3822 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

1See also 29 CFR 2510.3–21(c) and 26 CFR 

54.4975–9(c). 

2See Interpretative Bulletin relating to participant 

investment education, 29 CFR 2509.96–1 

(Interpretive Bulletin 96–1); Advisory Opinion (AO) 

2005–10A (May 11, 2005); AO 2001–09A (December 

14, 2001); and AO 97–15A (May 22, 1997). 3Public Law 109–280, 120 Stat. 780 (Aug. 17, 

2006). 4Under Reorganization Plan No. 4 of 1978 (43 FR 

47713, Oct. 17, 1978), 5 U.S.C. App. 1, 92 Stat. 

3790, the authority of the Secretary of the Treasury 

to issue rulings under section 4975 of the Code has 

been transferred, with certain exceptions not here 

relevant, to the Secretary of Labor. Therefore, the 

references in this notice to specific sections of 

ERISA should be taken as referring also to the 

corresponding sections of the Code. 

5 71 FR 70429. The Department, on the same date, 

also published an RFI in the Federal Register 

soliciting information to assist the Department in 

determining, as required by PPA section 601(b)(3), 

the feasibility of using computer models in 

connection with individual retirement accounts. 72 

FR 70427. 

6 In this regard, the Department cited the 

following: August 3, 2006 Floor Statement of Senate 

Health, Education, Labor and Pensions Committee 

Chairman Enzi (who chaired the Conference 

Committee drafting legislation forming the basis of 

H.R. 4) regarding investment advice to participants 

in which he states, ‘‘It was the goal and objective 

of the Members of the Conference to keep this 

advisory opinion [AO 2001–09A, SunAmerica 

Advisory Opinion] intact as well as other preexisting advisory opinions granted by the 

Department. This legislation does not alter the 

current or future status of the plans and their many 

participants operating under these advisory 

opinions. Rather, the legislation builds upon these 

advisory opinions and provides alternative means 

for providing investment advice which is protective 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB13 

Investment Advice—Participants and 

Beneficiaries 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Final rule. 

SUMMARY: This document contains final 

rules under the Employee Retirement 

Income Security Act, and parallel 

provisions in the Internal Revenue Code 

of 1986, relating to the provision of 

investment advice by a fiduciary adviser 

to participants and beneficiaries in 

participant-directed individual account 

plans, such as 401(k) plans, and 

beneficiaries of individual retirement 

accounts (and certain similar plans). 

These rules affect sponsors, fiduciaries, 

participants and beneficiaries of 

participant-directed individual account 

plans, as well as providers of 

investment and investment advicerelated services to such plans. 

DATES: These final rules are effective on 

March 23, 2009. 

FOR FURTHER INFORMATION CONTACT: Fred 

Wong, Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration, (202) 693– 

8500. This is not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

Section 3(21)(A)(ii) of the Employee 

Retirement Income Security Act of 1974 

(ERISA) and section 4975(e)(3)(B) of the 

Internal Revenue Code of 1986 (Code) 

include within the definition of 

‘‘fiduciary’’ a person that renders 

investment advice for a fee or other 

compensation, direct or indirect, with 

respect to any moneys or other property 

of a plan, or has any authority or 

responsibility to do so.1 The prohibited 

transaction provisions of ERISA and the 

Code prohibit an investment advice 

fiduciary from using the authority, 

control or responsibility that makes it a 

fiduciary to cause itself, or a party in 

which it has an interest that may affect 

its best judgment as a fiduciary, to 

receive additional fees. As a result, in 

the absence of a statutory or 

administrative exemption, fiduciaries 

are prohibited from rendering 

investment advice to plan participants 

regarding investments that result in the 

payment of additional advisory and 

other fees to the fiduciaries or their 

affiliates. Section 4975 of the Code 

applies similarly to the rendering of 

investment advice by a fiduciary to an 

individual retirement account (IRA) 

beneficiary. 

With the growth of participantdirected individual account plans, there 

has been an increasing recognition of 

the importance of investment advice to 

participants and beneficiaries in such 

plans. Over the past several years, the 

Department of Labor (Department) has 

issued various forms of guidance 

concerning when a person would be a 

fiduciary by reason of rendering 

investment advice and when the 

provision of investment advice might 

result in prohibited transactions.2 Most 

recently, Congress and the 

Administration, responding to the need 

to afford participants and beneficiaries 

greater access to professional 

investment advice, amended the 

prohibited transaction provisions of 

ERISA and the Code, as part of the 

Pension Protection Act of 2006 (PPA),3

to permit a broader array of investment 

advice providers to offer their services 

to participants and beneficiaries 

responsible for investment of assets in 

their individual accounts and, 

accordingly, for the adequacy of their 

retirement savings. 

Specifically, section 601 of the PPA 

added a statutory exemption under 

sections 408(b)(14) and 408(g) of ERISA. 

Parallel provisions were added to the 

Code at sections 4975(d)(17) and 

4975(f)(8).4 Section 408(b)(14) sets forth 

the investment advice-related 

transactions that will be exempt from 

the prohibitions of section 406 if the 

requirements of section 408(g) are met. 

The transactions described in section 

408(b)(14) are: The provision of 

investment advice to the participant or 

beneficiary with respect to a security or 

other property available as an 

investment under the plan; the 

acquisition, holding or sale of a security 

or other property available as an 

investment under the plan pursuant to 

the investment advice; and the direct or 

indirect receipt of compensation by a 

fiduciary adviser or affiliate in 

connection with the provision of 

investment advice or the acquisition, 

holding or sale of a security or other 

property available as an investment 

under the plan pursuant to the 

investment advice. 

On December 4, 2006, the Department 

published a Request for Information 

(RFI) in the Federal Register soliciting 

information to assist the Department in 

the development of regulations under 

sections 408(b)(14) and 408(g).5

Specifically, the Department invited 

interested persons to address the 

qualifications for the ‘‘eligible 

investment expert’’ that is required to 

certify that computer models used in 

connection with the statutory 

exemption meet the requirements of the 

statutory exemption. The Department 

also invited interested persons to 

provide information to assist the 

Department in developing procedures to 

be followed in certifying that a 

computer model meets the requirements 

of the statutory exemption. The 

Department also invited suggestions for 

a model disclosure form for purposes of 

the statutory exemption. In response to 

the RFI, the Department received 24 

letters addressing a variety of issues 

presented by the statutory exemption. 

These comments were taken into 

account in developing the proposed 

regulations described below. 

On February 2, 2007, the Department 

issued Field Assistance Bulletin 2007– 

01 addressing certain issues presented 

by the new statutory exemption. This 

Bulletin affirmed that the enactment of 

sections 408(b)(14) and 408(g) did not 

invalidate or otherwise affect prior 

guidance of the Department relating to 

investment advice and that such 

guidance continues to represent the 

views of the Department.6 The Bulletin 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3823 

of the interests of plan participants and IRA 

owners.’’ 152 Cong. Rec. S8,752 (daily ed. Aug. 3, 

2006) (statement of Sen. Enzi). 

7See Field Assistance Bulletin 2007–1 (Feb. 2, 

2007). 8See section 408(g)(10) and Field Assistance 

Bulletin 2007–1 for a discussion of a fiduciary’s 

duty to prudently select and monitor investment 

advisers. 

also confirmed the applicability of the 

principles set forth in section 408(g)(10) 

[Exemption for plan sponsor and certain 

other fiduciaries] to plan sponsors and 

fiduciaries who offered investment 

advice arrangements with respect to 

which relief under the statutory 

exemption is not required. Finally, the 

Bulletin addressed the scope of the feeleveling requirement for purposes of an 

eligible investment advice arrangement 

described in section 408(g)(2)(A)(i). 

On August 22, 2008, the Department 

published in the Federal Register 

proposed regulations that would, upon 

adoption, implement the provisions of 

the statutory exemption for the 

provision of investment advice to 

participants and beneficiaries under 

sections 408(b)(14) and 408(g) of the Act 

and the parallel provisions in the Code 

(73 FR 49896). On the same date, the 

Department also published a proposed 

class exemption that, upon adoption, 

would establish alternative conditions 

for granting prohibited transaction relief 

in connection with the provision of 

investment advice, and thereby promote 

the broad availability of investment 

advice to both participants and 

beneficiaries in individual account 

plans and beneficiaries with individual 

retirement accounts (73 FR 49924). In 

response to these proposals, the 

Department received forty-three 

comment letters. 

On October 21, 2008, the Department 

held a public hearing at which 

interested members of the public were 

afforded an additional opportunity to 

present their views on the proposals. 

Eight organizations testified at the 

hearing. 

Set forth below is an overview of the 

final rules and an overview of the major 

comments received on the proposed 

rules and class exemption. 

B. Overview of Final § 2550.408g–1 and 

Public Comments 

1. General 

As noted above, the Department 

published both a proposed regulation 

and a proposed class exemption 

pertaining to the furnishing of 

investment advice to participants and 

beneficiaries. In an effort to facilitate 

both use of and reference to the relief 

afforded by the statutory exemption and 

the class exemption, the Department has 

included both within a single final rule, 

discussed below. In this regard, a 

number of paragraph, subparagraph and 

other reference changes are reflected in 

the final rule to accommodate the 

merger of the two proposals, as well as 

other changes. The provisions 

applicable to the statutory exemption 

are set forth in paragraph (b) of the final 

rule and the provisions applicable to the 

class exemption are set forth at 

paragraph (d) of the final rule. In 

addition to the structural changes, the 

final rule, while retaining the general 

requirements and substance of the 

proposals, reflects a number of 

clarifying changes made in response to 

suggestions and concerns from 

commenters on the proposals. These 

suggestions and concerns are discussed 

below. 

Paragraph (a)(1) of the final rule 

describes the general scope of the final 

rule, referencing both the statutory 

exemption under sections 408(b)(14) 

and 408(g)(1) of ERISA and sections 

4975(d)(17) and 4975(f)(8) of the Code 

for certain transactions in connection 

with the provision of investment advice, 

as set forth in paragraph (b) of the final 

rule, and the class exemption, issued 

pursuant to the Department’s authority 

under section 408(a) of ERISA and 

section 4975(c)(2) of the Code, for 

certain transactions not otherwise 

covered by the statutory exemption. In 

response to the concerns of some 

commenters that the conditions of the 

final rule might be construed as being 

applicable to all investment advice 

arrangements, without regard to 

whether the provision of advice 

pursuant to such arrangements involves 

prohibited transactions, paragraph (a)(1) 

makes clear that the requirements and 

conditions of the final rule apply solely 

for the relief described in the final rule 

and, accordingly, that no inferences 

should be drawn with respect to the 

requirements applicable to the provision 

of investment advice not addressed by 

the rule. 

Commenters also requested that the 

final rule make clear that nothing in the 

rule establishes an obligation on the part 

of plans or plan sponsors to provide 

investment advice. Other commenters 

requested that the Department reaffirm 

its view that neither the statutory 

exemption under section 408(g)(1) nor 

the regulations issued thereunder 

invalidate or otherwise affect prior 

guidance concerning the circumstances 

under which the provision of 

investment advice would not constitute 

a prohibited transaction. The 

Department addressed these concerns in 

paragraphs (a)(2) and (a)(3), 

respectively. Paragraph (a)(2) provides 

that nothing contained in ERISA section 

408(g)(1), Code section 4975(f)(8), the 

regulation or the class exemption 

imposes an obligation on a plan 

fiduciary or any other party to offer, 

provide or otherwise make available any 

investment advice to a participant or 

beneficiary. Paragraph (a)(3) provides 

that nothing contained in those same 

provisions of ERISA and the Code, the 

regulation or the class exemption 

invalidates or otherwise affects prior 

regulations, exemptions, interpretive or 

other guidance issued by the 

Department pertaining to the provision 

of investment advice and the 

circumstances under which such advice 

may or may not constitute a prohibited 

transaction under section 406 of ERISA 

or section 4975 of the Code.7

One commenter requested 

confirmation that the provision of 

investment advice pursuant to the final 

rule will not affect the relief accorded 

plan fiduciaries under section 404(c) of 

the Act. It is the view of the Department 

that there is nothing in the Act, Code, 

or this final rule that, in connection 

with the offering or provision of 

investment advice, would itself affect 

the availability of relief to plan sponsors 

or other fiduciaries of the plan (with the 

exception of the fiduciary advisers) 

otherwise available under section 

404(c). The Department notes that, as 

explained in Field Assistance Bulletin 

2007–1, a plan sponsor or other 

fiduciary that prudently selects and 

monitors an investment advice provider 

will not be liable for the advice 

furnished by such provider to the plan’s 

participants and beneficiaries, whether 

or not that advice is provided pursuant 

to the statutory exemption under section 

408(b)(14).8 It is the view of the 

Department that section 404(c) and the 

Department’s regulations thereunder do 

not limit the liability of fiduciary 

advisers that, pursuant to the 

exemptions contained in the final rule, 

specifically assume and acknowledge 

fiduciary responsibility for the 

provision of investment advice, within 

the meaning of section 3(21)(A)(ii) and 

the regulations issued thereunder, and 

related transactions; advice that clearly 

is intended to serve as the primary basis 

for investment decisions by plan 

participants and beneficiaries. Section 

404(c) provides relief for acts which are 

the direct and necessary result of a 

participant’s or beneficiary’s exercise of 

control. The investment advice (and 

related transactions) covered by the 

exemption and furnished to participants 

and beneficiaries would not, in the 

Department’s view, be the direct and 

necessary result of a participant’s or 

mstockstill on PROD1PC66 with RULES3

3824 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

9See ‘‘Fiduciary Requirements for Disclosure in 

Participant-Directed Individual Account Plans,’’ 73 

FR 43013 (July 23, 2008) (proposed rule); 

‘‘Reasonable Contract or Arrangement under 

Section 408(b)(2)—Fee Disclosure; Proposed Rule,’’ 

73 FR 70987 (Dec. 13, 2007); and Notice of adoption 

of revisions to annual return/report forms, 72 FR 

64731, 64788–794, 64824–28 (Nov. 16, 2007) (form 

and instructions for the Schedule C (From 5500), 

‘‘Service Provider Information’’). 

beneficiary’s exercise of control and, 

accordingly, the fiduciary adviser would 

not be relieved of liability for such 

advice. See examples at paragraphs 

(f)(8) and (f)(9) of § 2550.404c–1. 

2. Statutory Exemption 

a. General 

Paragraph (b) of the final rule 

specifically addresses the statutory 

exemption and applicable conditions set 

forth in section 408(g)(1) of the Act. Like 

the proposal, these provisions generally 

track the requirements under section 

408(g)(1) that must be satisfied in order 

for the investment advice-related 

transactions described in section 

408(b)(14) to be exempt from the 

prohibitions of section 406. 

Paragraph (b)(1) provides that for 

purposes of the relief afforded for 

transactions described in section 

408(b)(14) (and section 4975(d)(17) of 

the Code) the investment advice must be 

provided by a fiduciary adviser under 

an ‘‘eligible investment advice 

arrangement.’’ The transactions 

described in section 408(b)(14) include 

the provision of investment advice to a 

participant or beneficiary with respect 

to a security or other property available 

as an investment under the plan; the 

acquisition, holding or sale of a security 

or other property available as an 

investment under the plan pursuant to 

the advice; and the direct or indirect 

receipt of fees or other compensation by 

the fiduciary adviser or an affiliate in 

connection with the provision of the 

advice or in connection with the 

acquisition, holding or sale of the 

security or other property. 

With regard to the scope of relief, one 

commenter requested that the 

Department clarify that transactions 

covered by the regulation and the class 

exemption include extensions of credit 

and similar transactions necessary to the 

execution and settlement of trades of 

securities. It is the view of the 

Department that transactions in 

connection with the provision of 

investment advice described in section 

3(21)(A)(ii) of ERISA include, for 

purposes of the statutory exemption and 

class exemption, otherwise permissible 

transactions necessary for the efficient 

execution and settlement of trades of 

securities, such as extensions of credit 

in connection with settlements. 

One commenter requested that the 

relief afforded by the regulation and 

class exemption be extended to 

investment advice provided to plan 

sponsors generally. The Department 

notes that the transactions described in 

408(b)(14), with respect to which relief 

is given if the requirements of section 

408(g)(1) are satisfied, are specifically 

limited to certain transactions that 

involve the provision of investment 

advice to a participant or beneficiary of 

a plan. The scope of both the regulation 

and the related class exemption, 

therefore, were limited to these 

transactions. While advice provided to 

plan fiduciaries such as plan sponsors 

may well be similar in many respects to 

advice provided to participants and 

beneficiaries, the Department does not 

believe it would be appropriate, as part 

of this final rule, without further notice 

and comment, to extend relief to 

transactions involving investment 

advice provided to plan sponsors. 

Accordingly, the Department has not 

adopted this suggestion. 

One commenter requested that the 

Department confirm that advice to a 

participant or beneficiary concerning 

the selection of an investment manager 

to manage some or all of the 

participant’s or beneficiary’s assets 

constitutes the provision of investment 

advice within the meaning of section 

3(21)(A)(ii) of ERISA for purposes of the 

statutory exemption and the class 

exemption. It has long been the view of 

the Department that the act of making 

individualized recommendations of 

particular investment managers to plan 

fiduciaries may constitute the provision 

of investment advice within the 

meaning of section 3(21)(A). The 

fiduciary nature of that advice does not, 

in the Department’s view, change 

merely because the advice is being given 

to a plan participant or beneficiary. 

Accordingly, it is the view of the 

Department that the recommending of 

investment managers to participants and 

beneficiaries may constitute the 

provision of investment advice for 

purposes of both the statutory and class 

exemption contained in this final rule. 

Paragraph (b)(2) provides that, for 

purposes of section 408(g)(1) of the Act 

and 4975(f)(8) of the Code, an ‘‘eligible 

investment advice arrangement’’ is an 

arrangement that meets the 

requirements of paragraph (b)(3), 

applicable to arrangements that use feeleveling, or paragraph (b)(4), applicable 

to arrangements that use computer 

models, or both. 

b. Arrangements using fee-leveling 

Paragraph (b)(3) sets forth the 

requirements applicable to investment 

advice arrangements that use feeleveling under the statutory exemption. 

Paragraph (b)(3)(i) delineates the 

specific requirements that must be met. 

In this regard, paragraph (b)(3)(i)(A) of 

the final rule, like the proposal, requires 

that any investment advice must be 

based on generally accepted investment 

theories that take into account historic 

returns of different asset classes over 

defined periods of time, noting that 

additional considerations are not 

precluded from being taking into 

account. 

One commenter recommended that 

the investment advice also take into 

account investment management and 

other fees attendant to the 

recommended investment(s). The 

Department agrees that the fees and 

expenses attendant to an investment are 

an important consideration and should 

be factored into individualized 

recommendations. Given the 

Department’s various regulatory 

initiatives directed toward enhancing 

the consideration of investment-related 

fees and expenses by plan fiduciaries 

and plan participants and beneficiaries,9

the Department believes that it is 

reasonable to expect fiduciary advisers, 

as well as their computer models, to 

take such fees and expenses into 

account in providing investment advice 

to the plan participants and 

beneficiaries. The Department, 

therefore, has added a new provision, at 

paragraph (b)(3)(i)(B), requiring 

arrangements that utilize fee-leveling to 

take into account investment 

management and other fees and 

expenses attendant to the recommended 

investments. Similar changes appear in 

paragraph (b)(4)(i)(B) for arrangements 

that use computer models, and 

paragraph (d)(6)(i)(B), applicable to 

arrangements for providing advice 

under the class exemption. 

Paragraph (b)(3)(i)(C) of the final rule 

requires that arrangements utilizing feeleveling must take into account certain 

personal information furnished by a 

participant or beneficiary. In the 

proposal, this information related to age, 

life expectancy, retirement age, risk 

tolerance, other assets or sources of 

income and investment preferences. The 

Department received a number of 

comments on this provision. Many of 

the commenters requested clarification 

that the delineated factors were not 

mandatory, some of the commenters 

noting that the fiduciary adviser may 

not have the information, participants 

may not be willing to give the 

information or the information they 

furnish may be incomplete. Other 

commenters recommended that the 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3825 

10See AO 97–15A and AO 2005–10A. 

information focus on ‘‘time horizons’’ 

rather than life expectancy or retirement 

age, noting the use of ‘‘time horizons’’ 

by the Financial Industry Regulatory 

Authority (FINRA) in its guidance on 

determining the suitability of a 

recommendation. 

For purposes of the final rule, the 

Department retained the factors 

delineated in the statute, section 

408(g)(3)(B)(ii) of ERISA, as examples of 

the information investment advice 

should be capable of taking into 

account. The Department also has 

included in the final rule, as an 

additional factor, information pertaining 

to the participant’s or beneficiary’s 

current investments in designated 

investment options. The Department 

believes that these factors are so 

fundamental to meaningful investment 

advice, the Department is applying the 

personal information requirement to all 

advice provided under the statutory 

exemption and class exemption. 

However, the Department notes that the 

information is only required to be taken 

into account to the extent that a 

participant or beneficiary actually 

provides such information. There is no 

obligation, therefore, for a fiduciary 

adviser to factor in personal information 

that it does not have or that the 

participant or beneficiary fails or refuses 

to provide. Rather, the fiduciary adviser 

is merely required to request the 

personal information described in the 

final rule, and utilize such information 

only to the extent furnished. The 

Department has modified the text of the 

final rule to provide this clarification. 

The Department also has modified the 

language of the final rule to reference 

‘‘time horizons,’’ and by parenthetical 

citation to life expectancy and 

retirement age as examples of such time 

horizons. Similar changes are reflected 

in paragraph (b)(4)(i)(C), for 

arrangements utilizing computer 

models, and paragraph (d)(6)(i)(C), 

applicable to arrangements for 

providing advice under the class 

exemption. 

Paragraphs (b)(3)(i)(D) and (E) of the 

final rule set forth the limitations on 

fees and compensation at the employee, 

agent and registered representative level 

and the fiduciary adviser level, 

respectively, applicable to arrangements 

utilizing fee-leveling under the statutory 

exemption. These limitations are 

unchanged from the proposal. Paragraph 

(b)(3)(i)(D) provides that any fees or 

other compensation (including salary, 

bonuses, awards, promotions, 

commissions or other things of value) 

received, directly or indirectly, by any 

employee, agent or registered 

representative that provides investment 

advice on behalf of a fiduciary adviser 

cannot vary depending on the basis of 

any investment option selected by a 

participant or beneficiary. Paragraph 

(b)(3)(i)(E) provides that any fees 

(including any commission or other 

compensation) received by the fiduciary 

adviser for investment advice or with 

respect to the sale, holding, or 

acquisition of any security or other 

property for purposes of investment of 

plan assets may not vary depending on 

the basis of any investment option 

selected by a participant or beneficiary. 

While a number of commenters 

supported the Department’s application 

of the fee-leveling requirement, some 

commenters objected to the 

Department’s implementation of the 

statutory provision, arguing that 

Congress, in an effort to eliminate the 

potential for conflicts of interest, 

intended the fee-leveling requirement to 

encompass not only the fiduciary 

adviser but also affiliates of the 

fiduciary adviser. The Department 

disagrees with this interpretation of the 

section 408(g)(2)(A)(i). Shortly after 

enactment of the PPA, the Department 

issued Field Assistance Bulletin 2007– 

1 (February 2, 2007) setting forth its 

legal analysis of the fee-leveling 

requirements in section 408(g)(2)(A)(i) 

of the Act. 

In that Bulletin, the Department noted 

that it is clear from section 

408(g)(2)(A)(i) that only the fees or other 

compensation of the fiduciary adviser 

may not vary. The Department 

explained that, in contrast to other 

provisions of section 408(b)(14) and 

section 408(g), section 408(g)(2)(A)(i) 

references only the fiduciary adviser, 

not the fiduciary adviser or an affiliate. 

Inasmuch as a person, pursuant to 

section 408(g)(11)(A), can be a fiduciary 

adviser only if that person is a fiduciary 

of the plan by virtue of providing 

investment advice, an affiliate of a 

registered investment adviser, a bank or 

similar financial institution, an 

insurance company, or a registered 

broker dealer will be subject to the 

varying fee limitation only if that 

affiliate is providing investment advice 

to plan participants and beneficiaries. 

The Department further explained that, 

consistent with earlier guidance in this 

area, if the fees and compensation 

received by an affiliate of a fiduciary 

that provides investment advice do not 

vary or are offset against those received 

by the fiduciary for the provision of 

investment advice, no prohibited 

transaction would result solely by 

reason of providing investment advice 

and thus there would be no need for a 

prohibited transaction exemption, such 

as provided under sections 408(b)(14) 

and 408(g).10 The Department 

concluded that, for purposes of section 

408(g)(2)(A)(i), Congress could not have 

intended for the requirement that fees 

not vary depending on the basis of any 

investment options selected to extend to 

affiliates of the fiduciary adviser, unless, 

of course, the affiliate is also a provider 

of investment advice to a plan. This 

position continues to reflect the 

Department’s legal analysis of section 

408(g)(2)(A)(i) and, therefore, is 

reflected in the fee-leveling provisions 

of the final regulation. 

With regard to those commenters 

concerned about potential conflicts of 

interest influencing the investment 

advice recommendations, the 

Department believes that, while there 

may always be a few individuals who, 

without regard to limitations imposed 

by law, abuse their position of trust as 

fiduciaries, the safeguards established 

by the regulation, as well as the class 

exemption, will, in the Department’s 

view, remove many of the incentives 

and create strong deterrents for abusive 

behavior. In this regard, we note that, in 

addition to the specific fee-leveling 

limitations, fiduciary advisers utilizing 

investment advice arrangements that 

employ fee-leveling must comply with 

the requirements of paragraphs (b)(5) 

[authorization by plan fiduciary], (b)(6) 

[annual audits], (b)(7) [advance and 

annual disclosure], (b)(8) [other 

conditions], and (e) [maintenance of 

records] of the final rule, each of which 

is discussed in more detail below. 

A number of commenters had 

questions or requested clarification of 

the fee-leveling requirements applicable 

to employees, agents, or registered 

representatives that provide advice on 

behalf of a fiduciary adviser, now set 

forth in paragraph (b)(3)(i)(D) of the 

final rule. One commenter asked for 

examples of things of value that an 

employee, agent or representative might 

receive, directly or indirectly, that 

would violate the rule. Paragraph 

(b)(3)(i)(D), like the proposal, delineates 

a number of types of compensation that, 

if varied based on investment options 

selected by a participant or beneficiary, 

would violate the rule, namely salary, 

bonuses, awards, commissions, or other 

things of value. Things of value would 

include trips, gifts and other things that 

while having a value, are not given in 

the form of cash. 

A number of commenters requested 

confirmation that bonus programs based 

on the overall profitability of the 

fiduciary adviser or its affiliate, or a 

designated business unit within the 

adviser’s business would not violate the 

mstockstill on PROD1PC66 with RULES3

3826 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

11 In general, these requirements track the 

requirements set forth in section 408(g)(3)(B) of the 

Act. 12See section 408(g)(3)(B)(v) of the Act. 

fee-leveling requirement. The 

application of the fee-leveling is 

intended to be very broad in order to 

ensure that objectivity of the investment 

advice recommendations to plan 

participants and beneficiaries is not 

compromised by the advice provider’s 

own financial interest in the outcome. 

Accordingly, almost every form of 

remuneration that takes into account the 

investments selected by participants 

and beneficiaries would likely violate 

the fee-leveling requirement of the final 

rule. On the other hand, it is 

conceivable that a compensation or 

bonus arrangement that is based on the 

overall profitability of an organization 

may be permissible to the extent that it 

can be established that the individual 

account plan and IRA investment advice 

and investment option components 

were excluded from, or constituted a 

negligible portion of, the calculation of 

the organization’s profitability. The 

Department believes, however, that 

whether any particular salary, bonus, 

awards, promotions or commissions 

program meets or fails this fee-leveling 

requirement ultimately depends on the 

details of the program. In this regard, 

the Department notes that the details of 

such programs will be the subject of 

both a review and a report by an 

independent auditor as a condition for 

relief under the statutory and class 

exemption. 

c. Arrangements Using Computer 

Models 

As with the general requirements for 

arrangements using fee-leveling, and 

like the proposal in most respects, the 

final rule requires that arrangements 

utilizing computer models satisfy 

certain basic requirements.11 These 

requirements include the application of 

generally accepted investment theories 

(paragraph (b)(4)(i)(A)), the 

consideration of investment 

management and other fees and 

expenses attendant to recommended 

investments (paragraph (b)(4)(i)(B)), and 

the utilization of certain participantprovided information (paragraph 

(b)(4)(i)(C)). The changes to these 

requirements were discussed in 

connection with the fee-leveling 

provisions of the regulation. 

Other conditions imposed on 

computer models require that such 

models utilize objective criteria to 

provide asset allocation portfolios 

(paragraph (b)(4)(i)(D)) and avoid 

recommendations that inappropriately 

favor investments options offered by the 

fiduciary adviser or that may generate 

greater income for the fiduciary adviser 

or those with a material affiliation or 

material contractual relationship with 

the fiduciary adviser (paragraph 

(b)(4)(i)(E)). 

As with the proposal, the language of 

the final rule makes clear that a 

computer model would not fail to meet 

the requirements of paragraph 

(b)(4)(i)(E) merely because the only 

investment options offered under the 

plan are options offered by the fiduciary 

adviser or a person with a material 

affiliation or material contractual 

relationship with the fiduciary adviser. 

The language also makes clear that a 

computer model cannot be designed and 

operated to inappropriately favor those 

investment options that generate the 

most income for the fiduciary adviser or 

a person with a material affiliation or 

material contractual relationship with 

the fiduciary adviser. The final rule 

defines a ‘‘material affiliation’’ and 

‘‘material contractual relationship’’ at 

paragraphs (c)(6) and (c)(7), 

respectively. 

One commenter requested 

clarification that the provisions of 

paragraph (b)(4)(i)(E) would not be 

violated where an IRA beneficiary 

requests investment advice with the 

understanding that the computer model 

will be providing only hold or sell 

recommendations with respect to 

investment options not offered through 

the IRA. While the Department believes 

that computer models should, with few 

exceptions, be required to model all 

investment options available under a 

plan or through an IRA, the Department 

does not believe that it is reasonable to 

expect that all computer models be 

capable of modeling the universe of 

investment options, rather than just 

those investment alternatives designated 

as available investments through the 

plan or IRA. Accordingly, it is the view 

of the Department that a computer 

model would not fail to meet the 

requirements of paragraph (b)(4)(i)(E) 

merely because it limits buy 

recommendations only to those 

investment options that can be bought 

through the plan or IRA, even if the 

model is capable of modeling hold and 

sell recommendations with respect to 

investments not available through the 

plan or IRA, provided, of course, that 

the plan participant or beneficiary or 

IRA beneficiary is fully informed of the 

model’s limitations in advance of the 

recommendations, thereby enabling the 

recipient of advice to assess the 

usefulness of the recommendations. 

This view would also extend to the 

requirements of the class exemption at 

paragraph (d)(3). 

Paragraph (b)(4)(i)(F)(1) of the final 

rule, like the proposal, requires that a 

computer model take into account all 

‘‘designated investment options’’ 

available under the plan without giving 

inappropriate weight to any investment 

option.12 The term ‘‘designated 

investment option’’ is defined in 

paragraph (c)(1) of the final rule to mean 

any investment option designated by the 

plan into which participants and 

beneficiaries may direct the investment 

of assets held in, or contributed to, their 

individual accounts. The term 

‘‘designated investment option’’ does 

not include ‘‘brokerage windows,’’ ‘‘selfdirected brokerage accounts,’’ or similar 

plan arrangements that enable 

participants and beneficiaries to select 

investments beyond those designated by 

the plan. 

Paragraph (b)(4)(i)(F)(2)(i) also, like 

the proposal, provides that a computer 

model shall not be treated as failing to 

take all designated investment options 

into account merely because it does not 

take into account an investment option 

that constitutes an investment primarily 

in qualifying employer securities. While 

most of the commenters on the proposal 

supported the exclusion of qualifying 

employer securities, some commenters 

requested clarification as to whether the 

computer model nonetheless had to 

factor in the holding of such 

investments by a participant or 

beneficiary, without regard to buy, sell 

or hold recommendations. 

It is the view of the Department that, 

absent a specific request from the 

participant or beneficiary to exclude 

such assets from the modeled 

investment advice, a computer model 

must take into account the fact that the 

participant or beneficiary has such an 

investment when giving advice with 

respect to the participant’s or 

beneficiaries remaining assets or 

investments. If, on the other hand, a 

participant or beneficiary elects not to 

have such investments factored into the 

modeled advice or does not provide 

such information and the computer 

model does not have such information, 

the model would not be required to take 

such assets into account in providing a 

recommendation. This approach, in the 

Department’s view, is consistent with 

the requirement set forth in paragraph 

(b)(4)(i)(C) of the final rule that 

computer models take into account 

other assets and investment preferences 

of the participant or beneficiary. One 

commenter requested that the exclusion 

for qualifying employer securities be 

expanded to apply to other single asset 

funds, such as funds invested in stock 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3827 

of prior employers or a spin-off 

company. The commenter did not 

indicate other types of single asset 

funds, or the extent to which they are 

offered as designated investment 

options under plans. The Department 

does not believe it has sufficient 

information at this time to extend 

similar treatment to any such 

investments. 

Other commenters requested that 

computer models not be required to 

include, among other things, options 

from predecessor plans (referred to as 

‘‘legacy options’’), managed accounts, 

target date funds, and in-plan annuity 

options, which they described as 

annuity purchase programs that serve as 

both accumulation and distribution 

options. With respect to legacy options, 

it is the view of the Department that to 

the extent participants continue to have 

an ability to further invest in such 

options, the options must be included 

within the computer model. If, on the 

other hand, participants are merely 

permitted to hold and sell investments 

in such options, it is the view of the 

Department that, as discussed above 

with respect to qualifying employer 

securities, unless a participant 

specifically elects to not have such 

investments taken into account, the 

model should take into account that the 

participant holds such assets. Similar to 

the above, a computer model would not, 

in the view of the Department, fail to 

meet the requirements of paragraph 

(b)(4)(i)(F)(1) merely because it limits 

buy recommendations only to those 

investment options that can be bought 

through the plan, even though the 

model is capable of modeling hold and 

sell recommendations with respect to 

other investments. 

A few commenters noted that certain 

types of investment options, such as 

managed accounts, life cycle-type funds, 

and funds that are designed to manage 

assets taking into account a particular 

risk level for the participant, rely on an 

investment manager to maintain the 

asset allocation appropriate to its 

particular fund, product or service and, 

therefore, that it serves no purpose to 

have such investments included in 

another unrelated overlaying asset 

allocation analysis. The Department 

agrees that where an investment fund, 

product or service is itself designed to 

maintain a particular asset allocation 

taking into account the time horizons 

(retirement age, life expectancy) or risk 

level of a participant, such fund should 

not be required to be included in the 

computer modeled investment advice. 

Similarly, the Department believes that 

where, in connection with an in-plan 

annuity option, with respect to which a 

participant may allocate a portion of his 

or her assets toward the purchase of an 

annuitized retirement benefit and those 

allocated assets are no longer available 

for investment at the time of the advice, 

the participant or beneficiary has, in 

effect, decided to treat those assets as no 

longer available for investment and, 

accordingly, such assets should not, in 

the view of the Department, be required 

to be modeled for purposes of buy, hold 

or sell recommendations. On the other 

hand, when such options are available 

to participants and beneficiaries, the 

Department believes that participants 

and beneficiaries receiving modeled 

recommendations should at the same 

time be furnished a general description 

of these options and how they operate. 

This disclosure will assure that 

participants and beneficiaries have 

information concerning all of their 

investment choices, not merely those 

that can be modeled by a computer. 

This treatment is set forth in paragraphs 

(b)(4)(i)(F)(2)(ii) and (iii). 

Thus, under paragraph 

(b)(4)(i)(F)(2)(ii) of the final rule, a 

computer model will not fail to meet the 

requirements of the regulation merely 

because it does not make 

recommendations relating to the 

acquisition, holding or sale of an 

investment fund, product or service that 

allocates the invested assets of a 

participant or beneficiary to achieve 

varying degrees of long-term 

appreciation and capital preservation 

through equity and fixed income 

exposures, based on a defined time 

horizon (such as retirement age or life 

expectancy) or level of risk of the 

participant or beneficiary (e.g., life 

cycle-type funds). 

Similarly, paragraph (b)(4)(i)(F)(2)(iii) 

provides that a computer model will not 

fail merely because it does not make 

recommendations with respect to an 

annuity option with respect to which a 

participant or beneficiary may allocate 

assets toward the purchase of a stream 

of retirement income payments 

guaranteed by an insurance company. 

As noted above, however, the 

foregoing exceptions from the modeling 

requirement apply only if participants 

and beneficiaries are provided, 

contemporaneous with the provision of 

investment advice generated by the 

computer model, information 

explaining the funds, products or 

services, or in the case of an annuity, 

the option. 

Paragraph (b)(4)(ii) of the final rule, 

like the proposal, requires that, prior to 

utilization of the computer model, the 

fiduciary adviser must obtain a written 

certification that the computer model 

meets the requirements of paragraph 

(b)(4)(i), discussed above. If the model is 

modified in a manner that may affect its 

ability to meet the requirements of 

paragraph (b)(4)(i), the fiduciary adviser, 

prior to utilization of the modified 

model, must obtain a new certification. 

The required certification must be made 

by an ‘‘eligible investment expert,’’ 

within the meaning of paragraph 

(b)(4)(iii) and must be made in 

accordance with the requirements of 

paragraph (b)(4)(iv). 

Paragraph (b)(4)(iii) of the final rule, 

like the proposal, defines an ‘‘eligible 

investment expert’’ to mean a person 

that, through employees or otherwise, 

has the appropriate technical training or 

experience and proficiency to analyze, 

determine and certify, in a manner 

consistent with paragraph (b)(4)(iv), 

whether a computer model meets the 

requirements of paragraph (b)(4)(i); 

except that the term eligible investment 

expert does not include any person that 

has any material affiliation or material 

contractual relationship with the 

fiduciary adviser, with a person with a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser, or with any employee, 

agent, or registered representative of the 

foregoing. 

One commenter requested that the 

Department provide examples of 

adequate credentials for an ‘‘eligible 

investment expert.’’ The Department 

continues to believe that it is very 

difficult to define a specific set of 

academic or other credentials that 

would serve to define the appropriate 

expertise and experience for an eligible 

investment expert. Unfortunately, for 

the same reason it is difficult to define 

specific credentials for an eligible 

investment expert, it is difficult to 

provide examples of the one or a set of 

credentials that in every case would 

qualify an individual to make the 

required certifications. The Department 

also is concerned that, even if an 

example were possible, such an 

example may encourage unnecessary 

and inappropriate reliance on the 

example as a person considered by the 

Department to possess the necessary 

qualifications. For this reason, the 

Department has not provided any 

examples of credentials for eligible 

investment experts. 

One commenter inquired whether the 

eligible investment expert is required to 

be bonded for purposes of section 412 

of ERISA. In the view of the 

Department, an eligible investment 

expert, in performing the computer 

model certification described in the 

final rule, would neither be acting as a 

fiduciary under ERISA, nor be 

‘‘handling’’ plan assets such that the 

mstockstill on PROD1PC66 with RULES3

3828 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

13See 29 CFR 2550.408b–2(e)(3). 

14See discussion in Field Assistance Bulletin 

2007–01. 

15The audit provisions are set forth in section 

408(g)(6) of ERISA. 

bonding requirements would be 

applicable to the eligible investment 

expert. 

One commenter requested 

confirmation that a fiduciary adviser’s 

selection and payment of an eligible 

investment expert is not itself a per se 

prohibited transaction. It is the view of 

the Department that, given the structure 

of the statutory exemption under section 

408(g)(1) and the expectation that a 

fiduciary adviser will obtain a 

certification from an eligible investment 

expert, the selection and payment of the 

fiduciary adviser is not a per se conflict, 

provided that the eligible investment 

expert has neither a material affiliation 

or material contractual relationship with 

the fiduciary adviser. Moreover, the 

Department has made clear that the 

selection of an eligible investment 

expert is a fiduciary act governed by 

section 404(a)(1) of the Act. See 

paragraph (b)(4)(v). Similarly, the 

selection and payment of an auditor to 

conduct the audit required under the 

statutory exemption or class exemption 

would not constitute a per se conflict of 

interest. As noted in the preamble to the 

proposal, while the rule gives latitude to 

a fiduciary adviser in selecting an 

eligible investment expert to certify a 

computer model, as the party seeking 

prohibited transaction relief under the 

exemption, the fiduciary adviser has the 

burden of demonstrating that all 

applicable requirements of the 

exemption are satisfied with respect to 

its arrangement. 

Paragraph (b)(4)(iv) of the final rule 

provides that a certification by an 

eligible investment expert shall be in 

writing and contain the following: An 

identification of the methodology or 

methodologies applied in determining 

whether the computer model meets the 

requirements of paragraph (b)(4)(i) of 

the final rule; an explanation of how the 

applied methodology or methodologies 

demonstrated that the computer model 

met the requirements of paragraph 

(b)(4)(i); and a description of any 

limitations that were imposed by any 

person on the eligible investment 

expert’s selection or application of 

methodologies for determining whether 

the computer model meets the 

requirements of paragraph (b)(4)(i). In 

addition the certification is required to 

contain a representation that the 

methodology or methodologies were 

applied by a person or persons with the 

educational background, technical 

training or experience necessary to 

analyze and determine whether the 

computer model meets the requirements 

of paragraph (b)(4)(i); and a statement 

certifying that the eligible investment 

expert has determined that the 

computer model meets the requirements 

of paragraph (b)(4)(i). Finally the 

certification must be signed by the 

eligible investment expert. The 

Department received no comments on 

this provision and, accordingly, has 

adopted the provision as proposed. 

d. Authorization by a Plan Fiduciary 

Paragraph (b)(5) of the final rule, 

consistent with section 408(g)(4) of 

ERISA, the proposed rule and proposed 

class exemption, provides that the 

arrangement pursuant to which 

investment advice is provided to 

participants and beneficiaries must be 

expressly authorized by a plan fiduciary 

(or, in the case of an IRA, the IRA 

beneficiary) other than: The person 

offering the arrangement; any person 

providing designated investment 

options under the plan; or any affiliate 

of either. The final rule, like the 

proposals, further provides that, for 

purposes of such authorization, an IRA 

beneficiary will not be treated as an 

affiliate of a person solely by reason of 

being an employee of such person, 

thereby enabling employees of a 

fiduciary adviser to take advantage of 

investment advice arrangements offered 

by their employer under the exemption. 

A number of commenters requested 

that the authorizing language of both the 

statutory exemption and class 

exemption be modified to permit a 

fiduciary adviser to provide investment 

advice for the adviser’s own plan. The 

Department does not believe it is 

necessary or appropriate to limit a 

fiduciary adviser’s employee’s choice of 

investment advice providers to only 

competitors of the fiduciary adviser. 

Accordingly, the Department has 

modified the authorization provisions of 

the final regulation and class exemption 

to permit a fiduciary adviser to provide 

advice to its own employees (or 

employees of an affiliate) pursuant to an 

arrangement under the final rule, 

provided that the fiduciary adviser or 

affiliate offers the same arrangement to 

participants and beneficiaries of 

unaffiliated plans in the ordinary course 

of its business. (See paragraphs (b)(5)(ii) 

and (d)(5)(ii) of the final rule). The 

Department notes, however, that neither 

the statutory exemption nor the class 

exemption provides relief for the 

selection of the fiduciary adviser or the 

arrangement pursuant to which advice 

will be provided. Accordingly, plan 

fiduciaries must nonetheless be prudent 

in their selection and may not, in 

contravention of section 406(b), use 

their position to benefit themselves. In 

this regard, the Department has 

indicated that if a fiduciary provides 

services to a plan without the receipt of 

compensation or other consideration 

(other than reimbursement of direct 

expenses properly and actually incurred 

in the performance of such services) the 

provision of such services does not, in 

and of itself, constitute an act described 

in section 406(b) of the Act.13

One commenter requested a 

clarification that, for purposes of the 

authorization provision, a plan sponsorfiduciary would not be treated as the 

person providing a designated 

investment option under the plan with 

respect to an option that is designed to 

invest in qualifying employer securities. 

The Department did not intend, nor 

does it believe Congress intended, to 

exclude employer-plan fiduciaries from 

authorizing investment advice 

arrangements solely because the plan for 

which the arrangement is being 

authorized offers participants the 

opportunity to invest in qualifying 

employer securities. The Department 

has added a provision to both the 

regulation and class exemption for 

purposes of such clarification (see 

paragraphs (b)(5)(iii) and (d)(5)(iii), 

respectively, of the final rule). 

One commenter asked for a 

clarification as to whether an 

authorizing plan fiduciary can rely on 

the representations of a fiduciary 

adviser with respect to whether a 

computer model meets the requirements 

of the regulation. Plan fiduciaries have 

an obligation to prudently select, and 

periodically review that selection, 

fiduciary advisers.14 In connection with 

an otherwise prudent and reasonable 

selection and review process, the 

Department believes that an authorizing 

plan fiduciary, in the absence of any 

information to the contrary, may rely on 

the representations of a fiduciary 

adviser regarding the fiduciary adviser’s 

compliance with the requirements of 

this rule. 

e. Annual Audit 

Paragraph (b)(6) of the final rule sets 

forth the annual audit requirements for 

the statutory exemption.15 Paragraph 

(b)(6)(i), like the proposal, provides that 

the fiduciary adviser shall, at least 

annually, engage an independent 

auditor, who has appropriate technical 

training or experience and proficiency, 

and so represents in writing to the 

fiduciary adviser, to conduct an audit of 

the investment advice arrangements for 

compliance with the requirements of the 

regulation and, within 60 days 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3829 

16 15 U.S.C. 7004(d)(1) (2000). 

following completion of the audit, to 

issue a written report to the fiduciary 

adviser and, except with respect to an 

arrangement with an IRA, to each 

fiduciary who authorized the use of the 

investment advice arrangement, setting 

forth the specific findings of the auditor 

regarding compliance of the 

arrangement with the requirements of 

the regulation. 

Given the significant number of 

reports that an auditor would be 

required to send if the written report 

was required to be furnished to all IRA 

beneficiaries, the Department framed an 

alternative requirement for investment 

advice arrangements with IRAs. This 

alternative is set forth in paragraph 

(b)(6)(ii) of the final rule. The final rule, 

like the proposal, provides that, with 

respect to an arrangement with an IRA, 

the fiduciary adviser shall, within 30 

days following receipt of the report from 

the auditor, furnish a copy of the report 

to the IRA beneficiary or make such 

report available on its Web site, 

provided that such beneficiaries are 

provided information, along with other 

required disclosures (see paragraph 

(b)(7) of the final rule), concerning the 

purpose of the report, and how and 

where to locate the report applicable to 

their account. With respect to making 

the report available on a Web site, the 

Department believes that this alternative 

to furnishing reports to IRA 

beneficiaries satisfies the requirement of 

section 104(d)(1) of the Electronic 

Signatures in Global and National 

Commerce Act (E–SIGN) 16 that any 

exemption from the consumer consent 

requirements of section 101(c) of 

E–SIGN must be necessary to eliminate 

a substantial burden on electronic 

commerce and will not increase the 

material risk of harm to consumers. The 

Department solicited comments on this 

finding in the proposal, and received no 

comments in response. 

Obtaining consent from each IRA 

holder or participant before publication 

on the Web site would be a tremendous 

burden on the plan or IRA provider. 

This element, along with the broad 

availability of internet access and the 

lack of any direct consequences to any 

particular participant for a failure to 

review the audit for the participants and 

beneficiaries, supports these findings. 

Paragraph (b)(6)(ii) of the final rule 

also provides, like the proposal, that, 

when the report of the auditor identifies 

noncompliance with the requirements 

of the regulation, the fiduciary adviser 

must send a copy of the report to the 

Department. The final rule, like the 

proposal, requires that the fiduciary 

adviser submit the report to the 

Department within 30 days following 

receipt of the report from the auditor. 

This report will enable the Department 

to monitor compliance with the 

statutory or class exemption. 

For purposes of paragraph (b)(6), an 

auditor is considered independent if it 

does not have a material affiliation or 

material contractual relationship with 

the person offering the investment 

advice arrangement to the plan or any 

designated investment options under 

the plan. See paragraph (b)(6)(iii). The 

terms ‘‘material affiliation’’ and 

‘‘material contractual relationship’’ are 

defined in paragraphs (c)(6) and (7) of 

the final rule, respectively. 

With regard to the scope of the audit, 

paragraph (b)(6)(iv) of the final rule 

provides that the auditor shall review 

sufficient relevant information to 

formulate an opinion as to whether the 

investment advice arrangements, and 

the advice provided pursuant thereto, 

offered by the fiduciary adviser during 

the audit period were in compliance 

with the regulation. Paragraph (b)(6)(iv) 

further provides that it is not intended 

to preclude an auditor from using 

information obtained by sampling, as 

reasonably determined appropriate by 

the auditor, investment advice 

arrangements, and the advice pursuant 

thereto, during the audit period. The 

final rule, like the proposal, does not 

require an audit of every investment 

advice arrangement at the plan or 

fiduciary adviser-level or of all the 

advice that is provided under the 

exemption. In general, the final rule 

appropriately leaves to the auditor the 

determination as to the appropriate 

scope of its review and the extent to 

which it can rely on representative 

samples for determining compliance 

with the exemption. 

While the audit provisions contained 

in the final rule are, with respect to both 

the statutory exemption and the class 

exemption, identical to the proposed 

audit requirements, the final rule does 

contain new provisions making clear 

that, like the selection of an eligible 

investment expert to certify a computer 

model, the selection of the required 

auditor, for purposes of both the 

statutory exemption and the class 

exemption, is a fiduciary act governed 

by section 404(a)(1) of ERISA. See 

paragraphs (b)(6)(v) and (d)(9)(v) of the 

final rule. 

A number of commenters raised 

issues or requested clarifications 

regarding various aspects of the audit 

requirements. 

One commenter requested that the 

Department establish that the first 

annual audit required by the statutory 

exemption would not be required to be 

completed until the end of 2009. 

Inasmuch as the audit and other 

provisions of the regulation relating to 

the statutory exemption closely track 

the provisions of the statutory 

exemption, the Department is not 

persuaded that there is a basis for 

deferring the completion of any 

otherwise required annual audit until 

the end of 2009. However, for purposes 

of any audits required to be completed 

prior to the effective date of the final 

rule, the auditor may take into account 

good faith compliance with the statute 

in the absence of regulatory guidance. 

One commenter requested that the 

Department should lessen the burden on 

small advisers by modifying the audit 

requirement by, for example, requiring 

an audit only every three years, rather 

than annually. It is the view of the 

Department that the audit requirements 

of both the statutory and class 

exemption are critical protections for 

participants and beneficiaries in 

investment advice arrangements with 

respect to which there is a possibility 

that an adviser may act in its own selfinterest rather than the interest of the 

plan’s participants and beneficiaries. No 

information or data has been furnished 

to the Department that would support a 

finding that this risk to participants and 

beneficiaries is any less from small 

advisers than large adviser. Thus, the 

Department has no basis on which to 

determine what, if any, special relief 

should be afforded small advisers. The 

final rule, therefore, contains no special 

provisions for small advisers. 

Another commenter suggested that 

rather than furnishing copies of the 

audit report to authorizing fiduciaries 

and IRA beneficiaries, fiduciary advisers 

should be required to inform the parties 

of the availability of the reports and 

furnish such reports only in response to 

requests. The Department did not adopt 

this suggestion. The Department 

believes that, as with the audit, the 

reports of the auditor are important and 

should be furnished to each authorizing 

plan fiduciary. On the other hand, the 

Department recognizes that, in the case 

of IRAs, furnishing a report to every IRA 

beneficiary may be unduly burdensome 

and expensive, and, accordingly, 

provided a special rule that permits the 

making available of the report on the 

fiduciary adviser’s Web site. 

One commenter requested that 

fiduciary advisers have an additional 30 

days to furnish the audit report to the 

authorizing plan fiduciaries. Another 

commenter requested that the final rule 

provide 60 days for the furnishing of 

IRA-related audit reports. The 

Department did not adopt these 

mstockstill on PROD1PC66 with RULES3

3830 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

suggestions. The Department notes, 

however, that the 60-day period 

referenced in paragraphs (b)(6)(i)(B) and 

(d)(9)(i)(B) of the final rule is the period 

following completion of the audit 

during which the auditor is required to 

furnish its report to the fiduciary 

adviser and, with the exception of an 

arrangement with an IRA, to each 

authorizing fiduciary. The exception for 

arrangements with IRAs serves to 

relieve the auditor from furnishing 

reports to the authorizing IRA 

beneficiaries. Paragraphs (b)(6)(ii)(A) 

and (d)(9)(ii)(A) of the final rule, 

applicable to arrangements with IRAs, 

place the obligation to furnish the 

auditor’s report on the fiduciary adviser 

and, in that regard, require that the 

fiduciary adviser furnish the report or 

make it available on its Web site within 

30 days following receipt of the report 

from the auditor. The Department did 

not receive any information or data that 

would indicate that the aforementioned 

time frames afforded the auditor and the 

fiduciary adviser are inadequate. 

With regard to the qualifications of an 

auditor, one commenter recommended 

that the auditor should be treated as a 

fiduciary. Other commenters requested 

clarification that the audit is not 

required to be conducted by an 

accountant or a lawyer. Another 

commenter requested clarification as to 

the credentials necessary to conduct an 

audit. As with the requirements for an 

‘‘eligible investment expert,’’ the 

Department does not believe that there 

is necessarily one set of credentials, 

such as certified public accountant, 

auditor, or lawyer, that is required or, 

conversely, by themselves qualifies an 

individual to conduct the required 

audits. In addition to any licenses, 

certifications or other evidence of 

professional or technical training, a 

fiduciary adviser will want to consider 

the relevance of that training to the 

required audit, as well as the individual 

or organization’s experience and 

proficiency in conducting similar types 

of audits. In this regard, it is the view 

of the Department that the selection of 

an auditor is a fiduciary act and, 

therefore, must be carried out in a 

manner consistent with the prudence 

requirements of section 404(a)(1), taking 

into account the nature and scope of the 

audit and the expertise and experience 

necessary to conduct such an audit. The 

Department also notes that, in its view, 

the performance of an audit under the 

final rule would not, by itself, cause an 

auditor to be a fiduciary under ERISA. 

A number of comments requested 

clarification of the scope of the audit, as 

now set forth in paragraphs (b)(6)(iv) 

and (d)(9)(iv) of the final rule. In this 

regard, commenters requested 

clarification that the permissible 

sampling of audits would be conducted 

at the fiduciary adviser level and not the 

plan level, such that a sampling of each 

plan’s or IRA’s transactions would not 

have to be audited. One commenter 

requested clarification as to whether the 

audit could be performed by a review of 

the audits conducted by the fiduciary 

adviser’s own personnel. As discussed 

above, the audit provisions of the final 

rule require that the auditor review 

sufficient information to formulate an 

opinion as to whether the investment 

advice arrangements, and the advice 

provided pursuant thereto, are in 

compliance with the final rule. In the 

case of the class exemption, the auditor 

is further required to review compliance 

with the fiduciary adviser’s policies and 

procedures, adopted in accordance with 

paragraph (d)(7), designed to assure 

compliance with the exemption’s 

requirements. Accordingly, the precise 

nature and scope of the audit, as well as 

how it is conducted, is to be determined 

by the auditor. The Department does 

note, however, that nothing in these 

provisions precludes the auditor from 

using sampling, as determined 

reasonably appropriate by the auditor, 

of investment advice arrangements and 

investment advice. 

While the Department believes that 

internal audits conducted by the 

personnel of a fiduciary adviser are 

important to reducing the risks of 

noncompliance with the conditions of 

the final rule, the Department does not 

believe that it would be appropriate for 

an auditor to limit, in any way, the 

scope of its audit based on such audits. 

Moreover, in the view of the 

Department, the fiduciary adviser has a 

fiduciary duty in selecting and 

monitoring an auditor to ensure that the 

required audits are complete and fully 

independent of any audits conducted 

internally by personnel of the fiduciary 

adviser. The Department notes, 

however, that there is nothing in the 

final rule that would preclude the 

independent auditor from working with 

the fiduciary adviser to establish 

policies and procedures designed to 

enhance or ensure compliance with the 

requirements of the statutory or class 

exemption, provided that 

determinations of compliance with the 

statutory and class exemption can be 

made without regard to such services. 

Some commenters asked for a 

clarification of the ‘‘independence’’ 

requirements applicable to the auditor. 

Paragraphs (b)(6)(iii) and (d)(9)(iii) of 

the final rule provide that an auditor is 

considered independent if it does not 

have a material affiliation or material 

contractual relationship with the 

fiduciary adviser or any person offering 

designated investment options. 

One commenter requested 

clarification that independence would 

not be lost merely because the auditor 

performs other services for the fiduciary 

adviser or its affiliates, such as 

performing audits or certifying 

computer models, as an eligible 

investment expert. In defining the term 

‘‘material contractual relationship,’’ the 

Department contemplated that there 

may be instances in which an auditor 

might be performing other services for a 

fiduciary adviser or affiliates. While one 

commenter recommended that the 

definition of material contractual 

relationship be revised to preclude 

receipt of any compensation, the 

Department believes that the 10% test 

set forth in paragraph (c)(7) of the final 

rule, defining ‘‘material contractual 

relationship,’’ is sufficient to minimize 

any influence on the part of the 

fiduciary adviser that would serve to 

compromise the independence of the 

auditor. Accordingly, the Department 

has not changed the final rule in this 

regard. 

A number of commenters expressed 

concern about the requirement, now at 

paragraphs (b)(6)(ii)(B) and (d)(9)(ii)(B) 

of the final rule, that, in the case of 

arrangements involving IRAs, the 

fiduciary adviser must send a copy of 

the auditor’s report to the Department if 

that report identifies instances of 

noncompliance. Some commenters 

recommended that reports only be 

required to be filed with the Department 

when there is ‘‘material’’ 

noncompliance, other commenters 

recommended that fiduciary advisers be 

afforded a period within which to selfcorrect prior to the reporting of 

noncompliance. As explained in the 

preamble to the proposal, this filing 

requirement will enable the Department 

to monitor compliance with the 

exemptions in those instances where 

there is no authorizing ERISA plan 

fiduciary to carry out that function. 

While the Department recognizes that 

not every instance of noncompliance 

would, itself, affect the quality of the 

advice provided, the Department also 

believes that, given the overall 

significance of the audit as a protection 

for participants and beneficiaries, all 

reports that identify noncompliance in 

this area should be furnished to the 

Department for review, thereby, leaving 

to the Department the opportunity to 

evaluate the significance of the 

noncompliance, the function that an 

authorizing plan fiduciary would carry 

out for its plan. Accordingly, the 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3831 

17See paragraph (d)(8)(i)(C) that incorporates in 

the class exemption compliance with the disclosure 

requirements under the statutory exemption 

provisions as set forth in paragraphs (b)(7)(i)(A) 

through (E), (G) and (H). 

Department is adopting the filing 

requirement as proposed. 

f. Disclosure 

The disclosure provisions are set forth 

in paragraph (b)(7) of the final rule as 

they relate to the statutory exemption 

and paragraph (d)(8) as they relate to the 

class exemption. In general, the 

disclosure requirements for both the 

statutory and class exemption are 

identical,17 and the provisions of the 

final rule, like the proposal, track the 

requirements set forth in section 

408(g)(6) of ERISA. 

The final rule, at paragraphs (b)(7)(i) 

and (d)(8)(i), generally requires that the 

fiduciary adviser provide to participants 

and beneficiaries, prior to the initial 

provision of investment advice with 

regard to any security or other property 

offered as an investment option, a 

written notification describing: The role 

of any party that has a material 

affiliation or material contractual 

relationship with the fiduciary adviser 

in the development of, in the case of the 

statutory exemption, the investment 

advice program or, in the case of the 

class exemption, if applicable, the 

computer model or materials described 

in paragraph (d)(3)(i) or (ii) of the final 

rule, and in the selection of investment 

options available under the plan; the 

past performance and historical rates of 

return of the designated investment 

options available under the plan, to the 

extent that such information is not 

otherwise provided; all fees or other 

compensation relating to the advice that 

the fiduciary adviser or any affiliate 

thereof is to receive (including 

compensation provided by any third 

party) in connection with the provision 

of the advice or in connection with the 

sale, acquisition, or holding of the 

security or other property pursuant to 

such advice; and any material affiliation 

or material contractual relationship of 

the fiduciary adviser or affiliates thereof 

in the security or other property. 

The notification to participants and 

beneficiaries also is required to explain: 

The manner, and under what 

circumstances, any participant or 

beneficiary information provided under 

the arrangement will be used or 

disclosed; the types of services provided 

by the fiduciary adviser in connection 

with the provision of investment advice 

by the fiduciary adviser, including, with 

respect to an arrangement utilizing a 

computer model, any limitations on the 

ability of the model to take into account 

an investment primarily in qualifying 

employer securities; that the adviser is 

acting as a fiduciary of the plan in 

connection with the provision of the 

advice; and that a recipient of the advice 

may separately arrange for the provision 

of advice by another adviser that could 

have no material affiliation with and 

receive no fees or other compensation in 

connection with the security or other 

property. 

Paragraphs (b)(7)(ii)(A) and 

(d)(8)(ii)(A) of the final rule require that 

the notification furnished to 

participants and beneficiaries must be 

written in a clear and conspicuous 

manner and in a manner calculated to 

be understood by the average plan 

participant and must be sufficiently 

accurate and comprehensive to 

reasonably apprise such participants 

and beneficiaries of the information 

required to be provided in the 

notification. 

Paragraphs (b)(7)(ii)(B) and 

(d)(8)(ii)(B) of the final rule reference 

the availability of a model disclosure 

form in the appendix to the final rule. 

As with the proposals, the model 

disclosure form may be used for 

purposes of satisfying the requirements 

set forth in paragraphs (b)(7)(i)(C) and 

(d)(8)(i), as well as the requirements of 

paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A) 

of the final rule. The final rule, like the 

proposals, makes clear, however, that 

the use of the model disclosure form is 

not mandatory. In response to several 

comments addressing the general 

readability of the model form, the 

Department has made minor changes to 

the form’s organization and language. 

Other commenters also made specific 

suggestions regarding the content of the 

model disclosure form. Four 

commenters made suggestions relating 

to the disclosure of fiduciary adviser 

cross-selling practices, such as fees 

received by an adviser in connection 

with rollovers to IRAs. As discussed 

below, given the potential for abuse in 

this area, the text of the final rule has 

been modified to require the disclosure 

of all fees or other compensation that a 

fiduciary adviser or any affiliate might 

receive in connection with any rollover 

or other distribution of plan assets or 

the investment of distributed assets. 

Language has been added to the model 

form to reflect this disclosure 

requirement. 

Commenters presented a number of 

issues concerning the timing and 

content of the proposed disclosure 

requirements. With regard to the timing 

of the required disclosures, some 

commenters suggested that the 

notifications be provided whenever 

advice is rendered; other commenters 

argued that the annual disclosures 

should be required only when there are 

material changes to the information 

furnished in advance of the advice. 

Other commenters recommended that 

required notifications be furnished 

quarterly. The Department did not adopt 

these recommendations. The 

Department believes that the statutory 

disclosure framework, reflected in both 

the proposal and final rule, strikes the 

appropriate balance in terms of ensuring 

participants and beneficiaries have the 

information to assess the potential for 

conflicts of interest and compensation 

of the fiduciary adviser. In this regard, 

the final rule, like the proposal, requires 

notifications to be furnished in advance 

of the advice, and annually thereafter, 

except that material changes to such 

information are required to be furnished 

at a time reasonably contemporaneous 

with the change in the information. 

Commenters also raised issues 

concerning the content of the required 

notifications. One commenter 

recommended that the Department 

clarify that the required disclosure of 

fees and compensation was not limited 

to designated investment options, but 

included fees and compensation 

received in connection with 

investments made through open 

brokerage windows and directed 

brokerage accounts. The disclosure 

obligation set forth in paragraph 

(b)(7)(i)(C)(2) of the final rule is very 

broad and includes any fees and other 

compensation that the fiduciary adviser 

or affiliate might receive in connection 

with the sale, acquisition, or holding of 

any security or other property pursuant 

to the investment advice. There is 

nothing in this provision which limits 

or is intended to limit the required 

disclosures to compensation and fees in 

connection with designated investment 

options. It is clear, therefore, that any 

compensation and fees to be received in 

connection with investments through an 

open brokerage window or directed 

brokerage account must be included in 

the required disclosures. 

Some commenters suggested that the 

required disclosure be required to 

contain information pertaining to 

compensation and fees in connection 

with rollovers or other distributions or 

the investment of assets in connection 

with a rollover or other distribution. 

Given the potential for abuse in this 

area, the Department agrees that such 

information should be furnished to 

participants and beneficiaries. In this 

regard, the final rule contains a specific 

provision that serves to require the 

disclosure of all fees or other 

compensation that a fiduciary adviser or 

any affiliate might receive in connection 

mstockstill on PROD1PC66 with RULES3

3832 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

18See AO 2005–23A (Dec. 7, 2005). 

with any rollover or other distribution 

of plan assets or the investment of 

distributed assets in any security or 

other property pursuant to the 

investment advice. See paragraph 

(b)(7)(i)(C)(3) of the final rule, and 

paragraph (d)(8)(i)(C) of the final rule, 

which applies several disclosures 

required for the statutory exemption to 

the class exemption. 

With regard to the practice of ‘‘crossselling,’’ i.e., using existing clients, plan 

participants and beneficiaries in this 

case, to market additional services or 

products, the Department notes that, 

while advising a participant or 

beneficiary to take an otherwise 

permissible plan distribution would not 

normally constitute ‘‘investment 

advice’’ within the meaning of 29 CFR 

2510.3–21(c), the Department has taken 

a different position with respect to such 

activities when the person making such 

recommendations is already a plan 

fiduciary, as would be the case with a 

fiduciary adviser.18 When a person is 

already acting in a fiduciary capacity 

with respect to the plan, the Department 

has indicated that recommendations 

relating to the taking of a distribution or 

the investment of amounts withdrawn 

from the plan would constitute the 

exercise of discretionary authority 

respecting management of the plan and, 

therefore must be undertaken prudently 

and solely in the interest of the 

participant or beneficiary, consistent 

with section 404(a)(1). The Department 

further notes that if, for example, a 

fiduciary exercises control over plan 

assets to cause a participant or 

beneficiary to take a distribution and 

then to invest the proceeds in an IRA 

account managed by the fiduciary, the 

fiduciary may be using plan assets in his 

or her own interest, in violation of 

ERISA section 406(b)(1). The prohibited 

transaction relief offered by the 

statutory and class exemption, which 

apply to transactions related to the 

provision of investment advice to plan 

participants or beneficiaries, would not 

cover such a violation. Moreover, the 

Department is unable to conclude that 

the mere disclosure of fees or other 

compensation received in connection 

with such a distribution and 

investment, by itself, would be 

sufficient to avoid a violation of section 

406(b)(1). Because a fiduciary adviser, 

in making recommendations related to 

the taking of a distribution or the 

investment of amounts so withdrawn 

from the plan, may violate ERISA 

section 404(a)(1) and/or 406(b)(1), 

authorizing plan fiduciaries, in carrying 

out their duties under section 404(a)(1) 

in selecting and periodically reviewing 

the adviser, may need to understand the 

extent to which such recommendations 

will be made. 

A commenter also suggested that the 

Department require disclosure of 

information about the profitability of 

various plan investment options to the 

fiduciary adviser. In addressing the 

need for disclosure regarding plan 

investments being recommended by a 

fiduciary adviser under the statutory 

exemption, Congress appears to have 

concluded that the interests of 

participants and beneficiaries would be 

adequately protected, in the context of 

the exemption’s other conditions, by 

information on all fees or other 

compensation that the fiduciary adviser 

or any affiliate is to receive. The 

conditions of the exemption, in general, 

focus on fees and compensation 

received in connection with 

investments recommended rather than 

profitability of those investments. 

Disclosures with respect to profitability 

of investments options may require 

significantly more information and 

effort to prepare than disclosures of fees 

and compensation, without adding 

significant benefits. The Department 

does not believe it would be 

appropriate, as part of this final rule, 

without further notice and comment, to 

include such a disclosure obligation. 

Accordingly, the Department has not 

adopted this suggestion. 

A number of commenters requested 

that the Department confirm that to the 

extent that the required disclosures are 

contained in disclosure materials 

required to be prepared under securities 

and other laws, such materials may be 

used for purposes of the exemptions. It 

is the view of the Department that 

nothing in the final rule forecloses the 

use of other materials for making the 

disclosures required by the final rule, so 

long as the understandability and clarity 

of the disclosures is not compromised 

by virtue of their inclusion in such other 

materials and the requirements of 

paragraphs (b)(7)(ii)(A) and (d)(8)(ii)(A) 

are satisfied. 

The proposed regulation and class 

exemption provided that the required 

notifications may, in accordance with 

29 CFR 2520.104b–1, be furnished in 

either written or electronic form. 

Several commenters requested that the 

Department provide greater flexibility 

for notices by electronic means, noting 

that the safe harbor for electronic 

distributions, at § 2520.104b–1(c), is not 

workable. The Department currently is 

reviewing its rules relating to the use of 

electronic media for disclosures under 

title I of ERISA. The Department notes 

that, pending the issuance of further 

guidance, its current rule, at 29 CFR 

2520.104b–1(c), is a safe harbor and, 

accordingly, represents merely one 

permissible means by which documents 

under title I of ERISA may be furnished 

to participants and beneficiaries 

electronically. Nothing in that rule, 

therefore, forecloses other means by 

which documents may, consistent with 

ERISA and the E–SIGN Act, be 

furnished to participants and 

beneficiaries electronically. 

Paragraphs (b)(7)(iv) and (d)(8)(iv) of 

the final rule set forth miscellaneous 

recordkeeping and furnishing 

responsibilities of the fiduciary adviser 

under the statutory and class 

exemption. Specifically, these 

paragraphs require that, at all times 

during the provision of advisory 

services to the participant or beneficiary 

pursuant to the arrangement, the 

fiduciary adviser must: maintain the 

information required to be disclosed to 

participants and beneficiaries in 

accurate form; provide, without charge, 

accurate, up-to-date disclosures to the 

recipient of the advice no less 

frequently than annually; provide, 

without charge, accurate information to 

the recipient of the advice upon request 

of the recipient; and provide, without 

charge, to the recipient of the advice any 

material change to the required 

information at a time reasonably 

contemporaneous to the change in 

information. These provisions are being 

adopted in the final rule without 

substantive change from the proposal. 

g. Other Conditions 

Paragraphs (b)(8) and (d)(10) of the 

final rule, like the proposals, 

incorporate a series of miscellaneous, 

although important, conditions set forth 

in section 408(g)(7) of ERISA. These 

requirements are as follows: the 

fiduciary adviser must provide 

appropriate disclosure, in connection 

with the sale, acquisition, or holding of 

the security or other property, in 

accordance with all applicable 

securities laws; any sale, acquisition, or 

holding of a security or other property 

occurs solely at the direction of the 

recipient of the advice; the 

compensation received by the fiduciary 

adviser and affiliates thereof in 

connection with the sale, acquisition, or 

holding of the security or other property 

is reasonable; and the terms of the sale, 

acquisition, or holding of the security or 

other property are at least as favorable 

to the plan as an arm’s length 

transaction would be. 

The Department received a number of 

comments requesting clarification of the 

requirement that sales, acquisitions, or 

the holding of securities or other 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3833 

19Technical Explanation of H.R. 5, The ‘‘Pension 

Protection Act of 2006’’, as passed by the House on 

July 28, 2006, and as considered by the Senate on 

August 3, 2006, prepared by the Staff of the Joint 

Committee on Taxation, August 3, 2006, JCX 38–06. 

property occurs solely at the direction of 

the recipient of the advice. In particular, 

commenters requested that the 

Department confirm that the ‘‘solely at 

the direction’’ requirement is not 

violated solely by virtue of a participant 

or beneficiary providing advance 

authorization for a fiduciary adviser to 

periodically take steps to rebalance the 

portfolio of the participant or 

beneficiary. One commenter requested 

clarification that the ‘‘solely at the 

direction’’ requirement would not be 

violated where, pursuant to an 

agreement with the participant or 

beneficiary, investment advice 

recommendations will be acted upon by 

the fiduciary adviser unless the 

participant or beneficiary objects with 

the allotted period of time, typically 30 

days. 

In general, it is the view of the 

Department that a pre-authorization for 

a fiduciary adviser to maintain a 

particular asset allocation structure for a 

participant’s portfolio by periodic 

rebalancing of investments would not 

violate the ‘‘solely at the direction’’ 

requirements of the final rule, provided 

that such maintenance does not involve 

the exercise of discretion on the part of 

the fiduciary adviser, that is, when a 

participant is informed of and approves, 

at the time of the authorization, the 

specific circumstances under which a 

rebalancing of his or her portfolio will 

take place and the particular 

investments that will be utilized for 

such rebalancing. If, on the other hand, 

the particular investments that might be 

utilized for purposes of rebalancing a 

participant’s account are not known and 

the fiduciary adviser is given the 

discretion to select the required 

investments, it is the view of the 

Department that the participant must be 

afforded advance notice of the fiduciary 

adviser’s intended investments and a 

reasonable opportunity, at least 30 days, 

to object to the investments in order to 

comply with the ‘‘solely at the 

direction’’ requirements of the final 

rule. With respect to a recommendation 

involving a different asset allocation 

structure, the Department believes that 

the participant or beneficiary must make 

an affirmative direction for its 

implementation. 

3. Definitions 

Paragraph (c) sets forth definitions 

applicable to both the statutory 

exemption and class exemption 

contained in the final rule. Paragraph 

(c)(1) defines the term ‘‘designated 

investment option.’’ Paragraph (c)(2) 

defines the term ‘‘fiduciary adviser.’’ 

Paragraph (c)(3) defines the term 

‘‘registered representative.’’ Paragraph 

(c)(4) defines the terms ‘‘individual 

retirement account’’ or ‘‘IRA’’ for 

purposes of the final rule. Paragraph 

(c)(5) defines the term ‘‘affiliate.’’ And, 

paragraphs (c)(6) and (c)(7) define the 

terms ‘‘material affiliation’’ and 

‘‘material contractual relationship,’’ 

respectively. Lastly, paragraph (c)(8) 

defines the term ‘‘control.’’ With the 

exception of a clarification in the 

definition of ‘‘material contractual 

relationship’’ in paragraph (c)(7), the 

definitions were adopted without 

change from the proposals. 

One commenter requested that the 

Department clarify that the term 

‘‘agent’’, as that term is used in the 

definition of ‘‘fiduciary adviser’’ (see 

paragraph (c)(2)(i)(F) of the final rule), is 

not limited to insurance agents. Another 

commenter requested that the 

Department clarify that ‘‘agents’’ must 

be registered under the Investment 

Advisers Act of 1940, unless otherwise 

exempt from registration. It is the view 

of the Department that the term ‘‘agent’’ 

as used in the fiduciary adviser 

definition is not limited to insurance 

agents or necessarily those registered 

under the Investment Advisers Act, but 

rather encompasses persons acting on 

behalf of a fiduciary adviser, applying 

agency law principles. The Department 

notes that the definition, consistent with 

the statutory definition, requires that 

any such agent satisfy the requirements 

of applicable insurance, banking and 

securities laws relating to the provision 

of advice. 

One commenter recommended a 

separate provision for investment 

adviser representatives. It was not clear 

how such a separate definition would 

substantively change the application of 

the fiduciary adviser definition, at 

paragraph (c)(2); accordingly, the 

Department did not adopt this 

suggestion. 

One comment recommended that the 

Department adopt the definition of 

‘‘affiliate’’ as set forth in 29 CFR 2510.3– 

21, rather than the definition contained 

in the proposed rule. Section 

408(g)(11)(C) of ERISA provides that an 

‘‘affiliate’’ of another entity means an 

affiliated person of the entity as defined 

in section 2(a)(3) of the Investment 

Company Act of 1940. The Department, 

therefore, adopted, as discussed in the 

preamble to the proposal, the 

Investment Company Act definition for 

purposes of both the proposal and this 

final rule, not the definition set forth in 

§ 2510.3–21. 

Finally, in order to clarify that the 

10% gross revenue test, applied for 

purposes of determining whether 

persons have a ‘‘material contractual 

relationship’’ under the final rule, is not 

limited to amounts paid pursuant to 

contracts or arrangements that have 

been reduced to writing, the Department 

has deleted the word ‘‘written’’ from the 

definition contained in paragraph (c)(7). 

4. Class exemption 

A number of the issues pertaining to 

the conditions applicable to the class 

exemption were raised and addressed in 

the above discussion of the rules 

implementing the statutory exemption. 

The following overview, therefore, will 

focus on those provisions and 

comments unique to the class 

exemption and not previously 

addressed. 

a. Authority and Findings 

A number of commenters questioned 

the Department’s authority to grant the 

proposed class exemption arguing, in 

effect, that the proposed class 

exemption is inconsistent with 

Congressional intent, suggesting that 

enactment of the statutory exemption 

for investment advice precluded or 

otherwise limited the Department’s 

authority to grant an administrative 

exemption under section 408(a). The 

Department has carefully considered 

this issue and in so considering has 

been unable to find anything in ERISA, 

the PPA, the Technical Explanation of 

the PPA prepared by the staff of the 

Joint Committee on Taxation,19 or the 

case law that would serve to limit or 

otherwise restrict the Department’s 

ability to grant, in accordance with its 

authority in section 408(a), an 

administrative exemption relating to the 

provision of investment advice. 

In fact, the Department has very broad 

authority under section 408(a) to grant 

conditional or unconditional 

exemptions for any fiduciary or 

transaction or class of fiduciaries or 

transactions, from all or part of the 

restrictions imposed by sections 406 

and 407(a), provided that the Secretary 

finds that such exemption is 

administratively feasible, in the 

interests of the plan and its participants 

and beneficiaries, and protective of the 

rights of participants and beneficiaries. 

The Department views the class 

exemption as necessary to provide more 

comprehensive relief for fiduciary 

investment advice and to address 

certain aspects of the statutory 

exemption that were unclear or that did 

not extend relief to certain 

arrangements. For example, the flush 

language in section 408(g)(3)(D) of 

mstockstill on PROD1PC66 with RULES3

3834 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

ERISA specifically permits participants 

to request individualized advice after 

receipt of computer model-based advice, 

but does not indicate whether any 

prohibited transaction relief would 

apply. In addition, although the 

Department concluded that computer 

model-based advice was feasible for 

IRAs to the extent that the advice takes 

into account generally recognized asset 

classes, some IRAs do not limit 

investment choices in this fashion. The 

class exemption therefore provides 

substitute relief for advisers that may 

not be able to take full advantage of 

computer model-based advice as to 

some IRAs. 

Taking into account the intent of the 

Congress and the administration to 

dramatically expand the availability of 

affordable, quality investment advice for 

millions of America’s workers 

participating in participant-directed 

individual account plans and IRAs, the 

Department concluded that the best 

approach to addressing the ambiguities 

and issues presented by the PPA and 

statutory exemption was to exercise its 

authority under section 408(a) of ERISA, 

building on the carefully crafted 

safeguards of the statutory exemption 

established by the Congress, safeguards 

that the Congress itself determined to be 

administratively feasible, in the 

interests of the plan and its participants 

and beneficiaries, and protective of the 

rights of participants and beneficiaries. 

A few commenters questioned 

whether the Department could make the 

findings required by section 408(a) with 

respect to the class exemption. As noted 

above, section 408(a) conditions 

exemptive relief on a finding by the 

Department that the exemption is 

administratively feasible, in the 

interests of the plan and its participants 

and beneficiaries, and protective of the 

rights of participants and beneficiaries. 

With regard to the class exemption 

contained in this document, the 

Department finds that the exemption is 

administratively feasible with respect to 

both compliance by fiduciary advisers 

electing to provide investment advice to 

participants and beneficiaries and 

enforcement by the Department. The 

Department finds that the exemption is 

in the interest of plans and their 

participants and beneficiaries because 

the availability of the exemption will 

significantly expand the opportunities 

for millions of participants and 

beneficiaries in participant-directed 

individual account plans and IRAs to 

obtain affordable, quality investment 

advice that might otherwise not be 

available to them. The Department 

further finds that the exemption is 

protective of the rights of participants 

and beneficiaries because of the 

conditions contained in the exemption 

intended to mitigate conflicts of interest 

that might otherwise affect the quality of 

investment advice. As noted above, the 

conditions of the class exemption build 

on the protections Congress determined 

to be administratively feasible, in the 

interest of plans and their participants 

and beneficiaries, and protective of the 

rights of those participants and 

beneficiaries for purposes of the 

statutory exemption set forth in section 

408(g). The specifics of these conditions 

are discussed below, if not previously 

addressed in connection with the 

statutory exemption provisions. 

b. General 

The final class exemption, like the 

statutory exemption described in 

paragraph (b) of the final rule, provides 

relief from otherwise prohibited 

transactions relating to the provision of 

investment advice to a plan participant 

or beneficiary or IRA beneficiary; the 

acquisition, holding or sale of a security 

or other property pursuant to the 

investment advice; and the direct or 

indirect receipt of compensation by a 

fiduciary adviser or affiliate in 

connection with the provision of 

investment advice or the acquisition, 

holding or sale of a security or other 

property pursuant to the investment 

advice. 

Unlike the statutory exemption, 

however, the final class exemption, like 

the proposed class exemption, provides 

relief for investment advice provided to 

individuals following the furnishing of 

recommendations generated by a 

computer model or, in instances where 

computer modeling under the statutory 

exemption is not feasible, the furnishing 

of investment education material. As 

explained in the preamble to the 

proposal, the computer generated advice 

recommendations and investment 

education materials are intended to 

provide individual account plan 

participants and beneficiaries and IRA 

beneficiaries with a context for 

assessing and evaluating the 

individualized investment advice 

contemplated by the class exemption. 

Also, unlike the statutory exemption, 

the final class exemption, like the 

proposal, applies the fee-leveling limits 

solely to the compensation received by 

the employee, agent or registered 

representative providing the advice on 

behalf of the fiduciary adviser, as 

distinguished from compensation 

received by the fiduciary adviser on 

whose behalf the employee, agent or 

registered representative is providing 

such advice. 

In general, the class exemption is 

intended to complement the adoption of 

regulations implementing the statutory 

exemption by furthering the availability 

of individualized investment advice to 

both participants and beneficiaries in 

participant-directed individual account 

plans and IRA beneficiaries under 

circumstances not clearly encompassed 

by the statutory exemption or 

implementing regulations, as described 

below. 

c. Scope of Exemption 

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

forth the scope of the class exemption. 

Specifically paragraph (d)(1)(i) provides 

that, with respect to the provision of 

advice to participants and beneficiaries 

of individual account plans, the 

restrictions of sections 406(a) and 406(b) 

of ERISA and the sanctions resulting 

from the application of section 4975 of 

the Code, by reason of section 

4975(c)(1)(A) through (F) of the Code, 

shall not apply to the provision of 

investment advice described in section 

3(21)(A)(ii) of the Act by a fiduciary 

adviser to a participant or beneficiary of 

an individual account plan that permits 

such participant or beneficiary to direct 

the investment of their individual 

accounts; the acquisition, holding, or 

sale of a security or other property 

pursuant to the investment advice; and, 

except as otherwise provided in the 

exemption, the direct or indirect receipt 

of fees or other compensation by the 

fiduciary adviser (or any employee, 

agent, registered representative or 

affiliate thereof) in connection with the 

provision of the advice or in connection 

with an acquisition, holding, or sale of 

a security or other property pursuant to 

the investment advice. Paragraph 

(d)(1)(ii) of the final rule provides the 

same relief with respect to the sanctions 

resulting from the application of section 

4975 of the Code, by reason of section 

4975(c)(1)(A) through (F) of the Code, 

for investment advice to beneficiaries of 

IRAs. 

d. Conditions for Relief 

Paragraph (d)(2) of the final rule 

provides that the relief described in 

paragraph (d)(1) is available if a 

fiduciary adviser provides advice in 

accordance with paragraph (d)(3), 

relating to the use of computer models 

and investment education materials, or 

paragraph (d)(4), relating to the use of 

fee-level arrangements, or both. In 

addition the fiduciary adviser must 

satisfy the conditions described in 

paragraphs: (d)(5), requiring 

authorization by a plan fiduciary or IRA 

beneficiary; (d)(6), relating to the basis 

for advice; (d)(7), requiring policies and 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3835 

procedures; (d)(8), requiring disclosure 

of specified information; (d)(9), 

requiring an annual audit; and (d)(10), 

specifying other miscellaneous 

conditions. With the exception of 

paragraph (d)(7), relating to the 

adoption of policies and procedures, the 

aforementioned requirements are 

modeled after, and were discussed in 

conjunction with, the conditions of the 

statutory exemption and, accordingly, 

will not again be described or reviewed 

in this section. 

e. Post-computer Model—Investment 

Education Advice 

Paragraph (d)(3) of the final rule, like 

the provision of the proposed class 

exemption, requires that, in advance of 

a participant or beneficiary being 

provided individualized investment 

advice, the participant or beneficiary 

must be furnished investment 

recommendations generated by either a 

computer model that meets the 

requirements of the statutory exemption 

or a computer model developed by a 

person independent of the fiduciary 

adviser. The proposal contained an 

exception to the general computer 

modeling requirement for IRAs with 

respect to which types or number of 

investment choices reasonably 

precludes the use of a computer model 

that meets certain requirements of the 

regulations under the statutory 

exemption. 

The Department received a number of 

comments on this condition of the 

proposal. One commenter requested that 

the Department clarify whether a 

fiduciary adviser providing 

individualized advice to a participant 

can utilize the recommendations 

generated by the computer model of 

another fiduciary adviser. For example, 

according to this commenter, a plan 

recordkeeper might offer participants 

access to a proprietary computer model 

that complies with the statutory 

exemption, and the plan sponsor might 

also provide access through a second 

advice provider. The commenter asked 

whether the second advice provider 

could, for purposes of the class 

exemption, rely on the computer model 

advice furnished to a participant by the 

plan recordkeeper. The Department 

does not believe one fiduciary adviser 

would necessarily be precluded from 

using another fiduciary adviser’s 

computer modeled recommendations 

for a particular participant, provided 

that the requirements of exemption for 

both the computer model and 

individualized advice are otherwise 

satisfied and the individualized advice 

is reasonably contemporaneous with the 

computer modeled advice. 

One commenter suggested that, given 

the other safeguards contained in the 

exemption, the requirement for 

computer modeled advice in advance of 

individualized advice should be 

eliminated, noting that the computer 

modeled advice will only confuse 

participants and limit the advisers. The 

Department disagrees. The Department 

continues to believe that the furnishing 

of computer modeled investment 

recommendations is an important 

protection and tool for participants in 

assessing and evaluating the 

individualized recommendations of the 

fiduciary adviser. The computer 

modeled advice provides participants 

and beneficiaries a means by which they 

can assess and question, in advance of 

an investment decision, the extent to 

which the recommendations of the 

fiduciary adviser deviate from modeled 

advice. For this reason, the Department 

did not adopt the commenter’s 

suggestion. 

One commenter recommended that 

post-model/education advice be subject 

to a fee-leveling requirement. The 

Department did not adopt this 

suggestion. First, the Department 

believes that the class exemption 

contains sufficient safeguards without a 

fee-leveling requirement to protect 

participants and beneficiaries against 

biased, inappropriate investment 

advice. Second, given such safeguards, 

the Department does not believe it is 

appropriate to favor one business model 

for providing investment advice over 

another business model, i.e., those 

fiduciary advisers that use fee-leveling 

over those that do not, particularly 

when doing so may only serve to limit 

the availability of investment advice to 

participants and beneficiaries. 

Several commenters argued that the 

exception from the class exemption’s 

computer modeling requirement that 

was provided to certain IRAs (i.e., 

where the types or number of 

investment choices reasonably 

precludes use of computer model 

meeting the requirements of the 

statutory exemption) be extended to 

brokerage windows and similar 

arrangements with respect to which the 

computer modeling of investment 

recommendations is not feasible and 

that, without such an exception, plan 

participants and beneficiaries utilizing 

such windows or accounts may not have 

access to the investment advice they 

need. The Department is persuaded that 

brokerage windows and similar 

arrangements that permit participants to 

invest beyond a plan’s designated 

investment options present the same 

computer modeling difficulties that are 

encountered by IRAs that impose few 

restrictions on a beneficiary’s 

investment choices. However, with 

regard to plans that offer participants 

and beneficiaries both designated 

investment options and a brokerage 

window or similar arrangement, the 

Department believes participants and 

beneficiaries electing to utilize such 

arrangements would, in addition to 

investment education materials, also 

benefit from receiving computer 

modeled investment recommendations 

with respect to the plan’s designated 

investment options in advance of being 

provided individualized investment 

advice. As with those participants and 

beneficiaries whose investment options, 

either by plan design or choice, are 

limited to designated investment 

options, the Department believes that 

computer modeled investment 

recommendations will help participants 

and beneficiaries considering the use of 

a brokerage window or similar 

arrangement assess the investment 

choices available through both the 

brokerage window and the plan, as well 

as the individualized investment 

recommendations and strategies of the 

fiduciary adviser. The exception 

contained in the final class exemption, 

at paragraph (d)(3)(ii)(A) of the final 

rule, reflects this position. 

Specifically, paragraph (d)(3)(ii)(A) 

provides that, in the case of a plan that 

offers a ‘‘brokerage window’’, ‘‘selfdirected brokerage account’’ or similar 

arrangement that enables participants 

and beneficiaries to select investments 

beyond those designated by the plan, if 

any, before providing investment advice 

with respect to any investment utilizing 

such arrangement, the participant or 

beneficiary shall be furnished the 

investment education material 

described in paragraph (d)(3)(ii)(B) and, 

if the plan offers designated investment 

options, the participant or beneficiary 

also shall be furnished the 

recommendations generated by a 

computer model, as required by 

paragraph (d)(3)(i), with regard to such 

options. 

Some commenters, while supporting 

the exception from computer modeling 

for IRAs, requested that the Department 

provide further guidance concerning 

when the types or number of investment 

choices would reasonably preclude the 

use of a computer model to generate 

investment recommendations. The 

Department believes that there are a 

variety of factors that may serve to 

reasonably preclude use of a computer 

model for generating recommendations 

with respect to the investments 

available under an IRA, including the 

number of investment options offered, 

the type of investment options (such as 

mstockstill on PROD1PC66 with RULES3

3836 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

investments in individual securities), 

and the relative costs of developing and 

maintaining such computer models and 

benefits of offering such modelgenerated advice services to IRA 

beneficiaries. The Department believes 

this will be an evolving, rather than 

static, standard. As computer modeling 

of investment advice develops, the 

Department anticipates that the 

feasibility of developing models to take 

into account a wider variety of 

investment choices also will change. 

The Department has retained the IRA 

exception without change from the 

proposal. See paragraph (d)(3)(ii)(B) of 

the final rule. 

The investment education material 

required to be furnished under the final 

rule is identical to that described in the 

proposal. Specifically, paragraph 

(d)(3)(ii)(B) of the final rule requires that 

participants and beneficiaries be 

furnished with material, such as graphs, 

pie charts, case studies, worksheets, or 

interactive software or similar programs, 

that reflect or produce asset allocation 

models taking into account the age (or 

time horizon) and risk profile of the 

beneficiary, to the extent known. As 

with the proposal, the final rule makes 

clear that nothing precludes the 

furnishing of material, in addition to the 

foregoing, reflecting asset allocation 

portfolios of hypothetical individuals 

with different time horizons and risk 

profiles. 

Also like the proposal, the final rule 

also requires that: (A) Models must be 

based on generally accepted investment 

theories that take into account the 

historic returns of different asset classes 

(e.g., equities, bonds, or cash) over 

defined periods of time; (B) such models 

must operate in a manner that is not 

biased in favor of investments offered by 

the fiduciary adviser or a person with a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser; and (C) all material 

facts and assumptions on which such 

models are based (e.g., retirement ages, 

life expectancies, income levels, 

financial resources, replacement income 

ratios, inflation rates, and rates of 

return) accompany the models. 

The proposal further required that the 

provided individualized, rather than 

computer modeled, investment advice 

(post-model/investment education 

advice) not recommend investment 

options that may generate for the 

fiduciary adviser, or certain other 

persons, greater income than other 

options of the same asset class, unless 

the fiduciary adviser prudently 

concludes that the recommendation is 

in the best interest of the participant or 

beneficiary and explains the basis for 

that conclusion to the participant or 

beneficiary. The proposal further 

required that the advice provider 

document the basis of any advice given 

to the participant or beneficiary within 

30 days following the provision of the 

advice. 

One commenter objected to the 

requirement that the furnished advice 

be documented, arguing that the 

advisers are required to comply with 

both ERISA prudence standards and 

FINRA suitability standards and that the 

documentation requirement does not 

add any additional protection. Another 

commenter argued that such 

explanations were not sufficiently 

protective of participants and 

beneficiaries. The Department disagrees 

with these comments. One of the many 

protections encompassed in the class 

exemption is the audit requirement. The 

Department expects that a critical part 

of the audit will involve a review of the 

explanations required to be documented 

by the fiduciary adviser. Without such 

documentation, auditors would have no 

basis for assessing compliance with a 

number of the conditions of the class 

exemption, including those set forth in 

paragraphs (d)(3)(ii)(A) and (B) and 

(d)(6) of the final rule. 

One comment misconstrued the 

requirement, reading the proposal as not 

requiring the fiduciary adviser to 

provide an explanation regarding 

investments that might generate higher 

fees until 30 days after the provision of 

the advice. Under the proposal, the 

explanation was required to be provided 

in advance of the advice, but that 

explanation was not required to be 

documented for the fiduciary adviser’s 

records, as well as for the required 

audit, until 30 days after the provision 

of the advice. The Department believes 

that it may not always be practical for 

a fiduciary adviser to document the 

advice they provide contemporaneously 

with the provision of that advice and, 

therefore, provided a limited period 

within which such advice must be 

documented. 

In an effort to address both ambiguity 

and confusion with respect to the 

aforementioned requirement, the 

Department has combined and 

simplified the requirement for purposes 

of the final class exemption. Further, 

because the Department believes that 

this requirement, in its revised form, 

would offer additional protections to 

participants and beneficiaries without 

being unnecessarily burdensome on 

fiduciary advisers, the Department is 

making it a general requirement of the 

final class exemption. In this regard, 

paragraph (d)(6)(ii) of the final rule 

provides that, in connection with the 

provision of any investment advice 

covered by the class exemption, the 

fiduciary adviser must conclude that the 

advice to be provided is prudent and in 

the best interest of the participant or 

beneficiary, and explain to the 

participant or beneficiary the basis for 

the conclusion, including, if applicable, 

why and how the advice deviates from 

or relates to the computer modeled 

recommendations or investment 

education materials furnished in 

satisfaction of paragraph (d)(3)(i) or (ii), 

and why the advice includes an 

option(s) with higher fees than other 

options in the same asset class(es) 

available under the plan. Further under 

paragraph (d)(6)(ii), not later than 30 

days following such explanation, the 

employee, agent or registered 

representative providing the advice on 

behalf of the fiduciary adviser must 

document the explanation. The final 

rule, like the proposal, also requires this 

documentation to be retained in 

accordance with the record retention 

requirements of paragraph (e) of the 

final rule. See paragraph (d)(6)(ii)(C) of 

the final rule. 

f. Use of Fee-Leveling 

Paragraph (d)(4) of the final rule 

addresses the fee-leveling requirement 

of the class exemption. As proposed, the 

class exemption applied the fee-leveling 

requirement only to the individuals who 

provide the investment advice on behalf 

of the fiduciary adviser, namely, 

employees, agents, and registered 

representatives. This is in contrast to the 

fee-leveling requirement under the 

statutory exemption, as described above 

with respect to paragraph (b) of the final 

rule, which applied the fee-leveling 

requirement at both the entity (fiduciary 

adviser)-level and the individual 

(employee, agent, registered 

representative)-level. In this regard, the 

Department was persuaded that the 

additional safeguards provided for in 

the class exemption were sufficient to 

permit the application of the feeleveling requirement at the individuallevel, rather than fiduciary adviserentity level, without compromising the 

availability of informed, unbiased, and 

objective investment advice for 

participants and beneficiaries. As 

explained in the discussion relating to 

the fee-leveling provisions of the 

statutory exemption, some commenters 

objected to the limited scope of the feeleveling requirement and other 

commenters requested that the breadth 

of the fee-leveling requirement be 

narrowed. The Department continues to 

believe it reached the appropriate 

balance of protections and flexibility in 

the proposal and, accordingly is 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3837 

adopting the fee-leveling framework of 

the proposed class exemption without 

modification in the final rule. 

g. Policies and Procedures 

The proposed exemption contained a 

requirement that the fiduciary adviser 

adopt and follow written policies and 

procedures that are designed to assure 

compliance with the conditions of the 

exemption. As explained in the 

preamble to the proposal, the 

Department believes that the 

maintenance of such policies and 

procedures will help ensure compliance 

with the exemption, as well as support 

a finding that, for purposes of section 

408(a)(1), the exemption is 

administratively feasible. The 

Department has not changed its view in 

this regard and, in the absence of any 

comments objecting to this provision of 

the proposal, is adopting this 

requirement without change in the final 

rule. See paragraph (d)(7). The 

Department also notes that the auditor 

engaged to conduct an audit pursuant to 

paragraph (d)(9) of the final rule, 

discussed earlier, is required, as part of 

that audit, to review a fiduciary 

adviser’s compliance with its policies 

and procedures. 

5. Retention of Records 

Both the proposed regulation 

implementing the statutory exemption 

and the proposed class exemption had 

record retention requirements, with 

respect to which there were no 

comments. Paragraph (e) of the final 

rule sets forth the record retention 

requirements now applicable to both 

investment advice arrangements relying 

on the statutory exemption, as set forth 

in paragraph (b), and investment advice 

provided pursuant to the class 

exemption, as set forth in paragraph (d), 

of the final rule. Paragraph (e) provides 

that the fiduciary adviser must 

maintain, for a period of not less than 

6 years after the provision of investment 

advice under the section any records 

necessary for determining whether the 

applicable requirements of the final rule 

have been met, noting that a transaction 

prohibited under section 406 of ERISA 

shall not be considered to have occurred 

solely because the records are lost or 

destroyed prior to the end of the 6-year 

period due to circumstances beyond the 

control of the fiduciary adviser. 

6. Noncompliance 

The proposed class exemption 

specifically addressed the effects of 

noncompliance with the exemption. In 

this regard, the proposal explained that 

the class exemption would not apply to 

any covered transaction in connection 

with the provision of investment advice 

to an individual participant or 

beneficiary with respect to which the 

conditions of the exemption have not 

been satisfied. The proposal also 

indicated that, in the case of a pattern 

or practice of noncompliance with any 

of the conditions, the exemption would 

not apply to any transaction in 

connection with the provision of 

investment advice provided by the 

fiduciary adviser during the period over 

which the pattern or practice extended. 

Several commenters objected to the 

‘‘pattern or practice’’ provision, arguing 

that because non-compliant advice is 

already subject to an excise tax under 

the Code, extending the penalty to all 

advice provided during a period, 

without regard to it being compliant 

advice, is unnecessary and punitive. 

Commenters also argued that the 

concept of a ‘‘pattern or practice’’ was 

unclear. Some commenters suggested 

the penalty should be prospective only, 

while others argued there should be a de 

minimus rule or period for correcting 

such noncompliance before losing the 

relief of the exemption for compliant 

advice. On the other side, one 

commenter argued that increased 

penalties for noncompliance would 

make the exemption more protective. 

The Department believes that one of 

the most significant deterrents to 

noncompliance with the conditions of 

the statutory and class exemption is the 

potentially significant excise taxes 

applicable to transactions that fail to 

satisfy the conditions of the exemptions. 

The Department believes that the 

‘‘pattern or practice’’ provision creates 

additional incentives on the part of 

fiduciary advisers taking advantage of 

the exemptive relief to be vigilant in 

designing and following policies, 

procedures and practices that will 

assure compliance. The Department, 

therefore, has retained this provision in 

the final rule. Unlike the proposal, 

however, the provision now applies to 

both relief under the statutory 

exemption and the class exemption. As 

revised, paragraph (f) of the final rule 

provides that: (1) The relief from the 

prohibited transaction provisions of 

section 406 of ERISA and the sanctions 

resulting from the application of section 

4975 of the Code described in 

paragraphs (b) and (d) of the final rule 

shall not apply to any transaction 

described in such paragraphs in 

connection with the provision of 

investment advice to an individual 

participant or beneficiary with respect 

to which the applicable conditions of 

the final rule have not been satisfied; 

and (2), in the case of a pattern or 

practice of noncompliance with any of 

the applicable conditions of the final 

rule, the relief described in paragraph 

(b) or (d) shall not apply to any 

transaction in connection with the 

provision of investment advice provided 

by the fiduciary adviser during the 

period over which the pattern or 

practice extended. 

With respect to what the Department 

might view as a ‘‘pattern or practice’’ of 

noncompliance with the exemptions, 

the Department believes that it is 

important to identify both individual 

violations and patterns of such 

violations. Isolated, unrelated, or 

accidental occurrences would not 

themselves constitute a pattern or 

practice. However, intentional, regular, 

deliberate practices involving more than 

isolated events or individuals, or 

institutionalized practices will almost 

always constitute a pattern or practice. 

In determining whether a pattern or 

practice exists, the Department will 

consider whether the noncompliance 

appears to be part of either written or 

unwritten policies or established 

practices, whether there is evidence of 

similar noncompliance with respect to 

more than one plan or arrangement, and 

whether the noncompliance is within a 

fiduciary adviser’s control. 

7. Effective Date 

The Department proposed that the 

regulation would be effective 60 days 

after the date of publication of the final 

rule and that the class exemption would 

be effective 90 days after the date of 

publication of the final exemption. One 

commenter suggested that the 60 day 

effective date would not constitute 

sufficient time to comply with the final 

rule. One commenter suggested that the 

final rule should be effective no earlier 

than the later of July 1, 2009, or 180 

days after publication of the final rule. 

Another commenter requested that rule 

be made effective upon publication. 

Given the importance of investment 

advice to participants and beneficiaries 

generally and given that the exemptions 

contained in this final rule will expand 

the opportunity for participant and 

beneficiaries to obtain affordable, 

quality investment advice, the 

Department believes that the final rule 

should be effective on the earliest 

possible date. Accordingly, the final 

rule contained in this document will be 

effective 60 days after the date of 

publication in the Federal Register and 

will apply to transactions described in 

paragraphs (b) and (d) of the final rule 

occurring on or after that date. 

8. General Information 

The attention of interested persons is 

directed to the following: 

mstockstill on PROD1PC66 with RULES3

3838 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

(1) The fact that a transaction is the 

subject of an exemption under section 

408(a) of the Act and section 4975(c)(2) 

of the Code does not relieve a fiduciary 

or other party in interest or disqualified 

person from other provisions of the Act 

and the Code, including any prohibited 

transaction provisions to which the 

exemption does not apply and the 

general fiduciary responsibility 

provisions of section 404 of the Act. 

Section 404 requires, among other 

things, that a fiduciary discharge its 

duties with respect to the plan 

prudently and solely in the interests of 

the plan’s participants and beneficiaries. 

A transaction’s qualification for an 

exemption also does not affect the 

requirement of section 401(a) of the 

Code that the plan must operate for the 

exclusive benefit of the employees of 

the employer maintaining the plan and 

their beneficiaries; 

(2) The exemptions contained herein 

are supplemental to, and not in 

derogation of, any other provisions of 

the Act and the Code, including 

statutory or administrative exemptions 

and transitional rules; and 

(3) In accordance with section 408(a) 

of ERISA and section 4975(c)(2) of the 

Code, and based on the entire record, 

the Department finds that, as discussed 

above, the class exemption contained in 

this document is administratively 

feasible, in the interests of the plan(s) 

and IRAs and of its participants and 

beneficiaries, and protective of the 

rights of the participants and 

beneficiaries of the plan and IRAs. 

C. Overview of Final § 2550.408g–2 

Section 408(g)(11)(A) of ERISA 

provides that, with respect to an 

arrangement that relies on use of a 

computer model to qualify as an 

‘‘eligible investment advice 

arrangement’’ under the statutory 

exemption, a person who develops the 

computer model, or markets the 

investment advice program or computer 

model, shall be treated as a fiduciary of 

a plan by reason of the provision of 

investment advice referred to in ERISA 

section 3(21)(A)(ii) to the plan 

participant or beneficiary, and shall be 

treated as a ‘‘fiduciary adviser’’ for 

purposes of ERISA sections 408(b)(14) 

and 408(g), except that the Secretary of 

Labor may prescribe rules under which 

only one fiduciary adviser may elect to 

be treated as a fiduciary with respect to 

the plan. Section 4975(f)(8)(J)(i) of the 

Code contains a parallel provision to 

ERISA section 408(g)(11)(A) that applies 

for purposes of Code sections 

4975(d)(17) and 4975(f)(8). 

In conjunction with the proposed 

regulation implementing the statutory 

exemption for investment advice, the 

Department also proposed a rule, 

§ 2550.408g–2, governing the 

requirements for electing to be treated as 

a fiduciary and fiduciary adviser by 

reason of developing or marketing a 

computer model or an investment 

advice program used in an eligible 

investment advice arrangement. Section 

2550.408g–2 sets forth requirements that 

must be satisfied in order for one such 

fiduciary adviser to elect to be treated as 

a fiduciary under such an eligible 

investment advice arrangement. See 

paragraph (a) of § 2550.408g–2. 

Paragraph (b)(1) of § 2550.408g–2 

provides that, if an election meets the 

requirements of paragraph (b)(2) of the 

proposal, then the person identified in 

the election shall be the sole fiduciary 

adviser treated as a fiduciary by reason 

of developing or marketing a computer 

model, or marketing an investment 

advice program, used in an eligible 

investment advice arrangement. 

Paragraph (b)(2) requires that the 

election be in writing and that the 

writing: identify the arrangement, and 

person offering the arrangement, with 

respect to which the election is to be 

effective; and identify the person who is 

the fiduciary adviser, the person who 

develops the computer model or 

markets the computer model or 

investment advice program with respect 

to the arrangement, and the person who 

elects to be treated as the only fiduciary, 

and fiduciary adviser, by reason of 

developing such computer model or 

marketing such computer model or 

investment advice program. Paragraph 

(b)(2) of § 2550.408g–2 also requires that 

the election be signed by the person 

acknowledging that it elects to be 

treated as the only fiduciary and 

fiduciary adviser; that a copy of the 

election be furnished to the plan 

fiduciary who authorized use of the 

arrangement; and that the writing be 

retained in accordance with the record 

retention requirements of § 2550.408g– 

1(e). 

The Department received no 

substantive comments on this regulation 

and, therefore, is adopting the 

regulation substantially as proposed. 

This regulation, like § 2550.408g–1, will 

be effective 60 days after the date of 

publication of the final rule in the 

Federal Register. 

D. Regulatory Impact Analysis 

1. Summary 

In the regulatory impact analysis 

(RIA) for the proposed regulation and 

class exemption (hereafter, ‘‘the 

proposals’’), the Department noted that, 

historically, many participants and 

beneficiaries in participant-directed 

defined contribution plans and 

beneficiaries of individual retirement 

accounts (IRAs) (collectively hereafter, 

‘‘participants’’) have made investment 

mistakes. The Department anticipates 

that full implementation of the PPA 

under this final regulation, together 

with this class exemption (hereafter, the 

‘‘final rule’’), by extending quality, 

expert investment advice to a greater 

number of participants will improve 

investment decisions and results. This 

improvement in investment results 

reflects reductions in investment errors, 

including poor trading strategies and 

inadequate diversification. The 

Department further anticipates that the 

increased investment advice resulting 

from the final rule also will reduce 

participants’ investment related 

expenses, further improving their 

overall investment results, and will 

improve the welfare of participants by 

better aligning participant investments 

and their risk tolerances. 

The provisions of the final rule are 

designed to promote the availability of 

affordable, quality investment advice. 

2. Public Comments 

The Department received several 

comments on the regulatory impact 

analysis of the proposals. The following 

is a summary of the major comments 

and the Department’s response thereto. 

a. Trading Strategies 

A number of commenters objected to 

the Department’s contention that 

participants’ active attempts to ‘‘time 

the market’’ constitute inferior trading 

strategies that result in losses. 

According to these commenters, the 

term ‘‘market timing’’ ‘‘no longer 

defines investment strategies providing 

investors with enhanced risk-adjusted 

returns’’ and professionals are proficient 

in actively managing clients’ portfolios. 

The commenters further asserted that 

the Department should not favor one 

investment strategy over another. 

The Department continues to believe 

that automatic rebalancing is likely to be 

superior on average to participants’ own 

efforts (without benefit of expert advice) 

to time the market (meaning to 

reallocate assets in anticipation of future 

market movements). However, this says 

nothing about the relative merits of 

active professional account 

management. The Department is 

unaware of any studies that measure the 

performance of managed accounts 

relative to that of target date funds or 

other automatic rebalancing 

arrangements, and proffers no view as to 

whether one strategy is superior to 

another. 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3839 

20 ‘‘Level’’ in this context means invariant with 

respect to associated investment decisions. 

21Since promulgating the proposals the 

Department has considered additional evidence 

Continued 

b. Permissible Arrangements 

The Department included in its 

analysis of the proposals a table 

summarizing how compensation of 

fiduciary advisers can vary in advice 

arrangements operating under the 

following three scenarios: Absent any 

exemptive relief, pursuant to the PPA 

statutory exemption, and pursuant to 

the proposed class exemption. As 

requested in comments, the Department 

advises that the table was not intended 

to exhaustively list all permissible 

advice arrangements. Some 

arrangements might operate pursuant to 

other exemptive relief. Participants and 

plans continue to have the option of 

obtaining advice under arrangements 

that were permitted prior to enactment 

of the PPA and promulgation of this 

final rule. Furthermore, the Department 

does not favor any particular 

permissible arrangement over any other. 

c. Preferences for Computer Models v. 

Contact With Advisers 

In response to commenters, the 

Department is modifying its assertion 

that some participants are dissatisfied 

with advice from computer models. 

Rather, the cited authorities indicate 

that plan sponsors rate arrangements 

that include contact with advisers as 

more effective than those that rely 

exclusively on computer models, and 

provide some evidence that more 

participants make use of the former than 

the latter. 

d. Revenue Sources and Active 

Marketing 

In its analysis of the proposals the 

Department suggested that advisers with 

revenue sources other than level 20 fees 

paid directly by participants, plans or 

sponsors might market their advisory 

services more actively to certain 

participant market segments than 

independent advisers do. Some 

commenters disputed this suggestion. 

These commenters pointed out that 

independent advisers may receive 

alternative revenue sources such as 

revenue sharing and may not rely 

exclusively on level fees, and 

emphasized that plan sponsors mediate 

adviser efforts to market to participants. 

First, the Department clarifies that in 

this context ‘‘independence’’ was meant 

to reference exclusive reliance on level 

fees rather than a lack of affiliation. 

Second, the Department notes that other 

commenters strongly suggested that 

alternative sources of compensation for 

investment advisory services may 

facilitate sales of such services where 

exclusive reliance on level fees would 

not—particularly sales of adviser 

consultations (as distinct from computer 

models alone) to small account holders. 

Therefore, the Department continues to 

believe that some advisers with such 

alternative sources of compensation for 

investment advice services will be more 

inclined than independent advisers to 

market such services to some 

participant market segments. Finally, 

the Department notes that active 

marketing could target plan sponsors as 

well as plan participants and IRA 

beneficiaries. 

e. Audit Requirement 

In response to comments, the 

Department notes that its assumption 

that audits would be outsourced to an 

independent legal professional was 

intended only as a proxy to estimate the 

cost of compliance with the audit 

requirement. In fact, as discussed earlier 

in the preamble, the Department is not 

persuaded that there is necessarily one 

set of credentials, such as experience as 

certified public account or auditor or 

lawyer, that, in and of itself, qualifies an 

individual or organization to conduct 

the audits required by the statutory and 

class exemptions. Likewise, the 

Department’s assumptions regarding the 

sample of transactions to be audited 

were adopted for purposes of cost 

estimation and should not be construed 

as guidance as to how sampling should 

be conducted. Having said that, the 

assumptions are consistent with 

compliant sampling at the level of the 

financial institution acting as the 

fiduciary adviser. 

f. Advice Quality 

The Department’s RIA of the 

proposals devoted considerable 

attention to the question of whether 

adviser conflicts might taint advice. As 

detailed there, there is evidence to 

suggest that conflicted advisers 

sometimes reap profit at investors’ 

expense. The proposals’ conditions 

were intended to prevent conflicts from 

tainting advice. Accordingly, the RIA 

assumed that advice arrangements 

operating pursuant to the proposals 

would be as effective as arrangements 

operating without need for exemptive 

relief, notwithstanding the conflicts that 

are attendant to the former. 

As noted earlier in this preamble, 

some commenters maintained that the 

proposals’ conditions, together with the 

threat of substantial excise tax penalties 

for noncompliance, are sufficiently 

protective and that consequently advice 

provided pursuant to the proposals will 

be of high quality and reflect the 

participants’ best interests. The 

Department can be confident that advice 

arrangements operating pursuant to the 

proposals will satisfy the applicable 

conditions because advisers are 

scrupulous about compliance, the 

commenters said. Some of these 

commenters suggested that some of the 

conditions were more stringent than 

necessary and should be relaxed. For 

example, some commenters objected to 

the proposed condition denying 

exemptive relief to all transactions 

under an arrangement where there is a 

pattern or practice of failures to satisfy 

applicable conditions. Relief should be 

denied only to particular transactions 

for which conditions were not satisfied, 

the commenters said. Some commenters 

argued that the proposals’ limits on 

compensation that can be paid under 

level fee arrangements should be 

relaxed to permit certain types of 

performance based rewards, bonuses 

and promotions. 

Also as noted earlier in this preamble, 

other commenters questioned the 

Department’s assumption that advice 

arrangements operating pursuant to the 

proposals would be as effective as 

arrangements operating without need 

for exemptive relief, predicting that the 

former will too often be tainted by 

attendant conflicts. Most of these 

commenters expressed deepest concern 

with the proposed class exemption, 

arguing that the fiduciary adviser and 

the person providing the advice may be 

conflicted. Some commenters also 

expressed concern with the proposed 

regulation’s interpretation of the 

statutory exemption, arguing that the 

fiduciary advisers’ affiliates may be 

conflicted. These commenters 

maintained that the proposals’ 

conditions are not sufficiently 

protective. Persons providing advice on 

behalf of fiduciary adviser entities 

cannot be fully insulated from conflicts 

affecting the entities or their affiliates, 

the commenters said, and the proposals’ 

procedural safeguards, including 

disclosure and independent audits, 

together with available enforcement 

mechanisms, are not sufficient to ensure 

compliance with the proposals’ 

substantive conditions, such as 

unbiasedness and adherence to 

investment theories. Some commenters 

cautioned that investors are vulnerable 

to manipulation. 

The Department continues to believe, 

as it did in connection with the 

proposals, that, in the absence of 

adequate protections, an adviser’s 

conflicts may result in biased advice.21

mstockstill on PROD1PC66 with RULES3

3840 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

suggesting that adviser conflicts can taint advice. 

See, e.g., U.S. SEC, Protecting Senior Investors: 

Report of Examinations of Securities Firms 

Providing ‘‘Free Lunch’’ Sales Seminar (Sept. 2007). 

22Under Code section 4975, fiduciaries 

participating in prohibited transactions may be 

subject to an excise tax of 15 percent of the amount 

involved for each year in the taxable period, in 

addition to which an excise tax of 100 percent of 

the amount involved may be added depending on 

whether the prohibited transactions are timely 

corrected. 23See 73 FR 43013 (July 23, 2008). 

24See e.g., James J. Choi et al., Why Does the Law 

of One Price Fail? An Experiment on Index Mutual 

Funds, National Bureau of Economic Research 

Working Paper W12261 (May 2006); Jeff Dominitz 

et al., How Do Mutual Funds Fees Affect Investor 

Choices? Evidence from Survey Experiments (May 

2008) (unpublished, on file with the Department) 

(Dominitz); and John Turner & Sophie Korczyk, 

Pension Participant Knowledge About Plan Fees, 

AARP Pub ID: DD–105 (Nov. 2004). Commenters 

pointed out that net flows are concentrated in 

mutual funds with low expenses. However it is 

unclear whether this reflects investor fee sensitivity 

or brand name recognition and successful 

marketing by large, established funds whose low 

fees are attributable to economies of scale. 

25Sebastian Mu ̈ller & Martin Weber, Financial 

Literacy and Mutual Fund Investments: Who Buys 

Actively Managed Funds?, Social Science Research 

Network Abstract 1093305 (Feb. 14, 2008) found 

that more financially literate investors pay lower 

front-end loads but similar management fees, and 

suggest that investors who know about management 

fees appear not to care about them. Dominitz finds 

that financially literate individuals are better able 

to estimate fees, and better estimates are associated 

with more optimal investment choices. Brad M. 

Barber et al., Out of Sight, Out of Mind, The Effects 

of Expenses on Mutual Fund Flows, Journal of 

Business, Volume 79, Number 6, 2095–2119 (2005) 

found that repeat investors are more sensitive to 

load fees than expense ratios, but commenters point 

out that this finding may be an artifact of industry 

load setting practices. 

26Mark Grinblatt et al., Are Mutual Fund Fees 

Competitive? What IQ-Related Behavior Tells Us, 

Social Science Research Network Abstract 1087120 

(Nov. 2007) found that investors with different IQs 

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

competitively.’’ 

However, the Department also believes 

that the safeguards included in this final 

rule, together with associated 

enforcement mechanisms including the 

potentially significant excise taxes 22 for 

noncompliance and for patterns and 

practice of noncompliance, effectively 

minimize the possibility that fiduciary 

advisers will act on their conflicts. 

Provisions expected to deter 

noncompliance include the annual 

audit requirement, disclosure of 

noncompliant activities identified in the 

course of an audit to authorizing plan 

fiduciaries and, in the case of IRAs, to 

the Department, and the pattern or 

practice provision. 

Because the conditions and 

enforcement mechanisms constitute 

adequate safeguards, the Department 

believes that any impact of conflicts on 

advice provided pursuant to the 

statutory and class exemptions will be 

minimal. The Department stands by its 

assumption that advice arrangements 

operating pursuant to the final rule will 

be as effective as arrangements 

operating without need for exemptive 

relief. 

g. Effect on Expenses 

Two distinct types of inefficiency can 

result in higher than optimal consumer 

expenditures for a particular type of 

good. The first is prices that are higher 

than would be efficient. Efficient 

markets require vigorous competition. 

Sellers with market power can 

command inefficiently high prices, 

thereby capturing consumer surplus and 

imposing a ‘‘dead weight loss’’ of 

welfare on society. Efficient markets 

also require perfect information and 

rational, utility maximizing consumers. 

Imperfect information, search costs and 

consumers’ behavioral biases likewise 

can allow some sellers to command 

inefficiently high prices. The 

Department accordingly has considered 

whether such conditions might exist in 

the market for investment products and 

services bought by or on behalf of 

participants. 

The second type of inefficiency is 

suboptimal consumer choices among 

available products. Even if goods are 

priced competitively, welfare will be 

lost if consumers make poor purchasing 

decisions. Imperfect information, search 

costs and behavioral biases can 

compromise purchasing decisions, and 

the Department has considered whether 

participants’ purchases of investment 

products and services might be so 

compromised. 

In its RIA of the proposals, the 

Department estimated that fees and 

expenses paid by unadvised 

participants are higher than necessary 

by 11.3 basis points on average. Some 

commenters on the proposals, as well as 

some commenters on the Department’s 

proposed regulation governing 

disclosure to participant-directed 

defined contribution (DC) plan 

participants,23 disputed this estimate. 

The commenters pointed to evidence 

that the pricing of investment products 

and related services is competitive and 

efficient, and contended that there is no 

credible evidence to the contrary. 

The commenters raised several 

specific challenges to the Department’s 

analysis. First, they contended that the 

Department’s estimate relies 

inappropriately on dispersion in mutual 

fund expenses as evidence that such 

expenses are sometimes higher than 

necessary and as a basis for estimating 

the degree to which this is so. 

Dispersion in expenses reflects 

differences among the investment 

products or the services bundled with 

them, the commenters said, and 

therefore such dispersion is consistent 

with competitive, efficient pricing. 

Second, the commenters argued that the 

analysis draws incorrect inferences 

about fees and expenses in DC plans. 

The analysis overlooks the role of DC 

plan fiduciaries in choosing reasonably 

priced investments and relies too much 

on research that examined retail rather 

than DC plan experience, they said. 

Third, the commenters highlighted what 

they say are technical flaws in some of 

the research that the Department had 

cited as supporting the conclusion that 

fees and expenses are sometimes higher 

than necessary, and they took issue with 

the Department’s interpretation of some 

of the research. 

In response to these commenters, the 

Department undertook to refine and 

strengthen its analysis. First, the 

Department agrees that the RIA of the 

proposals relied too heavily on mere 

dispersion of fees and expenses as a 

basis for estimating whether and to what 

degree they might be higher than 

necessary. The estimate that they are on 

average 11.3 basis points higher than 

necessary lacks adequate basis and 

should be disregarded. Second, the 

Department agrees that fees and 

expenses paid by DC plan participants 

can differ from those paid by retail 

investors. Any evidence of higher than 

necessary expenses in the retail sector 

might suggest similar circumstances in 

DC plans, but would not demonstrate it. 

Third, the Department reviewed 

available research literature in light of 

the commenters, and refined its analysis 

and conclusions accordingly, as 

summarized immediately below. 

(i) Expense sensitivity—Surveys and 

studies strongly suggest gaps in 

awareness of and sensitivity to 

expenses.24 Other studies consider 

whether investors with different levels 

of sophistication make different 

decisions about fees. If more 

sophisticated investors are more 

sensitive to fees, less sophisticated ones 

might be paying more than would be 

optimal. Alternatively, they might be 

paying more in order to obtain 

sophisticated help. Much literature 

suggests a negative relationship between 

sophistication and expenses paid,25 but 

some does not.26 Overall this literature 

leaves open the question of whether 

investment prices are sometimes 

inefficiently high, but suggests that even 

if prices are efficient investors may 

make poor purchasing decisions. The 

Department believes that many 

individual investors, including both DC 

plan participants and IRA beneficiaries, 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3841 

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

Fund Advisory Fees: The Cost of Conflicts of 

Interest, The Journal of Corporate Law, Volume 26, 

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

mutual funds for equity fund management is higher 

than that paid by pension funds. Based on this and 

other evidence they argue that mutual fund fees are 

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

Competition in the Mutual Fund Industry: Evidence 

and Implications for Policy, Social Science 

Research Network Abstract 1005426 (Aug. 2007), 

challenged Freeman and Brown’s methods and 

conclusions, arguing that these differences in prices 

are attributable to differences in services for which 

Freeman and Brown did not account. They offer 

evidence that fees are competitive. Alicia H. 

Munnell et al., Investment Returns: Defined 

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

Research Issue Brief Number 52 (Sept. 2006), found 

higher returns in defined benefit (DB) plans than in 

DC plans and offered that ‘‘part of the explanation 

may rest with higher fees’’ that are paid by DC plan 

participants. Rob Bauer & Rik G.P. Frehen, The 

Performance of U.S. Pension Funds, Social Science 

Research Network Abstract 965388 (Jan. 2008), 

found that DC and DB plans both perform close to 

benchmarks while mutual funds underperform, and 

point to hidden costs in mutual funds as the most 

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

The Determinants of the Flow of Funds of Managed 

Portfolios: Mutual Funds vs. Pension Funds, The 

Journal of Financial and Quantitative Analysis, 

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

that ‘‘in contrast to mutual fund investors, pension 

clients punish poorly performing managers by 

withdrawing assets under management and do not 

flock disproportionately to recent winners.’’ 

28 Guo Ying Luo, Mutual Fund Fee-Setting, 

Market Structure and Mark-Ups, Economica, 

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

exploited differences in market concentration 

across different narrow mutual funds categories, 

and found that mark-ups average 30 percent of fees 

across all categories of no load funds and more than 

70 percent across load funds (assuming a 5-year 

holding period). 

29The literature also attributed much expense 

dispersion to differences in the cost of managing 

different types of funds. For example, active equity 

management is more expensive than passive and 

management of foreign or small cap equity funds is 

more expensive than management of large cap 

domestic equity funds. Investors therefore might 

optimally diversify across funds with different 

levels of investment management expense. Some 

studies questioned whether active management 

delivers observable financial benefits 

commensurate to the associate expense. For 

example, Kenneth R. French, The Cost of Active 

Investing, Social Science Research Network 

Abstract 1105775 (Apr. 2008), found that investors 

spend 0.67 percent of aggregate U.S. stock market 

value each year searching for superior return, and 

characterized this as society’s cost of price 

discovery. 

30Both of these hypotheses are also consistent 

with literature finding a negative link between 

sophistication and expenses. 

31The following is a sampling of findings and 

interpretations reported in various studies that the 

Department reviewed. The Department observes 

that some of these studies have been published in 

peer-reviewed journals, while others have not. 

Some are working papers subject to later revision. 

Some research is visibly supported by industry or 

other interests, and some may be independent. Very 

little of this research separately examines DC plan 

investing. Nearly all of it examines mutual fund 

markets to the exclusion of certain competing 

insurance company or bank products. Some of it 

examines foreign experience. The Department 

believes it must be cautious in drawing inferences 

from this research as to whether investment prices 

paid by participants are efficient. 

Daniel B. Bergstresser et al., Assessing the Costs 

and Benefits of Brokers in the Mutual Fund 

Industry, Social Science Research Network Abstract 

616981 (Sept. 2007), found that investors who pay 

to purchase funds via intermediaries realize inferior 

returns, and said this result is consistent with either 

intangible benefits for investors or inefficiently high 

prices due to conflicts. 

Ralph Bluethgen et al., Financial Advice and 

Individual Investors’ Portfolios, Social Science 

Research Network Abstract 968197 (Mar. 2008), 

found that advisers (who are mostly compensated 

by commission) improve diversification and 

allocation across classes while increasing fees and 

turnover. They said these findings are consistent 

with ‘‘honest advice.’’ 

Mercer Bullard et al., Investor Timing and Fund 

Distribution Channels, Social Science Research 

Network Abstract 1070545 (Dec. 2007), found that 

investors who transact through conflicted advisers 

incur timing underperformance. 

Susan Christoffersen et al., The Economics of 

Mutual-Fund Brokerage: Evidence from the Cross 

Section of Investment Channels, Science Research 

Network Abstract 687522 (Dec. 2005), identified 

some financial benefits reaped by investors who 

pay to invest through intermediaries. 

Sean Collins, Fees and Expenses of Mutual 

Funds, 2006, Investment Company Institute 

Research Fundamentals, Volume 16, Number 2 

(June 2007), reported that mutual fund fees and 

expenses are declining. 

Sean Collins, Are S&P 500 Index Mutual Funds 

Commodities?, Investment Company Institute 

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

argued that S&P 500 index funds are not uniform 

commodities. For example, they are distributed in 

different ways. He found that 91 percent of the 

variation in these funds’ expense ratios can be 

explained by a combination of fund asset size, 

investor account size, fee waivers and separate fees, 

and investor advice that is bundled into expense 

ratios. He argued that these funds competitively 

pass economies of scale along to investors, and 

reported that assets and flows are concentrated in 

low-cost funds. 

Henrik Cronqvist, Advertising and Portfolio 

Choice, Social Science Research Network Abstract 

920693 (July 26, 2006), found that fund advertising 

steered investors toward ‘‘portfolios with higher 

fees, more risk, more active management, more ‘hot’ 

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

‘‘with the use of advertising, funds can differentiate 

themselves and therefore charge investors higher 

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

Daniel N. Deli, Mutual Fund Advisory Contracts: 

An Empirical Investigation, The Journal of Finance, 

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

that differences in investment advisers’ marginal 

compensation reflected differences in their 

marginal product, difficulty in measuring adviser 

performance, control environments, and scale 

economies. Based on this finding, he suggested that 

investment prices are efficient and recommended 

caution in any regulatory effort to influence such 

prices. 

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

Choices Among Index Funds, The Journal of 

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

2004), found that flows into high-expense (and 

therefore predictably low performance) S&P 500 

index mutual funds were higher than would be 

expected in an efficient market. They concluded 

that, because investors are not perfectly informed 

and rational, inferior products can prosper. 

Commenters, however, contended that, because the 

authors scaled flows by fund size and smaller funds 

have higher expenses, these findings exaggerated 

the degree to which flows are directed to highexpense funds. 

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

Puzzle? Relation Between Price and Performance in 

the Mutual Fund Industry, Social Science Research 

Network Abstract 947448 (March 2007), found that 

‘‘funds with worse before-fee performance charge 

higher fees.’’ They hypothesized that lowerperforming funds lose sophisticated investors to 

higher performing funds, then are left with 

relatively unsophisticated investors who are not as 

responsive to price. 

Continued 

historically have not factored expenses 

optimally into their investment choices. 

(ii) Sector differences—Some studies 

lend insight to the question of whether 

investment prices are efficient by 

comparing prices paid or performance 

in different market segments.27 The 

Department believes that taken together, 

this literature suggests that there are 

unexplained differences in prices and 

performance across sectors but fails to 

demonstrate conclusively whether such 

differences are systematically 

attributable to inefficiently high 

investment prices. 

(iii) Market power—At least one study 

suggests that mutual funds may wield 

market power to mark up prices to 

inefficient levels.28

(iv) What expenses buy—A number of 

studies considered the degree to which 

expense dispersion is a function of 

product features and bundled services, 

and if it is, whether that dispersion is 

justified by differences in observable 

attendant financial benefits such as 

performance. Some of this literature also 

considered the degree to which 

investors choose investments where 

expenses are so justified. In the 

Department’s view this literature taken 

together suggests that a substantial 

portion of expense dispersion is 

attributable to distribution expenses, 

including compensation of 

intermediaries and advertising.29 It casts 

doubt on whether such expenses are 

duly offset by observable financial 

benefits. Most studies are consistent 

with the possibility that such expenses 

are at least partly offset by unobserved 

benefits such as reduced search costs 

and other support for novice and 

unsophisticated investors, but most are 

also consistent with the possibility that 

some expenses are not so offset and that 

investors, especially unsophisticated 

ones, sometimes pay inefficiently high 

prices.30 The authors of some studies 

expressly interpreted their failure to 

identify offsetting financial benefits as 

evidence that prices are inefficiently 

high. Some suggested that conflicted 

intermediaries may serve their own and 

fund managers’ interests, thereby 

generating inefficiently high profits for 

either or both. Others disagreed, 

believing that investors efficiently 

derive a combination of financial and 

intangible benefits for their expense 

dollars.31

mstockstill on PROD1PC66 with RULES3

3842 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

John A. Haslem et al., Performance and 

Characteristics of Actively Managed Retail Equity 

Mutual Funds with Diverse Expense Ratios, 

Financial Services Review, Volume 17, Number 1, 

49–68 (2008), found that funds with lower expenses 

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

Identification and Performance of Equity Mutual 

Funds with High Management Fees and Expense 

Ratios, Journal of Investing, Volume 16, Number 2 

(2007), found that certain performance measures 

vary negatively with fees and, on that basis, 

suggested that mutual funds do not compete 

strongly on price and that expenses are too high. 

Sarah Holden & Michael Hadley, The Economics 

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

Expenses 2006, Investment Company Institute 

Research Fundamentals, Volume 16, Number 4 

(Sept. 2007), reported that 401(k) mutual fund 

investors tended to pay lower than average 

expenses and that 401(k) assets were concentrated 

in low-cost funds. 

Ali Hortacsu & Chad Syverson, Product 

Differentiation, Search Costs, and Competition in 

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

Index Funds, Quarterly Journal of Economics, 403 

(May 2004), documented dispersion in S&P 500 

Index Fund expense ratios, and reported that lowcost funds had a dominant, but falling, market 

share. They concluded that an influx of novice 

investors who must defray search costs explained 

dispersion in expenses and flows to high-expense 

funds. 

Todd Houge & Jay W. Wellman, The Use and 

Abuse of Mutual Fund Expenses, Social Science 

Research Network Abstract 880463 (Jan. 2006), 

found that load funds charge higher 12b-1 and 

management fees. They attributed this to abusive 

market segmentation that extracted excessive fees 

from unsophisticated investors. 

Giuliano Iannotta & Marco Navone, Search Costs 

and Mutual Fund Fee Dispersion, Social Science 

Research Network Abstract 1231843 (Aug. 2008), 

analyzed the effect of search costs on mutual fund 

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

They estimated the portion of the expense ratio that 

was not justified by the quality of service provided, 

by the cost structure of the investment company, or 

by the specificities of the clientele served by the 

fund and found that its dispersion was lower for 

highly visible funds and for funds that invested 

heavily in marketing. In the case of the U.S. mutual 

fund market, they argued, the dispersion of this 

residual demonstrated the extent to which some 

firms can charge a ‘‘non-marginal’’ (that is higher 

than competitive) price. 

Marc M. Kramer, The Influence of Financial 

Advice on Individual Investor Portfolio 

Performance, Social Science Research Network 

Abstract 1144702 (Mar. 2008), found that advised 

investors took less risk and thereby reaped lower 

returns. Risk-adjusted performance was similar. 

Adjusting further for investor characteristics, 

advised investors performed slightly worse. 

Erik R. Sirri & Peter Tufano, Costly Search and 

Mutual Fund Flows, The Journal of Finance, 

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

found that investors were ‘‘fee sensitive in that 

lower-fee funds and funds that reduce fees grow 

faster.’’ Investors’ fee sensitivity was not symmetric, 

however. 

Edward Tower & Wei Zheng, Ranking Mutual 

Fund Families: Minimum Expenses and Maximum 

Loads as Markers for Moral Turpitude, Social 

Science Research Network Abstract 1265103 (Sept. 

2008), found a negative relationship between 

expense ratios and gross performance. The Division 

of Investment Management: Report on Mutual Fund 

Fees and Expenses, U.S. Securities and Exchange 

Commission (Dec. 2000), at http://www.sec.gov/ 

news/studies/feestudy.htm, described mutual fund 

fees and expenses and identified major factors that 

influenced fee levels but did not assess whether 

prices were efficient. 

Xinge Zhao, The Role of Brokers and Financial 

Advisors Behind Investment Into Load Funds, 

China Europe International Business School 

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

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

found that funds with higher loads received higher 

flows, and suggested that conflicted intermediaries 

enriched themselves at investors’ expense. 

32 It is possible that the converse could sometimes 

occur: participants might fail to buy efficiently 

priced products and services whose marginal cost 

lags the associated marginal benefit to them. In that 

case advice, by correcting this error, might lead to 

higher expenses, but would still improve welfare. 

Because research suggests that participants are 

insensitive to fees rather than excessively sensitive 

to them, the Department believes that this converse 

situation is likely to be rare. 

In light of this literature and public 

commenters, the Department believes 

that the available research provides an 

insufficient basis to confidently 

determine whether or to what degree 

participants pay inefficiently high 

investment prices. Market conditions 

that may lead to inefficiently high 

prices—namely imperfect information, 

search costs and investor behavioral 

biases—certainly exist in the retail IRA 

market and likely exist to some degree 

in particular segments of the DC plan 

market. The Department believes there 

is a strong possibility that at least some 

participants, especially IRA 

beneficiaries, pay inefficiently high 

investment prices. If so, the Department 

would expect these actions to reduce 

that inefficiency. This would increase 

participants’ welfare by transferring 

surplus from producers of investment 

products and services to them and by 

reducing dead weight loss. The 

Department additionally believes that 

even where investment prices are 

efficient, participants often make bad 

investment decisions with respect to 

expenses—that is, they buy investment 

products and services whose marginal 

cost exceed the associated marginal 

benefit to them.32

The Department expects these actions 

to reduce such investment errors, 

improving participant and societal 

welfare. However, the Department has 

no basis on which to quantify such 

errors or improvements. 

3. Impact Assessment 

Although the Department anticipates 

that these actions will increase the 

availability of investment advice to DC 

plan participants and the use of advice 

by IRA beneficiaries, the Department is 

uncertain how changing market 

conditions might affect the incidence 

and magnitude of investment errors, as 

well as the availability, use, and effect 

of investment advice. Recent 

developments in financial markets and 

in the market for financial products and 

services underscore this uncertainty. 

However, given that the costs of this 

regulation are due to the cost of 

providing (or paying for) investment 

advice, it will be incurred only to the 

extent that participants seek advice and 

anticipate improved returns on their 

investments. Thus, the Department 

remains confident that these actions 

will yield positive net benefits though 

we are uncertain of the magnitude. The 

Department believes that the approach 

used in the analysis for the proposed 

rule could reflect the long-term effects 

of these actions and can be viewed as a 

reasonable upper bound. The 

Department’s assumptions are 

summarized in Tables 1, 2, and 3. 

TABLE 1—AVAILABILITY OF ADVICE TO

DC PLAN PARTICIPANTS

Policy context 

Any advice 

(computer 

or live) 

Live adviser 

Pre-PPA ............ 40% 20% 

PPA ................... 50 25 

Class exemption 60 35 

Note: There are approximately 66 million 

DC participants. 

TABLE 2—NUMBER OF ENTITIES

Pre PPA PPA CE 

DC: 

Plans offering (000s) .................................................................................................................................... 209.46 261.82 314.19 

Participants offered (MM) ............................................................................................................................. 26.44 33.05 39.66 

Participants using (MM) ................................................................................................................................ 6.61 8.26 10.25 

IRA: 

IRAs using (MM) ........................................................................................................................................... 16.81 25.47 33.97 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3843 

TABLE 3—USE OF ADVICE BY DC PLAN AND IRA PARTICIPANTS

Policy context 

Share of participants 

advised 

Dollars advised ($ trillions) 

DC plans 

IRA DC plans IRAs Combined 

Where 

offered Overall 

Pre-PPA ........................................................................... 25% 10% 33% $0.30 $1.40 $1.70 

PPA .................................................................................. 25 13 50 0.30 2.10 2.50 

Class exemption .............................................................. 26 16 67 0.40 2.80 3.20 

Note: There are approximately 66 million DC participants and approximately 51 million IRA beneficiaries. 

As in its RIA of the proposals, the 

Department assumes here that advised 

participants make investment errors at 

one-half the rate of unadvised 

participants. The remaining errors 

reflect participant failures to follow 

advice, together with possible flaws in 

some advice. Advice arrangements 

operating without need for exemptive 

relief, pursuant to the PPA statutory 

exemption, and pursuant to the class 

exemption are equally effective on 

average, the Department assumes. 

The Department expects the PPA as 

implemented by this regulation, 

together with this class exemption, to 

reduce investment errors to the benefit 

of participants. The Department’s 

estimates of investment errors and 

reductions from investment advice are 

summarized in Table 4. 

TABLE 4—LONG TERM INVESTMENT ERRORS AND IMPACT OF ADVICE

[$ billions, annual] 

Policy context Remaining 

errors 

Errors eliminated by 

advice 

Incremental Cumulative 

No advice ................................................................................................................................................. $115 $0 $0 

Pre-PPA advice only ................................................................................................................................ 101 14 14 

PPA .......................................................................................................................................................... 95 7 20 

Class exemption ...................................................................................................................................... 88 7 27 

In the RIA of the proposals, the 

Department estimated costs of 

$1.8 billion for advice arrangements 

operating under the PPA statutory 

exemption and $2.3 billion for advice 

arrangements under the class 

exemption. As the requirement to 

document and keep records on the basis 

of advice provided under the class 

exemption was broadened, costs of 

about $610 million were added to the 

costs of the class exemption, leading to 

a new estimate of $2.9 billion. The 

current cost estimates are summarized 

in Table 5. 

TABLE 5—COST OF ADVICE

Pre-PPA PPA Class 

exemption 

Incremental 

Advice cost ($ billions) ..................................................................................................................... $3.80 $1.80 $2.90 

Advice cost rate (bps, average) .............................................................................................................. 23 23 37 

Cumulative (combined with policies to the left) 

Advice cost ($ billions) ..................................................................................................................... $3.80 $5.60 $8.50 

Advice cost rate (bps, average) ....................................................................................................... 23 23 26 

4. Alternatives 

In formulating this final rule, the 

Department considered several 

alternative approaches, which it 

detailed in its RIA of the proposals. The 

Department in these final actions did 

not adopt any of the alternatives 

discussed in its RIA of the proposals, 

having received no sufficiently 

persuasive comments suggesting that it 

should. Some public commenters on the 

proposals suggested alternatives the 

Department had not yet considered. The 

furthest reaching commenters, 

expressing concern that conflicts 

permitted under the proposals would 

taint advice, suggested that the 

Department should either withdraw the 

proposals or modify them to require 

stricter and/or broader fee leveling. As 

detailed above, the Department believes 

these actions’ conditions are sufficiently 

protective to safeguard the quality of 

advice. Accordingly, the Department 

did not pursue these alternatives. Other 

commenters suggested more 

incremental revisions to the proposals. 

The Department’s decisions whether to 

adopt these suggestions are discussed 

earlier in this preamble. 

5. Uncertainty 

As previously stated, the Department 

is uncertain how changing market 

conditions might affect the incidence 

and magnitude of investment errors, as 

well as the availability, use, and effect 

of investment advice. Recent 

developments in financial markets and 

in the market for financial products and 

mstockstill on PROD1PC66 with RULES3

3844 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

services underscore this uncertainty. On 

one hand, falling account balances 

might reduce the magnitude of both 

investment errors and potential gains 

from corrective advice. On the other 

hand, volatility and losses in financial 

markets might amplify these, and might 

increase plan sponsors’ propensity to 

make advice available and participants’ 

propensity to seek and follow advice. At 

the same time, restructuring and 

consolidation among suppliers of 

financial products and services might 

alter the cost and availability of advice. 

The Department intends its quantitative 

estimates to reflect the long-term effects 

that will encompass a variety of market 

circumstances. The literature and 

experience underlying the Department’s 

estimates reflect a variety of historical 

market contexts and conditions. 

However, given the uncertainty, we now 

present the estimate as a plausible 

upper bound for the possible effects. 

Regardless, the Department remains 

highly confident in its conclusion 

expressed in its RIA of the proposals 

that investment errors are common and 

often large, producing large avoidable 

losses (including foregone earnings) in 

the long run for participants. It likewise 

remains confident that participants can 

reduce errors substantially by obtaining 

and following good advice. Public 

comments on the proposals reinforce 

these conclusions. 

The Department also remains 

confident that these actions, by relaxing 

rules governing arrangements under 

which advice can be delivered, will 

promote wider use of advice. However, 

the Department is uncertain to what 

extent advice will reach participants 

and to what extent advice that does 

reach them will reduce errors. To 

illustrate that uncertainty, the 

Department conducted sensitivity tests 

of how its estimates of the reduction in 

investment errors attributable to the 

PPA and this class exemption would 

change in response to alternative 

assumptions regarding the availability, 

use, and quality of advice. Table 6 

summarizes the results of these tests. 

TABLE 6—UNCERTAINTY IN ESTIMATE OF INVESTMENT ERROR REDUCTION

[$ billions annually] 

Scenarios Impact of 

PPA 

Impact of 

class 

exemption 

Impact of all 

advice 

Remaining 

errors 

Advice eliminates: 

75% of errors ............................................................................................................ $10 $10 $43 $80 

50% of errors ............................................................................................................ 7 7 27 88 

25% of errors ............................................................................................................ 3 3 13 96 

After PPA/class exemption, advice reaches: 

15%/21% of DC and 60%/80% of IRA ..................................................................... 11 8 33 82 

13%/16% of DC and 50%/67% of IRA ..................................................................... 7 7 27 88 

11%/13% of DC and 40%/50% of IRA ..................................................................... 3 4 20 95 

The Department remains uncertain 

whether the magnitude and incidence of 

investment errors and the potential for 

correction of such errors in the context 

of IRAs might differ from that in the 

context of ERISA-covered DC plans. If a 

DC plan’s menu of investment options 

is efficient then the incidence and/or 

magnitude of errors might be smaller 

than in the IRA context. If it is 

inefficient then errors might be more 

numerous and/or larger, but the 

potential for correcting them might be 

constrained. Commenters that address 

this issue mostly suggest that menus are 

efficient. 

The Department remains uncertain 

about the mix of advice and other 

support arrangements that will compose 

the market, and about the relative 

effectiveness of alternative investment 

advice arrangements or other means of 

supporting participants’ investment 

decisions. As discussed above, 

comments on these questions are mixed 

and provide no basis for the Department 

to revise its baseline assumption that all 

arrangements will be equally effective. 

The Department is uncertain about 

the potential magnitude of any 

transitional costs associated with this 

final rule. These might include costs 

associated with efforts of prospective 

fiduciary advisers to adapt their 

business practices to the applicable 

conditions. They might also include 

transaction costs associated with initial 

implementation of investment 

recommendations by newly advised 

participants. The Department’s concern 

over this uncertainty is modest because 

commenters on the proposals emphasize 

the industry’s willingness to comply 

with these actions’ conditions and the 

benefits to investors of implementing 

sound recommendations. 

Another source of uncertainty 

involves potential indirect downstream 

effects of this final rule. Investment 

advice may sometimes come packaged 

with broader financial advice, which 

may include advice on how much to 

contribute to a DC plan. The Department 

has no basis to estimate the incidence of 

such broad advice or its effects, but 

notes that those effects could be large. 

The opening of large new markets to a 

variety of investment advice 

arrangements to which they were 

heretofore closed may affect the 

evolution of investment advice products 

and services and related technologies 

and their distribution channels and 

respective market shares. Other possible 

indirect effects that the Department 

lacks bases to estimate include financial 

market impacts of changes in investor 

behavior and related macroeconomic 

effects. 

However, given that the costs of this 

regulation are due to the cost of 

providing (or paying for) investment 

advice, it will be incurred only to the 

extent that participants seek advice and 

anticipate improved returns on their 

investments. Thus, the Department 

remains confident that these actions 

will yield positive net benefits though 

we are uncertain of the magnitude. 

E. Executive Order 12866 

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). This action, comprising this 

final rule, is economically significant 

under section 3(f)(1) of the Executive 

Order because it is likely to have an 

effect on the economy of $100 million 

or more in any one year. Accordingly, 

the Department undertook the foregoing 

analysis of the action’s impact. On that 

basis the Department believes that the 

action’s benefits justify its costs. 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3845 

33Changes made to the disclosure requirements 

in the final rule are specifically identified below. 

In addition to the disclosure requirements 

contained in the NPRM, the final statutory and class 

exemption provide that, if a computer model does 

not make recommendations with respect to 

investment options that constitute certain 

investment funds, products, or services, the 

fiduciary adviser must provide the participant or 

beneficiary with information explaining such funds, 

products, or services when the investment advice 

generated by the computer model is presented. For 

purposes of this analysis, the Department assumes 

that this information is readily available to the 

fiduciary advisor and will not necessarily have to 

be given to the participant in paper form. Therefore, 

no additional paperwork burden was added. The 

numbers presented also reflect a very minor update 

of the number of DC plan participants utilizing 

advice. 

F. Regulatory Flexibility Act 

In the notice of proposed rulemaking, 

the Department certified that the 

proposed regulation, if adopted, would 

not have a significant economic impact 

on a substantial number of small 

entities. For purposes of the analysis, 

the Department proposed to continue its 

usual practice of considering a small 

entity to be an employee benefit plan 

with fewer than 100 participants. The 

Department consulted with the Small 

Business Administration Office of 

Advocacy concerning use of this 

participant count standard for 

Regulatory Flexibility Act purposes and 

requested public commenters on this 

issue. The Department did not receive 

any comments that address its use of the 

participant count standard and 

continues to consider a small entity to 

be an employee benefit plan with fewer 

than 100 participants. 

The Department received a comment 

from a small investment advisory firm 

that provides investment management 

services to IRA beneficiaries. The 

commenter expressed concern that it 

will incur substantial cost to comply 

with the PPA’s statutory exemption in 

order to continue providing investment 

advisory services for its IRA clients. The 

Department observes, however, that 

investment advice arrangements that 

were permissible before enactment of 

the PPA remain permissible without 

respect to whether they satisfy the 

conditions of the PPA’s statutory 

exemption. Therefore the Department 

does not detect in this comment 

evidence of a substantial impact on a 

small entity. 

Another commenter stated that small 

plan sponsors will bear an additional 

fiduciary burden under the statutory 

exemption, because it allows them to 

enter into investment advice 

arrangements with conflicted fiduciary 

advisers. Therefore, the commenter 

opined, the Department should have 

completed an Initial Regulatory 

Flexibility Analysis when proposing the 

regulation. The Department notes, 

however, that the permissibility of such 

arrangements is established by statute 

and not by this implementing 

regulation. The Department also notes 

that small plan sponsors remain free to 

enter into advice arrangements that are 

free from conflicts. Therefore the 

Department does not detect in this 

comment evidence of a substantial 

impact on a significant number of small 

entities. 

In light of the foregoing, the 

Department hereby certifies that the 

final rule will not have a significant 

impact on a substantial number of small 

entities. 

G. Congressional Review Act 

This 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 the Congress and the 

Comptroller General for review. 

H. Unfunded Mandates Reform Act 

For purposes of the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), as well as Executive Order 

12875, the final rule does not include 

any federal mandate that will 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. 

I. 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 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. This 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 rule 

do not alter the fundamental provisions 

of the statute with respect to employee 

benefit plans, and as such would have 

no implications for the States or the 

relationship or distribution of power 

between the national government and 

the States. 

J. Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

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

of proposed rulemaking (NPRM) 

solicited commenters on the 

information collections included 

therein. The Department also submitted 

an information collection request (ICR) 

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

3507(d), contemporaneously with the 

publication of the NPRM, for OMB’s 

review. No public comments were 

received that specifically addressed the 

paperwork burden analysis of the 

information collections. 

The Department submitted an ICR to 

OMB for its request of a new 

information collection. OMB approved 

the ICR on January 9, 2009, under OMB 

Control Number 1210–0134, which will 

expire on January 31, 2012. 

In order to use the statutory 

exemption and/or the class exemption 

to provide investment advice to 

participants and beneficiaries in 

participant-directed DC plans and 

beneficiaries of IRAs (collectively 

hereafter, ‘‘participants’’), investment 

advisory firms are required to make 

disclosures to participants and hire an 

independent auditor to conduct a 

compliance audit and issue an audit 

report every year. Investment advice 

firms following the conditions of the 

exemption based on disclosure of 

computer model-generated investment 

advice are required to obtain 

certification of the model from an 

eligible investment expert. The class 

exemption conditions its relief on 

establishing written policies and 

procedures, and both exemptions 

impose recordkeeping requirements. 

These paperwork requirements are 

designed to safeguard the interests of 

participants in connection with 

investment advice covered by the 

exemptions. 

The calculation of the estimated hour 

and cost burden of the ICRs under the 

statutory and class exemption were 

discussed in detail in the NPRM and are 

summarized below.33

1. Final Statutory Exemption Hour and 

Cost Burden 

The Department estimates that the 

third-party disclosures, computer model 

certification, and audit requirements for 

mstockstill on PROD1PC66 with RULES3

3846 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

the final statutory exemption will 

require approximately 4.0 million 

burden hours with an equivalent cost of 

approximately $416.8 million and a cost 

burden of approximately $579.4 million 

in the first year. In each subsequent year 

the total labor burden hours are 

estimated to be approximately 2.1 

million hours with an equivalent cost of 

approximately $215.6 million and the 

cost burden is estimated at 

approximately $430.1 million per year. 

2. Final Class Exemption Hour and Cost 

Burden 

The Department estimates that the 

third-party disclosures, the written 

policies and procedures, and the 

recordkeeping and audit requirements 

for the final class exemption will 

require a total of approximately 12.1 

million burden hours with an 

equivalent cost of approximately $991.3 

million and a total cost burden of 

approximately $63.2 million in the first 

year. In each subsequent year, the total 

burden hours are estimated at 

approximately 11.4 million hours with 

an equivalent cost of approximately 

$905.6 million and a total cost burden 

of approximately $63.2 million per year. 

These numbers include an additional 

7.7 million burden hours ($610 million 

in equivalent costs) in all years due to 

the extension in the final class 

exemption of the requirement that 

fiduciary advisers in arrangements using 

fee-leveling conclude that the provided 

advice is in the best interest of the 

participant or beneficiary, explain the 

basis of this conclusion, document the 

explanation within 30 days, and retain 

the documentation. Under the proposed 

class exemption, this requirement only 

applied to arrangements involving postcomputer model or post-investment 

education investment advice. 

3. Overall Exemption Hour and Cost 

Burden 

The Department estimates that the 

third-party disclosures, the computer 

model certification, the written policies 

and procedures, and the recordkeeping 

and audit requirements for the statutory 

and class exemptions require 

approximately 16.1 million burden 

hours with an equivalent cost of 

approximately $1.41 billion and a cost 

burden of approximately $642.6 million 

in the first year. The labor burden hours 

in each subsequent year are 

approximately 13.5 million hours with 

an equivalent cost of approximately 

$1.12 billion and the cost burden in 

each subsequent year is approximately 

$493.3 million per year. These 

paperwork burden estimates are 

summarized as follows: 

Type of Review: New collection 

(Request for new OMB Control 

Number). 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Titles: (1) Proposed Class Exemption 

for the Provision of Investment Advice 

to Participants and Beneficiaries of SelfDirected Individual Account Plans and 

IRAs, and (2) Proposed Investment 

Advice Regulation. 

OMB Control Number: 1210–NEW. 

Affected Public: Business or other forprofit. 

Estimated Number of Respondents: 

16,000. 

Estimated Number of Annual 

Responses: 20,789,000. 

Frequency of Response: Initially, 

Annually, Upon Request, when a 

material change. 

Estimated Total Annual Burden 

Hours: 16,126,000 hours in the first 

year; 13,504,000 hours in each 

subsequent year. 

Estimated Total Annual Burden Cost: 

$642,552,000 for the first year; 

$493,253,000 for each subsequent year. 

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 

is revised 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. Sections 2550.404c–1 and 2550.404c– 

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

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

1107. Sec. 2550.404a–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–19 also issued 

under sec. 611, Public Law 109–280, 120 

Stat. 780, 972, 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. 

2550.408g–1 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. 2550.408g–2 also issued 

under 29 U.S.C. 1108(g) and sec. 102, 

Reorganization Plan No. 4 of 1978, 3 CFR, 

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

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

Comp. 332. Sec. 2550.412–1 also issued 

under 29 U.S.C. 1112. 

■ 2. Add § 2550.408g–1 to read as 

follows: 

§ 2550.408g–1 Investment advice— 

participants and beneficiaries. 

(a) In general. (1) This section 

provides relief from the prohibitions of 

section 406 of the Employee Retirement 

Income Security Act of 1974, as 

amended (ERISA or the Act), and 

section 4975 of the Internal Revenue 

Code of 1986, as amended (the Code), 

for certain transactions in connection 

with the provision of investment advice 

to participants and beneficiaries. This 

section, at paragraph (b), implements 

the statutory exemption set forth at 

sections 408(b)(14) and 408(g)(1) of 

ERISA and sections 4975(d)(17) and 

4975(f)(8) of the Code. This section, at 

paragraph (d), prescribes, pursuant to 

section 408(a) of ERISA and section 

4975(c)(2) of the Code, a class 

exemption for certain transactions not 

otherwise covered by the statutory 

exemption. The requirements and 

conditions set forth in this section apply 

solely for the relief described in 

paragraphs (b) and (d) of this section 

and, accordingly, no inferences should 

be drawn with respect to requirements 

applicable to the provision of 

investment advice not addressed by this 

section. 

(2) Nothing contained in ERISA 

section 408(g)(1), Code section 

4975(f)(8), this regulation or the class 

exemption contained herein imposes an 

obligation on a plan fiduciary or any 

other party to offer, provide or 

otherwise make available any 

investment advice to a participant or 

beneficiary. 

(3) Nothing contained in ERISA 

section 408(g)(1), Code section 

4975(f)(8), this regulation or the class 

exemption contained herein invalidates 

or otherwise affects prior regulations, 

exemptions, interpretive or other 

guidance issued by the Department of 

Labor pertaining to the provision of 

investment advice and the 

circumstances under which such advice 

may or may not constitute a prohibited 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3847 

transaction under section 406 of ERISA 

or section 4975 of the Code. 

(b) Statutory exemption. (1) General. 

Sections 408(b)(14) and 408(g)(1) of 

ERISA provide an exemption from the 

prohibitions of section 406 of ERISA for 

transactions described in section 

408(b)(14) of ERISA in connection with 

the provision of investment advice to a 

participant or a beneficiary if the 

investment advice is provided by a 

fiduciary adviser under an ‘‘eligible 

investment advice arrangement.’’ 

Sections 4975(d)(17) and (f)(8) of the 

Code contain parallel provisions to 

ERISA sections 408(b)(14) and (g)(1). 

(2) Eligible investment advice. For 

purposes of section 408(g)(1) of ERISA 

and section 4975(f)(8) of the Code, an 

‘‘eligible investment advice 

arrangement’’ means an arrangement 

that meets either the requirements of 

paragraph (b)(3) of this section or 

paragraph (b)(4) of this section, or both. 

(3) Arrangements that use feeleveling. For purposes of this section, an 

arrangement is an eligible investment 

advice arrangement if— 

(i)(A) Any investment advice is based 

on generally accepted investment 

theories that take into account the 

historic returns of different asset classes 

over defined periods of time, although 

nothing herein shall preclude any 

investment advice from being based on 

generally accepted investment theories 

that take into account additional 

considerations; 

(B) Any investment advice takes into 

account investment management and 

other fees and expenses attendant to the 

recommended investments; 

(C) Any investment advice takes into 

account, to the extent furnished by a 

plan, participant or beneficiary, 

information relating to age, time 

horizons (e.g., life expectancy, 

retirement age), risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences of 

the participant or beneficiary. A 

fiduciary adviser shall request such 

information, but nothing in this 

paragraph (b)(3)(i)(C) shall require that 

any investment advice take into account 

information requested, but not 

furnished by a participant or 

beneficiary, nor preclude requesting and 

taking into account additional 

information that a plan or participant or 

beneficiary may provide; 

(D) Any fees or other compensation 

(including salary, bonuses, awards, 

promotions, commissions or other 

things of value) received, directly or 

indirectly, by any employee, agent or 

registered representative that provides 

investment advice on behalf of a 

fiduciary adviser does not vary 

depending on the basis of any 

investment option selected by a 

participant or beneficiary; 

(E) Any fees (including any 

commission or other compensation) 

received by the fiduciary adviser for 

investment advice or with respect to the 

sale, holding, or acquisition of any 

security or other property for purposes 

of investment of plan assets do not vary 

depending on the basis of any 

investment option selected by a 

participant or beneficiary; and 

(ii) The requirements of paragraphs 

(b)(5), (6), (7), and (8) and paragraph (e) 

of this section are met. 

(4) Arrangements that use computer 

models. For purposes of this section, an 

arrangement is an eligible investment 

advice arrangement if the only 

investment advice provided under the 

arrangement is advice that is generated 

by a computer model described in 

paragraphs (b)(4)(i) and (ii) of this 

section under an investment advice 

program and with respect to which the 

requirements of paragraphs (b)(5), (6), 

(7), and (8) and paragraph (e) are met. 

(i) A computer model shall be 

designed and operated to— 

(A) Apply generally accepted 

investment theories that take into 

account the historic returns of different 

asset classes over defined periods of 

time, although nothing herein shall 

preclude a computer model from 

applying generally accepted investment 

theories that take into account 

additional considerations; 

(B) Take into account investment 

management and other fees and 

expenses attendant to the recommended 

investments; 

(C) Request from a participant or 

beneficiary and, to the extent furnished, 

utilize information relating to age, time 

horizons (e.g., life expectancy, 

retirement age), risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences; 

provided, however, that nothing herein 

shall preclude a computer model from 

requesting and taking into account 

additional information that a plan or a 

participant or beneficiary may provide; 

(D) Utilize appropriate objective 

criteria to provide asset allocation 

portfolios comprised of investment 

options available under the plan; 

(E) Avoid investment 

recommendations that: 

(1) Inappropriately favor investment 

options offered by the fiduciary adviser 

or a person with a material affiliation or 

material contractual relationship with 

the fiduciary adviser over other 

investment options, if any, available 

under the plan; or 

(2) Inappropriately favor investment 

options that may generate greater 

income for the fiduciary adviser or a 

person with a material affiliation or 

material contractual relationship with 

the fiduciary adviser; and 

(F)(1) Except as provided in clause (2) 

of this paragraph (F), take into account 

all designated investment options, 

within the meaning of paragraph (c)(1) 

of this section, available under the plan 

without giving inappropriate weight to 

any investment option. 

(2) A computer model shall not be 

treated as failing to meet the 

requirements of this paragraph merely 

because it does not make 

recommendations relating to the 

acquisition, holding or sale of an 

investment option that: 

(i) Constitutes an investment 

primarily in qualifying employer 

securities; 

(ii) Constitutes an investment fund, 

product or service that allocates the 

invested assets of a participant or 

beneficiary to achieve varying degrees of 

long-term appreciation and capital 

preservation through equity and fixed 

income exposures, based on a defined 

time horizon (such as retirement age or 

life expectancy) or level of risk of the 

participant or beneficiary, provided 

that, contemporaneous with the 

provision of investment advice 

generated by the computer model, the 

participant or beneficiary is also 

furnished a general description of such 

funds, products or services and how 

they operate; or 

(iii) Constitutes an annuity option 

with respect to which a participant or 

beneficiary may allocate assets toward 

the purchase of a stream of retirement 

income payments guaranteed by an 

insurance company, provided that, 

contemporaneous with the provision of 

investment advice generated by the 

computer model, the participant or 

beneficiary is also furnished a general 

description of such options and how 

they operate. 

(ii) Prior to utilization of the computer 

model, the fiduciary adviser shall obtain 

a written certification, meeting the 

requirements of paragraph (b)(4)(iv) of 

this section, from an eligible investment 

expert, within the meaning of paragraph 

(b)(4)(iii) of this section, that the 

computer model meets the requirements 

of paragraph (b)(4)(i) of this section. If, 

following certification, a computer 

model is modified in a manner that may 

affect its ability to meet the 

requirements of paragraph (b)(4)(i), the 

fiduciary adviser shall, prior to 

utilization of the modified model, 

mstockstill on PROD1PC66 with RULES3

3848 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

obtain a new certification from an 

eligible investment expert that the 

computer model, as modified, meets the 

requirements of paragraph (b)(4)(i). 

(iii) The term ‘‘eligible investment 

expert’’ means a person that, through 

employees or otherwise, has the 

appropriate technical training or 

experience and proficiency to analyze, 

determine and certify, in a manner 

consistent with paragraph (b)(4)(iv) of 

this section, whether a computer model 

meets the requirements of paragraph 

(b)(4)(i) of this section; except that the 

term ‘‘eligible investment expert’’ does 

not include any person that has any 

material affiliation or material 

contractual relationship with the 

fiduciary adviser, with a person with a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser, or with any employee, 

agent, or registered representative of the 

foregoing. 

(iv) A certification by an eligible 

investment expert shall— 

(A) Be in writing; 

(B) Contain— 

(1) An identification of the 

methodology or methodologies applied 

in determining whether the computer 

model meets the requirements of 

paragraph (b)(4)(i) of this section; 

(2) An explanation of how the applied 

methodology or methodologies 

demonstrated that the computer model 

met the requirements of paragraph 

(b)(4)(i) of this section; 

(3) A description of any limitations 

that were imposed by any person on the 

eligible investment expert’s selection or 

application of methodologies for 

determining whether the computer 

model meets the requirements of 

paragraph (b)(4)(i) of this section; 

(4) A representation that the 

methodology or methodologies were 

applied by a person or persons with the 

educational background, technical 

training or experience necessary to 

analyze and determine whether the 

computer model meets the requirements 

of paragraph (b)(4)(i); and 

(5) A statement certifying that the 

eligible investment expert has 

determined that the computer model 

meets the requirements of paragraph 

(b)(4)(i) of this section; and 

(C) Be signed by the eligible 

investment expert. 

(v) The selection of an eligible 

investment expert as required by this 

section is a fiduciary act governed by 

section 404(a)(1) of ERISA. 

(5) Arrangement must be authorized 

by a plan fiduciary. (i) Except as 

provided in paragraph (b)(5)(ii), the 

arrangement pursuant to which 

investment advice is provided to 

participants and beneficiaries pursuant 

to this section must be expressly 

authorized by a plan fiduciary (or, in the 

case of an Individual Retirement 

Account (IRA), the IRA beneficiary) 

other than: The person offering the 

arrangement; any person providing 

designated investment options under 

the plan; or any affiliate of either. 

Provided, however, that for purposes of 

the preceding, in the case of an IRA, an 

IRA beneficiary will not be treated as an 

affiliate of a person solely by reason of 

being an employee of such person. 

(ii) In the case of an arrangement 

pursuant to which investment advice is 

provided to participants and 

beneficiaries of a plan sponsored by the 

person offering the arrangement or a 

plan sponsored by an affiliate of such 

person, the authorization described in 

paragraph (b)(5)(i) may be provided by 

the plan sponsor of such plan, provided 

that the person or affiliate offers the 

same arrangement to participants and 

beneficiaries of unaffiliated plans in the 

ordinary course of its business. 

(iii) For purposes of the authorization 

described in paragraph (b)(5)(i), a plan 

sponsor shall not be treated as a person 

providing a designated investment 

option under the plan merely because 

one of the designated investment 

options of the plan is an option that 

permits investment in securities of the 

plan sponsor or an affiliate. 

(6) Annual audit. (i) The fiduciary 

adviser shall, at least annually, engage 

an independent auditor, who has 

appropriate technical training or 

experience and proficiency, and so 

represents in writing to the fiduciary 

adviser, to: 

(A) Conduct an audit of the 

investment advice arrangements for 

compliance with the requirements of 

this section; and 

(B) Within 60 days following 

completion of the audit, issue a written 

report to the fiduciary adviser and, 

except with respect to an arrangement 

with an IRA, to each fiduciary who 

authorized the use of the investment 

advice arrangement, in accordance with 

paragraph (b)(5) of this section, setting 

forth the specific findings of the auditor 

regarding compliance of the 

arrangement with the requirements of 

this section. 

(ii) With respect to an arrangement 

with an IRA, the fiduciary adviser: 

(A) Within 30 days following receipt 

of the report from the auditor, as 

described in paragraph (b)(6)(i)(B) of 

this section, shall furnish a copy of the 

report to the IRA beneficiary or make 

such report available on its Web site, 

provided that such beneficiaries are 

provided information, with the 

information required to be disclosed 

pursuant to paragraph (b)(7) of this 

section, concerning the purpose of the 

report, and how and where to locate the 

report applicable to their account; and 

(B) In the event that the report of the 

auditor identifies noncompliance with 

the requirements of this section, within 

30 days following receipt of the report 

from the auditor, shall send a copy of 

the report to the Department of Labor at 

the following address: Investment 

Advice Exemption Notification— 

Statutory, U.S. Department of Labor, 

Employee Benefits Security 

Administration, Room N–1513, 200 

Constitution Ave., NW., Washington, 

DC 20210. 

(iii) For purposes of this paragraph 

(b)(6), an auditor is considered 

independent if it does not have a 

material affiliation or material 

contractual relationship with the person 

offering the investment advice 

arrangement to the plan or with any 

designated investment options under 

the plan. 

(iv) For purposes of this paragraph 

(b)(6), the auditor shall review sufficient 

relevant information to formulate an 

opinion as to whether the investment 

advice arrangements, and the advice 

provided pursuant thereto, offered by 

the fiduciary adviser during the audit 

period were in compliance with this 

section. Nothing in this paragraph shall 

preclude an auditor from using 

information obtained by sampling, as 

reasonably determined appropriate by 

the auditor, investment advice 

arrangements, and the advice pursuant 

thereto, during the audit period. 

(v) The selection of an auditor for 

purposes of this paragraph (b)(6) is a 

fiduciary act governed by section 

404(a)(1) of ERISA. 

(7) Disclosure. (i) The fiduciary 

adviser must provide, without charge, to 

a participant or a beneficiary before the 

initial provision of investment advice 

with regard to any security or other 

property offered as an investment 

option, a written notification of: 

(A) The role of any party that has a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser in the development of 

the investment advice program, and in 

the selection of investment options 

available under the plan; 

(B) The past performance and 

historical rates of return of the 

designated investment options available 

under the plan, to the extent that such 

information is not otherwise provided; 

(C) All fees or other compensation 

that the fiduciary adviser or any affiliate 

thereof is to receive (including 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3849 

compensation provided by any third 

party) in connection with— 

(1) The provision of the advice; 

(2) The sale, acquisition, or holding of 

any security or other property pursuant 

to such advice; or 

(3) Any rollover or other distribution 

of plan assets or the investment of 

distributed assets in any security or 

other property pursuant to such advice; 

(D) Any material affiliation or 

material contractual relationship of the 

fiduciary adviser or affiliates thereof in 

the security or other property; 

(E) The manner, and under what 

circumstances, any participant or 

beneficiary information provided under 

the arrangement will be used or 

disclosed; 

(F) The types of services provided by 

the fiduciary adviser in connection with 

the provision of investment advice by 

the fiduciary adviser, including, with 

respect to a computer model 

arrangement referred to in paragraph 

(b)(4) of this section, any limitations on 

the ability of a computer model to take 

into account an investment primarily in 

qualifying employer securities; 

(G) The adviser is acting as a fiduciary 

of the plan in connection with the 

provision of the advice; and 

(H) That a recipient of the advice may 

separately arrange for the provision of 

advice by another adviser that could 

have no material affiliation with and 

receive no fees or other compensation in 

connection with the security or other 

property. 

(ii)(A) The notification required under 

paragraph (b)(7)(i) of this section must 

be written in a clear and conspicuous 

manner and in a manner calculated to 

be understood by the average plan 

participant and must be sufficiently 

accurate and comprehensive to 

reasonably apprise such participants 

and beneficiaries of the information 

required to be provided in the 

notification. 

(B) The appendix to this section 

contains a model disclosure form that 

may be used to provide notification of 

the information described in paragraph 

(b)(7)(i)(C) of this section. Use of the 

model form is not mandatory. However, 

use of an appropriately completed 

model disclosure form will be deemed 

to satisfy the requirements of paragraphs 

(b)(7)(i) and (ii) of this section with 

respect to such information. 

(iii) The notification required under 

paragraph (b)(7)(i) of this section may, 

in accordance with 29 CFR 2520.104b1, be provided in written or electronic 

form. 

(iv) With respect to the information 

required to be disclosed pursuant to 

paragraph (b)(7)(i) of this section, the 

fiduciary adviser shall, at all times 

during the provision of advisory 

services to the participant or beneficiary 

pursuant to the arrangement,— 

(A) Maintain accurate, up-to-date 

information in a form that is consistent 

with paragraph (b)(7)(ii) of this section, 

(B) Provide, without charge, accurate, 

up-to-date information to the recipient 

of the advice no less frequently than 

annually, 

(C) Provide, without charge, accurate 

information to the recipient of the 

advice upon request of the recipient, 

and 

(D) Provide, without charge, to the 

recipient of the advice any material 

change to the information described in 

paragraph (b)(7)(i) at a time reasonably 

contemporaneous to the change in 

information. 

(8) Other Conditions. The 

requirements of this paragraph are met 

if- 

(i) The fiduciary adviser provides 

appropriate disclosure, in connection 

with the sale, acquisition, or holding of 

the security or other property, in 

accordance with all applicable 

securities laws, 

(ii) Any sale, acquisition, or holding 

of a security or other property occurs 

solely at the direction of the recipient of 

the advice, 

(iii) The compensation received by 

the fiduciary adviser and affiliates 

thereof in connection with the sale, 

acquisition, or holding of the security or 

other property is reasonable, and 

(iv) The terms of the sale, acquisition, 

or holding of the security or other 

property are at least as favorable to the 

plan as an arm’s length transaction 

would be. 

(c) Definitions. For purposes of this 

section: 

(1) The term ‘‘designated investment 

option’’ means any investment option 

designated by the plan into which 

participants and beneficiaries may 

direct the investment of assets held in, 

or contributed to, their individual 

accounts. The term ‘‘designated 

investment option’’ shall not include 

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

brokerage accounts,’’ or similar plan 

arrangements that enable participants 

and beneficiaries to select investments 

beyond those designated by the plan. 

(2)(i) The term ‘‘fiduciary adviser’’ 

means, with respect to a plan, a person 

who is a fiduciary of the plan by reason 

of the provision of investment advice 

referred to in section 3(21)(A)(ii) of 

ERISA by the person to the participant 

or beneficiary of the plan and who is— 

(A) Registered as an investment 

adviser under the Investment Advisers 

Act of 1940 (15 U.S.C. 80b–1 et seq. ) 

or under the laws of the State in which 

the fiduciary maintains its principal 

office and place of business, 

(B) A bank or similar financial 

institution referred to in section 

408(b)(4) of ERISA or a savings 

association (as defined in section 3(b)(1) 

of the Federal Deposit Insurance Act (12 

U.S.C. 1813(b)(1)), but only if the advice 

is provided through a trust department 

of the bank or similar financial 

institution or savings association which 

is subject to periodic examination and 

review by Federal or State banking 

authorities, 

(C) An insurance company qualified 

to do business under the laws of a State, 

(D) A person registered as a broker or 

dealer under the Securities Exchange 

Act of 1934 (15 U.S.C. 78a et seq.), 

(E) An affiliate of a person described 

in any of clauses (A) through (D), or 

(F) An employee, agent, or registered 

representative of a person described in 

paragraphs (c)(2)(i)(A) through (E) of 

this section who satisfies the 

requirements of applicable insurance, 

banking, and securities laws relating to 

the provision of advice. 

(ii) Except as provided under 29 CFR 

2550.408g–2, a fiduciary adviser 

includes any person who develops the 

computer model, or markets the 

computer model or investment advice 

program, utilized in satisfaction of 

paragraph (b)(4) of this section. 

(3) A ‘‘registered representative’’ of 

another entity means a person described 

in section 3(a)(18) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(18)) (substituting the entity for 

the broker or dealer referred to in such 

section) or a person described in section 

202(a)(17) of the Investment Advisers 

Act of 1940 (15 U.S.C. 80b-2(a)(17)) 

(substituting the entity for the 

investment adviser referred to in such 

section). 

(4) ‘‘Individual Retirement Account’’ 

or ‘‘IRA’’ means— 

(i) An individual retirement account 

described in section 408(a) of the Code; 

(ii) An individual retirement annuity 

described in section 408(b) of the Code; 

(iii) An Archer MSA described in 

section 220(d) of the Code; 

(iv) A health savings account 

described in section 223(d) of the Code; 

(v) A Coverdell education savings 

account described in section 530 of the 

Code; or 

(vi) A trust, plan, account, or annuity 

which, at any time, has been determined 

by the Secretary of the Treasury to be 

described in any of paragraphs (c)(4)(i) 

through (v) of this section. 

(5) An ‘‘affiliate’’ of another person 

means— 

(i) Any person directly or indirectly 

owning, controlling, or holding with 

mstockstill on PROD1PC66 with RULES3

3850 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

power to vote, 5 percent or more of the 

outstanding voting securities of such 

other person; 

(ii) Any person 5 percent or more of 

whose outstanding voting securities are 

directly or indirectly owned, controlled, 

or held with power to vote, by such 

other person; 

(iii) Any person directly or indirectly 

controlling, controlled by, or under 

common control with, such other 

person; and 

(iv) Any officer, director, partner, 

copartner, or employee of such other 

person. 

(6)(i) A person with a ‘‘material 

affiliation’’ with another person 

means— 

(A) Any affiliate of the other person; 

(B) Any person directly or indirectly 

owning, controlling, or holding, 5 

percent or more of the interests of such 

other person; and 

(C) Any person 5 percent or more of 

whose interests are directly or indirectly 

owned, controlled, or held, by such 

other person. 

(ii) For purposes of paragraph (c)(6)(i) 

of this section, ‘‘interest’’ means with 

respect to an entity— 

(A) The combined voting power of all 

classes of stock entitled to vote or the 

total value of the shares of all classes of 

stock of the entity if the entity is a 

corporation; 

(B) The capital interest or the profits 

interest of the entity if the entity is a 

partnership; or 

(C) The beneficial interest of the 

entity if the entity is a trust or 

unincorporated enterprise. 

(7) Persons have a ‘‘material 

contractual relationship’’ if payments 

made by one person to the other person 

pursuant to contracts or agreements 

between the persons exceed 10 percent 

of the gross revenue, on an annual basis, 

of such other person. 

(8) ‘‘Control’’ means the power to 

exercise a controlling influence over the 

management or policies of a person 

other than an individual. 

(d) Class exemption. (1) General. 

Pursuant to section 408(a) of the Act 

and section 4975(c)(2) of the Code— 

(i) The restrictions of sections 406(a) 

and 406(b) of the Act and the sanctions 

resulting from the application of section 

4975 of the Code, by reason of section 

4975(c)(1)(A) through (F) of the Code, 

shall not apply to: 

(A) The provision of investment 

advice described in section 3(21)(A)(ii) 

of the Act by a fiduciary adviser to a 

participant or beneficiary of an 

individual account plan that permits 

such participant or beneficiary to direct 

the investment of their individual 

accounts; 

(B) The acquisition, holding, or sale of 

a security or other property pursuant to 

the investment advice; and 

(C) except as otherwise provided in 

this exemption, the direct or indirect 

receipt of fees or other compensation by 

the fiduciary adviser (or any employee, 

agent, registered representative or 

affiliate thereof) in connection with the 

provision of the advice or in connection 

with an acquisition, holding, or sale of 

a security or other property pursuant to 

the investment advice, provided that the 

conditions set forth in paragraph (d)(2) 

are met; 

(ii) The sanctions resulting from the 

application of section 4975 of the Code, 

by reason of section 4975(c)(1)(A) 

through (F) of the Code, shall not apply 

to: 

(A) The provision of investment 

advice described in section 

4975(e)(3)(B) of the Code by a fiduciary 

adviser to a beneficiary of an IRA that 

permits such beneficiary to direct the 

investment of the assets of his or her 

IRA; 

(B) The acquisition, holding, or sale of 

a security or other property pursuant to 

the investment advice; and 

(C) Except as otherwise provided in 

this exemption, the direct or indirect 

receipt of fees or other compensation by 

the fiduciary adviser (or any employee, 

agent, registered representative or 

affiliate thereof) in connection with the 

provision of the advice or in connection 

with an acquisition, holding, or sale of 

a security or other property pursuant to 

the investment advice, provided that the 

conditions set forth in paragraph (d)(2) 

of this section are met. 

(2) Conditions. The relief described in 

paragraph (d)(1) shall be available if the 

fiduciary adviser— 

(i) Provides investment advice in 

accordance with paragraphs (d)(3) or (4), 

or both; and 

(ii) Satisfies the requirements of 

paragraphs (d)(5) through (10). 

(3) Use of computer model or 

investment education. The requirements 

of this paragraph (d)(3) will be satisfied 

if: 

(i) Except as provided in paragraph 

(d)(3)(ii), before providing other 

investment advice covered by this 

exemption, the participant or 

beneficiary shall be furnished with 

investment recommendations generated 

by a computer model that— 

(A) Meets the requirements of 

paragraphs (b)(4)(i) and (ii); or 

(B) Meets the requirements of 

paragraph (b)(4)(i) and was designed 

and is maintained by a person 

independent of the fiduciary adviser 

(and any of the adviser’s affiliates) and 

utilizes methodologies and parameters 

determined appropriate solely by the 

independent person, without influence 

from the fiduciary adviser (or any of the 

adviser’s affiliates); for purposes of this 

paragraph (d)(3)(i), a person is 

‘‘independent’’ of another person if it is 

not an affiliate of the other person, and 

does not have a material affiliation or 

material contractual relationship with 

the other person. 

(ii)(A) In the case of a plan that offers 

a ‘‘brokerage window,’’ ‘‘self-directed 

brokerage account’’ or similar 

arrangement that enables participants 

and beneficiaries to select investments 

beyond those designated by the plan, if 

any, before providing investment advice 

with respect to any investment utilizing 

such arrangement, the participant or 

beneficiary shall be furnished the 

material described in paragraph 

(d)(3)(ii)(B) and, if the plan offers 

designated investment options, the 

participant or beneficiary also shall be 

furnished the recommendations 

described in paragraph (d)(3)(i ) with 

regard to such options. 

(B) In the case of an IRA with respect 

to which the types or number of 

investment choices reasonably 

precludes the use of a computer model 

meeting the requirements of section 

408(g)(3)(B) of ERISA to generate 

recommendations, before providing 

other investment advice covered by this 

exemption, the participant or 

beneficiary shall be furnished with 

material, such as graphs, pie charts, case 

studies, worksheets, or interactive 

software or similar programs, that reflect 

or produce asset allocation models 

taking into account the age (or time 

horizon) and risk profile of the 

beneficiary, to the extent known. 

Nothing shall preclude the furnishing of 

material, in addition to the foregoing, 

reflecting asset allocation portfolios of 

hypothetical individuals with different 

time horizons and risk profiles. For 

purposes of any materials provided 

pursuant to this paragraph (d)(3)(ii): 

(1) Models must be based on generally 

accepted investment theories that take 

into account the historic returns of 

different asset classes (e.g., equities, 

bonds, or cash) over defined periods of 

time; 

(2) Such models must operate in a 

manner that is not biased in favor of 

investments offered by the fiduciary 

adviser or a person with a material 

affiliation or material contractual 

relationship with the fiduciary adviser; 

and 

(3) All material facts and assumptions 

on which such models are based (e.g., 

retirement ages, life expectancies, 

income levels, financial resources, 

replacement income ratios, inflation 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3851 

rates, and rates of return) accompany 

the models. 

(iii) The fiduciary adviser shall retain 

the information furnished pursuant to 

paragraph (d)(3)(i) or (ii) in accordance 

with paragraph (e) of this section. 

(4) Use of fee-leveling. Any fees or 

other compensation (including salary, 

bonuses, awards, promotions, 

commissions or any other thing of 

value) received, directly or indirectly, 

by an employee, agent or registered 

representative providing advice on 

behalf of the fiduciary adviser pursuant 

to this exemption (as distinguished from 

any compensation received by the 

fiduciary adviser on whose behalf the 

employee, agent or registered 

representative is providing such advice) 

do not vary depending on the basis of 

any investment option selected by a 

participant or beneficiary. 

(5) Authorized by a plan fiduciary or 

IRA beneficiary. (i) Except as provided 

in paragraph (d)(5)(ii), the arrangement 

pursuant to which investment advice is 

provided to participants and 

beneficiaries is expressly authorized in 

advance by a plan fiduciary (or, in the 

case of an IRA, the IRA beneficiary) 

other than: The person offering the 

investment advice arrangement; any 

person providing designated investment 

options under the plan; or any affiliate 

of either. Provided, however, that for 

purposes of the preceding, in the case of 

an IRA, an IRA beneficiary will not be 

treated as an affiliate of a person solely 

by reason of being an employee of such 

person. 

(ii) In the case of an arrangement 

pursuant to which investment advice is 

provided to participants and 

beneficiaries of a plan sponsored by the 

person offering the arrangement or a 

plan sponsored by an affiliate of such 

person, the authorization described in 

paragraph (d)(5)(i) may be provided by 

the plan sponsor of such plan, provided 

that the person or affiliate offers the 

same arrangement to participants and 

beneficiaries of unaffiliated plans in the 

ordinary course of its business. 

(iii) For purposes of the authorization 

described in paragraph (d)(5)(i), a plan 

sponsor shall not be treated as a person 

providing a designated investment 

option under the plan merely because 

one of the designated investment 

options of the plan is an option that 

permits investment in securities of the 

plan sponsor or an affiliate. 

(6) Basis for advice. (i) The 

investment advice— 

(A) Is based on generally accepted 

investment theories that take into 

account the historic returns of different 

asset classes over defined periods of 

time; provided, however, that nothing 

herein shall preclude any investment 

advice from being based on generally 

accepted investment theories that take 

into account additional considerations; 

(B) Takes into account investment 

management and other fees and 

expenses attendant to the recommended 

investments; and 

(C) Takes into account, to the extent 

furnished by a plan, participant or 

beneficiary, information relating to age, 

time horizons (e.g., life expectancy, 

retirement age), risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences of 

the participant or beneficiary. A 

fiduciary adviser shall request such 

information, but nothing in this 

paragraph (d)(6)(i)(C) shall require that 

any investment advice take into account 

information requested, but not 

furnished by a participant or 

beneficiary, nor preclude requesting and 

taking into account additional 

information that a plan or participant or 

beneficiary may provide. 

(ii) In connection with the provision 

of the investment advice— 

(A) The fiduciary adviser concludes 

that the advice to be provided is 

prudent and in the best interest of the 

participant or beneficiary, and explains 

to the participant or beneficiary— 

(1) The basis for the conclusion, 

(2) If applicable, why the advice 

includes an option(s) with higher fees 

than other options in the same asset 

class(es) available under the plan, and 

(3) If applicable, in the case of 

investment advice provided pursuant to 

paragraph (d)(3)(i) or (ii), how the 

advice deviates from or relates to the 

information provided pursuant to such 

paragraphs; 

(B) Not later than 30 days following 

the explanation described in paragraph 

(d)(6)(ii)(A), the employee, agent, or 

registered representative providing the 

advice on behalf of the fiduciary adviser 

shall document such explanation; and 

(C) The fiduciary adviser retains the 

documentation developed pursuant to 

paragraph (d)(6)(ii)(B) in accordance 

with paragraph (e) of this section. 

(7) Policies and procedures. The 

fiduciary adviser adopts and follows 

written policies and procedures that are 

designed to assure compliance with the 

conditions of this exemption. 

(8) Disclosure. (i) The fiduciary 

adviser provides, without charge, to the 

participant or beneficiary before the 

initial provision of investment advice 

under the class exemption, written 

notification of: 

(A) The role of any party that has a 

material affiliation or material 

contractual relationship with the 

fiduciary adviser in the development of 

the computer model described in 

paragraph (d)(3)(i) of this section or, if 

applicable, the materials described in 

paragraph (d)(3)(ii) of this section, and, 

to the extent applicable, in the selection 

of investment options available under 

the plan; 

(B) The types of services provided by 

the fiduciary adviser in connection with 

the provision of investment advice by 

the fiduciary adviser, including, with 

respect to a computer model 

arrangement referred to in paragraph 

(d)(3)(i) of this section, any limitations 

on the ability of a computer model to 

take into account an investment 

primarily in qualifying employer 

securities; and 

(C) The information described in 

paragraphs (b)(7)(i)(B) through (E), (G) 

and (H); 

(ii)(A) Such notification must be 

written in a clear and conspicuous 

manner and in a manner calculated to 

be understood by the average plan 

participant and shall be sufficiently 

accurate and comprehensive to 

reasonably apprise such participants 

and beneficiaries of the information 

required to be disclosed; 

(B) The appendix to this section 

contains a model disclosure form that 

may be used to provide the notification 

of information described in paragraph 

(b)(7)(i)(C). Use of the model disclosure 

form is not mandatory. However, use of 

an appropriately completed model 

disclosure form will be deemed to 

satisfy the requirements of paragraphs 

(d)(8)(i)(C) and (d)(8)(ii)(A) with respect 

to such information. 

(iii) Such notification may, in 

accordance with 29 CFR 2520.104b–1, 

be provided in written or electronic 

form. 

(iv) With respect to the information 

required to be disclosed pursuant to 

paragraph (d)(8)(i) of this section, the 

fiduciary adviser shall, at all times 

during the provision of advisory 

services to the participant or beneficiary 

pursuant to the arrangement— 

(A) Maintain accurate, up-to-date 

information in a form that is consistent 

with paragraph (d)(8)(ii) of this section, 

(B) Provide, without charge, accurate, 

up-to-date information to the recipient 

of the advice no less frequently than 

annually, 

(C) Provide, without charge, accurate 

information to the recipient of the 

advice upon request of the recipient, 

and 

(D) Provide, without charge, to the 

recipient of the advice any material 

change to the information described in 

paragraph (d)(8)(i) at a time reasonably 

mstockstill on PROD1PC66 with RULES3

3852 Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 

contemporaneous to the change in 

information. 

(9) Annual audit. (i) The fiduciary 

adviser shall, at least annually, engage 

an independent auditor, who has 

appropriate technical training or 

experience and proficiency and so 

represents in writing to the fiduciary 

adviser, to: 

(A) Conduct an audit for compliance 

with the policies and procedures of 

paragraph (d)(7) of this section and the 

requirements of paragraph (d) of this 

section; and 

(B) Within 60 days following the 

completion of the audit, issue a written 

report to the fiduciary adviser, and, 

except with respect to an arrangement 

with an IRA, to each fiduciary who 

authorized the arrangement, in 

accordance with paragraph (d)(5), 

setting forth the specific findings of the 

auditor regarding compliance of the 

arrangement with the policies and 

procedures of paragraph (d)(7) and the 

requirements of paragraph (d) of this 

section. 

(ii) With respect to an arrangement 

with an IRA, the fiduciary adviser: 

(A) Within 30 days following receipt 

of the report from the auditor, shall 

furnish a copy of the report to the IRA 

beneficiary or make such report 

available on its Web site, provided that 

such beneficiaries are provided 

information, with the information 

required to be disclosed pursuant to 

paragraph (d)(8) of this section, 

concerning the purpose of the report, 

and how and where to locate the report 

applicable to their account; and 

(B) In the event that the report of the 

auditor identifies noncompliance with 

the policies and procedures required by 

paragraph (d)(7) or the conditions of 

paragraph (d) of this section, within 30 

days following receipt of the report from 

the auditor, sends a copy of the report 

to the Department of Labor at the 

following address: Investment Advice 

Notification—Class Exemption, U.S. 

Department of Labor, Employee Benefits 

Security Administration, Room N–1513, 

200 Constitution Ave., NW., 

Washington, DC 20210. 

(iii) For purposes of paragraph 

(d)(9)(i), an auditor is considered 

independent if it does not have a 

material affiliation or material 

contractual relationship with the person 

offering the investment advice 

arrangement to the plan or IRA or any 

designated investment options under 

the plan or IRA. 

(iv) For purposes of the audit 

described in paragraph (d)(9)(i), the 

auditor shall review sufficient relevant 

information to formulate an opinion as 

to whether the investment advice 

arrangements, and the advice provided 

pursuant thereto, offered by the 

fiduciary adviser during the audit 

period were in compliance with the 

policies and procedures of paragraph 

(d)(7) of this section and the 

requirements of this paragraph (d); 

provided, however, that nothing in this 

subparagraph shall preclude an auditor 

from using information obtained by 

sampling, as reasonably determined 

appropriate by the auditor, investment 

advice arrangements, and the advice 

pursuant thereto, during the audit 

period. 

(v) The selection of an auditor for 

purposes of this paragraph (d)(9) is a 

fiduciary act governed by section 

404(a)(1) of ERISA. 

(10) Other. The requirements of 

paragraph (b)(8), relating to other 

conditions, and paragraph (e), relating 

to retention of records, of this section 

are met. 

(e) Retention of records. The fiduciary 

adviser must maintain, for a period of 

not less than 6 years after the provision 

of investment advice under this section 

any records necessary for determining 

whether the applicable requirements of 

this section have been met. A 

transaction prohibited under section 

406 of ERISA shall not be considered to 

have occurred solely because the 

records are lost or destroyed prior to the 

end of the 6-year period due to 

circumstances beyond the control of the 

fiduciary adviser. 

(f) Noncompliance. (1) The relief from 

the prohibited transaction provisions of 

section 406 of ERISA and the sanctions 

resulting from the application of section 

4975 of the Code described in 

paragraphs (b) and (d) of this section 

shall not apply to any transaction 

described in such paragraphs in 

connection with the provision of 

investment advice to an individual 

participant or beneficiary with respect 

to which the applicable conditions of 

this section have not been satisfied. 

(2) In the case of a pattern or practice 

of noncompliance with any of the 

applicable conditions of this section, the 

relief described in paragraph (b) or (d) 

shall not apply to any transaction in 

connection with the provision of 

investment advice provided by the 

fiduciary adviser during the period over 

which the pattern or practice extended. 

(g) Applicability date. This section 

shall apply to transactions described in 

paragraphs (b) and (d) of this section 

occurring on or after March 23, 2009. 

Appendix to § 2550.408g–1 

Fiduciary Adviser Disclosure 

This document contains important 

information about [enter name of Fiduciary 

Adviser] and how it is compensated for the 

investment advice provided to you. You 

should carefully consider this information in 

your evaluation of that advice. 

[enter name of Fiduciary Adviser] has been 

selected to provide investment advisory 

services for the [enter name of Plan]. [enter 

name of Fiduciary Adviser] will be providing 

these services as a fiduciary under the 

Employee Retirement Income Security Act 

(ERISA). [enter name of Fiduciary Adviser], 

therefore, must act prudently and with only 

your interest in mind when providing you 

recommendations on how to invest your 

retirement assets. 

Compensation of the Fiduciary Adviser and 

Related Parties 

[enter name of Fiduciary Adviser] (is/is 

not) compensated by the plan for the advice 

it provides. (if compensated by the plan, 

explain what and how compensation is 

charged (e.g., asset-based fee, flat fee, per 

advice)). (If applicable, [enter name of 

Fiduciary Adviser] is not compensated on the 

basis of the investment(s) selected by you.) 

Affiliates of [enter name of Fiduciary 

Adviser] (if applicable enter, and other 

parties with whom [enter name of Fiduciary 

Adviser] is related or has a material financial 

relationship) also will be providing services 

for which they will be compensated. These 

services include: [enter description of 

services, e.g., investment management, 

transfer agent, custodial, and shareholder 

services for some/all the investment funds 

available under the plan.] 

When [enter name of Fiduciary Adviser] 

recommends that you invest your assets in an 

investment fund of its own or one of its 

affiliates and you follow that advice, [enter 

name of Fiduciary Adviser] or that affiliate 

will receive compensation from the 

investment fund based on the amount you 

invest. The amounts that will be paid by you 

will vary depending on the particular fund in 

which you invest your assets and may range 

from l% to l%. Specific information 

concerning the fees and other charges of each 

investment fund is available from [enter 

source, such as: your plan administrator, 

investment fund provider (possibly with 

Internet Web site address)]. This information 

should be reviewed carefully before you 

make an investment decision. 

(if applicable enter, [enter name of 

Fiduciary Adviser] or affiliates of [enter name 

of Fiduciary Adviser] also receive 

compensation from non-affiliated investment 

funds as a result investments you make as a 

result of recommendations of [enter name of 

Fiduciary Adviser]. The amount of this 

compensation also may vary depending on 

the particular fund in which you invest. This 

compensation may range from l% to l%. 

Specific information concerning the fees and 

other charges of each investment fund is 

available from [enter source, such as: your 

plan administrator, investment fund provider 

(possibly with Internet Web site address)]. 

This information should be reviewed 

carefully before you make an investment 

decision. 

(if applicable enter, In addition to the 

above, [enter name of Fiduciary Adviser] or 

affiliates of [enter name of Fiduciary Adviser] 

mstockstill on PROD1PC66 with RULES3

Federal Register / Vol. 74, No. 12 / Wednesday, January 21, 2009 / Rules and Regulations 3853 

also receive other fees or compensation, such 

as commissions, in connection with the sale, 

acquisition or holding of investments 

selected by you as a result of 

recommendations of [enter name of Fiduciary 

Adviser]. These amounts are: [enter 

description of all other fees or compensation 

to be received in connection with sale, 

acquisition or holding of investments]. This 

information should be reviewed carefully 

before you make an investment decision. 

(if applicable enter, When [enter name of 

Fiduciary Adviser] recommends that you 

take a rollover or other distribution of assets 

from the plan, or recommends how those 

assets should subsequently be invested, 

[enter name of Fiduciary Adviser] or affiliates 

of [enter name of Fiduciary Adviser] will 

receive additional fees or compensation. 

These amounts are: [enter description of all 

other fees or compensation to be received in 

connection with any rollover or other 

distribution of plan assets or the investment 

of distributed assets]. This information 

should be reviewed carefully before you 

make a decision to take a distribution. 

Consider Impact of Compensation on Advice 

The fees and other compensation that 

[enter name of Fiduciary Adviser] and its 

affiliates receive on account of assets in 

[enter name of Fiduciary Adviser] (enter if 

applicable, and non-[enter name of Fiduciary 

Adviser]) investment funds are a significant 

source of revenue for the [enter name of 

Fiduciary Adviser] and its affiliates. You 

should carefully consider the impact of any 

such fees and compensation in your 

evaluation of the investment advice that 

[enter name of Fiduciary Adviser] provides to 

you. In this regard, you may arrange for the 

provision of advice by another adviser that 

may have not material affiliation with or 

receive compensation in connection with the 

investment funds or products offered under 

the plan. This type of advice is/is not 

available through your plan. 

Investment Returns 

While understanding investment-related 

fees and expenses is important in making 

informed investment decisions, it is also 

important to consider additional information 

about your investment options, such as 

performance, investment strategies and risks. 

Specific information related to the past 

performance and historical rates of return of 

the investment options available under the 

plan (has/has not) been provided to you by 

[enter source, such as: your plan 

administrator, investment fund provider]. (If 

applicable enter. If not provided to you, the 

information is attached to this document.) 

For options with returns that vary over 

time, past performance does not guarantee 

how your investment in the option will 

perform in the future; your investment in 

these options could lose money. 

Parties Participating in Development of 

Advice Program or Selection of Investment 

Options 

Name, and describe role of, affiliates or 

other parties with whom the fiduciary 

adviser has a material affiliation or 

contractual relationship that participated in 

the development of the investment advice 

program (if this is an arrangement that uses 

computer models) or the selection of 

investment options available under the plan. 

Use of Personal Information 

Include a brief explanation of the 

following— 

What personal information will be 

collected; 

How the information will be used; 

Parties with whom information will be 

shared; 

How the information will be protected; and 

When and how notice of the Fiduciary 

Adviser’s privacy statement will be available 

to participants and beneficiaries. 

Should you have any questions about 

[enter name of Fiduciary Adviser] or the 

information contained in this document, you 

may contact [enter name of contact person for 

fiduciary adviser, telephone number, 

address]. 

■ 3. Add § 2550.408g–2 to read as 

follows: 

§ 2550.408g–2 Investment advice— 

fiduciary election. 

(a) General. Section 408(g)(11)(A) of 

the Employee Retirement Income 

Security Act, as amended (ERISA), 

provides that a person who develops a 

computer model or who markets a 

computer model or investment advice 

program used in an ‘‘eligible investment 

advice arrangement’’ shall be treated as 

a fiduciary of a plan by reason of the 

provision of investment advice referred 

to in ERISA section 3(21)(A)(ii) to the 

plan participant or beneficiary, and 

shall be treated as a ‘‘fiduciary adviser’’ 

for purposes of ERISA sections 

408(b)(14) and 408(g), except that the 

Secretary of Labor may prescribe rules 

under which only one fiduciary adviser 

may elect to be treated as a fiduciary 

with respect to the plan. Section 

4975(f)(8)(J)(i) of the Internal Revenue 

Code, as amended (the Code), contains 

a parallel provision to ERISA section 

408(g)(11)(A) that applies for purposes 

of Code sections 4975(d)(17) and 

4975(f)(8). This section sets forth 

requirements that must be satisfied in 

order for one such fiduciary adviser to 

elect to be treated as a fiduciary with 

respect to a plan under an eligible 

investment advice arrangement. 

(b)(1) If an election meets the 

requirements in paragraph (b)(2) of this 

section, then the person identified in 

the election shall be the sole fiduciary 

adviser treated as a fiduciary by reason 

of developing or marketing the 

computer model, or marketing the 

investment advice program, used in an 

eligible investment advice arrangement. 

(2) An election satisfies the 

requirements of this subparagraph with 

respect to an eligible investment advice 

arrangement if the election is in writing 

and such writing— 

(i) Identifies the investment advice 

arrangement, and the person offering the 

arrangement, with respect to which the 

election is to be effective; 

(ii) Identifies a person who— 

(A) Is described in any of 29 CFR 

2550.408g–1(c)(2)(i)(A) through (E); 

(B) Develops the computer model, or 

markets the computer model or 

investment advice program, utilized in 

satisfaction of 29 CFR 2550.408g–1(b)(4) 

with respect to the arrangement, and 

(C) Acknowledges that it elects to be 

treated as the only fiduciary, and 

fiduciary adviser, by reason of 

developing such computer model, or 

marketing such computer model or 

investment advice program; 

(iii) Is signed by the person identified 

in paragraph (b)(2)(ii) of this section; 

(iv) Is furnished to the fiduciary who 

authorized the arrangement, in 

accordance with 29 CFR 2550.408g– 

1(b)(5); and 

(v) Is maintained in accordance with 

29 CFR 2550.408g–1(e). 

Signed at Washington, DC, this 9th day of 

January, 2009. 

Bradford P. Campbell, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. E9–710 Filed 1–16–09; 8:45 am] 

BILLING CODE 4510–29–P 

mstockstill on PROD1PC66 with RULES3