ..................................................................................... 5,648,000 17,578,000 6,247,000 929,000 30,403,000 

2016 ..................................................................................... 5,279,000 16,428,000 5,839,000 869,000 28,414,000 

2017 ..................................................................................... 4,933,000 15,354,000 5,457,000 812,000 26,555,000 

2018 ..................................................................................... 4,611,000 14,349,000 5,100,000 759,000 24,818,000 

2019 ..................................................................................... 4,309,000 13,410,000 4,766,000 709,000 23,194,000 

2020 ..................................................................................... 4,027,000 12,533,000 4,454,000 663,000 21,677,000 

Total with 7% Discounting ................................................................................................................................................................... 412,183,000 

Total with 3% Discounting ................................................................................................................................................................... 462,827,000 

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

e. Comments and Revisions 

The Department received several 

comments suggesting that it had 

underestimated the costs of the proposal 

and questioning various assumptions on 

which the estimates were based. In 

response to these comments, the 

Department increased its estimate of the 

amount of legal and financial 

professionals’ time service providers 

would require to become compliant 

with the regulation. It also reevaluated 

its estimates of the number of affected 

service providers. (The Department also 

revised some of the proposal’s 

provisions in light of these comments to 

ease compliance burdens, as explained 

earlier in this preamble.) 

In addition to revisions made in 

response to comments, the Department 

updated its estimates of service 

providers, plans, participants, assets 

and labor costs, as well as its estimates 

of the preparation, distribution and 

mailing costs of the required 

disclosures, to reflect more current data. 

f. Summary 

In summary, the Department has 

calculated total costs of approximately 

$412 million for the ten-year period 

2011 to 2020. 

9. Uncertainty 

The Department’s estimates of the 

effects of this regulation are subject to 

uncertainty. While the Department is 

confident that improved fee disclosures 

can reduce the time fiduciaries spend 

searching for needed information, 

discourage harmful conflicts of interest, 

reduce gaps in information received by 

plan fiduciaries, improve fiduciary 

decisions relating to purchases of plan 

services leading to reduced plan fees 

and provide better enforcement tools to 

redress abuses by service providers, it is 

uncertain about the magnitude of these 

effects. The uncertainty is attributable to 

gaps in available data and empirical 

evidence. Some key areas of uncertainty 

are elaborated below. 

Reduction in fees—By making 

information more readily available, this 

regulation may increase the amount of 

information that is considered, along 

with the effort devoted to and efficiency 

of such consideration. This in turn 

could reduce fees paid to service 

providers relative to value derived for 

participants in either or both of two 

ways. First, fiduciaries might more 

accurately optimize the levels and types 

of services purchased, for example by 

downgrading from a premium service 

level, whose price exceeds the benefit to 

participants, to an economy service 

level whose price is smaller than the 

benefit. This would represent a gain in 

welfare equal to the cost savings 

reduced by any diminishment in 

benefits attendant to the service 

downgrade. Second, fiduciaries might 

identify and take advantage of 

opportunities to purchase equivalent 

services at a lower price (or superior 

services at the same price) from a 

different vendor. If this savings is 

attributable to the service being 

produced more efficiently by the 

competing vendor it would reflect a 

welfare gain; if it is attributable to a 

shifting of existing surplus from the 

service producers to consumers with no 

improvement in production efficiency, 

it would reflect a transfer. 

The Department attempted to 

consider the potential amount by which 

fees might be reduced. A review of 

literature on dispersion of mutual fund 

fee levels and the value of services 

purchased with such fees suggests that 

at least some fiduciaries and 

participants of individual account 

plans, by making different and more 

optimal choices about which services to 

purchase or what vendors to purchase 

from, might reduce fees by perhaps 11 

basis points per year on average.44 There 

is evidence for potential savings to 

defined benefit plans as well. A recent 

GAO report found that defined benefit 

plans whose consultants have 

undisclosed conflicts of interest have 

between 1.2 and 1.3 percentage points 

lower rates of return. The report 

acknowledges that this finding does not 


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45See Conflicts of Interest Involving High Risk or 

Terminated Plans Pose Enforcement Challenges, 

U.S. Government Accountability Office (June 2007). 

46See e.g., Chatham Partners, Looking Beneath 

the Surface: Plan Sponsor Perspectives on Fee 

Disclosure (2008). 

47See e.g., Hewitt, Hot Topics in Retirement, 

2008. 

necessarily imply a causal arrangement, 

but it references ‘‘expert’’ opinions that 

such undisclosed conflicts of interest 

could result in lower returns.45

In light of the foregoing evidence, the 

Department believes it is highly possible 

that this regulation could fill gaps in 

critical information, thus improving 

fiduciary decisions, and will reduce 

service costs relative to value derived to 

yield benefits that exceed costs. Table 

11 below provides a break-even analysis 

to illustrate this point. Previously cited 

studies suggest that perhaps a quarter of 

sponsors currently lack critical 

information 46 and as many as 65 

percent would use additional 

information to change existing fee 

structures. 47 Given the total amount of 

assets in plans, if the sponsors are able 

to reduce fees by 0.6 basis point per year 

on average, the benefits of the 

mandatory disclosure requirements 

would exceed the costs. Due to 

uncertainty about the size of the 

reduction in fees, and uncertainty about 

what fraction of the fee reduction would 

reflect welfare gains, the Department 

did not include the reduction in fees in 

its calculation of the benefits of the 

regulation. 

TABLE 11—REDUCTION IN FEES NECESSARY FOR BENEFITS TO EXCEED COSTS (2011) 

Total amount of assets in 

plans (in millions of 2010 

dollars) 

Percent of sponsors currently lacking critical information 

Percent of sponsor who 

will use the information to 

change existing fee structures 

Total 10–Year compliance 

costs annualized at 7% (in 

millions of 2010 dollars) 

Percent correction due to 

disclosure necessary for 

benefits to exceed costs 

(A) (B) (C) (D) D/(A*B*C) 

$6,390,000 25% 65% $58.7 0.006% 

Other areas of uncertainty—Also 

subject to substantial uncertainty are the 

Department’s estimates of: The fraction 

of plan fiduciaries already receiving the 

required disclosure information (both 

benefits and costs would vary 

negatively); the time required for legal 

professionals, financial professionals 

and clerical professionals to perform 

compliance tasks pursuant to the 

regulation (costs would vary positively); 

and the extent to which disclosures will 

be made electronically rather than on 

paper (costs would vary negatively). In 

developing its assumptions regarding 

these and other variables, the 

Department took into account both 

relevant comments received on the 

proposed regulation and differences 

between the requirements of the 

proposed and those of the final 

regulations. The Department believes its 

assumptions are reasonable and that the 

uncertainty attendant to them does not 

cast serious doubt on the Department’s 

conclusion that the regulation’s benefits 

justify its costs. 

10. Final Regulatory Flexibility Analysis 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) imposes 

certain requirements with respect to 

Federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

Procedure Act (5 U.S.C. 551 et seq.) and 

which are likely to have a significant 

economic impact on a substantial 

number of small entities. Unless an 

agency determines that a proposal is not 

likely to have a significant economic 

impact on a substantial number of small 

entities, section 604 of the RFA requires 

that the agency present a final 

regulatory flexibility analysis (FRFA) 

describing the rule’s impact on small 

entities and explaining how the agency 

made its decisions with respect to the 

application of the rule to small entities. 

Small entities include small businesses, 

organizations and governmental 

jurisdictions. 

a. Need for and Objectives of the Rule 

Service providers to pension plans 

increasingly have complex 

compensation arrangements that may 

present conflicts of interest. Thus, small 

plan fiduciaries face increasing 

difficulty in carrying out their duty to 

assess whether the compensation paid 

to their service providers is reasonable. 

As supported by public commenters on 

the proposal and witnesses at the 

Department’s hearing, this rule is 

necessary to help such fiduciaries get 

the information they need to negotiate 

with and select service providers who 

offer high quality services at reasonable 

rates. 

b. Public Comments 

Public comments on the proposed 

rule raised a number of issues with 

respect to its application to and impact 

on small entities. Several commenters 

affirmed the Department’s view, 

articulated in the preamble to the 

proposed rule, that the number of small 

service providers to plans is large and 

that the cost of complying with the 

proposed rule might be proportionately 

higher for smaller service providers. 

However, some comments suggested 

that the Department had underestimated 

the cost to small service providers to 

comply with the proposed rule. 

Many of the comments expressed 

uncertainty about the scope of the 

proposed rule’s application, attributing 

complexity and cost to that uncertainty 

and to the possibility that the scope 

might be very broad (for example, that 

it might encompass a broad array of 

indirect service providers). The 

Department has refined the proposed 

rule to clarify that the interim final rule 

encompasses only those service 

providers and compensation 

arrangements that are likely to require 

close consideration by plan fiduciaries. 

Small service providers generally fall 

within the scope of the interim final 

rule only if they are plan fiduciaries, 

provide plan services as a registered 

investment adviser, provide certain 

other services directly to a plan and 

receive indirect compensation in 

connection with such services, or 

provide an investment platform through 

which investment options are made 

available to participants and 

beneficiaries in participant-directed 

individual account plans. A potentially 

large number of small, indirect service 

providers will not be subject to the 

interim final rule, even if they perform 

services for a plan under subcontract to 

another (direct) service provider. The 

Department lacks data on how many 

such indirect service arrangements 

exist, because such arrangements are not 

required to be identified in plans’ 

annual reports. 

Some comments suggested that the 

cost of rigorous disclosure is not 


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41630 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

justified in the case of very small service 

arrangements. The interim final rule 

generally excepts from its requirements 

contracts or arrangements where 

compensation or fees are less than 

$1,000. It is likely that a large number 

of small service provider arrangements 

fall into this category. Some portion of 

compliance costs, including the most 

recurring costs (as opposed to start-up 

costs), are variable: they grow with the 

number of covered arrangements the 

service provider maintains. Therefore, 

this exception will be especially helpful 

to small service providers whose 

business consists of a large number of 

small contracts or arrangements, which 

will be excepted from coverage if they 

result in less than $1,000 in 

compensation or fees. 

Some comments stated that many 

arrangements are not established under 

a formal contract and that requiring all 

arrangements to be so established would 

be costly. The Department believes such 

a requirement might be 

disproportionately costly for small 

service providers, whose arrangements 

might be small relative to the partially 

fixed cost of entering into a contract and 

who might lack in-house expertise in 

contract law. The interim final rule 

includes no such requirement, but 

instead allows all required disclosures 

to be provided by other means so long 

as they are provided in writing. 

c. Affected Small Entities 

The Department estimates that the 

interim final rule will apply to 

approximately 9,600 small service 

providers (generally, those with revenue 

less than $6.5 million per year). These 

service providers generally consist of 

professional service enterprises that 

provide a wide range of services to 

plans, such as investment management 

or advisory services for plans or plan 

participants, and accounting, auditing, 

actuarial, appraisal, banking, consulting, 

custodial, insurance, legal, 

recordkeeping, brokerage, 

administration, or valuation services. 

Many of these service providers have 

special education, training, and/or 

formal credentials in fields such as 

ERISA and benefits administration, 

employee compensation, taxation, 

actuarial science, law, accounting, or 

finance. 

d. Compliance Requirements 

The classes of small service providers 

subject to the interim final rule includes 

service providers who are plan 

fiduciaries (for example who manage 

plan investments), who provide services 

as registered investment advisers to 

plans, who receive indirect 

compensation in connection with 

provision of certain services (namely, 

accounting, auditing, actuarial, 

appraisal, banking, certain consulting, 

custodial, insurance, participant 

investment advisory, legal, 

recordkeeping, securities or other 

investment brokerage, third party 

administration, or valuation services) or 

who provide an investment platform 

through which investment options are 

made available to participants and 

beneficiaries in participant-directed 

individual account plans. 

These small service providers will, in 

connection with covered service 

arrangements, be required to disclose to 

plan fiduciaries certain information. 

Such information will include what 

services will be included in the 

arrangement and what direct and 

indirect compensation the service will 

receive in connection with the 

arrangement. Certain service providers 

whose arrangements make certain 

investment products available to plans 

also will be required to disclose to 

fiduciaries certain information relating 

to expenses associated with such 

products. Certain specified information 

generally must be disclosed before the 

arrangement is entered into or renewed, 

on request from a fiduciary, and when 

the information changes. 

Preparing compliant disclosures often 

will require one or more professional 

skills such as financial or legal 

expertise, and knowledge of financial 

products and services and related 

compensation and revenue sharing 

arrangements. Generally, small service 

providers will be responsible for 

disclosing only those types of 

compensation arrangements to which 

they (or their affiliate or subcontractor 

performing the services) are a party. 

e. Agency Steps To Minimize Negative 

Impacts 

As explained in (b) above in 

connection with public comments, the 

Department took a number of steps to 

minimize any negative impact of this 

interim final rule on small service 

providers. These include clarifying the 

scope of the rule’s application to 

include only those service providers 

and compensation arrangements that are 

likely to require close consideration by 

plan fiduciaries, excepting from the 

rule’s requirements contracts or 

arrangements where compensation or 

fees are less than $1,000, and omitting 

from the rule a requirement that all 

arrangements be maintained under 

formal contracts. The disclosure 

requirements included in the interim 

final rule are necessary to ensure that 

plan fiduciaries can efficiently and 

effectively carry out their duties in 

purchasing services for plans. 

The policy justification for these 

requirements includes benefits to 

fiduciaries, who will realize savings in 

the form of reduced search costs more 

than commensurate to the compliance 

costs shouldered by service providers. 

Small plan fiduciaries are likely to 

benefit most—lacking economies of 

scale and negotiating power, they would 

otherwise face the greatest potential cost 

to obtain and consider the information 

necessary to the performance of their 

duty. Small service providers, while 

shouldering the cost of providing 

disclosure, will likely often pass these 

costs to their plan clients, who in turn 

will reap a net benefit on average that 

will more than offset this shifted 

compliance cost. 

Major alternatives considered by the 

Department fell short of the approach 

adopted in the interim final rule of 

achieving policy goals at reasonable and 

justified cost. As discussed, the 

Department rejected as unnecessarily 

costly approaches that would have 

applied disclosure requirements to 

arrangements involving compensation 

or fees of less than $1,000, to indirect 

service arrangements where the service 

provider is not a plan fiduciary, or that 

would have required a formal, written 

contract or arrangement to delineate the 

disclosure obligations. The Department 

also rejected these approaches as 

inadequate to achieve a central policy 

and legal goal—namely, enabling plan 

fiduciaries, including especially small 

plan fiduciaries, to efficiently and 

effectively carry out their duties in 

connection with the purchase of plan 

services by easing their access to 

necessary information. 

An alternative approach advocated by 

some public commenters would not 

have expressly conditioned the section 

408(b)(2) prohibited transaction 

exemption on the service provider’s 

production of such information. That 

approach, however, would perpetuate 

the information asymmetry and 

therefore would not allow small plan 

fiduciaries to efficiently and effectively 

carry out their fiduciary obligations 

when purchasing plan services and 

equip them to redress service provider 

abuses. 

11. Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

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

proposed regulation solicited comments 

on the information collections included 

therein. The Department also submitted 

an information collection request (ICR) 

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


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48On Dec. 3, 2007, OMB issued a notice (ICR 

Reference No. 200710–1210–001) that it would not 

approve the Department’s request for approval of 

the information collection provisions until after 

consideration of public comment on the proposed 

regulation and promulgation of a final rule, 

describing any changes. OMB issued Control 

Number 1210–0133 for the collection once it 

approved the information collection provisions of 

the final rule. 

49Out of these pension plans, about 37,000 are 

small DB plans and 576,000 small DC plans. Small 

plans generally are those with less than 100 

participants. 

50EBSA wage estimates for 2010 are based on the 

National Occupational Employment Survey (May 

2008, Bureau of Labor Statistics) and the 

Employment Cost Index (June 2009, Bureau of 

Labor Statistics), unless otherwise noted. Total 

labor costs (wages plus benefits plus overhead) 

were estimated to average $119.03 per hour over the 

period for legal professional, $62.81 for financial 

professionals, and $26.14 per hour for clerical staff. 

3507(d), contemporaneously with the 

publication of the proposed regulation, 

for OMB’s review.48 Although no public 

comments were received that 

specifically addressed the paperwork 

burden analysis of the information 

collections, the comments that were 

submitted, and which are described 

earlier in this preamble, contained 

information relevant to the costs and 

administrative burdens attendant to the 

proposals. The Department took into 

account such public comments in 

connection with making changes to the 

proposal, analyzing the economic 

impact of the proposals, and developing 

the revised paperwork burden analysis 

summarized below. 

In connection with publication of this 

interim final rule, the Department 

submitted an ICR to OMB for its request 

of a new information collection. OMB 

approved the ICR on May 20, 2010, 

under OMB Control Number 1210–0133, 

which will expire on May 31, 2013. 

A copy of the ICR may be obtained by 

contacting the PRA addressee shown 

below or at http://www.RegInfo.gov. 

PRA ADDRESSEE: G. Christopher 

Cosby, Office of Policy and Research, 

U.S. Department of Labor, Employee 

Benefits Security Administration, 200 

Constitution Avenue, NW., Room N– 

5718, Washington, DC 20210. 

Telephone: (202) 693–8410; Fax: (202) 

219–4745. These are not toll-free 

numbers. 

The information collection 

requirements of the interim final rule 

are contained in paragraph (c)(1)(iv), 

which requires service providers to 

disclose, in writing, specific information 

to responsible plan fiduciaries related to 

the compensation to be received under 

the contract or arrangement. Generally, 

the information must be disclosed 

reasonably in advance of the date the 

contract or arrangement is entered into, 

or extended or renewed. These 

disclosure requirements are discussed 

fully in section B. of this 

SUPPLEMENTARY INFORMATION. 

Annual Hour Burden 

In order to estimate the potential costs 

of the disclosure provisions of the 

interim final rule, the Department 

estimated the number of service 

providers, plans, and arrangements 

covered by the rule. Based on 

information from the 2006 Form 5500, 

the Department estimates that 

approximately 49,000 defined benefit 

pension plans (DB plans) covering more 

than 42 million participants and 

approximately 646,000 defined 

contribution plans (DC plans) covering 

almost 80 million participants are 

covered by the rule.49

The Department also estimates that 

based on data from the 2006 Form 5500 

Annual Return/Report and Schedule C 

that there are almost 10,000 covered 

service providers. The 2006 Form 5500 

Schedule C data was also used to count 

the number of covered plan-service 

provider arrangements. On average, DB 

plans employ more covered service 

providers per plan than DC plans, and 

large plans use more covered service 

providers per plan than small plans. In 

total, the Department estimates that DB 

plans have approximately 119,000 

arrangements with covered service 

providers, while DC plans have an 

estimated 780,000 arrangements. For 

purposes of this analysis, the 

Department assumes that about 50 

percent of disclosures between service 

providers and plan fiduciaries are made 

only electronically. 

Compliance Review and 

Implementation: Most of the hour 

burden under the interim final rule will 

be imposed on service providers. 

Covered service providers will need to 

review the rule, evaluate whether their 

current disclosure practices comply 

with its requirements, and, if not, 

determine how their disclosure 

practices must be changed to be 

compliant. The Department projected 

this as an hour burden incurred in 2011, 

the year in which the rule takes effect. 

Although all covered service 

providers are assumed to incur these 

initial costs, it is likely that service 

providers with complex fee 

arrangements and conflicts of interest 

will require more time to comply. The 

Department assumes that the number of 

service providers with more complex 

arrangements can be approximated by 

the number of unique service providers 

who are reported on the Schedule C as 

having received $1 million or more in 

compensation (approximately 1,000 

service providers). 

The Department assumes that covered 

service providers with complex 

arrangements will require 24 hours of 

legal professional time and 80 hours of 

financial professional time.50 The noncomplex service providers 

(approximately 9,000 service providers 

based on the quantitative analysis 

above) would require only three hours 

of legal professional time and 13 hours 

of financial professional time. Based on 

the foregoing, the Department estimates 

that in the first year service providers 

will incur an hour burden of 

approximately 241,000 hours with an 

equivalent cost of approximately $17.9 

million. 

The Department also has estimated 

the initial compliance review and 

implementation costs for service 

providers newly entering the market 

(‘‘new service providers’’) to provide 

service to plans (either for the first time 

or by re-entry) beginning in 2012 and 

each year thereafter. Based on data from 

the 2005 and 2006 Form 5500, the 

Department assumes that about eight 

percent of all service providers will be 

new in each year subsequent to 2011, 

and that these service providers will 

incur the same compliance review and 

implementation costs as existing service 

providers. Based on the foregoing, the 

Department estimates that new service 

providers will incur an hour burden of 

approximately 20,000 hours with an 

equivalent cost of approximately $1.5 

million. 

Based on the foregoing, the 

Department estimates that the three-year 

average total hour burden associated 

with compliance review and 

implementation is almost 94,000 hours. 

The equivalent cost of these hours is 

$7.0 million. 

Initial Disclosure: As discussed above, 

covered service providers also must 

develop or update their current 

disclosure materials to comply with the 

regulatory requirements. Paragraph 

(c)(1)(iv) of the rule requires service 

providers to disclose general 

information to a responsible plan 

fiduciary when a contract is entered 

into, renewed, or extended. The 

Department assumes that service 

providers will create a general 

disclosure that can be used for all plans 

and customize this document by adding 

individualized information for each 

plan. This activity includes developing 

formulae and algorithms to present or 

estimate direct and indirect 

compensation that will be applied in a 

pro forma projection for each plan with 

which the provider will contract. The 

Department assumes that the majority of 


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51 Generally, service providers must disclose any 

change to investment-related information as soon as 

practicable, but not later than 60 days from the date 

on which the covered service provider is informed 

of such change. 

this cost would be incurred by service 

providers in 2011 and that one hour of 

a legal professional’s and 45 minutes of 

a financial professional’s time will be 

required to prepare the general 

disclosure for each plan. Based on the 

foregoing, the total hour burden to 

prepare these disclosures in year 2011 

will be approximately 1.6 million hours 

and the equivalent cost of these hours 

will be approximately $150 million. 

In 2012 and subsequent years, the 

regulation will cause additional 

disclosures to be made between covered 

plans and service providers for any new 

contracts and arrangements. The 

Department does not have information 

on the number of new arrangements in 

a year; therefore, the Department used 

the percentage of plans that are new 

plans, about 14 percent, as a proxy for 

the percentage of new arrangements in 

a year. This results in approximately 

122,000 new arrangements every year. 

The Department assumes that half of the 

responsible plan fiduciaries in these 

arrangements would receive the 

required information even without the 

regulation enacted. The Department 

estimates that preparing the disclosures 

for new arrangements will require one 

hour of a legal professional’s time at an 

equivalent cost of approximately $119 

and 45 minutes of a financial 

professional’s time at an equivalent cost 

of almost $63. Based on the foregoing, 

the total hour burden to prepare these 

disclosures in year 2012 and thereafter 

will be approximately 215,000 hours 

and the equivalent cost of these hours 

will be $20.3 million. The resulting 

three-year average burden hours is 

673,000 hours with an equivalent cost of 

$63.5 million. 

Paragraph (c)(1)(vi) requires service 

providers to provide any other 

information relating to compensation 

received in connection with the contract 

or arrangement that is required for the 

covered plan to comply with the 

reporting and disclosure requirements 

of Title I of ERISA and the regulations, 

forms, and schedules issued thereunder 

upon the request of responsible plans 

fiduciaries or plan administrators of 

covered plans. The Department is not 

aware of a basis for determining the 

number of requests that responsible 

plan fiduciaries or plan administrators 

will make; therefore, it assumes that 

approximately ten percent 

(approximately 90,000) of responsible 

plan fiduciaries will request additional 

information annually. The Department 

further assumes that service providers 

already will have this information 

available, because it is required to 

comply with other legal requirements. 

Therefore, the Department estimates 

that it will take clerical staff two 

minutes per request to prepare the 

information with an hourly rate of 

approximately $26. Based on the 

foregoing, the Department estimates that 

the yearly and three-year average total 

hour burden to disclose information 

upon request will total 4,500 hours at an 

equivalent cost of $118,000. 

Paragraph (c)(1)(v)(B) generally 

requires service providers to disclose 

any changes to the general information 

as soon as reasonably practicable, but no 

later than 60 days from the date the 

covered service provider knows of such 

change. The Department assumes that 

one-half hour of legal professional time 

and one-third hour of a financial 

professional time will be required to 

update the disclosures. The Department 

also assumes that changes in plan 

disclosures will occur at least once 

every three years, because plans 

normally conduct requests for proposal 

(RFPs) from service providers at least 

once every three to five years. If it is 

assumed that an equal number of plans 

conduct an RFP in any given year, then 

approximately 35 percent of 

arrangements will require an updated 

disclosure every year and half of these 

would already have updated the 

information without the regulation for a 

total of approximately 315,000 updates 

to the general information. Based on the 

foregoing, the Department estimates that 

the annual hour burden to update the 

disclosure of general information will be 

approximately 268,000 hours with an 

equivalent cost of approximately $25.5 

million. 

In summary, the hour burden to 

disclose the required general 

information in 2011 will be almost 1.6 

million hours with an equivalent cost of 

approximately $150 million. The hour 

burden in subsequent years will be 

approximately 483,000 hours with an 

equivalent cost of approximately $45.8 

million. The average total hour burden 

to disclose general information over the 

three year period 2011–2013 will be 

852,000 hours, and the equivalent cost 

of these hours will be $80.5 million. 

Investment Disclosure: Paragraphs 

(c)(1)(iv)(F) and (G) generally require 

fiduciaries to certain investment 

vehicles holding plan assets (described 

in paragraph (c)(1)(iii)(A)(2)) and 

providers of recordkeeping and 

brokerage services to a participantdirected individual account plan 

(without regard to whether they expect 

to receive indirect compensation), if 

they provide access to one or more 

designated investment alternatives for 

the covered plan (described in 

paragraph (c)(1)(iii)(B) (‘‘platform 

providers’’)), to disclose investmentrelated compensation information. This 

information generally must be disclosed 

to the responsible plan fiduciary 

reasonably in advance of the date the 

contract or arrangement is entered into, 

extended or renewed.51 Paragraph 

(c)(1)(iv)(G)(2) allows covered platform 

providers to satisfy this disclosure 

requirement by passing through to the 

responsible plan fiduciary copies of any 

state or federally regulated disclosure 

materials (e.g., prospectuses) of the 

issuer of the designated investment 

alternative, so long as such issuer is not 

affiliated with the platform provider, 

and the platform provider does not 

know that any of the information 

contained in such materials is 

incomplete or inaccurate. 

The hour burden associated with 

disclosing investment-related 

compensation and fee information will 

be attributable primarily to the time 

spent gathering the required 

information. However, much of this cost 

will be reduced, because, as discussed 

above, the rule allows platform 

providers to satisfy this requirement by 

passing through information to the 

responsible plan fiduciary. Based on the 

foregoing, the Department assumes that 

preparation of investment-related 

compensation and fee information will 

require one-half hour of financial 

professional time for each of the 

individual account plans. There will be 

approximately 462,000 plan fiduciaries 

receiving this information in 2011. 

Further, it is assumed that 14 percent 

(approximately 63,000) of arrangements 

will be new in each subsequent year and 

require the initial investment 

disclosure. The Department estimates 

that the hour burden to disclose the 

required investment information will be 

approximately 362,000 hours with an 

equivalent cost of $17.9 million in 2011. 

In the subsequent years, the burden 

hours will be approximately 249,000 

hours with an equivalent cost of $2.4 

million. The three-year average hour 

burden associated with disclosing 

investment related information 462,000 

disclosures are 286,000 hours at an 

equivalent cost of $7.6 million. 

In addition, service providers must 

disclose changes to investment 

information. The Department assumes 

that service providers will have to 

disclose investment information 

changes to each responsible plan 

fiduciary at least once per year due to 

the regulation, resulting in 

approximately 399,000 disclosures. This 


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notification is expected to require onehalf hour of financial professional time 

to prepare. Based on the foregoing, the 

cost to update investment information 

in subsequent years is estimated to be 

approximately 206,000 hours with an 

equivalent cost of $12.7 million. The 

Department estimates that the three-year 

average burden hours associated with 

reporting changes to the required 

investment related information will be 

138,000 hours at an equivalent cost of 

$8.5 million. 

In summary, the hour burden to 

disclose all investment information in 

2011 is estimated to be 362,000 hours 

with an equivalent cost of $17.9 million. 

The burden to disclose the required 

investment information in subsequent 

years is 455,000 hours with an 

equivalent cost of $15.1 million. The 

total three-year hour burden for service 

providers to disclose the required 

investment information is estimate to be 

424,000 hours with an equivalent cost of 

$16.1 million. 

Hour Burden Imposed on Plans: The 

main hour burden of the regulation that 

is imposed on plans is additional time 

spent reviewing the regulation and 

ensuring that the plan has received all 

of the required disclosures. The 

Department estimates the responsible 

plan fiduciaries will need one hour of 

time to review new requirements. The 

hour burden is estimated to be 695,000 

with an equivalent cost of 

approximately $43.6 million in 2011. 

Starting in 2012 and each year 

thereafter, responsible plan fiduciaries 

of new plans will have to review the 

new requirements. Based on data from 

the 2005 and 2006 Form 5500, the 

Department estimates that 14 percent of 

plans will be new each year. The 

Department assumes that responsible 

plan fiduciaries of new plans will have 

the same costs as fiduciaries of existing 

plans. Therefore, the hour burden 

associated with the review for 

fiduciaries of new plans is estimated to 

be approximately 94,000 hours at an 

equivalent cost of $5.9 million for years 

2012 and thereafter. 

Based on the foregoing, the hour 

burden imposed on plans to review the 

regulation is estimated to be 695,000 

hours in 2011 with an equivalent cost of 

$43.6 million. The three-year average 

burden on plans to review the 

regulation is estimated to be 294,000 

hours with an equivalent cost of $18.5 

million. 

Exemption for Responsible Plan 

Fiduciary: The final prohibited 

transaction class exemption contained 

in paragraph (c)(1)(ix) of the rule 

provides relief from the restrictions of 

sections 406(a)(1)(C) and (D) for plan 

fiduciaries that enter into contracts or 

arrangements with service providers 

upon a mistaken belief that they have 

received all of the disclosures required 

by the interim final rule. Upon 

discovering that a covered service 

provider failed to disclose all of the 

required information, the responsible 

plan fiduciary must take reasonable 

steps to obtain such information, 

including requesting in writing that the 

covered service provider furnish the 

information in order to rely on the 

exemption and notify the Department if 

the service provider fails to comply with 

the written request within 90 days. 

While the Department has no basis for 

estimating the percentage of 

arrangements where a responsible plan 

fiduciary will not receive all of the 

required disclosures from a covered 

service provider, the Department 

assumes that 10 percent of arrangements 

(approximately 69,000) may experience 

a failure that will require the 

responsible plan fiduciary to send a 

notice to the service provider in 2011. 

In 2012 and thereafter, the number of 

requests for missing information is 

expected to decrease to 5 percent of 

arrangements (approximately 35,000). 

The Department estimates that one-half 

hour of a financial professional’s time 

will be required to prepare the request 

for the undisclosed information. 

The Department estimates that the 

burden for plans to send notice to 

service providers of missing information 

will be approximately 35,000 hours 

with an equivalent cost of over $2.2 

million in 2011. The hour burden for 

subsequent years is estimated to be over 

18,000 hours with an equivalent cost of 

$1.1 million. The three-year average 

burden hours for requesting missing 

information is estimated to be 24,000 

hours with an equivalent cost of $1.5 

million. 

The Department further assumes that 

service providers may not respond to 10 

percent of the requests for undisclosed 

information within 90 days, which will 

result in the responsible plan fiduciary 

preparing and sending a notice to the 

Department. The Department estimates 

that one-half hour of a financial 

professional’s time will be required to 

prepare the notice. The Department 

estimates that the burden for plans to 

send notice to the Department of Labor 

will be approximately 3,500 hours with 

an equivalent cost of $219,600 in 2011. 

The hour burden for subsequent years is 

estimated to be approximately 1,800 

hours with an equivalent cost of 

$110,000. The three-year average burden 

hours to prepare the notice to be sent to 

the Department are estimated to be 

2,400 hours with an equivalent cost of 

$146,000. 

Summary 

Table 12 shows the total hour burden 

of the information collection and Table 

13 shows the total equivalent cost. The 

total three year average hour burden for 

service providers and plans is estimated 

to be 1.4 million hours with an 

equivalent cost of $104 million. The 

total three-year average hour burden for 

plans is estimated to be 320,000 hours 

with an equivalent cost of $20.1 million. 

The total three-year average hour 

burden of the regulation is estimated to 

be 1.7 million hours with an equivalent 

cost of $124 million. 

TABLE 12—HOUR BURDEN

Year 1 Year 2 Year 3 Average 

Service Providers ..................................................................... 2,197,000 963,000 963,000 1,374,000 

Plans ........................................................................................ 733,000 114,000 114,000 320,000 

Total .................................................................................. 2,930,000 1,076,000 1,076,000 1,694,000 

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

TABLE 13—EQUIVALENT COST

Year 1 Year 2 Year 3 Average 

Service Providers ..................................................................... $185,811,000 $62,529,000 $62,039,000 $103,623,000 


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41634 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

TABLE 13—EQUIVALENT COST—Continued 

Year 1 Year 2 Year 3 Average 

Plans ........................................................................................ 46,041,000 7,119,000 7,119,000 20,093,000 

Total .................................................................................. 231,852,000 69,648,577 69,158,577 123,716,000 

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

Annual Cost Burden 

Table 14 reports the estimated 

printing and postage costs associated 

with each required notice and 

disclosure. The Department assumes 

that 50 percent of the disclosures will be 

sent electronically at no cost, and that 

the cost of printing and paper for the 

remaining 50% of documents will be 5 

cents per page. The Department 

estimates that the total cost burden of 

the rule in 2010 will be $8,830,000 

(approximately $8,810.000 for service 

providers and $21,000 for plans), and 

$1,435,000 (approximately $1,424,000 

for service providers and $10,000 for 

plans in subsequent years. The threeyear average cost burden is estimated to 

be almost $3.9 million. 

TABLE 14—COST BURDEN

Year 1 Year 2 Year 3 Average 

Initial Disclosure ............................................................................................... $378,000 $51,000 $51,000 $160,000 

Update Initial Disclosure .................................................................................. 0 101,000 101,000 67,000 

Information Upon Request ............................................................................... 42,000 42,000 42,000 42,000 

General Information Total ......................................................................... 420,000 194,000 194,000 270,000 

Investment Disclosure ..................................................................................... 8,290,000 1,122,000 1,122,000 3,509,000 

Update Investment Disclosure ......................................................................... 108,000 108,000 108,000 108,000 

Investment Disclosure Total ..................................................................... 8,390,000 1,230,000 1,230,000 3,617,000 

Request for Additional Information for Exemption ........................................... 19,000 9,000 9,000 13,000 

Notice to DOL .................................................................................................. 2000 900 900 1,000 

Total .......................................................................................................... 8,830,000 1,435,000 1,435,000 3,900,000 

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

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection 

(Request for new OMB control number). 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Title: Reasonable Contract or 

Arrangement Under Section 408(b)(2)— 

Fee Disclosure. 

OMB Control Number: 1210–0133. 

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

Estimated Number of Respondents: 

79,000 (first year); 56,000 (three-year 

average). 

Estimated Number of Responses: 

1,528,000 (first year); 1,194,000 (threeyear average). 

Frequency of Response: Annually; 

occasionally. 

Estimated Annual Burden Hours: 

2,930,000 (first year); 1,694,000 (threeyear average). 

Estimated Annual Burden Cost: 

$8,830,000 (first year); $3,900,000 

(three-year average). 

Congressional Review Act 

The interim final rule is subject to the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.) and will be 

transmitted to Congress and the 

Comptroller General for review. The 

interim final rule is a ‘‘major rule’’ as 

that term is defined in 5 U.S.C. 804, 

because it is likely to result in an annual 

effect on the economy of $100 million 

or more. 

Unfunded Mandates Reform Act 

For purposes of the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), as well as Executive Order 

12875, the interim final rule does not 

include any Federal mandate that may 

result in expenditures by State, local, or 

tribal governments in the aggregate of 

more than $100 million, adjusted for 

inflation, or increase expenditures by 

the private sector of more than $100 

million, adjusted for inflation. 

Federalism Statement 

Executive Order 13132 (August 4, 

1999) outlines fundamental principles 

of federalism, and requires the 

adherence to specific criteria by Federal 

agencies in the process of their 

formulation and implementation of 

policies that have substantial direct 

effects on the States, the relationship 

between the national government and 

States, or on the distribution of power 

and responsibilities among the various 

levels of government. The interim final 

rule does not have federalism 

implications because it has no 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Section 514 of 

ERISA provides, with certain exceptions 

specifically enumerated, that the 

provisions of Titles I and IV of ERISA 

supersede any and all laws of the States 

as they relate to any employee benefit 

plan covered under ERISA. The 

requirements implemented in the 

interim final rule do not alter the 

fundamental reporting and disclosure 

requirements of the statute with respect 

to employee benefit plans, and, as such, 

have no implications for the States or 

the relationship or distribution of power 

between the national government and 

the States. 


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List of Subjects in 29 CFR Part 2550 

Employee benefit plans, Exemptions, 

Fiduciaries, Investments, Pensions, 

Prohibited transactions, Reporting and 

recordkeeping requirements, and 

Securities. 

■ For the reasons set forth in the 

preamble, the Department amends 

chapter XXV, subchapter F, part 2550 of 

title 29 of the Code of Federal 

Regulations as follows: 

SUBCHAPTER F—FIDUCIARY 

RESPONSIBILITY UNDER THE EMPLOYEE 

RETIREMENT INCOME SECURITY ACT OF 

1974 

PART 2550–RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

■ 1. The authority citation for part 2550 

continues to read as follows: 

Authority: 29 U.S.C. 1135; and Secretary 

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

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

under sec. 102, Reorganization Plan No. 4 of 

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

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

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

332. Sec. 2550.401c–1 also issued under 29 

U.S.C. 1101. Sec. 2550.404c–1 also issued 

under 29 U.S.C. 1104. Sec. 2550.407c–3 also 

issued under 29 U.S.C. 1107. Sec. 2550.404a– 

2 also issued under 26 U.S.C. 401 note (sec. 

657, Pub. L. 107–16, 115 Stat. 38). Sec. 

2550.408b–1 also issued under 29 U.S.C. 

1108(b) (1) and sec. 102, Reorganization Plan 

No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, 

effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 

1978), and 3 CFR, 1978 Comp. 332. Sec. 

2550.408b–2 also issued under sec. 102, 

Reorganization Plan No. 4 of 1978, 3 CFR, 

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

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

Comp. 332. Sec. 2550.412–1 also issued 

under 29 U.S.C. 1112. 

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

read as follows: 

§ 2550.408b–2 General statutory 

exemption for services or office space. 

* * * * * 

(c) Reasonable contract or 

arrangement— 

(1) Pension plan disclosure. 

(i) General. No contract or 

arrangement for services between a 

covered plan and a covered service 

provider, nor any extension or renewal, 

is reasonable within the meaning of 

section 408(b)(2) of the Act and 

paragraph (a)(2) of this section unless 

the requirements of this paragraph (c)(1) 

are satisfied. The requirements of this 

paragraph (c)(1) are independent of 

fiduciary obligations under section 404 

of the Act. 

(ii) Covered plan. For purposes of this 

paragraph (c)(1), a ‘‘covered plan’’ is an 

‘‘employee pension benefit plan’’ or a 

‘‘pension plan’’ within the meaning of 

section 3(2)(A) (and not described in 

section 4(b)) of the Act, except that the 

term ‘‘covered plan’’ shall not include a 

‘‘simplified employee pension’’ 

described in section 408(k) of the 

Internal Revenue Code of 1986 (the 

Code), a ‘‘simple retirement account’’ 

described in section 408(p) of the Code, 

an individual retirement account 

described in section 408(a) of the Code, 

or an individual retirement annuity 

described in section 408(b) of the Code. 

(iii) Covered service provider. For 

purposes of this paragraph (c)(1), a 

‘‘covered service provider’’ is a service 

provider that enters into a contract or 

arrangement with the covered plan and 

reasonably expects $1,000 or more in 

compensation, direct or indirect, to be 

received in connection with providing 

one or more of the services described in 

paragraphs (c)(1)(iii)(A), (B), or (C) of 

this section pursuant to the contract or 

arrangement, regardless of whether such 

services will be performed, or such 

compensation received, by the covered 

service provider, an affiliate, or a 

subcontractor. 

(A) Services as a fiduciary or 

registered investment adviser. 

(1) Services provided directly to the 

covered plan as a fiduciary (unless 

otherwise specified, a ‘‘fiduciary’’ in this 

paragraph (c)(1) is a fiduciary within the 

meaning of section 3(21) of the Act); 

(2) Services provided as a fiduciary to 

an investment contract, product, or 

entity that holds plan assets (as 

determined pursuant to sections 3(42) 

and 401 of the Act and 29 CFR 2510.3– 

101) and in which the covered plan has 

a direct equity investment (a direct 

equity investment does not include 

investments made by the investment 

contract, product, or entity in which the 

covered plan invests); or 

(3) Services provided directly to the 

covered plan as an investment adviser 

registered under either the Investment 

Advisers Act of 1940 or any State law. 

(B) Certain recordkeeping or 

brokerage services. Recordkeeping 

services or brokerage services provided 

to a covered plan that is an individual 

account plan, as defined in section 3(34) 

of the Act, and that permits participants 

or beneficiaries to direct the investment 

of their accounts, if one or more 

designated investment alternatives will 

be made available (e.g., through a 

platform or similar mechanism) in 

connection with such recordkeeping 

services or brokerage services. 

(C) Other services for indirect 

compensation. Accounting, auditing, 

actuarial, appraisal, banking, consulting 

(i.e., consulting related to the 

development or implementation of 

investment policies or objectives, or the 

selection or monitoring of service 

providers or plan investments), 

custodial, insurance, investment 

advisory (for plan or participants), legal, 

recordkeeping, securities or other 

investment brokerage, third party 

administration, or valuation services 

provided to the covered plan, for which 

the covered service provider, an 

affiliate, or a subcontractor reasonably 

expects to receive indirect 

compensation (as defined in paragraph 

(c)(1)(viii)(B)(2) of this section) or 

compensation described in paragraph 

(c)(1)(iv)(C)(3) of this section). 

(D) Limitations. Notwithstanding 

paragraphs (c)(1)(iii)(A), (B), or (C) of 

this section, no person or entity is a 

‘‘covered service provider’’ solely by 

providing services— 

(1) As an affiliate or a subcontractor 

that is performing one or more of the 

services described in paragraphs 

(c)(1)(iii)(A), (B), or (C) of this section 

under the contract or arrangement with 

the covered plan; or 

(2) To an investment contract, 

product, or entity in which the covered 

plan invests, regardless of whether or 

not the investment contract, product, or 

entity holds assets of the covered plan, 

other than services as a fiduciary 

described in paragraph (c)(1)(iii)(A)(2) 

of this section. 

(iv) Initial disclosure requirements. 

The covered service provider must 

disclose the following information to a 

responsible plan fiduciary, in writing— 

(A) Services. A description of the 

services to be provided to the covered 

plan pursuant to the contract or 

arrangement (but not including nonfiduciary services described in 

paragraph (c)(1)(iii)(D)(2) of this 

section). 

(B) Status. If applicable, a statement 

that the covered service provider, an 

affiliate, or a subcontractor will provide, 

or reasonably expects to provide, 

services pursuant to the contract or 

arrangement directly to the covered plan 

(or to an investment contract, product or 

entity that holds plan assets and in 

which the covered plan has a direct 

equity investment) as a fiduciary; and, 

if applicable, a statement that the 

covered service provider, an affiliate, or 

a subcontractor will provide, or 

reasonably expects to provide, services 

pursuant to the contract or arrangement 

directly to the covered plan as an 

investment adviser registered under 

either the Investment Advisers Act of 

1940 or any State law. 

(C) Compensation. 

(1) Direct compensation. A 

description of all direct compensation 

(as defined in paragraph (c)(1)(viii)(B)(1) 


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41636 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

of this section), either in the aggregate 

or by service, that the covered service 

provider, an affiliate, or a subcontractor 

reasonably expects to receive in 

connection with the services described 

pursuant to paragraph (c)(1)(iv)(A) of 

this section. 

(2) Indirect compensation. A 

description of all indirect compensation 

(as defined in paragraph (c)(1)(viii)(B)(2) 

of this section) that the covered service 

provider, an affiliate, or a subcontractor 

reasonably expects to receive in 

connection with the services described 

pursuant to paragraph (c)(1)(iv)(A) of 

this section; including identification of 

the services for which the indirect 

compensation will be received and 

identification of the payer of the 

indirect compensation. 

(3) Compensation paid among related 

parties. A description of any 

compensation that will be paid among 

the covered service provider, an 

affiliate, or a subcontractor, in 

connection with the services described 

pursuant to paragraph (c)(1)(iv)(A) of 

this section if it is set on a transaction 

basis (e.g., commissions, soft dollars, 

finder’s fees or other similar incentive 

compensation based on business placed 

or retained) or is charged directly 

against the covered plan’s investment 

and reflected in the net value of the 

investment (e.g., Rule 12b-1 fees); 

including identification of the services 

for which such compensation will be 

paid and identification of the payers 

and recipients of such compensation 

(including the status of a payer or 

recipient as an affiliate or a 

subcontractor). Compensation must be 

disclosed pursuant to this paragraph 

(c)(1)(iv)(C)(3) regardless of whether 

such compensation also is disclosed 

pursuant to paragraph (c)(1)(iv)(C)(1) or 

(2), (F) or (G) of this section. This 

paragraph (c)(1)(iv)(C)(3) shall not apply 

to compensation received by an 

employee from his or her employer on 

account of work performed by the 

employee. 

(4) Compensation for termination of 

contract or arrangement. A description 

of any compensation that the covered 

service provider, an affiliate, or a 

subcontractor reasonably expects to 

receive in connection with termination 

of the contract or arrangement, and how 

any prepaid amounts will be calculated 

and refunded upon such termination. 

(D) Recordkeeping services. Without 

regard to the disclosure of compensation 

pursuant to paragraph (c)(1)(iv)(C), (F), 

or (G) of this section, if recordkeeping 

services will be provided to the covered 

plan— 

(1) A description of all direct and 

indirect compensation that the covered 

service provider, an affiliate, or a 

subcontractor reasonably expects to 

receive in connection with such 

recordkeeping services; and 

(2) If the covered service provider 

reasonably expects recordkeeping 

services to be provided, in whole or in 

part, without explicit compensation for 

such recordkeeping services, or when 

compensation for recordkeeping 

services is offset or rebated based on 

other compensation received by the 

covered service provider, an affiliate, or 

a subcontractor, a reasonable and good 

faith estimate of the cost to the covered 

plan of such recordkeeping services, 

including an explanation of the 

methodology and assumptions used to 

prepare the estimate and a detailed 

explanation of the recordkeeping 

services that will be provided to the 

covered plan. The estimate shall take 

into account, as applicable, the rates 

that the covered service provider, an 

affiliate, or a subcontractor would 

charge to, or be paid by, third parties, 

or the prevailing market rates charged, 

for similar recordkeeping services for a 

similar plan with a similar number of 

covered participants and beneficiaries. 

(E) Manner of receipt. A description 

of the manner in which the 

compensation described in paragraph 

(c)(1)(iv)(C) and (D) of this section will 

be received, such as whether the 

covered plan will be billed or the 

compensation will be deducted directly 

from the covered plan’s account(s) or 

investments. 

(F) Investment disclosure—fiduciary 

services. In the case of a covered service 

provider described in paragraph 

(c)(1)(iii)(A)(2) of this section, the 

following additional information with 

respect to each investment contract, 

product, or entity that holds plan assets 

and in which the covered plan has a 

direct equity investment, and for which 

fiduciary services will be provided 

pursuant to the contract or arrangement 

with the covered plan, unless such 

information is disclosed to the 

responsible plan fiduciary by a covered 

service provider providing 

recordkeeping services or brokerage 

services as described in paragraph 

(c)(1)(iii)(B) of this section— 

(1) A description of any compensation 

that will be charged directly against the 

amount invested in connection with the 

acquisition, sale, transfer of, or 

withdrawal from the investment 

contract, product, or entity (e.g., sales 

loads, sales charges, deferred sales 

charges, redemption fees, surrender 

charges, exchange fees, account fees, 

and purchase fees); 

(2) A description of the annual 

operating expenses (e.g., expense ratio) 

if the return is not fixed; and 

(3) A description of any ongoing 

expenses in addition to annual 

operating expenses (e.g., wrap fees, 

mortality and expense fees). 

(G) Investment disclosure— 

recordkeeping and brokerage services. 

(1) In the case of a covered service 

provider described in paragraph 

(c)(1)(iii)(B) of this section, the 

additional information described in 

paragraph (c)(1)(iv)(F)(1) through (3) of 

this section with respect to each 

designated investment alternative for 

which recordkeeping services or 

brokerage services as described in 

paragraph (c)(1)(iii)(B) of this section 

will be provided pursuant to the 

contract or arrangement with the 

covered plan. 

(2) A covered service provider may 

comply with this paragraph (c)(1)(iv)(G) 

by providing current disclosure 

materials of the issuer of the designated 

investment alternative that include the 

information described in such 

paragraph, provided that such issuer is 

not an affiliate, the disclosure materials 

are regulated by a State or federal 

agency, and the covered service 

provider does not know that the 

materials are incomplete or inaccurate. 

(v) Timing of initial disclosure 

requirements; changes. 

(A) A covered service provider must 

disclose the information required by 

paragraph (c)(1)(iv) of this section to the 

responsible plan fiduciary reasonably in 

advance of the date the contract or 

arrangement is entered into, and 

extended or renewed, except that— 

(1) When an investment contract, 

product, or entity is determined not to 

hold plan assets upon the covered 

plan’s direct equity investment, but 

subsequently is determined to hold plan 

assets while the covered plan’s 

investment continues, the information 

required by paragraph (c)(1)(iv) of this 

section must be disclosed as soon as 

practicable, but not later than 30 days 

from the date on which the covered 

service provider knows that such 

investment contract, product, or entity 

holds plan assets; and 

(2) The information described in 

paragraph (c)(1)(iv)(G) of this section 

relating to any investment alternative 

that is not designated at the time the 

contract or arrangement is entered into 

must be disclosed as soon as 

practicable, but not later than the date 

the investment alternative is designated 

by the responsible plan fiduciary. 

(B) A covered service provider must 

disclose a change to the information 

required by paragraph (c)(1)(iv) of this 


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Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 41637 

section as soon as practicable, but not 

later than 60 days from the date on 

which the covered service provider is 

informed of such change, unless such 

disclosure is precluded due to 

extraordinary circumstances beyond the 

covered service provider’s control, in 

which case the information must be 

disclosed as soon as practicable. 

(vi) Reporting and disclosure 

information; timing. 

(A) Upon request of the responsible 

plan fiduciary or covered plan 

administrator, the covered service 

provider must furnish any other 

information relating to the 

compensation received in connection 

with the contract or arrangement that is 

required for the covered plan to comply 

with the reporting and disclosure 

requirements of Title I of the Act and 

the regulations, forms and schedules 

issued thereunder. 

(B) The covered service provider must 

disclose the information required by 

paragraph (c)(1)(vi)(A) of this section 

not later than 30 days following receipt 

of a written request from the responsible 

plan fiduciary or covered plan 

administrator, unless such disclosure is 

precluded due to extraordinary 

circumstances beyond the covered 

service provider’s control, in which case 

the information must be disclosed as 

soon as practicable. 

(vii) Disclosure errors. No contract or 

arrangement will fail to be reasonable 

under this paragraph (c)(1) solely 

because the covered service provider, 

acting in good faith and with reasonable 

diligence, makes an error or omission in 

disclosing the information required 

pursuant to paragraph (c)(1)(iv) or (vi) of 

this section, provided that the covered 

service provider discloses the correct 

information to the responsible plan 

fiduciary as soon as practicable, but not 

later than 30 days from the date on 

which the covered service provider 

knows of such error or omission. 

(viii) Definitions. For purposes of 

paragraph (c)(1) of this section: 

(A) Affiliate. A person’s or entity’s 

‘‘affiliate’’ directly or indirectly (through 

one or more intermediaries) controls, is 

controlled by, or is under common 

control with such person or entity; or is 

an officer, director, or employee of, or 

partner in, such person or entity. Unless 

otherwise specified, an ‘‘affiliate’’ in this 

paragraph (c)(1) refers to an affiliate of 

the covered service provider. 

(B) Compensation. Compensation is 

anything of monetary value (for 

example, money, gifts, awards, and 

trips), but does not include nonmonetary compensation valued at $250 

or less, in the aggregate, during the term 

of the contract or arrangement. 

(1) ‘‘Direct’’ compensation is 

compensation received directly from the 

covered plan. 

(2) ‘‘Indirect’’ compensation is 

compensation received from any source 

other than the covered plan, the plan 

sponsor, the covered service provider, 

an affiliate, or a subcontractor (if the 

subcontractor receives such 

compensation in connection with 

services performed under the 

subcontractor’s contract or arrangement 

described in paragraph (c)(1)(viii)(F) of 

this section). 

(3) A description or an estimate of 

compensation may be expressed as a 

monetary amount, formula, percentage 

of the covered plan’s assets, or a per 

capita charge for each participant or 

beneficiary or, if the compensation 

cannot reasonably be expressed in such 

terms, by any other reasonable method. 

Any description or estimate must 

contain sufficient information to permit 

evaluation of the reasonableness of the 

compensation. 

(C) Designated investment alternative. 

A ‘‘designated investment alternative’’ is 

any investment alternative designated 

by a fiduciary into which participants 

and beneficiaries may direct the 

investment of assets held in, or 

contributed to, their individual 

accounts. The term ‘‘designated 

investment alternative’’ shall not 

include brokerage windows, selfdirected brokerage accounts, or similar 

plan arrangements that enable 

participants and beneficiaries to select 

investments beyond those specifically 

designated. 

(D) Recordkeeping services. 

‘‘Recordkeeping services’’ include 

services related to plan administration 

and monitoring of plan and participant 

and beneficiary transactions (e.g., 

enrollment, payroll deductions and 

contributions, offering designated 

investment alternatives and other 

covered plan investments, loans, 

withdrawals and distributions); and the 

maintenance of covered plan and 

participant and beneficiary accounts, 

records, and statements. 

(E) Responsible plan fiduciary. A 

‘‘responsible plan fiduciary’’ is a 

fiduciary with authority to cause the 

covered plan to enter into, or extend or 

renew, the contract or arrangement. 

(F) Subcontractor. A ‘‘subcontractor’’ 

is any person or entity (or an affiliate of 

such person or entity) that is not an 

affiliate of the covered service provider 

and that, pursuant to a contract or 

arrangement with the covered service 

provider or an affiliate, reasonably 

expects to receive $1,000 or more in 

compensation for performing one or 

more services described pursuant to 

paragraph (c)(1)(iii)(A) through (C) of 

this section provided for by the contract 

or arrangement with the covered plan. 

(ix) Exemption for responsible plan 

fiduciary. Pursuant to section 408(a) of 

the Act, the restrictions of section 

406(a)(1)(C) and (D) of the Act shall not 

apply to a responsible plan fiduciary, 

notwithstanding any failure by a 

covered service provider to disclose 

information required by paragraph 

(c)(1)(iv) or (vi) of this section, if the 

following conditions are met: 

(A) The responsible plan fiduciary did 

not know that the covered service 

provider failed or would fail to make 

required disclosures and reasonably 

believed that the covered service 

provider disclosed the information 

required by paragraph (c)(1)(iv) or (vi) of 

this section; 

(B) The responsible plan fiduciary, 

upon discovering that the covered 

service provider failed to disclose the 

required information, requests in 

writing that the covered service 

provider furnish such information; 

(C) If the covered service provider 

fails to comply with such written 

request within 90 days of the request, 

then the responsible plan fiduciary 

notifies the Department of Labor of the 

covered service provider’s failure, in 

accordance with paragraph (c)(1)(ix)(E) 

of this section; 

(D) The notice shall contain the 

following information— 

(1) The name of the covered plan; 

(2) The plan number used for the 

covered plan’s Annual Report; 

(3) The plan sponsor’s name, address, 

and EIN; 

(4) The name, address, and telephone 

number of the responsible plan 

fiduciary; 

(5) The name, address, phone number, 

and, if known, EIN of the covered 

service provider; 

(6) A description of the services 

provided to the covered plan; 

(7) A description of the information 

that the covered service provider failed 

to disclose; 

(8) The date on which such 

information was requested in writing 

from the covered service provider; and 

(9) A statement as to whether the 

covered service provider continues to 

provide services to the plan; 

(E) The notice shall be filed with the 

Department not later than 30 days 

following the earlier of— 

(1) The covered service provider’s 

refusal to furnish the information 

requested by the written request 

described in paragraph (c)(1)(ix)(B) of 

this section; or 

(2) 90 days after the written request 

referred to in paragraph (c)(1)(ix)(B) of 

this section is made; 


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41638 Federal Register / Vol. 75, No. 136 / Friday, July 16, 2010 / Rules and Regulations 

(F) The notice required by paragraph 

(c)(1)(ix)(C) of this section shall be sent 

to the following address: U.S. 

Department of Labor, Employee Benefits 

Security Administration, Office of 

Enforcement, 200 Constitution Ave., 

NW., Suite 600, Washington, DC 20210; 

or may be sent electronically to OEDelinquentSPnotice@dol.gov; and 

(G) The responsible plan fiduciary, 

following discovery of a failure to 

disclose required information, shall 

determine whether to terminate or 

continue the contract or arrangement. In 

making such a determination, the 

responsible plan fiduciary shall evaluate 

the nature of the failure, the availability, 

qualifications, and cost of replacement 

service providers, and the covered 

service provider’s response to 

notification of the failure. 

(x) Preemption of State law. Nothing 

in this section shall be construed to 

supersede any provision of State law 

that governs disclosures by parties that 

provide the services described in this 

section, except to the extent that such 

law prevents the application of a 

requirement of this section. 

(xi) Internal Revenue Code. Section 

4975(d)(2) of the Code contains 

provisions parallel to section 408(b)(2) 

of the Act. Effective December 31, 1978, 

section 102 of the Reorganization Plan 

No. 4 of 1978, 5 U.S.C. App. 214 (2000 

ed.), transferred the authority of the 

Secretary of the Treasury to promulgate 

regulations of the type published herein 

to the Secretary of Labor. All references 

herein to section 408(b)(2) of the Act 

and the regulations thereunder should 

be read to include reference to the 

parallel provisions of section 4975(d)(2) 

of the Code and regulations thereunder 

at 26 CFR 54.4975–6. 

(xii) Effective date. Paragraph (c) of 

this section shall be effective on July 16, 

2011. Paragraph (c)(1) of this section 

shall apply to contracts or arrangements 

between covered plans and covered 

service providers as of the effective date, 

without regard to whether the contract 

or arrangement was entered into prior to 

such date; for contracts or arrangement 

entered into prior to the effective date, 

the information required to be disclosed 

pursuant to paragraph (c)(1)(iv) of this 

section must be furnished no later than 

the effective date. 

(2) Welfare plan disclosure. 

[Reserved] 

(3) Termination of contract or 

arrangement. No contract or 

arrangement is reasonable within the 

meaning of section 408(b)(2) of the Act 

and paragraph (a)(2) of this section if it 

does not permit termination by the plan 

without penalty to the plan on 

reasonably short notice under the 

circumstances to prevent the plan from 

becoming locked into an arrangement 

that has become disadvantageous. A 

long-term lease which may be 

terminated prior to its expiration 

(without penalty to the plan) on 

reasonably short notice under the 

circumstances is not generally an 

unreasonable arrangement merely 

because of its long term. A provision in 

a contract or other arrangement which 

reasonably compensates the service 

provider or lessor for loss upon early 

termination of the contract, 

arrangement, or lease is not a penalty. 

For example, a minimal fee in a service 

contract which is charged to allow 

recoupment of reasonable start-up costs 

is not a penalty. Similarly, a provision 

in a lease for a termination fee that 

covers reasonably foreseeable expenses 

related to the vacancy and reletting of 

the office space upon early termination 

of the lease is not a penalty. Such a 

provision does not reasonably 

compensate for loss if it provides for 

payment in excess of actual loss or if it 

fails to require mitigation of damages. 

* * * * * 

Signed at Washington, DC, this 6th day of 

July, 2010. 

Phyllis C. Borzi, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2010–16768 Filed 7–15–10; 8:45 am] 

BILLING CODE 4510–29–P 


jlentini on DSKJ8SOYB1PROD with RULES3