Vol. 76 Tuesday, 

No. 206 October 25, 2011 

Part II 

Department of Labor 

Employee Benefits Security Administration 

29 CFR Part 2550 

Investment Advice; Participants and Beneficiaries; Final Rule 


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66136 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

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

54.4975–9(c). 

2ERISA section 406(b)(1) and (3) and Code 

section 4975(c)(1)(E) and (F). 

3 29 CFR 2550.408b–2(e). 

4See 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). 

5Public Law 109–280, 120 Stat. 780 (Aug. 17, 

2006). 

6Under 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. 

7 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 

of the interests of plan participants and IRA 

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

2006) (statement of Sen. Enzi). 

8Section 408(g)(10) addresses the responsibility 

and liability of plan sponsors and other fiduciaries 

in the context of investment advice provided 

pursuant to the statutory exemption. Subject to 

certain requirements, section 408(g)(10) provides 

that a plan sponsor or other person who is a plan 

fiduciary, other than a fiduciary adviser, is not 

treated as failing to meet the fiduciary requirements 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB35 

Investment Advice—Participants and 

Beneficiaries 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Final rule. 

SUMMARY: This document contains a 

final rule under the Employee 

Retirement Income Security Act, and 

parallel provisions of the Internal 

Revenue Code of 1986, relating to the 

provision of investment advice to 

participants and beneficiaries in 

individual account plans, such as 401(k) 

plans, and beneficiaries of individual 

retirement accounts (and certain similar 

plans). The final rule affects sponsors, 

fiduciaries, participants and 

beneficiaries of participant-directed 

individual account plans, as well as 

providers of investment and investment 

advice related services to such plans. 

DATES: The final rule is effective on 

December 27, 2011. 

FOR FURTHER INFORMATION CONTACT: Fred 

Wong, Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration (EBSA), (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 a fiduciary from dealing 

with the assets of the plan in his own 

interest or for his own account and from 

receiving any consideration for his own 

personal account from any party dealing 

with such plan in connection with a 

transaction involving the assets of the 

plan.2 These statutory provisions have 

been interpreted as prohibiting a 

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.3 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 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 such 

investment advice might result in 

prohibited transactions.4 Responding to 

the need to afford participants and 

beneficiaries greater access to 

professional investment advice, 

Congress amended the prohibited 

transaction provisions of ERISA and the 

Code, as part of the Pension Protection 

Act of 2006 (PPA),5 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 prohibited transaction 

exemption under sections 408(b)(14) 

and 408(g) of ERISA, with parallel 

provisions at Code sections 4975(d)(17) 

and 4975(f)(8).6 Section 408(b)(14) sets 

forth the investment advice-related 

transactions that will be exempt from 

the prohibitions of ERISA 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. As described more 

fully below, the requirements in section 

408(g) are met only if advice is provided 

by a fiduciary adviser under an ‘‘eligible 

investment advice arrangement.’’ 

Section 408(g) provides for two general 

types of eligible arrangements: one 

based on compliance with a ‘‘feeleveling’’ requirement (imposing 

limitation on fees and compensation of 

the fiduciary adviser); the other, based 

on compliance with a ‘‘computer 

model’’ requirement (requiring use of a 

certified computer model). Both types of 

arrangements also must meet several 

other requirements. 

On February 2, 2007, the Department 

issued Field Assistance Bulletin (FAB) 

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.7 The 

Bulletin also confirmed the applicability 

of the principles set forth in section 

408(g)(10) [Exemption for plan sponsor 

and certain other fiduciaries] 8 to plan 


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Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 66137 

of ERISA solely by reason of the provision of 

investment advice as permitted by the statutory 

exemption. This provision does not exempt a plan 

sponsor or a plan fiduciary from fiduciary 

responsibility under ERISA for the prudent 

selection and periodic review of the selected 

fiduciary adviser. 

9 In connection with the development of the 

January 2009 final rules, the Department published 

two requests for information from the public (see 

71 FR 70429 (Dec. 4, 2006) and 72 FR 70427; 

comments found at http://www.dol.gov/ebsa/regs/ 

cmt-Investmentadvice.html and http:// 

www.dol.gov/ebsa/regs/cmtInvestmentadviceIRA.html); published proposed 

regulations and class exemption with solicitation of 

public comment (see 73 FR 49896 (Aug. 22, 2008) 

and 73 FR 49924; comments found at http:// 

www.dol.gov/ebsa/regs/cmt-investment-advice.html 

and http://www.dol.gov/ebsa/regs/cmtinvestmentadviceexemption.html); and held public 

hearings on October 21, 2008 (see 73 FR 60657 (Oct. 

21, 2008) and 73 FR 60720) and July 31, 2007 (see 

72 FR 34043 (June 20, 2007)). 

10 74 FR 59092 (Nov. 17, 2009); 74 FR 23951 (May 

22, 2009); 74 FR 11847 (Mar. 20, 2009). Comments 

can be found at: http://www.dol.gov/ebsa/regs/cmtinvestmentadvicefinalrule.html. 11Comments can be found at: http:// 

www.dol.gov/ebsa/regs/cmt-1210-AB35.html. 

12See also Field Assistance Bulletin 2007–1 (Feb. 

2, 2007). 

sponsors and fiduciaries who offer 

investment advice arrangements with 

respect to which relief under the 

statutory exemption is not required. 

Finally, the Bulletin addressed the 

scope of the fee-leveling requirement 

under the statutory exemption. 

On January 21, 2009, the Department 

published in the Federal Register final 

rules implementing section 408(b)(14) 

and 408(g) of ERISA, and the parallel 

provisions in the Code.9 The final rules 

also included an administrative class 

exemption, adopted pursuant to ERISA 

section 408(a), granting additional 

prohibited transaction relief. The 

effective and applicability dates of the 

final rules, originally set for March 23, 

2009, subsequently were delayed to 

allow the Department to solicit and 

review comments from interested 

persons on legal and policy issues 

raised under the final rules.10 Based on 

a consideration of the concerns raised 

by commenters as to whether the 

conditions of the class exemption would 

be adequate to mitigate advisers’ 

conflicts, the Department decided to 

withdraw the final rule. Notice of the 

withdrawal of the final rule was 

published in the Federal Register on 

November 20, 2009 (74 FR 60156). 

On March 2, 2010, the Department 

published in the Federal Register new 

proposed regulations that, upon 

adoption, implement the statutory 

prohibited transaction exemption under 

ERISA sections 408(b)(14) and 408(g), 

and the parallel provisions in the Code 

(75 FR 9360). In response to the 

proposal, the Department received 74 

comment letters.11

Set forth below is an overview of the 

final rule and an overview of the major 

comments received on the proposed 

rule. 

B. Overview of Final § 2550.408g–1 and 

Public Comments 

1. General 

In general, § 2550.408g–1 tracks the 

requirements under section 408(g) of 

ERISA 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 

(a) describes the general scope of the 

statutory exemption and regulation. 

Paragraph (b) sets forth the requirements 

that must be satisfied for an 

arrangement to qualify as an ‘‘eligible 

investment advice arrangement’’ and for 

the exemption to apply. Paragraph (c) 

defines certain terms used in the 

regulation. Paragraph (d) sets forth the 

record retention requirement applicable 

to an eligible investment advice 

arrangement. Paragraph (e) describes the 

implications of noncompliance on the 

prohibited transaction relief under the 

statutory exemption. 

The provisions in paragraph (a) of the 

final rule have not been changed from 

the proposal. Paragraph (a)(1) describes 

the general scope of the final rule, 

referencing the statutory exemption 

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

of ERISA, and under 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. It further provides that the 

requirements and conditions of the final 

rule apply solely for the relief described 

in the final rule, and that no inferences 

should be drawn with respect to the 

requirements applicable to the provision 

of investment advice not addressed by 

the rule. 

Several comment letters raised issues 

with respect to the general scope of the 

proposal. Although a number of 

commenters supported the Department’s 

decision with respect to the withdrawal 

of the class exemption, others requested 

its re-proposal. The latter group argued 

that increasing the availability of 

investment advice to plan participants 

and beneficiaries requires broader 

prohibited transaction relief than 

provided under the proposed regulation. 

Other commenters argued that plan 

sponsors also would benefit from 

increased access to investment advice, 

and suggested extending exemptive 

relief to advice provided to plan 

sponsors, either through the final rule or 

by an administrative class exemption. 

Another commenter requested that the 

final rule provide relief for management 

of managed accounts. These comments 

are beyond the scope of the proposal, 

which was limited to implementation of 

the statutory exemption for the 

provision of investment advice to plan 

participants and beneficiaries, and have 

not been adopted by the Department. 

Two commenters observed that 

paragraph (a)(1) indicates that the 

requirements contained in the final rule 

should not be read as applicable to 

arrangements for which prohibited 

transaction relief is not necessary. They 

requested clarification that a plan 

sponsor’s selection and monitoring 

responsibilities do not differ for advice 

provided pursuant to the regulation 

compared to arrangements for which 

prohibited transaction relief is not 

necessary. In response, we note that, as 

stated in FAB 2007–1, it is the 

Department’s view that, except for 

section 408(g)(10)(A)(i) to (iii), the same 

fiduciary duties and responsibilities 

apply to the selection and monitoring of 

an investment adviser regardless of 

whether the arrangement for investment 

advice services is one to which the 

regulation applies. As further explained 

in that Bulletin, 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). 

Paragraph (a)(2) provides that nothing 

contained in ERISA section 408(g)(1), 

Code section 4975(f)(8), or the final rule 

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, or 

the final rule 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. 

Several commenters suggested that, 

rather than merely affirming the 

continued applicability of pre-PPA 

guidance in paragraph (a)(3),12 the 

Department should reconsider its past 

guidance in light of the safeguards 

contained in the statutory exemption 

and the proposed rule. Such an 

undertaking is beyond the scope of the 


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66138 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

13See Code section 4975(a), (b), and (e)(2)(A). 14Code section 4975(e)(1)(B). Public Law 93–406 

section 2003(a), 88 Stat. 971. 15As indicated in footnote 6 above, pursuant to 

section 102 of Reorganization Plan No. 4 of 1978, 

the Secretary of Labor has authority to interpret 

certain provisions of Code section 4975. 16AO 2005–23A (Dec. 7, 2005). This opinion 

further states that where someone who is already 

a plan fiduciary responds to participant questions 

concerning the advisability of taking a distribution 

or the investment of amounts withdrawn from the 

plan, that fiduciary is exercising discretionary 

authority respecting management of the plan and 

must act prudently and solely in the interest of the 

participant. 

17 75 FR 65263 (Oct. 22, 2010). 

18 74 FR 3822, 3824 (Jan. 21, 2009). See also AO 

84–04A (Jan. 4, 1984); AO 84–03A (Jan. 4, 1984); 

29 CFR 2509.96–1(c). 

19See footnote 17, above. 

current proposal, and the Department 

has not adopted this suggestion. 

Other commenters requested a general 

clarification of how the final rule 

applies in the context of IRAs. In 

particular, a commenter asked if 

paragraph (a)(3) indicates that prior 

ERISA regulations are now applicable to 

IRAs. Code section 4975(c), similar to 

ERISA section 406, generally prohibits a 

plan fiduciary from rendering 

investment advice that results in the 

payment of additional advisory and 

other fees to the fiduciaries or their 

affiliates. A fiduciary who participates 

in a prohibited transaction is subject to 

excise taxes under Code section 4975(a) 

and (b).13 The application of the Code 

section 4975 prohibited transaction 

provisions to IRAs pre-dates the 

enactment of the PPA.14 The statutory 

exemption implemented by this rule 

merely provides limited conditional 

relief from the application of those Code 

provisions. Except for the relief afforded 

by the statutory exemption, the final 

rule does not change the manner or 

extent to which Code section 4975 

applies to an IRA.15 Nor does the final 

rule make ERISA’s fiduciary 

responsibility provisions applicable to 

an IRA that is not covered by ERISA. 

Commenters also asked questions 

relating to the prohibited transaction 

implications of making 

recommendations to plan participants to 

roll-over plan benefits into an IRA. The 

Department has taken the position that 

merely advising a plan participant to 

take an otherwise permissible plan 

distribution, even when that advice is 

combined with a recommendation as to 

how the distribution should be invested, 

does not constitute ‘‘investment advice’’ 

within the meaning of 29 CFR 2510– 

3.21(c).16 The Department, however, has 

invited public comment on the issue as 

part of its review of the definition of 

‘‘fiduciary’’ with regard to persons 

providing investment advice to plans or 

plan participants and beneficiaries 

under 29 CFR 2510.3–21(c).17 The 

Department has not completed its 

review of those comments and, 

accordingly, is not addressing the issue 

as part of this final rule. 

2. Statutory Exemption 

a. General 

Paragraph (b) of the final rule 

describes the requirements 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. These 

requirements generally track the 

requirements in section 408(g)(1) of 

ERISA. 

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

forth the general scope of the statutory 

exemption and regulation as providing 

relief 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.’’ 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. Paragraph 

(b)(1) also notes that the Code contains 

parallel provisions at section 

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

A commenter asked whether relief 

would be provided for extensions of 

credit intrinsic to investments made 

pursuant to investment advice rendered. 

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, otherwise 

permissible routine transactions 

necessary for the efficient execution and 

settlement of trades of securities, such 

as extensions of short term credit in 

connection with settlements. 

Commenters also requested 

clarification as to whether 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 plan assets 

constitutes the provision of investment 

advice within the meaning of section 

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

statutory exemption. As previously 

stated in the context of adopting the 

2009 final rule, the Department has long 

held the view that individualized 

recommendations of particular 

investment managers to plan fiduciaries 

constitutes the provision of investment 

advice within the meaning of section 

3(21)(A)(ii) in the same manner as 

recommendations of particular 

securities or other property. The 

fiduciary nature of such advice does not 

change merely because the advice is 

being given to a plan participant or 

beneficiary.18 The Department has 

reaffirmed this position in connection 

with proposed amendments to 

regulations at 29 CFR 2510.3–21(c).19

Paragraph (b)(2) provides that, for 

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

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

‘‘eligible investment advice 

arrangement’’ is an arrangement that 

meets either the requirements of 

paragraph (b)(3) [describing investment 

advice arrangements that use feeleveling] or paragraph (b)(4) [describing 

investment advice arrangements that 

use computer modeling], or both. 

b. Arrangements Using Fee-Leveling 

With respect to arrangements that use 

fee-leveling, paragraph (b)(3)(i)(A) 

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, but also notes that generally 

accepted investment theories that take 

into account additional considerations 

are not precluded. Paragraph (b)(3)(i)(B) 

requires that investment advice must 

take into account investment 

management and other fees and 

expenses attendant to the recommended 

investments. These provisions have not 

been changed from the proposal. 

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

requires that investment advice 

provided under a fee-leveling 

arrangement must take into account, to 

the extent furnished, 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. Despite a 

request for re-consideration by 

commenters, paragraph (b)(3)(i)(C) 

requires that a fiduciary adviser must 

request such information. These 


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Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 66139 

20See AO 97–15A and AO 2005–10A. 21The commenter focused on the Department’s 

preamble explanation that, even though an affiliate 

of a fiduciary adviser would be permitted to receive 

fees that vary depending on investment options 

selected, any provision of financial or economic 

incentives by an affiliate (or any other party) to a 

fiduciary adviser or person employed by such 

fiduciary adviser to favor certain investments 

would be impermissible under the proposal. 75 FR 

9361 

commenters noted that ERISA section 

408(g)(3) does not contain a mandatory 

request for information, and that the 

Department similarly should avoid such 

a mandate. The Department believes 

that this information is sufficiently 

important to the provision of useful 

investment advice that fiduciary 

advisers should be required to make a 

request for the information. 

Accordingly, this requirement is 

retained in both the fee-leveling and 

computer modeling provisions of the 

final rule. We note that, as also reflected 

in paragraph (b)(3)(i)(C) of the final rule, 

investment advice need not take into 

account information requested, but not 

furnished by a participant or 

beneficiary, and a fiduciary adviser is 

not precluded from requesting and 

taking into account additional 

information that a plan or participant or 

beneficiary may provide. Furthermore, 

the Department does not believe that 

this provision, or paragraph (b)(4)(i)(D) 

applicable to arrangements using 

computer models, would preclude a 

fiduciary adviser or computer model, 

when making an information request, 

from also providing a participant or 

beneficiary with an opportunity to 

direct the use of information previously 

provided. 

Paragraphs (b)(3)(i)(D) of the final rule 

sets forth the limitations on fees and 

compensation applicable to fee-leveling 

arrangements. As proposed, paragraph 

(b)(3)(i)(D) provided that no fiduciary 

adviser (including any employee, agent, 

or registered representative) that 

provides investment advice receives 

from any party (including an affiliate of 

the fiduciary adviser), directly or 

indirectly, any fee or other 

compensation (including commissions, 

salary, bonuses, awards, promotions, or 

other things of value) that is based in 

whole or in part on a participant’s or 

beneficiary’s selection of an investment 

option. Some commenters suggested 

that the fee and compensation limitation 

be expanded to include the affiliates of 

a fiduciary adviser. The Department has 

not adopted this suggestion. In FAB 

2007–1, the Department concluded that 

the requirement in ERISA section 

408(g)(2)(A)(i) that fees not vary 

depending on the basis of any 

investment option selected applies only 

to a fiduciary adviser, and does not 

extend to affiliates of the fiduciary 

adviser unless the affiliate also is a 

provider of investment advice. In 

reaching this conclusion, the 

Department explained that, consistent 

with its previous guidance, 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 will 

result solely by reason of providing 

investment advice, and prohibited 

transaction relief, such as provided 

under sections 408(b)(14) and 408(g), is 

not necessary.20

Several commenters suggested that 

the Department revise the language in 

paragraph (b)(3)(i)(D) that refers to fees 

or compensation that is ‘‘based in whole 

or in part’’ on a participant’s investment 

selection to conform to the statutory 

provision, and make clear that the 

regulation only proscribes fees or 

compensation that vary based on 

investment selections. As an example, a 

commenter explained that if 

commissions paid with respect to each 

plan investment option are the same, 

the commission could nonetheless be 

considered ‘‘based on’’ an investment 

selection because it is paid only if an 

investment is made, and therefore 

would appear to violate the proposal. 

Such a result, it is argued, is 

inconsistent with the section 

408(g)(2)(A)(i), which only requires that 

‘‘any fees (including any commission or 

other compensation) received by the 

fiduciary adviser * * * do not vary 

depending on the basis of any 

investment option selected.’’ (Emphasis 

added) Another commenter cautioned 

that the proposal could be 

misinterpreted as proscribing only those 

payments that a payor intends to act as 

an incentive, whereas the statutory 

provision appears to address receipt of 

any varying payment that has the effect 

of creating an incentive, without regard 

to the payor’s intent.21 This commenter 

also recommended that the proposal 

should be revised to conform to the 

statutory language. 

The Department agrees with the 

observations of the commenters and, 

accordingly, has revised the provision 

in response to these comments. 

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

requires that no fiduciary adviser 

(including any employee, agent, or 

registered representative) that provides 

investment advice receives from any 

party (including an affiliate of the 

fiduciary adviser), directly or indirectly, 

any fee or other compensation 

(including commissions, salary, 

bonuses, awards, promotions, or other 

things of value) that varies depending 

on the basis of a participant’s or 

beneficiary’s selection of a particular 

investment option. Consistent with the 

statute, this provision proscribes the 

receipt of fees or compensation that vary 

based on investment options selected, 

and therefore could have the effect of 

creating an incentive for a fiduciary 

adviser, or any individual employed by 

the adviser, to favor certain investments. 

A commenter expressed the view that 

by encompassing bonuses, awards, 

promotions, or other things of value, the 

fee-leveling requirement may be 

unnecessarily broad. Some commenters 

asked whether particular compensation 

arrangements or structures described in 

their comment letters would meet the 

fee-leveling requirement. Others 

similarly sought confirmation that 

bonuses, where it can be established 

that plan and IRA components are 

excluded from, or constitute a negligible 

portion of, the calculation, would not 

violate the fee-leveling requirement. The 

Department intends the fee-leveling 

requirement to be broadly applied in 

order to ensure the 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. For purposes of applying the 

provision, the Department would 

consider things of value to include trips, 

gifts and other things that, while having 

a value, are not given in the form of 

cash. 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, a compensation 

or bonus arrangement that is based on 

the overall profitability of an 

organization may be permissible if the 

individual account plan and IRA 

investment advice and investment 

option components are 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 the 

fee-leveling requirement ultimately 

depends on the details of the program. 

In this regard, the Department notes 

that, under paragraph (b)(6), 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 exemption. 

In addition to the foregoing, under 

paragraph (b)(3)(ii), fiduciary advisers 

utilizing investment advice 


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22This is consistent with a survey of literature on 

generally accepted investment theories prepared for 

the Department. See Deloitte Financial Advisory 

Services LLP, Generally Accepted Investment 

Theories (July 11, 2007) (unpublished, on file with 

the Department of Labor). 

arrangements that employ fee-leveling 

must comply with the requirements of 

paragraphs (b)(5) [authorization by plan 

fiduciary], (b)(6) [audits], (b)(7) 

[disclosure to participants], (b)(8) 

[disclosure to authorizing fiduciary], 

(b)(9) [miscellaneous], and (d) 

[maintenance of records] of the final 

rule, each of which is discussed in more 

detail below. 

c. Arrangements Using Computer 

Models 

Paragraph (b)(4) addresses the 

requirements applicable to investment 

advice arrangements that rely on use of 

computer models under the statutory 

exemption. To qualify as an eligible 

investment advice arrangement, the 

only investment advice provided under 

the arrangement must be advice 

generated by a computer model 

described in paragraph (b)(4)(i) 

[computer model design and operation] 

and (ii) [computer model certification], 

and the arrangement must meet the 

requirements of paragraphs (b)(5) 

through (9) and paragraph (d), each of 

which is discussed in more detail 

below. 

1. Computer Model Design and 

Operation 

In general, the computer model design 

and operation provisions in the 

proposal were based on section 

408(g)(3)(B)(i)–(v) of ERISA. They also 

reflected comments received during 

development of the January 2009 final 

rule. However, the proposal also 

included a new provision, at paragraph 

(b)(4)(i)(E)(3), requiring that a computer 

model must be designed and operated to 

avoid investment recommendations that 

inappropriately distinguish among 

investment options within a single asset 

class on the basis of a factor that cannot 

confidently be expected to persist in the 

future. The Department added this 

provision to enhance the rule’s 

protections against the potential that the 

adviser’s conflicts might taint advice 

given under the exemption. To further 

explore the merits of enhancing the 

rule’s protections by providing more 

specific computer model standards, the 

Department solicited comment on a 

number of questions involving 

computer models. These questions 

related to matters such as the 

identification and application of, and 

practices consistent with, generally 

accepted investment theories; use of 

historical data (such as past 

performance) of asset classes and plan 

investments; and criteria appropriate for 

consideration in developing asset 

allocation recommendations consisting 

of plan investments. 

As in the proposal, paragraph 

(b)(4)(i)(A) of the final rule relates to the 

application of generally accepted 

investment theories that take into 

account the historic risks and returns of 

different asset classes over defined 

periods of time. In response to the 

Department’s solicitation, commenters 

indicated that generally accepted 

investment theories is a term defined by 

wide usage and acceptance by 

investment experts and academics, and 

is subject to change over time. Most did 

not believe, however, that the 

Department should specifically define 

or identify generally accepted 

investment theories, or prescribe 

particular practices or computer model 

parameters. These commenters 

explained that economic and 

investment theories and practices 

continuously evolve over time in 

response to changes and developments 

in academic and expert thinking, 

technology, and financial markets. 

Commenters cautioned that defining 

generally accepted theories and 

practices through the final rule would 

reflect a determination made at a 

particular point in time, and that such 

a determination might limit the ability 

of advisers to select and apply 

investment theories and methodologies 

they believe to be appropriate, and 

cause them to apply theories and 

methodologies that they otherwise 

might determine to be outdated. They 

also suggested that establishing a 

specific standard might inhibit 

innovation in participant-oriented 

investment advice. Commenters further 

noted that the proposal’s computer 

model provisions, without modification, 

would be sufficient to protect against 

use of specious or highly unorthodox 

methods, or inappropriate consideration 

of factors such as recent performance of 

plan investment options. These 

commenters therefore suggested that 

specifying theories and practices is not 

necessary to protect participants, and 

furthermore may impede the 

development of advice that is in their 

best interests. 

Other commenters suggested that 

more specific standards might be 

helpful. One commenter stated that lack 

of guidance on what constitutes a 

generally accepted investment theory 

may present difficulties in performing 

the rule’s required computer model 

certifications. The commenter 

recommended that the Department 

revise the rule to include a process for 

determining whether a theory is 

generally accepted, which could include 

submission to a panel of experts for 

determination and publication of an 

acceptable list of theories. Another 

commenter suggested that the final rule 

contain non-exclusive ‘‘safe harbor’’ 

computer model parameters. Another 

commenter requested clarification that a 

computer model must apply generally 

accepted investment theories that take 

into account the other considerations 

described in the regulation’s computer 

model provisions (e.g., information 

about a participants age and time 

horizon). 

Virtually all commenters who 

addressed this issue indicated that use 

of historical performance data is 

required by generally accepted 

investment theories, but only in ways 

that recognize statistical uncertainty. 

Most noted that defining ‘‘historical’’ 

differently can have a tremendous 

impact on the resulting data and 

investment recommendations, and 

generally agreed that long-term 

performance information is preferable to 

short-term performance information. 

Some opined that historical 

performance data must reflect at least 

one market or economic cycle, but 

provided different timeframes (e.g., at 

least 5, 10, or 20 years) that they believe 

would meet this standard. Some also 

suggested that use of historical 

performance data should be limited to 

estimating future performance for an 

entire asset class, rather than as a 

predictor for individual investments 

within an asset class. 

After careful consideration of all the 

comments on the issue, the Department 

does not believe it has a sufficient basis 

for determining appropriate changes to 

the generally accepted investment 

theory standard. While several 

commenters described theories and 

practices they believe to be generally 

accepted, there did not appear to be any 

consensus among them, with the 

exception of modern portfolio theory,22

which the Department believes is 

already reflected in the rule’s reference 

to investment theories that take into 

account the historic returns of different 

asset classes over defined periods of 

time. Moreover, the Department is 

concerned that attempting to provide 

further clarification or additional 

specificity in this area may have 

potentially significant unintended 

consequences—such as limiting 

advisers’ ability to select, apply or make 

further innovations in participantoriented investment advice—that could 

potentially lower the quality of 


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investment advice received by 

participants and reduce the economic 

benefit of the statutory exemption. The 

Department also is persuaded that, 

without additional specificity, the final 

rule’s computer model requirements are 

sufficient to safeguard participants from 

inappropriate application of investment 

theories. As the party seeking prohibited 

transaction relief under the exemption, 

the fiduciary adviser has the burden of 

demonstrating satisfaction of all 

applicable requirements of the 

exemption. A fiduciary adviser relying 

on use of computer models therefore 

must be able to demonstrate that the 

computer model is designed and 

operated to apply generally-accepted 

investment theories. Furthermore, as 

with the other computer model 

requirements in paragraph (b)(4)(i), 

application of generally-accepted 

investment theories is subject to 

certification by an eligible investment 

expert under paragraph (b)(4)(ii). This 

provides significant additional 

procedural and substantive safeguards, 

as the expert must be independent of 

the fiduciary adviser as described in 

paragraph (b)(4)(ii), and must following 

its evaluation of a computer model 

prepare a written certification report. 

Paragraph (d) of the final rule, in turn, 

requires the fiduciary adviser to retain 

for a period of no less than 6 years any 

records necessary for determining 

whether the applicable requirements of 

the regulation have been met. 

Accordingly, paragraph (b)(4)(i)(A) of 

the final rule has not been changed from 

the proposal. This provision requires 

that a computer model must be designed 

and operated to apply generally 

accepted investment theories that take 

into account the historic risks and 

returns of different asset classes over 

defined periods of time, but also makes 

clear that the provision does not 

preclude a computer model from 

applying generally accepted investment 

theories that take into account 

additional considerations. 

Paragraph (b)(4)(i)(B) of the final rule 

requires that a computer model must 

take into account investment 

management and other fees and 

expenses attendant to the recommended 

investments. No substantive comments 

were received on this provision, and it 

is being adopted unchanged from the 

proposal. 

Paragraph (b)(4)(i)(C) of the final rule, 

as described below, reflects the 

requirement that was contained in 

paragraph (b)(4)(i)(E)(3) of the proposal. 

Paragraph (b)(4)(i)(D) of the final rule, 

as with paragraph (b)(4)(i)(C) of the 

proposal, requires a computer model to 

request from a participant or beneficiary 

and, to the extent furnished, utilize 

information relating to age, time 

horizons, risk tolerance, current 

investments in designated investment 

options, other assets or sources of 

income, and investment preferences. 

The provision further makes clear, 

however, that a computer model is not 

precluded from requesting, and 

utilizing, other information from a 

participant or beneficiary. As discussed 

above in the description of paragraph 

(b)(3)(i)(C) (applicable to arrangements 

that use fee-leveling), the Department 

has not adopted commenter requests to 

remove the regulation’s mandatory 

request for information from 

participants and beneficiaries. A few 

commenters also suggested that the 

Department revise the regulation to 

provide additional factors that must be 

considered in computer models, such as 

participant contribution rates and 

liquidity needs. Although paragraph 

(b)(4)(i)(D) has not been modified to 

reflect these factors, the Department 

notes that there is nothing in the final 

rule that expressly precludes a 

computer model from requesting and 

taking into account additional factors to 

the extent the model otherwise complies 

with the requirements of the regulation. 

Paragraph (b)(4)(i)(D) of the proposal 

requires that a computer model must be 

designed and operated to utilize 

appropriate objective criteria to provide 

asset allocation portfolios comprised of 

investment options available under the 

plan. Paragraph (b)(4)(i)(E) of the 

proposal further requires that a 

computer model be designed and 

operated to avoid investment 

recommendations that inappropriately 

favor investment options offered by the 

fiduciary adviser or certain other 

persons, over other investment options, 

if any, available under the plan 

(paragraph (b)(4)(i)(E)(1)); 

inappropriately favor investment 

options that may generate greater 

income for the fiduciary adviser or 

certain other persons (paragraph 

(b)(4)(i)(E)(2)); or inappropriately 

distinguish among investment options 

within a single asset class on the basis 

of a factor that cannot confidently be 

expected to persist in the future 

(paragraph (b)(4)(i)(E)(3)). With respect 

to paragraph (b)(4)(i)(E)(3), the 

Department explained that while some 

differences between investment options 

within a single asset class, such as 

differences in fees and expenses or 

management style, are likely to persist 

in the future and therefore to constitute 

appropriate criteria for asset allocation, 

other differences, such as differences in 

historical performance, are less likely to 

persist and therefore less likely to 

constitute appropriate criteria for asset 

allocation; asset classes, in contrast, can 

more often be distinguished from one 

another on the basis of differences in 

their historical risk and return 

characteristics. 

The Department did not receive any 

substantive comments with respect to 

paragraphs (b)(4)(i)(D), (b)(4)(i)(E)(1) and 

(2), and therefore is adopting these 

provisions as proposed, now at 

paragraphs (b)(4)(i)(E), (b)(4)(i)(F)(1) and 

(2) of the final rule. A number of 

commenters requested that the 

Department consider removing 

paragraph (b)(4)(i)(E)(3) of the proposal. 

Some opined that the test contained in 

that provision—which applies on an 

asset-class by asset-class basis—lacks 

sufficient clarity because it fails to 

define the essential term ‘‘asset class.’’ 

A commenter further noted that a rulesbased definition of asset class, and the 

necessary confidence of future 

persistence, likely would be too vague 

or too restrictive. Some commenters also 

requested removal of this provision 

unless the Department clarifies that it 

would be acceptable for a computer 

model to take into account historical 

performance data. According to these 

commenters, the proposal’s discussion 

of paragraph (b)(4)(i)(E)(3) and related 

computer model questions has been 

construed as strictly prohibiting, or 

strongly cautioning against, any 

consideration of historical performance 

data, even if considered in conjunction 

with other information. These 

commenters opined that a complete 

disregard of historical performance data 

would be inconsistent with generally 

accepted investment theories, as 

discussed above. Furthermore, some 

cautioned that, by limiting 

consideration to only those factors that 

can confidently be expected to persist in 

the future, a computer model might be 

limited to distinguishing between 

investment options solely on the basis 

of fees and expenses. A commenter 

noted that, other than fees, it could not 

identify any other factor with the 

necessary likelihood of persistence it 

believed would be required under the 

proposal. Although commenters 

generally agreed that fees are an 

important consideration, most 

recognized they should not be the only 

factor taken into account. 

Several commenters indicated that, 

while the rule is limited to 

implementation of the statutory 

exemption for investment advice, any 

views the Department expresses with 

respect to investment theories and 

practices might be read as applying 

more generally to any fiduciary decision 


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66142 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

23Under paragraph (b)(4)(i)(F)(2)(ii) of the 

proposal, the limitation for these types of funds was 

subject to the condition that the participant, 

contemporaneous with the provision of the 

computer-generated advice, would be furnished 

with a general description of the fund and how they 

operate. 

24 In 2009, the Department and the U.S. Securities 

and Exchange Commission (SEC) held a joint public 

hearing to examine issues related to the design and 

operation of target date funds and similar 

investments. See http://www.dol.gov/ebsa/regs/cmttargetdatefundshearing.html. In 2010, the agencies 

jointly provided an Investor Bulletin to help 

investors and plan participants better understand 

the operations and risks of target date fund 

investments. See http://www.dol.gov/ebsa/pdf/ 

TDFinvestorbulletin.pdf. The Department is in the 

process of developing regulations to address 

disclosures related to target date funds, 75 FR 73987 

(Nov. 30, 2010), and also is currently developing 

guidance to assist plan sponsors in the selection 

and monitoring of target date funds for their plans. 

relating to investments. Thus, a number 

of commenters expressed concern that 

the proposal, with its focus on historical 

performance data, superior past 

performance and fees, appeared to 

suggest that it would be impermissible 

under any circumstances for a plan 

fiduciary to pursue an active 

management style, or that a plan 

fiduciary would bear a very high burden 

of justification. Commenters also stated 

that the Department’s proposal appeared 

to demonstrate a clear bias in favor of 

passive investment styles over active 

styles, which they believe to be 

premature because it is the subject of 

ongoing debate among investment 

experts. 

Other commenters, however, 

questioned the utility of historical 

performance data beyond estimating 

future performance of an entire asset 

class. They further noted that, because 

the regulation permits a fiduciary 

adviser to provide investment 

recommendations to plan participants 

when the adviser has an interest in the 

investment options being 

recommended, there is the potential that 

the computer model might be designed 

to favor certain options by giving undue 

weight to historical performance data. 

They therefore stressed the importance 

of scrutinizing the use of historical 

performance data and supported the 

inclusion of paragraph (b)(4)(i)(E)(3) of 

the proposal. 

Paragraph (b)(4)(i)(E)(3) of the 

proposal incorporated the generallyrecognized premise that an investment 

option’s historical performance on its 

own is not an adequate predictor of 

such investment option’s future 

performance. The provision was not 

intended to prohibit a computer model 

from any consideration of an investment 

option’s historical performance, as some 

commenters interpreted. Rather, as 

some commenters recognized, the 

provision is intended to ensure that in 

evaluating investment options for asset 

allocation, it would be appropriate and 

consistent with generally accepted 

investment theories for a computer 

model to take into account multiple 

factors, including historical 

performance, attaching weights to those 

factors based on surrounding facts and 

circumstances. As with the 

consideration of fees and expenses 

attendant to investment options, 

commenters generally recognized the 

importance of ensuring that historical 

performance of options is not given 

inappropriate weight. The Department 

is not persuaded by the comments 

received that the provision should be 

eliminated, however, to avoid further 

misinterpretation of the provision, the 

requirement has been clarified and 

moved to paragraph (b)(4)(i)(C) of the 

final rule. This provision requires that a 

computer model must be designed and 

operated to appropriately weight the 

factors used in estimating future returns 

of investment options. 

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

rule, like paragraph (b)(4)(i)(F)(1) of the 

proposal, requires a computer model to 

take into account all ‘‘designated 

investment options’’ available under the 

plan without giving inappropriate 

weight to any investment option. 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,’’ ‘‘self-directed 

brokerage accounts,’’ or similar plan 

arrangements that enable participants 

and beneficiaries to select investments 

beyond those designated by the plan. 

As with paragraph (b)(4)(i)(F)(2) of the 

proposal, paragraph (b)(4)(i)(G)(2) of the 

final rule provides that a computer 

model will not be treated as failing to 

meet paragraph (b)(4)(i)(G)(1) merely 

because it does not make 

recommendations relating to the 

acquisition, holding or sale of certain 

types of investment options. Under the 

proposal, this exception applied to: 

qualifying employer securities; an 

investment 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 or level of risk of the participant 

or beneficiary; and 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. 

Several commenters suggested 

removal of one or more of these 

exceptions. Commenters noted that 

requiring computer models to be 

capable of providing recommendations 

with respect to employer securities 

could help participants avoid risks 

associated with overconcentrated 

investments in equity securities of a 

single company. As to asset allocation 

funds (e.g., lifecycle, or target date, 

funds), commenters noted that, if a 

computer model does not include 

recommendations on these popular 

investments, then interested 

participants would need to conduct 

their own research beyond the general 

explanation required under the 

proposal.23 With respect to in-plan 

annuity options, several commenters 

noted that these newly-developing 

options can help participants address 

longevity risk and improve retirement 

security, and that permitting their 

exclusion from computer model advice 

could result in low utilization by 

participants. A commenter also 

expressed confidence that, in the time 

since the Department’s 2009 final rule, 

computer modeling technology has 

become sufficiently sophisticated to 

take in-plan annuity options into 

account. 

The Department has decided to 

remove qualifying employer securities 

and asset allocations funds from the list 

of excepted options in paragraph 

(b)(4)(i)(G)(2). The Department believes 

that it is feasible to develop a computer 

model capable of addressing 

investments in qualifying employer 

securities, and that plan participants 

may significantly benefit from this 

advice. The Department also believes 

that participants who seek investment 

advice as they manage their plan 

investments would benefit from advice 

that takes into account asset allocation 

funds, if available under the plan. Based 

on recent experience in examining 

target date funds and similar 

investments, the Department believes it 

is feasible to design computer models 

with this capability.24

The Department, however, is less 

certain that computer models are able to 

give adequate consideration to in-plan 

annuity products, which permit a 

participant to allocate a portion of the 

assets in his or her plan account 

towards the purchase of an annuitized 

retirement benefit. In the absence of a 

better understanding of the computer 

modeling issues raised by in-plan 

annuities, the Department is hesitant to 

mandate their inclusion in a computer 


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25See footnote 9, above. 

26The Department’s response as it relates to the 

independent auditor is contained in the discussion 

of the audit provisions, below. 

model. The Department therefore is 

retaining the exception for in-plan 

annuity options. Thus, paragraph 

(b)(4)(i)(G)(2)(i) of the final rule 

provides that a computer model will not 

fail to satisfy paragraph (b)(4)(i)(G)(1) 

merely because it does not make 

recommendations relating to the 

acquisition, holding, or sale of 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. The 

Department notes, however, that even 

though paragraph (b)(4)(i)(G)(2)(i) 

permits a computer model to not make 

recommendations to allocate amounts to 

an in-plan annuity, amounts that a 

participant or beneficiary have already 

allocated to such an annuity must be 

taken into account by the computer 

model in developing the 

recommendation with respect to the 

investment of the participant’s 

remaining available assets. The 

Department further notes that, while not 

mandated, there is nothing in the 

regulation that precludes a computer 

model from being designed to make 

recommendations to allocate amounts to 

an in-plan annuity, subject to the other 

conditions of the regulation being 

satisfied. 

Also, the Department has added a 

new provision to reflect the interaction 

between paragraph (b)(4)(i)(G)(1) and 

paragraph (b)(4)(i)(C), which requires a 

computer model to request and, to the 

extent furnished, take into account a 

participant’s investment preferences. 

This new provision, paragraph 

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

provides that a computer model will not 

fail to satisfy paragraph (b)(4)(i)(G)(1) 

merely because it does not provide a 

recommendation with respect to an 

investment option that a participant or 

beneficiary requests to be excluded from 

consideration in such 

recommendations. 

A commenter requested clarification 

as to whether an IRA with an unlimited 

universe of investment options would 

be treated similar to a brokerage 

window or self-directed brokerage 

account for purposes of this provision. 

Another commenter indicated that some 

IRAs permit beneficiaries to make 

investments in a limited universe of 

options, while also permitting them to 

hold other investments that are not 

offered by the IRA, and asked if 

paragraph (b)(4)(i)(G)(1) would be 

violated if a computer model provides 

‘‘buy’’ ‘‘hold’’ and ‘‘sell’’ 

recommendations with respect to the 

limited universe of options, while 

accommodating ‘‘hold’’ and ‘‘sell’’ 

recommendations for the investments 

not available 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 

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)(G)(1) 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. 

2. Computer Model Certification 

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 

subsequently 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). 

Consistent with section 408(g)(3)(C)(iii) 

of ERISA, paragraph (b)(4)(iii) further 

limits this definition by excluding 

certain parties that would not have 

sufficient independence from an 

arrangement to certify a computer 

model for compliance with the 

regulation. The proposal provided 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. 

Several commenters asked for 

additional guidance on the credentials 

necessary to serve as an ‘‘eligible 

investment expert.’’ The Department 

previously attempted to define with 

greater specificity the qualifications of 

the eligible investment expert. It 

received public comments on this issue 

in response to a specific request for 

information published in 2006 and to 

similar proposed rules published in 

2008.25 At that time, it concluded that 

it could not define a specific set of 

academic or other credentials for an 

eligible investment expert. The 

Department continues to believe it 

would be very difficult to do so, and the 

comments received with respect to this 

most recent proposal did not provide 

significant additional information for 

consideration. As a result, no changes 

have been made to this aspect of the 

final rule. The Department notes, 

however, that as provided in paragraph 

(b)(4)(v) of the final rule, the fiduciary 

adviser’s selection of the eligible 

investment expert is a fiduciary act 

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

Therefore, a fiduciary adviser must act 

prudently in its selection. Moreover, 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. 

Commenters raised general questions 

as to whether the provision of certain 

types of services for a fiduciary adviser 

would disqualify a person from acting 

as the ‘‘eligible investment expert’’ 

required under paragraph (b)(4) or as the 

independent auditor required under 

paragraph (b)(6).26 With respect to the 

eligible investment expert, the 

Department believes that the 10% gross 

revenue test in the definition of the term 

‘‘material contractual relationship,’’ 


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66144 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

27For example, a person who develops a 

computer model used under the exemption 

generally is treated as a fiduciary adviser under 

paragraph (c)(2)(ii) of the final rule. However, the 

fiduciary election described in Sec. 2550.408g–2 

permits another person to be treated as fiduciary 

adviser. 

28See 29 CFR 2550.408b–2(e)(3). 29See ERISA sections 101(h) (application of 

reporting requirements) and 404(c)(2) (application 

of fiduciary responsibility requirements). The 

Department treats SEP and SIMPLE IRA plans 

differently from other ERISA-covered pension plans 

in other contexts. See 29 CFR 2550.404a–5 

(disclosures to participants in participant-directed 

individual account plans) and 2550.408b–2(c)(1) 

(disclosures to fiduciaries of pension plans). 

30 29 CFR 2520.104–48 and 2520.104–49. 

which contemplates that there may be 

instances in which a person might be 

performing other services for a fiduciary 

adviser or affiliates, generally is 

sufficient to minimize any influence on 

the part of the fiduciary adviser by 

virtue of service relationships that might 

compromise the independence of the 

person in performing the certification 

under the regulation. However, the 

Department does not believe that a 

person who develops a computer model 

should be considered sufficiently 

independent to conduct a certification 

of the same model.27 The exclusionary 

language of paragraph (b)(4)(iii) of the 

final rule has been modified 

accordingly, and provides 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; or develops the computer 

model utilized by the fiduciary adviser 

to satisfy paragraph (b)(4). 

One commenter asked whether the 

eligible investment expert must 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 bonding 

requirements would be applicable to the 

eligible investment expert. 

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. 

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

provides that the selection of an eligible 

investment expert as required by the 

regulation is a fiduciary act governed by 

section 404(a)(1) of ERISA. A 

commenter recommended that the 

eligible investment expert should be 

treated as a fiduciary under ERISA. The 

Department does not believe it would be 

appropriate, as part of this final rule, 

without further notice and comment to 

adopt such a potentially significant 

change. Accordingly, the Department 

has not adopted this recommendation. 

d. Authorization by a Plan Fiduciary 

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

requires that, except as provided in 

paragraph (b)(5)(ii), 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. For 

purposes of this authorization, an IRA 

beneficiary will not be treated as an 

affiliate of a person solely by reason of 

being an employee of such person. 

Therefore, an IRA beneficiary is not 

precluded from providing the 

authorization required under paragraph 

(b)(5)(i) merely because the IRA 

beneficiary is an employee of the 

fiduciary adviser. Paragraph (b)(5)(iii) 

provides that a plan sponsor is not 

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. Therefore, a plan 

sponsor-fiduciary is not precluded from 

providing the authorization required by 

paragraph (b)(5)(i) merely because the 

plan includes qualifying employer 

securities as a designated investment 

option. 

Paragraph (b)(5)(ii) addresses 

authorization in connection with the 

adviser’s own plan. This provision 

accommodates a fiduciary adviser’s 

provision of investment 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. The 

Department notes, however, that the 

statutory exemption does not provide 

relief for the selection of the fiduciary 

adviser or the arrangement pursuant to 

which advice will be provided. 

Accordingly, a plan fiduciary must 

nonetheless be prudent in its selection 

and may not, in contravention of ERISA 

section 406(b), use its position to benefit 

itself or a person in which such 

fiduciary has an interest that may affect 

the exercise of such fiduciary’s best 

judgment as a fiduciary. 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).28

One commenter asked whether 

paragraph (b)(5) requires authorization 

by the employer or the IRA beneficiary 

with respect to an employer-sponsored 

SIMPLE IRA. Savings Incentive Match 

Plan for Employees (SIMPLE) IRA plans 

and Simplified Employee Pension (SEP) 

plans are relatively uncomplicated IRAbased retirement savings vehicles that 

allow contributions to be made on a taxfavored basis to individual retirement 

accounts and individual retirement 

annuities (IRAs) owned by the 

employees. Although generally a SEP or 

SIMPLE IRA is a plan subject to Title I 

of ERISA, many of the rules applicable 

to other ERISA-covered employer 

sponsored pension plans do not apply 

to SIMPLE IRA and SEP plans.29 For 

example, SIMPLE IRA and SEP plans 

are subject to minimal reporting and 

disclosure requirements.30 Many 

employers that sponsor these IRA-based 

plans that are intended to be 


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31The audit provisions are set forth in section 

408(g)(6) of ERISA. 

32 15 U.S.C. 7004(d)(1) (2000). 

33See 74 FR 3829 (Jan. 21, 2009). 

uncomplicated to establish and 

administer may not be willing to assume 

the duty to authorize an investment 

advice provider under the regulation, 

even one selected by an IRA beneficiary. 

This could limit access to fiduciary 

investment advice under the regulation 

for the participants and beneficiaries of 

such IRA-based plans. Under these 

circumstances, the Department has 

defined the term ‘‘IRA’’ in this 

regulation to include a ‘‘simplified 

employee pension’’ described in section 

408(k) of the Code, and a ‘‘simple 

retirement account’’ described in 

section 408(p) of the Code. Thus, 

SIMPLE IRA plans and SEP plans would 

be treated like IRAs under the 

requirements of the final regulation, and 

the required authorization would be 

given by the participant or beneficiary 

to whom the account belongs and who 

receives the advice. The Department is 

interested in continuing to receive 

public input on the operation of the 

regulation in the context of SIMPLE IRA 

plans and SEP plans, especially the 

experience of participants and 

beneficiaries and, to the extent public 

input suggests that changes in this 

context are necessary, the Department 

may consider further adjustments to the 

regulation in the future. 

e. Annual Audit 

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

forth the annual audit requirements for 

the statutory exemption.31 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 adviser’s investment advice 

arrangements for compliance with the 

requirements of the regulation and, 

within 60 days 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. The written report must 

set forth the specific findings of the 

auditor regarding compliance of the 

arrangement with the requirements of 

the regulation (paragraph (b)(6)(i)(B)(4)). 

However, as discussed below, because 

of the importance of the annual audit in 

helping an authorizing fiduciary 

monitor compliance of the arrangement, 

paragraph (b)(6)(i)(B) of the final rule, 

unlike the proposal, also enumerates 

certain basic information about the 

audited arrangement that must be 

included in the audit report. 

Specifically, the report must identify the 

fiduciary adviser and the type of 

arrangement (i.e., fee leveling, computer 

models, or both) (paragraphs 

(b)(6)(i)(B)(1) and (2)). Further, if the 

arrangement uses computer models, or 

both computer models and fee leveling, 

the report must also indicate the date of 

the most recent computer model 

certification, and identify the eligible 

investment expert that provided the 

certification (paragraph (b)(6)(i)(B)(3)). 

The Department believes that this basic 

information will benefit the authorizing 

fiduciary or IRA beneficiary in 

understanding the arrangement without 

imposing a significant burden on the 

auditor, which ordinarily will have such 

information. 

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 proposal and the final 

rule. Under this provision, the fiduciary 

adviser must, within 30 days following 

receipt of the report from the auditor as 

required under paragraph (b)(6)(i)(B), 

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 

participant 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. The Department believes 

that making reports available on a Web 

site in this manner to IRA beneficiaries 

satisfies the requirement of section 

104(d)(1) of the Electronic Signatures in 

Global and National Commerce Act (E– 

SIGN) 32 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 connection 

with the prior proposal, and received no 

comments in response.33

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. 

As with the proposal, paragraph 

(b)(6)(ii) of the final rule also provides 

with respect to an arrangement with an 

IRA that, if the report of the auditor 

identifies noncompliance with the 

requirements of the regulation, then 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 exemption. 

Some commenters expressed concern 

with the requirement in paragraph 

(b)(6)(ii)(B) that the fiduciary adviser 

must send a copy of the auditor’s report 

to the Department if that report 

identifies instances of noncompliance. 

They 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. This filing requirement 

will enable the Department to monitor 

compliance with the exemption in those 

instances where there is no authorizing 

ERISA plan fiduciary to carry out that 

function. While it recognizes that not 

every instance of noncompliance would, 

itself, affect the quality of the advice 

provided to an IRA beneficiary, the 

Department believes that, given the 

overall significance of the audit as a 

protection for advice recipients, all 

reports that identify noncompliance in 

this area should be furnished to the 

Department for review, thereby giving it 

the opportunity to evaluate the 

significance of the noncompliance, the 

function that an authorizing plan 

fiduciary would carry out for its plan. 

Accordingly, the Department is 

adopting the filing requirement as 

proposed without substantive change. 

We note, however, that language has 

been added to paragraph (b)(6)(ii)(B) to 

provide a means for electronic 

submission to the Department. 

A commenter suggested that plan 

participants should be informed of audit 

results. The Department does not 

believe it is appropriate as part of the 

final rule, without further notice and 

comment, to adopt such a requirement, 

which could involve a significant 

number of audit reports being furnished 

to plan participants. The Department 

believes that the furnishing of the audit 

report to the authorizing plan fiduciary, 

who must act prudently and solely in 


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66146 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

the interest of plan participants, is 

sufficient to protect the interests of 

participants and beneficiaries. The 

fiduciary should examine the audit 

report furnished and, if noncompliance 

is identified, take appropriate steps. 

Because of the importance of the audit 

report, the Department has included a 

new provision, at paragraph (b)(8), 

which requires that the fiduciary 

adviser provide the authorizing 

fiduciary with written notification that 

the fiduciary adviser intends to comply 

with the statutory exemption and the 

regulations and that the fiduciary 

adviser’s investment advice 

arrangement will be audited annually by 

an independent auditor for compliance, 

and that the auditor will furnish the 

authorizing fiduciary with a copy of that 

auditor’s findings within 60 days of its 

completion of the audit. This disclosure 

serves to place the authorizing fiduciary 

on notice that an audit will be 

conducted annually and that a report of 

that audit will be furnished. The 

Department would expect the 

authorizing fiduciary to take reasonable 

steps if the report is not furnished in a 

timely manner, such as making 

inquiries with the auditor, the fiduciary 

adviser, or both. 

With regard to the person who 

conducts the audit, one commenter 

recommended that the auditor should 

be treated as a fiduciary. Others asked 

if the audit must be conducted by a 

certified public accountant. Another 

requested that the final rule provide 

additional guidance with respect to 

necessary credentials to conduct an 

audit, such as minimum standards of 

experience, education, or professional 

certification or licensing. As with the 

requirements for an ‘‘eligible investment 

expert,’’ the Department does not 

believe there is necessarily one set of 

credentials, such as being a certified 

public accountant, auditor, or lawyer, 

that 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’s or organization’s 

experience and proficiency in 

conducting similar types of audits. In 

this regard, because the selection of an 

auditor is a fiduciary act (see paragraph 

(b)(6)(v)), a fiduciary adviser’s selection 

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. 

Paragraph (b)(6)(iii) describes the 

circumstances under which an auditor 

will be considered independent for 

purposes of paragraph (b)(6). As 

proposed, this paragraph required that 

the auditor 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. The terms 

‘‘material affiliation’’ and ‘‘material 

contractual relationship’’ are defined in 

paragraphs (c)(6) and (7) of the final 

rule, respectively. Some commenters 

asked whether an auditor’s provision of 

certain services (e.g., computer model 

certification required under the 

regulation) would disqualify the 

auditor. The Department believes that 

the 10% gross revenue test in the 

definition of the term ‘‘material 

contractual relationship,’’ which 

contemplates that there may be 

instances in which an auditor might be 

performing other services for a fiduciary 

adviser or affiliates, generally is 

sufficient to minimize any influence on 

the part of the fiduciary adviser by 

virtue of service relationships that 

would serve to compromise the 

independence of the auditor. However, 

if an auditor participates in the 

development of a fiduciary adviser’s 

investment advice arrangement, then 

the auditor would appear to be in a 

position of auditing its own work for 

compliance with the exemption. The 

Department does not believe such an 

auditor is sufficiently independent for 

purposes of the regulation. Similarly, in 

the case of an investment advice 

arrangement that uses computer 

modeling, because an auditor would be 

in the position of determining whether 

the person who certifies a computer 

model, as required by paragraph 

(b)(4)(ii), has any relationship that 

would preclude it from acting as an 

‘‘eligible investment expert’’ as defined 

in paragraph (b)(4)(iii), the Department 

does not believe an auditor may also act 

as the computer model certifier. 

Paragraph (b)(6)(iii) has been modified 

accordingly. 

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 of how to conduct its 

review, including the extent to which it 

can rely on representative samples for 

determining compliance with the 

exemption. 

A number of comments requested 

clarification with respect to the conduct 

and scope of the audit. Several 

commenters asked whether each plan, 

IRA, and participant and beneficiary 

must be included. A commenter also 

asked whether the audit could be 

performed by only reviewing 

documentation of compliance with the 

fiduciary adviser’s internal compliance 

policies and procedures. 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. 

Accordingly, the methods used to 

conduct the audit are 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. The Department 

expects that the sample used by an 

auditor will depend on the facts and 

circumstances encountered. For 

example, an auditor may initially 

believe that the most appropriate way to 

make the required findings is to 

construct a sample that represents a 

subset of all advice arrangements of a 

fiduciary adviser, and advice provided. 

In testing the sample, however, the 

auditor should look for, and may find, 

patterns of compliance failures that 

indicate that certain areas are more 

prone to compliance failures than 

others. If such patterns appear, the 

auditor may need to expand the sample 

to more accurately assess the extent and 

causes of noncompliance. While the 

Department believes that internal 

policies and procedures, if reasonably 

designed and followed, can be helpful 

to a fiduciary adviser to ensure 

compliance with the requirements of the 

regulation, the Department does not 

believe it would be appropriate for an 


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auditor to limit, in any way, the conduct 

of its audit to an examination of 

compliance with those policies and 

procedures. 

Another commenter appeared to 

suggest development of audit 

alternatives for fiduciary advisers that 

are regulated and subject to periodic 

examination by other agencies. This 

commenter, however, did not include 

sufficient information for further 

consideration. The Department notes, 

moreover, that section 408(g)(6) of 

ERISA requires an annual audit for 

compliance with the exemption. 

Paragraph (b)(6)(v) of the final rule, 

like the proposal, provides that for 

purposes of the statutory exemption, the 

selection of an auditor is a fiduciary act 

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

In response to a question from a 

commenter, the Department 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. 

f. Disclosure to Participants 

As in the proposal, paragraph (b)(7) of 

the final rule sets forth a number of 

requirements involving disclosures to 

participants and beneficiaries that are 

based on, and generally track, the 

disclosure requirements contained in 

section 408(g)(6). 

Paragraph (b)(7)(i) generally requires 

that the fiduciary adviser provide to 

participants and beneficiaries without 

charge, 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 

the investment advice program 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, the sale, acquisition, or 

holding of the security or other property 

pursuant to such advice, or any rollover 

or other distribution of plan assets or 

the investment of distributed assets in 

any 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; 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. Because the computer model 

exception for qualifying employer 

securities has been removed from 

paragraph (b)(4)(i)(G)(2), explained 

above, the language in paragraph 

(b)(7)(i)(F) of the proposal that required 

the notification to include any 

limitations with respect to a computer 

model’s ability to take into account 

qualifying employer securities also has 

been removed. 

Paragraph (b)(7)(ii)(A) of the final rule 

requires 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. 

Paragraph (b)(7)(ii)(B) of the final rule 

references the availability of a model 

disclosure form in the appendix to the 

final rule. As with the proposal, the 

model disclosure form may be used for 

purposes of satisfying the requirements 

set forth in paragraph (b)(7)(i)(C), as 

well as the requirements of paragraph 

(b)(7)(ii)(A) of the final rule. The final 

rule, like the proposal, makes clear, 

however, that the use of the model 

disclosure form is not mandatory. 

The Department received a number of 

comments related to the contents and 

timing of the disclosures required under 

paragraph (b)(7). One commenter 

suggested that the final rule require the 

disclosure be provided at least 14 days 

before the initial provision of 

investment advice, and further require 

that each advice session be 

accompanied by a summary disclosure 

that includes a subset of the information 

required under the proposal (e.g., fees or 

other compensation that may be 

received, and that the adviser is acting 

as a fiduciary). Another commenter 

recommended disclosure of each 

investment option’s profitability to the 

fiduciary advisers or their affiliates, 

suggesting that this would enable 

participants to better understand the 

advisers’ financial interests. In contrast, 

another commenter stated that requiring 

disclosure of ‘‘all’’ fees or other 

compensation could overwhelm 

participants and beneficiaries with 

information, and that the Department 

should instead adopt a materiality 

standard for such disclosure. Another 

commenter suggested removal of the 

past return information disclosure, 

arguing that participants may focus on 

investments with the highest returns 

without considering or understanding 

the associated risks. Another commenter 

suggested that the provision should 

require disclosure of historical rates of 

return at the asset class level, rather 

than the individual investment level. 

Others also indicated the practical 

difficulties in providing the proposal’s 

disclosures for plans with numerous 

investment options, and requested that 

the Department consider more limited 

disclosures. 

After consideration of the comments 

received, 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. 

Some commenters requested that the 

Department clarify that the required 

disclosures may be combined with other 

disclosures the adviser is required to 

furnish under securities or other laws. 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 

paragraph (b)(7)(ii)(A) are satisfied. 

Like the proposal, paragraph (b)(7)(iii) 

of the final rule provides that the 

required notifications may, in 

accordance with 29 CFR 2520.104b–1, 

be furnished in either written or 

electronic form. Some commenters 

requested more flexibility for electronic 

disclosures than is permitted under 29 

CFR 2520.104b–1. Others, however, 

suggested more limited use of electronic 

disclosures. Because the Department 

currently is reviewing issues related to 

use of electronic media to furnish 

information to participants and 

beneficiaries, this provision has not 


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66148 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

34See 76 FR 19285 (Apr. 7, 2011). 

been changed from the proposal in 

response to these comments.34

Paragraph (b)(7)(iv) of the final rule 

sets forth miscellaneous recordkeeping 

and furnishing responsibilities of the 

fiduciary adviser. Specifically, this 

paragraph requires 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. Disclosure to Authorizing Fiduciary 

As discussed in more detail above in 

connection with the audit provision, 

paragraph (b)(8) of the final rule is a 

new provision that requires disclosure 

of certain information to the fiduciary 

that authorizes an investment advice 

arrangement. Under this provision, the 

fiduciary adviser must provide the 

authorizing fiduciary with a written 

notification that the fiduciary adviser 

intends to comply with the conditions 

of the statutory exemption for 

investment advice under section 

408(b)(14) and (g) and this regulation. 

The notification also must inform the 

authorizing fiduciary that the fiduciary 

adviser’s arrangement will be audited 

annually by an independent auditor for 

compliance with the requirements of the 

statutory exemption and this regulation, 

and that the auditor will furnish the 

authorizing fiduciary a copy of that 

auditor’s findings within 60 days of its 

completion of the audit. 

Because paragraph (b)(5) of the rule 

already requires authorization by an 

independent fiduciary, the Department 

does not believe the notification 

requirement in paragraph (b)(8) will 

impose a significant additional burden 

on fiduciary advisers. 

h. Other Conditions 

Paragraph (b)(9) of the final rule, like 

paragraph (b)(8) of the proposal, sets 

forth the additional requirements 

contained in section 408(g)(7) of ERISA 

that apply to the provision of 

investment advice under the statutory 

exemption. 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 (paragraph 

(b)(9)(i)); any sale, acquisition, or 

holding of a security or other property 

occurs solely at the direction of the 

recipient of the advice (paragraph 

(b)(9)(ii)); 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 (paragraph 

(b)(9)(iii)); 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 (paragraph 

(b)(9)(iv)). This provision is unchanged 

from the corresponding provision of the 

proposal. 

A commenter described a situation 

where an IRA owner or participant gives 

standing instructions to rebalance his or 

her portfolio on a pre-determined basis 

(which the commenter referred to as 

‘‘ministerial rebalancing’’) and another 

situation where changes to a portfolio 

are permitted when a model changes 

and the client receives advance notice 

(which the commenter referred to as 

‘‘re-optimization’’ or ‘‘re-allocation’’), 

and asked whether these were 

consistent with the requirement in 

paragraph (b)(9)(ii) that any sale, 

acquisition or holding of a security or 

other property occurs solely at the 

direction of the recipient of the advice. 

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’’ 

requirement in paragraph (b)(9)(ii), 

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, in order to avoid 

violating paragraph (b)(9)(ii), the 

participant must be afforded advance 

notice of the fiduciary adviser’s 

intended investments and a reasonable 

opportunity, generally at least 30 days, 

to object to the investments. With 

respect to a different asset allocation 

structure, the Department believes that 

the participant or beneficiary must make 

an affirmative direction for its 

implementation. 

i. Definitions 

Paragraph (c) sets forth definitions of 

terms used in the final rule. 

Paragraph (c)(1) defines the term 

‘‘designated investment option.’’ 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. 

The Department has added a crossreference to clarify that the term 

‘‘designated investment option’’ has the 

same meaning as ‘‘designated 

investment alternative’’ as defined in 29 

CFR 2550.404a–5 (relating to certain 

disclosures to participants). 

Paragraph (c)(2) defines the term 

‘‘fiduciary adviser,’’ as it appears in 

section 408(g)(11)(A) of ERISA. A 

commenter suggested that paragraph 

(c)(2)(ii), which treats a person who 

develops the computer model or 

markets the investment advice program 

or computer model utilized in 

satisfaction of paragraph (b)(4) as a 

fiduciary adviser, is overly broad, and 

could result in higher costs overall and 

fewer parties willing to provide these 

functions. In response, the Department 

notes that such fiduciary status is 

conferred by statute at section 

408(g)(11)(A). However, the Department 

further notes that Sec. 2550.408g–2, 

discussed in more detail below, permits 

one such fiduciary to elect to be treated 

as a fiduciary with respect to the plan. 

Paragraph (c)(3) defines the term 

‘‘registered representative’’ as set forth 

in ERISA section 408(g)(11)(C), which 

states that 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 


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35 ICA section 2(a)(3)(E) and (F) include in the 

definition of an affiliated person: If the other person 

is an investment company, any investment adviser 

thereof or any member of an advisory board thereof; 

and if such other person is an unincorporated 

investment company not having a board of 

directors, the depositor thereof. 15 U.S.C. 80a– 

2(a)(3)(E)–(F). 36 29 CFR 2510.3–21(e)(1). 

37See 74 FR 3822 (Jan. 21, 2009) (explaining 

corresponding language in the 2009 final rule). 

investment adviser referred to in such 

section). 

Paragraph (c)(4), consistent with 

section 601(b)(3)(A)(i) of the PPA, 

generally defines the term ‘‘Individual 

Retirement Account’’ or ‘‘IRA’’ for 

purposes of the final rule to mean plans 

described in paragraphs (B) through (F) 

of section 4975(e)(1) of the Code, as well 

as a trust, plan, account, or annuity 

which, at any time, has been determined 

by the Secretary of the Treasury to be 

described in such paragraphs. However, 

as explained above, paragraphs 

(c)(4)(vii) and (c)(4)(viii) have been 

added to make clear that for purposes of 

the regulation, the term ‘‘IRA’’ includes 

a ‘‘simplified employee pension’’ 

described in section 408(k) of the Code, 

and a ‘‘simple retirement account’’ 

described in section 408(p) of the Code. 

Like the proposal, paragraph (c)(5) of 

the final rule defines the term 

‘‘affiliate.’’ Under this provision, an 

‘‘affiliate’’ of another person means: Any 

person directly or indirectly owning, 

controlling, or holding with power to 

vote, 5 percent or more of the 

outstanding voting securities of such 

other person (paragraph (c)(5)(i)); 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 (paragraph (c)(5)(ii)); any 

person directly or indirectly controlling, 

controlled by, or under common control 

with, such other person (paragraph 

(c)(5)(iii)); and any officer, director, 

partner, copartner, or employee of such 

other person (paragraph (c)(5)(iv)). 

Consistent with ERISA section 

408(g)(11)(B), this definition is based on 

the definition of an ‘‘affiliated person’’ 

of an entity as contained in section 

2(a)(3) of the Investment Company Act 

of 1940 (ICA) (15 U.S.C. sec. 80a– 

2(a)(3)), except that it does not reflect 

clauses (E) and (F) thereof. The 

Department has determined that 

including provisions similar to clauses 

(E) and (F) is unnecessary, because these 

clauses appear to focus on persons who 

exercise control over the management of 

an investment company.35 These 

persons would be treated as affiliates 

under paragraph (c)(5)(iii) of the final 

rule because they would be persons 

directly or indirectly controlling, 

controlled by, or under common control 

with, such other person. 

A number of commenters presented 

factual questions on the definition of 

‘‘affiliate’’ in paragraph (c)(5). These 

have not been addressed here because of 

their inherently factual nature. 

One comment requested that the 

Department instead adopt the definition 

of ‘‘affiliate’’ that applies under 29 CFR 

2510.3–21. For purposes of that 

regulation, an ‘‘affiliate’’ of a person 

includes: Any person directly or 

indirectly, through one or more 

intermediaries, controlling, controlled 

by, or under common control with such 

person; any officer, director, partner, 

employee or relative (as defined in 

ERISA section 3(15)) of such person; 

and any corporation or partnership of 

which such person is an officer, director 

or partner.36 Because section 

408(g)(11)(B) of ERISA defines the term 

‘‘affiliate’’ for purposes of the statutory 

exemption specifically by reference to 

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

ICA, the Department has not adopted 

this comment. 

In a variety of places, the final rule 

refers to persons with ‘‘material 

affiliations’’ or ‘‘material contractual 

relationships,’’ which are defined in 

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

respectively. Paragraph (c)(6)(i) of the 

final rule describes a person with a 

‘‘material affiliation’’ with another 

person as: Any affiliate of the other 

person; any person directly or indirectly 

owning, controlling, or holding, 5 

percent or more of the interests of such 

other person; and any person 5 percent 

or more of whose interests are directly 

or indirectly owned, controlled, or held, 

by such other person. Paragraph 

(c)(6)(ii) provides that, for these 

purposes, an ‘‘interest’’ means with 

respect to an entity: 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; the capital 

interest or the profits interest of the 

entity if the entity is a partnership; or 

the beneficial interest of the entity if the 

entity is a trust or unincorporated 

enterprise. 

Paragraph (c)(7) of the final rule 

provides that persons shall be treated as 

having a ‘‘material contractual 

relationship’’ if payments made by one 

person to the other person pursuant to 

written contracts or agreements between 

the persons exceed 10 percent of the 

gross revenue, on an annual basis, of 

such other person. The Department 

notes that this 10% gross revenue test is 

not limited to amounts paid pursuant to 

contracts or arrangements that have 

been reduced to writing.37

Lastly, paragraph (c)(8) defines 

‘‘control’’ to mean the power to exercise 

a controlling influence over the 

management or policies of a person 

other than an individual. 

j. Retention of Records 

As with the proposal, paragraph (d) of 

the final rule sets forth the record 

retention requirements applicable to an 

eligible investment advice arrangement. 

Consistent with section 408(g)(9) of 

ERISA, paragraph (d) 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. 

k. Noncompliance 

Paragraph (e) of the final rule, like the 

proposal, specifically addresses the 

consequences of noncompliance with 

the regulation. This provision makes 

clear that the prohibited transaction 

relief described in paragraph (b) of the 

regulation will not apply to any 

transaction with respect to which the 

applicable conditions of the final rule 

have not been satisfied. Further, in the 

case of a pattern or practice of 

noncompliance with any of the 

applicable conditions of the final rule, 

the relief will 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 

would constitute a ‘‘pattern or practice,’’ 

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 


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66150 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

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. 

This provision is being adopted 

without change from the proposal. The 

Department believes that one of the 

most significant deterrents to 

noncompliance with the conditions of 

the statutory exemption is the 

potentially significant excise taxes 

applicable to transactions that fail to 

satisfy its conditions, and that extending 

the potential for excise taxes to 

encompass a period over which a 

pattern or practice of noncompliance 

extends creates additional incentives on 

the part of fiduciary advisers that take 

advantage of the exemptive relief to be 

vigilant in assuring compliance. 

l. Effective Date 

The Department proposed that the 

regulation would be effective 60 days 

after the date of publication of the final 

rule. One commenter indicated that the 

60 day effective date would not 

constitute sufficient time to comply 

with the final rule, and suggested the 

effective date should be extended to 180 

days after publication of the final rule. 

Given the importance of investment 

advice to participants and beneficiaries 

generally and given that the exemption 

implemented in the 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, and has not made the 

suggested change. 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) of the final rule occurring 

on or after that date. 

m. Miscellaneous 

A number of commenters made 

suggestions beyond the scope of this 

regulation that they believed would 

additionally benefit participants and 

beneficiaries. These suggestions were 

not adopted by the Department. 

C. Overview of Final § 2550.408g–2 and 

Public Comments 

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. Such a 

person also shall be treated as a 

‘‘fiduciary adviser’’ for purposes of 

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

The Secretary of Labor, however, 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, Sec. 

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 with respect to a plan under 

such an eligible investment advice 

arrangement. See paragraph (a) of Sec. 

2550.408g–2. 

Paragraph (b)(1) of Sec. 2550.408g–2 

provides that, if an election meets the 

requirements of paragraph (b)(2), 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. The writing also must identify 

the electing person. Under paragraph 

(b)(2)(ii), the electing person must: fall 

within any of paragraphs (c)(2)(i)(A) 

through (E) of Sec. 2550.408g–1; 

develop the computer model or market 

the computer model or investment 

advice program; and acknowledge 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. Paragraph 

(b)(2) of Sec. 2550.408g–2 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 person who 

authorized use of the arrangement; and 

that the writing be retained in 

accordance with the record retention 

requirements of Sec. 2550.408g–1(d). 

The Department notes that this 

election applies only for purposes of 

limiting fiduciary status that results 

from developing or marketing a 

computer model or investment advice 

program used under the statutory 

exemption. It would not, for example, 

permit a fiduciary adviser who actually 

renders investment advice to 

participants or beneficiaries to avoid 

fiduciary status. 

The Department received no 

substantive comments on this regulation 

and, therefore, is adopting the 

regulation substantially as proposed. 

This regulation, like Sec. 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 

Regulatory Procedures 

Executive Order 12866 ‘‘Regulatory 

Planning and Review’’ and Executive 

Order 13563 ‘‘Improving Regulation and 

Regulatory Review’’ 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. Executive 

Order 12866 and 13563 require a 

comprehensive regulatory impact 

analysis be performed for any 

economically significant regulatory 

action, defined as an action that would 

result in an annual effect of $100 

million or more on the national 

economy or which would have other 

substantial impacts. In accordance with 

OMB Circular A–4, the Department has 

examined the economic and policy 

implications of this final rule and has 

concluded that the action’s benefits 

justify its costs. 

Summary of Impacts 

The provisions of this final regulation 

reflect the Department’s efforts to ensure 

that the advice provided pursuant to 

them will be affordable and of high 

quality. The results of this final 

regulation will depend on its impacts on 

the availability, cost, use, and quality of 

participant investment advice. The 


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38See 74 FR No 164 (Aug. 22, 2008), 74 FR No 

12 (Jan. 21, 2009), and 75 FR No 40 (Mar. 2, 2010) 

for background on the analysis contained in the 

Department’s Regulatory Impact Analysis. 

Department anticipates that, as a result 

of these actions, quality, affordable 

expert investment advice will 

proliferate, producing significant net 

gains for participant-directed defined 

contribution (DC) plan participants and 

beneficiaries and beneficiaries of 

individual retirement accounts (IRAs) 

(collectively hereafter, ‘‘participants’’). 

The improved investment results will 

reflect reductions in investment errors 

such as poor trading strategies and 

inadequate diversification. 

The Department estimates that this 

final rule will yield benefits of between 

$7 billion and $18 billion annually, at 

a cost of between $2 billion and $5 

billion, thereby producing a net 

financial benefit of between $5 billion 

and $13 billion. The estimated costs of 

the final regulation include costs of 

approximately $745 million that are 

associated with the Paperwork 

Reduction Act information collection 

requests contained in the final rule. 

Table 1 below presents these average 

annual real benefits and costs given a 

ten year horizon with discount rates of 

3 percent and 7 percent. 

TABLE 1—ACCOUNTING STATEMENT

Category 

Estimates Units 

Primary estimate Low 

estimate 

High 

estimate Year dollar Discount rate 

Period 

covered 

Benefits: 

Annualized .................................................... 13,200.0 7,000.0 18,300.0 2009 7% 2011–2020 

Monetized ($millions/year) ............................ 13,200.0 7,000.0 18,300.0 2009 3% 2011–2020 

Annualized .................................................... 0.0 0.0 0.0 .................... 7% 

Quantified ...................................................... 0.0 0.0 0.0 .................... 3% 

Qualitative ..................................................... In addition to the quantified benefits, the Department anticipates that the regulation will 

improve aggregate investment results, reflecting reduced participants’ investment related 

expenses, and will improve the welfare of participants by better aligning participant 

investments and their risk tolerances. 

Notes ............................................................. The regulation is anticipated to extend quality, expert investment advice to a significantly 

greater number of participants. This will improve aggregate investment results, reflecting 

reductions in investment errors (including poor trading strategies and inadequate 

diversification). 

Costs: 

Annualized .................................................... 3,700.0 1,900.0 5,100.0 2009 7% 2011–2020 

Monetized ($millions/year) ............................ 3,700.0 1,900.0 5,100.0 2009 3% 2011–2020 

Annualized .................................................... 0.0 0.0 0.0 .................... 7% 

Quantified ...................................................... 0.0 0.0 0.0 .................... 3% 

Qualitative 

Notes ............................................................. The costs of this regulation are due to the direct cost of providing (or paying for) investment 

advice, including approximately $745 million that are associated with the Paperwork 

Reduction Act information collection requests contained in this final rule. 

Transfers .............................................................. Not applicable. 

Effects: 

State, Local, and/or Tribal Government ....... Not applicable. 

Small Business ............................................. Not applicable. 

Wages ........................................................... Not applicable. 

Growth .......................................................... The regulation may also have macroeconomic consequences, which are likely to be small but 

positive. 

Need for Regulatory Action 

With the growth of participantdirected retirement savings accounts, 

the retirement income security of 

America’s workers increasingly depends 

on their investment decisions. 

Unfortunately, there is evidence that 

many participants of these retirement 

accounts often make costly investment 

errors due to flawed information or 

reasoning. As more fully discussed in 

the Benefits section below, these 

participants may make financial 

mistakes which result in lower asset 

accumulation, and thus final retirement 

account balances, for these individuals 

and/or result in less than optimal levels 

of compensated risk. Financial losses 

(including foregone earnings) from such 

mistakes likely amounted to more than 

$114 billion in 2010.38 These losses 

compound and grow larger as workers 

progress toward and into retirement. 

Such mistakes and consequent losses 

historically can be attributed at least in 

part to provisions of the Employee 

Retirement Income Security Act of 1974 

that effectively preclude a variety of 

arrangements whereby financial 

professionals might otherwise provide 

retirement plan participants with expert 

investment advice. Specifically, these 

‘‘prohibited transaction’’ provisions of 

section 406 of ERISA and section 4975 

of the Internal Revenue Code prohibit 

fiduciaries from dealing with DC plan or 

IRA assets in ways that advance their 

own interests. The prohibited 

transaction provisions prohibit a 

fiduciary from dealing with the assets of 

a plan in his own interest or for his own 

account and from receiving any 

consideration for his own personal 

account from any party dealing with the 

plan in connection with a transaction 


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39ERISA section 406(b)(1) and (3) and Code 

section 4975(c)(1)(E) and (F). 40 29 CFR 2550.408b–2(e). 41See 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). In October 2010, the Department proposed 

amendments to the regulation, at 29 CFR 2510.3– 

21(c) that define when the provision of advice 

causes a person to be a fiduciary. 

42Public Law 109–280, 120 Stat. 780 (Aug. 17, 

2006). 

43Under 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. 

44The 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. 

45The Department bases these estimates upon the 

retirement assets in DC plans and Individual 

Retirement Accounts reported by the Federal 

Reserve Board’s Flow of Funds Accounts (Mar. 

2011), at http://www.federalreserve.gov/releases/z1/ 

Current/. This estimate is subject to wide 

uncertainty. See 74 FR No 164 (Aug. 22, 2008), 74 

FR No 12 (Jan. 21, 2009), and 75 FR No 40 (Mar. 

2, 2010) for the details of the Department’s 

Regulatory Impact Analysis. 

involving the assets of the plan.39 These 

statutory provisions have been 

interpreted as prohibiting a 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.40 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 to an 

individual retirement account (IRA) 

beneficiary. 

Over the past several years, the 

Department has issued various forms of 

guidance concerning when a person 

would be a fiduciary by reason of 

rendering investment advice, and when 

such investment advice might result in 

prohibited transactions.41 Responding 

to the need to afford participants and 

beneficiaries greater access to 

professional investment advice, 

Congress amended the prohibited 

transaction provisions of ERISA and the 

Code, as part of the Pension Protection 

Act of 2006 (PPA),42 to permit a broader 

array of investment advice providers to 

offer their services to participants 

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 prohibited transaction 

exemption under sections 408(b)(14) 

and 408(g) of ERISA, with parallel 

provisions at Code sections 4975(d)(17) 

and 4975(f)(8).43 Section 408(b)(14) sets 

forth the investment advice-related 

transactions that will be exempt from 

the prohibitions of ERISA section 406 if 

the requirements of section 408(g) are 

met.44 These requirements are met only 

if advice is provided by a fiduciary 

adviser under an ‘‘eligible investment 

advice arrangement.’’ Section 408(g) 

provides for two general types of 

eligible arrangements: one based on 

compliance with a ‘‘fee-leveling’’ 

requirement (imposing limitation on 

fees and compensation of the fiduciary 

adviser); the other, based on compliance 

with a ‘‘computer model’’ requirement 

(requiring use of a certified computer 

model). Both types of arrangements also 

must meet several other requirements. 

The Department’s final investment 

advice regulation is needed to provide 

additional guidance regarding the 

conditions set forth in the PPA statutory 

exemption for investment advice. The 

Department calibrated this final 

regulation to protect participants while 

promoting the affordability of 

investment advice arrangements 

operating pursuant to the PPA’s 

statutory exemptive relief. The 

Department expects that as a result of 

this regulatory action, high-quality, 

affordable investment advice will 

proliferate, producing significant net 

benefits for participants. For a further 

discussion of these benefits, see the 

Benefits section below. 

Benefits 

The Department believes this final 

regulation will provide important 

benefits to society by extending quality, 

expert investment advice to more 

participants, leading them to make 

fewer investment mistakes. As noted 

below, prior to implementation of the 

PPA, investment mistakes cost 

participants approximately $114 billion 

in 2010 for participants, the Department 

estimates.45 The Department believes 

that participants, after having received 

such advice, may pay lower fees and 

expenses, engage in less excessive or 

poorly timed trading, more adequately 

diversify their portfolios and thereby 

assume less uncompensated risk, 

achieve a more optimal level of 

compensated risk, and/or pay less 

excess taxes. The Department estimates 

that advice available prior to the PPA 

reduced errors by $15 billion annually 

(i.e., investment errors would have been 

$124 billion absent this advice). 

Increased use of investment advice 

under the PPA will incrementally 

reduce such mistakes by between $7 

billion and $18 billion annually 

(roughly 6 percent to 16 percent of the 

$114 billion in investment errors 

remaining after pre-PPA advise is 

given), the Department estimates. Thus, 

the cumulative benefit of the pre-PPA 

investment advice and the new 

investment advice under the PPA and 

this final rule ranges between $22 

billion and $33 billion. The 

Department’s estimates of the 

magnitude of these investment errors 

and the resulting reductions from 

participants receiving investment advice 

are summarized in Table 2 below. The 

sections below describe in more detail 

the investment errors participants may 

make along with the method the 

Department used to calculate the 

baseline, benefit and impact estimates 

for this final regulation. 

TABLE 2—LONG TERM INVESTMENT ERRORS AND IMPACT OF ADVICE

[$Billions, annual] 

Policy context Remaining 

errors 

Errors eliminated by advice 

Incremental Cumulative 

No advice ............................................................................................................................................... $124 $0 $0 

Existing/Pre-PPA advice only (Baseline) ............................................................................................... 114 15 15 

New/PPA advice: 


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46See, e.g., Richard H. Thaler & Shlomo Benartzi, 

The Behavioral Economics of Retirement Savings 

Behavior, AARP Public Policy Institute White Paper 

2007–02 (Jan. 2007); and Jeffrey R. Brown & Scott 

Weisbenner, Individual Account Investment 

Options and Portfolio Choice: Behavioral Lessons 

from 401(k) Plans, Social Science Research Network 

Abstract 631886 (Dec. 2004). 

47The Department notes that much of the 

research documenting investment mistakes does not 

account for whether advice was present or not. At 

least some of the mistakes may have been made 

despite good advice to the contrary; some may have 

been made pursuant to bad advice. There is 

evidence both that advice sometimes is not 

followed, and that advice is sometimes bad. These 

issues are explored more below. 

48See 74 FR No 164 (Aug. 22, 2008), 74 FR No 

12 (Jan. 21, 2009), and 75 FR No 40 (Mar. 2, 2010) 

for background on the analysis contained in the 

Department’s Regulatory Impact Analysis. 

49 It is possible that the converse could sometimes 

occur: participants might fail to buy efficiently 

priced products and services whose marginal cost 

lags their associated marginal benefit. If so advice, 

by correcting this error, might lead to higher 

expenses, but would still improve overall societal 

welfare. The economic research suggests that 

participants are insensitive to fees rather than 

excessively sensitive to fees, thus the Department 

believes that the converse situation is likely to be 

rare. 

50See, e.g., Takeshi Yamaguchi et al., Winners 

and Losers: 401(k) Trading and Portfolio 

Performance, Michigan Retirement Research Center 

Working Paper WP2007–154 (June 2007). 

51See, e.g., Dalbar Inc., Quantitative Analysis of 

Investor Behavior 2007 (2007). 

52See, e.g., Rene Fischer & Ralf Gerhardt, 

Investment Mistakes of Individual Investors and the 

Impact of Financial Advice, Science Research 

Network Abstract 1009196 (Aug. 2007); Julie Agnew 

& Pierluigi Balduzzi, Transfer Activity in 401(k) 

Plans, Social Science Research Network Abstract 

342600 (June 2006); and George Cashman et al., 

Investor Behavior in the Mutual Fund Industry: 

Evidence from Gross Flows, Social Science Research 

Network Abstract 966360 (Feb. 2007). 

TABLE 2—LONG TERM INVESTMENT ERRORS AND IMPACT OF ADVICE—Continued 

[$Billions, annual] 

Policy context Remaining 

errors 

Errors eliminated by advice 

Incremental Cumulative 

Low Estimate .................................................................................................................................. 96 7 22 

Primary Estimate ............................................................................................................................ 101 13 28 

High Estimates ............................................................................................................................... 107 18 33 

Investment Mistakes 

The Department believes that many 

participants make costly investment 

mistakes and therefore could benefit 

from receiving and following good 

advice. In theory, investors can optimize 

their investment mix over time to match 

their investment horizon and personal 

taste for risk and return. But in practice 

many investors do not optimize their 

investments, at least not in accordance 

with generally accepted financial 

theories. 

Some investors fail to exhibit clear, 

fixed and rational preferences for risk 

and return. Some base their decisions 

on flawed information or reasoning. For 

example some investors appear to 

anchor decisions inappropriately to 

plan features or to mental accounts or 

frames, or to rely excessively on past 

performance measures or peer 

examples. Some investors suffer from 

overconfidence, myopia, or simple 

inertia.46 Such informational and 

behavioral problems translate into at 

least five distinct types of investment 

mistakes.47

Fees and 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. 

The Department believes that the 

research available at this time provides 

an insufficient basis to confidently 

determine whether or to what degree 

participants pay inefficiently high 

investment prices.48 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 that quality advice 

reduces that inefficiency. Such a 

reduction in inefficiencies would 

increase participants’ welfare by 

transferring economic surplus from 

producers of investment products and 

services to participants and thereby 

reducing societal 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, participants buy 

investment products and services whose 

marginal cost exceed their associated 

marginal benefit.49 The Department 

expects the PPA and this final 

regulation to reduce such investment 

errors, improving participant and 

societal welfare. However, at this time 

the Department has no basis on which 

to quantify such errors or 

improvements. 

Poor Trading Strategies 

There is evidence that some 

participants trade excessively, while 

many more participants trade too little, 

failing even to rebalance. In DC plans, 

excessive participant trading often 

worsens performance, and participants 

in accounts that are automatically 

rebalanced generally fare best.50 Among 

inferior strategies, it is likely that active 

trading aimed at timing the market 

generates more adverse results than 

failing to rebalance. Many mutual funds 

investors’ experience badly lags the 

performance of the funds they hold 

because they buy and sell shares too 

frequently and/or at the wrong times.51

Investors often buy and sell in response 

to short-term past returns, and suffer as 

a result.52 Good advice is likely to 

discourage market timing efforts and 

encourage rebalancing, thereby 


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53See, e.g., Olivia S. Mitchell & Stephen P. Utkus, 

The Role of Company Stock in Defined Contribution 

Plans, National Bureau of Economic Research 

Working Paper W9250 (Oct. 2002); and Jeffrey R. 

Brown & Scott Weisbenner, Individual Account 

Investment Options and Portfolio Choice: 

Behavioral Lessons from 401(k) Plans, Social 

Science Research Network Abstract 631886 (Dec. 

2004). 

54This comparison should be viewed as an outer 

bound. Full diversification of the same assets might 

not be feasible if companies are unwilling to alter 

the compensation mix in this way (see, e.g., Olivia 

S. Mitchell & Stephen P. Utkus, The Role of 

Company Stock in Defined Contribution Plans, 

National Bureau of Economic Research Working 

Paper W9250 (Oct. 2002)). The comparison also 

neglects some potential tax benefits of employer 

stock investments that might offset losses from 

reduced diversification (see, e.g., Mukesh Bajaj et 

al., The NUA Benefit and Optimal Investment in 

Company Stock in 401(k) Accounts, Social Science 

Research Network Abstract 965808 (Feb. 2007)). See 

also, Lisa K. Meulbroek, Company Stock in Pension 

Plans: How Costly Is It?, Social Science Research 

Network Abstract 303782 (Mar. 2002) and Krishna 

Ramaswamy, Company Stock and Pension Plan 

Diversification, in The Pension Challenge: Risk 

Transfers and Retirement Income Security 71, 71– 

88 (Olivia S. Mitchell & Kent Smetters eds., 2003). 

The economic literature provides some evidence 

that investing in employer stock increases 

participants’ exposure to equity overall, which 

might increase average wealth (see, e.g., Jack L. 

Vanderhei, The Role of Company Stock in 401(k) 

Plans, Employee Benefit Research Institute T–133 

Written Statement for the House Education and 

Workforce Committee, Subcommittee on EmployerEmployee Relations, Hearing on Enron and Beyond: 

Enhancing Worker Retirement Security (Feb. 2002), 

at http://www.ebri.org/pdf/publications/testimony/ 

t133.pdf). 

55Following findings reported in Lisa K. 

Meulbroek, Company Stock in Pension Plans: How 

Costly Is It?, Social Science Research Network 

Abstract 303782 (Mar. 2002), this estimate reflects 

losses amounting to 14 percent of the employer 

stock’s value, assuming 10 percent of DC plan assets 

are held in employer stock, the DC plan is one-half 

of total wealth, and the holding period is 10 years. 

For comparison, following findings reported in 

Krishna Ramaswamy, Company Stock and Pension 

Plan Diversification, in The Pension Challenge: Risk 

Transfers and Retirement Income Security 71, 71– 

88 (Olivia S. Mitchell & Kent Smetters eds., 2003), 

the annualized cost of an option to receive the 

higher of the return on a typical company stock or 

the return on a fully diversified equity portfolio 

over a three-year horizon would amount to 

approximately $24 billion, the Department 

estimates. This measure probably exaggerates the 

loss to participants, however, insofar as it would 

preserve for the participant the potential upside of 

a company stock that outperforms the market. 

56See, e.g., Edwin J. Elton et al., The Adequacy 

of Investment Choices Offered By 401(k) Plans, 

Social Science Research Network Abstract 567122 

(Mar. 2004), which finds that menus are frequently 

inadequate, and Ning Tang and Olivia S. Mitchell, 

The Efficiency of Pension Plan Investment Menus: 

Investment Choices in Defined Contribution 

Pension Plans, University of Michigan Retirement 

Research Center Working Paper WP 2008–176 (June 

2008), at http://www.mrrc.isr.umich.edu/ 

publications/papers/pdf/wp176.pdf, which finds 

that most menus are efficient. 

57 See, e.g., Laurent E. Calvet et al., Down or Out: 

Assessing the Welfare Costs of Household 

Investment Mistakes, Harvard Institute of Economic 

Research Discussion Paper No. 2107 (Feb. 2006). 

58See, e.g., Daniel B. Bergstresser & James M. 

Poterba, Asset Allocation and Asset Location: 

Household Evidence from the Survey of Consumer 

Finances, Journal of Public Economics, Volume 88 

1893, 1893–1915 (2004). 

59See, e.g., James M. Poterba et al., Asset Location 

for Retirement Savers, in Public Policies and Private 

Pensions 290, 290–331 (John B. Shoven et al. eds., 

2004); John B. Shoven & Clemens Sialm, Asset 

Location in Tax-Deferred and Conventional Savings 

Accounts, Journal of Public Economics, Volume 88 

(2003); James M. Poterba et al., Asset Location for 

Retirement Savers, in Public Policies and Private 

Pensions 290, 290–331 (John B. Shoven et al. eds., 

2004); Gene Amromin, Portfolio Allocation Choices 

in Taxable and Tax-Deferred Accounts: An 

Empirical Analysis of Tax-Efficiency, Social 

Science Research Network Abstract 302824 (May 

2002); Lorenzo Garlappi & Jennifer C. Huang, Are 

Stocks Desirable in Tax-Deferred Accounts?, 

Journal of Public Economics, Volume 90 2257, 

2257- and Robert M. Dammon et al., Optimal Asset 

Location and Allocation with Taxable and TaxDeferred Investing, The Journal of Finance, Volume 

LIX, Number 3 999, 999–1037 (2004). 

ameliorating adverse impacts from poor 

trading strategies. 

Inadequate Diversification 

Investors sometimes fail to diversify 

adequately and thereby assume 

uncompensated risk and suffer 

associated losses. For example, DC plan 

participants sometimes concentrate 

their assets excessively in stock of their 

employer.53 Relative to full 

diversification,54 employer stock 

investments can be costly for DC plan 

participants.55 Other lapses in 

diversification may involve omission 

from portfolios asset classes such as 

overseas equity or debt, small cap 

stocks, or real estate. Such lapses may 

sometimes reflect limited investment 

menus supplied by DC plans.56 Yet even 

where adequate choices are available 

and company stock is not a factor, 

investors sometimes fail to diversify 

adequately.57 The Department believes 

that quality advice will address over 

concentration in employer stock and 

other failures to properly diversify. 

Inappropriate Risk 

Investors who avoid the foregoing 

mistakes might be said to invest 

efficiently, in the sense that the investor 

generally can expect the maximum 

possible return given their level risk. 

However, these participants may still be 

making a costly mistake: they may fail 

to calibrate the risk and return of their 

portfolio to match their own risk and 

return preferences. As a result, 

participant investments may be too 

risky or too safe for their own tastes. 

The Department currently lacks a 

sufficient basis on which to estimate the 

magnitude of such mistakes, but 

believes mistakes associated with 

inappropriate risk levels may be 

common and large. The characteristics 

of a diversified portfolio’s risks and 

returns generally are determined by the 

portfolio’s allocation across asset 

classes. As noted above, there is ample 

evidence that participants’ asset 

allocation choices often are inconsistent 

with fixed or well behaved risk and 

return preferences. If participants’ true 

preferences are in fact fixed or well 

behaved, then observed asset 

allocations, which often appear to shift 

in response to seemingly irrelevant 

factors (or fail to shift in response to 

relevant factors), certainly entail large 

welfare losses. The Department believes 

good advice might help participants 

calibrate their asset allocations to match 

their true preferences. 

Excess Taxes 

It is likely that many households pay 

excess taxes as a result of disconnects 

between their investments and current 

tax strategies. Households saving for 

retirement must decide not only what 

assets to hold, but also whether to locate 

these assets in taxable or tax-deferred 

accounts. For example, households may 

be able to maximize their expected aftertax wealth by first placing heavily taxed 

bonds in their tax-deferred account and 

then placing lightly taxed equities in 

their taxable account. However a 

significant number of households do not 

follow this practice.58 What is not clear, 

however, is whether such households 

are in fact making investment mistakes. 

In practice, this simple asset location 

rule may fail to minimize taxes.59 As a 

result the Department currently has no 

basis to estimate the magnitude of 

excess taxes that might derive from 

participants’ investment mistakes. In 

any event, whether or to what extent 

investment advisers would be 

positioned to provide advice on tax 

efficiency is unclear. 

Baseline Estimates: Availability and Use 

of Advice by Participants 

Participants have always had the 

option of obtaining permissible 

investment advice services directly in 

the retail market. DC plan sponsors 

likewise have had the option of 

obtaining such services in the 

commercial market and making them 

available to plan participants and 

beneficiaries in connection with the 

plan. 

Prior to the 2006 enactment of the 

PPA, a substantial fraction of DC plan 

sponsors made investment advice 

available to plan participants and 

beneficiaries. Today, as the PPA’s 

implementation progresses, many more 

have begun providing or are gearing up 

to provide such advice. The Department 

bases its estimate for pre-PPA 

availability of advice to DC plan 

participants on reported plan 


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60This assessment is based on the Department’s 

reading of Hewitt Associates LLC, Survey Findings: 

Hot Topics in Retirement, 2007 (2007); Profit 

Sharing/401(k) Council of America, 50th Annual 

Survey of Profit Sharing and 401(k) Plans (2007); 

and Deloitte Development LLC, Annual 401(k) 

Benchmarking Survey, 2005/2006 Edition (2006). In 

addition to investment advice, a majority of 

sponsors also provide one or more other types of 

support to participants’ investment decisions. 

61Eighty-two percent of mutual fund 

shareholders who hold funds outside of DC plans 

purchase some or all of their funds from a 

professional financial adviser such as a full-service 

broker, independent financial planner, bank or 

savings institution representative, insurance agent, 

or accountant (see, e.g., Victoria Leonard-Chambers 

& Michael Bogdan, Why Do Mutual Fund Investors 

Use Professional Financial Advisers?, Investment 

Company Institute Research Fundamentals, Volume 

16, Number 1 (April 2007)). As families owning 

IRAs outnumber those owning pooled investment 

vehicles outside of retirement accounts (see, e.g., 

Brian K. Bucks et al., Recent Changes in U.S. 

Family Finances: Evidence from the 2001 and 2004 

Survey of Consumer Finances, Federal Reserve 

Bulletin 92 A1, A1–A38 (2006)), it is reasonable to 

conclude that a large majority of IRA beneficiaries 

who invest in mutual funds purchase them via such 

professionals. However, the Department has no 

basis to estimate the fraction of these beneficiaries 

that receive true investment advice from such 

professionals. It is possible that some make their 

purchase decisions without receiving any 

recommendation or material guidance from the 

professional making the sale. 

62Alternatives including advice of peers, written 

plan materials, print media, television and radio, 

seminars, software, on-line information or advice, 

and retirement benefit statements were all less 

likely to be characterized as ‘‘most helpful.’’ 63See, e.g., Employee Benefit Research Institute, 

2007 Retirement Confidence Survey, Wave XVII, 

Posted Questionnaire (Jan. 2007). 64See, e.g., Profit Sharing/401(k) Council of 

America, 50th Annual Survey of Profit Sharing and 

401(k) Plans (2007); and Julie Agnew, Personalized 

Retirement Advice and Managed Accounts: Who 

Uses Them and How Does Advice Affect Behavior 

in 401(k) Plans?, Center for Retirement Research 

Working Paper 2006–9 (2006). 

65See, e.g., Employee Benefit Research Institute, 

2007 Retirement Confidence Survey, Wave XVII, 

Posted Questionnaire (Jan. 2007). In practice this 

might translate into a high rate of compliance with 

recommendations, if recommendations turn out not 

to diverge too much from participants’ own ideas. 

66See, e.g., Employee Benefit Research Institute, 

2008 Retirement Confidence Survey, Wave XVIII, 

Posted Questionnaire (Jan. 2008). 

67The Department’s bases its assumptions on its 

reading of Employee Benefit Research Institute, 

2007 Retirement Confidence Survey, Wave XVII, 

Posted Questionnaire (Jan. 2007); Hewitt Associates 

LLC, Survey Findings: Hot Topics in Retirement, 

2007 (2007); Profit Sharing/401(k) Council of 

America, 50th Annual Survey of Profit Sharing and 

401(k) Plans (2007); and Deloitte Development LLC, 

Annual 401(k) Benchmarking Survey, 2005/2006 

Edition (2006). There are a number of reasons to 

believe that use of advice will be higher among IRA 

beneficiaries than DC plan participants. The 

aforementioned survey reports, read together, 

generally support this conclusion. In addition, 

relative to IRA beneficiaries, DC participants may 

have less need for advice and/or easier access to 

alternative forms of support for their investment 

decisions. DC plan participants’ choice is usually 

confined to a limited menu selected by a plan 

fiduciary, and the menu may include one-stop 

alternatives such as target date funds that may 

mitigate the need for advice. Their plan or employer 

may provide general financial and investment 

education in the form of printed material or 

seminars. They often make initial investment 

decisions (sometimes by default) before 

contributing to the plan so the decisions’ impact 

Continued 

experiences in 2006.60 The Department 

assumes that approximately 40 percent 

of DC plan sponsors provided access to 

investment advice either on line, by 

phone, or in-person in 2006, as outlined 

in Table 3 below. The Department 

further assumes that approximately 25 

percent of the participants that are 

offered advice use the offered advice, as 

outlined in Table 4 below. In-person 

advice seems to be offered by most plan 

sponsors. On-line advice and, to a lesser 

degree, telephone advice are favored 

more by large sponsors. Smaller plan 

sponsors appear to offer advice 

generally, and in-person advice in 

particular, more frequently than larger 

plan sponsors. 

TABLE 3—AVAILABILITY OF ADVICE: 

DC PLANS OFFERING ADVICE

Policy context 

Any advice 

(computer 

or live) 

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

PPA—Low Estimate ................. 56% 

PPA—Primary Estimate ........... 63% 

PPA—High Estimate ................ 69% 

Investment advice is also already used 

by a substantial fraction of IRA 

participants, the Department believes. A 

majority of IRA participants that invest 

in mutual funds purchase some or all of 

their funds via a professional financial 

adviser.61 Overall in 2006, 60 percent of 

U.S. workers and retirees said they use 

the advice of a financial professional 

when making retirement savings and 

investment decisions; 40 percent said 

the advice of a financial professional 

was more helpful to them than 

alternatives.62 However, what is not 

clear from the survey was how recently 

the participant received the referenced 

advice: in the same survey just 29 

percent of participants stated that in the 

past year they obtained investment 

advice from a professional financial 

adviser who was paid through fees or 

commissions.63

TABLE 4—USE OF ADVICE BY DC PLAN AND IRA PARTICIPANTS

Policy context 

Share of participants advised 

DC Plans 

IRA 

Where offered Overall 

Pre-PPA ................................................................................................................................. 25% 10% 33% 

PPA—Low Estimate .............................................................................................................. 25% 14% 50% 

PPA—Primary Estimate ......................................................................................................... 25% 16% 67% 

PPA—High Estimates ............................................................................................................ 25% 17% 80% 

The effect of investment advice 

depends not merely on its availability 

but on its use by DC plan and IRA 

participants. Do the participants seek 

advice, and if so do they follow it? 

According to one survey, among DC 

plan participants offered investment 

advice, approximately one in four uses 

the offered advice. There is some 

evidence that historically in-person 

advice has achieved higher use rates 

than on-line advice, with on-line advice 

appealing more to higher-income 

participants.64 In another survey large 

fractions of workers say they would be 

very likely (19 percent) or somewhat 

likely (35 percent) to take advantage of 

advice provided by the company that 

manages their employer’s DC plan. Of 

these, two-thirds said they would 

implement only those recommendations 

that were in line with their own ideas; 

21 percent said they would implement 

all of the recommendations they receive 

as long as they trusted the source.65 In 

a subsequent survey, among those 

obtaining investment advice, 36 percent 

say they implemented ‘‘all’’ of the 

advice, 58 percent ‘‘some,’’ and just 5 

percent ‘‘none.’’ 66

The Department’s assumptions 

regarding use of advice are summarized 

in Tables 3 and 4 above.67 The 


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may seem small. Finally, the availability of advice 

in connection with the plan is intermediated by the 

plan sponsor and fiduciary. In contrast, IRA 

beneficiaries generally have wider choice and are 

more likely to be without employer-provided 

support for their decisions. Decision points may 

more often occur when account balances are large, 

such as when rolling a large DC plan balance into 

an IRA or when retiring. Finally, the availability of 

advice to IRA beneficiaries is not intermediated by 

an employer—rather IRA beneficiaries interface 

directly with the retail market and will thereby be 

more directly affected by the exemptive relief 

provided by the PPA and this final regulation. For 

all of these reasons IRA beneficiaries may use 

advice more frequently than DC plan participants. 

68See 74 FR No 164 (Aug. 22, 2008), 74 FR No 

12 (Jan. 21, 2009), and 75 FR No 40 (Mar. 2, 2010) 

for background on the analysis contained in the 

Department’s Regulatory Impact Analysis. 

69For example, an adviser employed by an asset 

manager can share the manager’s research instead 

of buying or producing such research 

independently. 

Department believes it is likely that in 

practice a large proportion of 

participants who receive advice will 

follow that advice either in whole or in 

part. This is especially likely if the 

advice turns out to be broadly in line 

with the participants’ own thinking. 

Nonetheless, some advice will not be 

followed, and as a result some 

investment errors will not be corrected. 

For purposes of this analysis, the 

Department has assumed that advised 

participants make investment errors at 

one-half the rate of unadvised 

participants. The remaining errors 

reflect participant failures to follow 

advice. Additionally, for purposes of 

this analysis, the Department assumes 

that all permissible advice arrangements 

deliver advice of similar quality and 

effectiveness. 

TABLE 5—NUMBER OF ENTITIES

Pre-PPA 

PPA 

Low 

estimate 

Primary 

estimate 

High 

estimate 

DC: 

Plans offering (000s) ................................................................................................................ 238 335 372 410 

Participants offered (MM) ......................................................................................................... 30 42 46 51 

Participants using (MM) ............................................................................................................ 6 9 10 11 

IRA: 

IRAs using (MM) ....................................................................................................................... 17 25 34 41 

Impact—Benefit 

For purposes of this assessment, the 

Department estimates that as a result of 

the PPA and this final regulation the 

proportion of participants using advice 

will increase.68 As stated above, the 

Department has assumed that advised 

participants make investment errors at 

one-half the rate of unadvised 

participants. The estimates provided in 

the Tables 3 to 5 show three possible 

impacts for the PPA and this final 

regulation to reflect the uncertainty 

surrounding the availability and use of 

advice as well as the percentage of 

errors eliminated by advice: ‘‘low’’ 

estimates assume that 14 percent of DC 

plan participants and half of IRA 

beneficiaries will utilize advice which 

eliminates 25 percent of investment 

errors, ‘‘primary’’ estimates assume that 

16 percent of DC plan participants and 

two-thirds of IRA beneficiaries will 

utilize advice which eliminates half of 

investment errors, and ‘‘high’’ estimates 

assume that 17 percent of DC plan 

participants and 80 percent of IRA 

beneficiaries will utilize advice which 

eliminates 75 percent of investment 

errors. 

As summarized in Tables 3 through 5 

above, the PPA and this final regulation 

will increase the availability of 

investment advice and thereby increase 

the use of investment advice by 

participants. The PPA and this final 

regulation will reduce investment 

mistakes by between $7 billion and $18 

billion annually, the Department 

estimates. Cumulatively, after 

implementation of this final regulation, 

use of existing and new investment 

advice by DC plan and IRA participants 

will eliminate between $22 billion and 

$33 billion worth of investment errors 

annually. The Department’s estimates of 

investment errors and reductions from 

investment advice are summarized in 

Table 2 above. 

Costs 

Compliance with the terms and 

condition of the final rule is a condition 

of relief from the prohibited transaction 

provisions of ERISA and the Code. Such 

exemptive relief would allow a 

fiduciary adviser to receive 

compensation from providers of 

recommended investments. As such, 

this final rule does not include any 

Federal mandates that will require 

expenditures by the private sector per 

se. Plan sponsors and participants are 

expected to take advantage of these new 

opportunities in the marketplace; 

therefore these plans and participants 

will shoulder the costs to reap the 

associated benefits. 

Nevertheless, participant gains from 

investment advice must be weighed 

against the cost of that advice. This final 

rule is expected to make quality 

fiduciary advice available to 

participants at a lower direct price, 

because advisers will be able to rely on 

indirect revenue sources, subject to the 

safeguards and conditions of the final 

rule, to compensate their efforts. It may 

also make such advice available at a 

lower total cost to participants. 

The general prohibition against 

transactions wherein fiduciary advisers’ 

and participants’ interests may conflict 

carries costs. Faced with such bars 

advisers may forgo certain potential 

economies of scale in production and 

distribution of financial services that 

would derive from more vertical and 

horizontal integration.69 If they choose 

instead to take advantage of these 

opportunities and relationships, they 

must incur costs to carefully monitor 

and calibrate their relationships and 

compensation arrangements to avoid a 

prohibited fiduciary conflict, or 

structure and monitor their 

arrangements to meet the conditions of 

an applicable prohibited transaction 

exemption. 

On the other hand, absent adequate 

protections, conflicts themselves may be 

more costly to participants than a 

general prohibition against them. The 

safeguards and conditions included in 

this final regulation are calibrated to 

ensure that conflicts do not compromise 

the quality of fiduciary advice. 

The Department therefore expects this 

final rule to produce cost savings by 

harnessing economies of scale and by 

reducing compliance burdens. The 

Department is unaware of any available 

empirical basis on which to determine 


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Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 66157 

whether or by how much costs might be 

reduced, however. 

Different types of advice may come 

with different costs. For example, 

advice generated by an automated 

computer program may be less costly 

than advice provided by a personal 

adviser. For purposes of this analysis 

the Department assumed that in the 

context of a DC plan, computer 

generated advice costs 10 basis points 

annually, while adviser provided advice 

costs 20 basis points. In connection with 

an IRA the corresponding assumptions 

are 15 and 30 basis points. These 

assumptions are reasonable in light of 

information available to the Department 

about the cost of various existing advice 

arrangements. On this basis the 

Department estimates the aggregate cost 

of advice under the final rule to be a 

range between $1.9 billion and $5.1 

billion annually as summarized in Table 

6 below. These costs include the costs, 

outlined in the Paperwork Reduction 

Act section below, associated with 

requirements to document and keep 

records, provide disclosures to 

participants, hire an independent 

auditor, and obtain certification of the 

model from an eligible investment 

expert. 

TABLE 6—COST OF ADVICE

Pre-PPA 

PPA 

Low 

estimate 

Mid 

estimate 

High 

estimate 

Incremental: 

Advice cost ($billions) ............................................................................................................... $3.90 $1.90 $3.70 $5.10 

Advice cost rate (bps, average) ............................................................................................... 22.4 22.6 23.0 23.1 

Cumulative (combined with policies to the left): 

Advice cost ($billions) ............................................................................................................... 3.90 5.80 7.60 9.00 

Advice cost rate (bps, average) ............................................................................................... 22.4 22.4 22.7 22.8 

Regulatory Alternatives 

Executive Order 12866 requires an 

economically significant regulation to 

include an assessment of the costs and 

benefits of potentially effective and 

reasonably feasible alternatives to a 

planned regulation, and an explanation 

of why the planned regulatory action is 

preferable to the identified potential 

alternatives. In formulating this final 

regulation, the Department considered 

several alternative approaches regarding 

computer model design and operation, 

which are discussed below. For a more 

detailed discussion of these alternatives, 

see section B.2., above. 

Paragraph (b)(4)(i)(A) of the March 

2010 proposal requires a computer 

model to be designed and operated to 

apply generally accepted investment 

theories that take into account historical 

risks and returns of different asset class 

over defined periods of time. The 

Department solicited comments in the 

proposal regarding whether the 

Department should amend the rule to 

specify generally accepted investment 

theories and require their application or 

specify certain practices required by 

such theories. Most commenters 

indicated that they did not believe the 

Department should specifically define 

or identify generally accepted 

investment theories or prescribe 

particular practices or computer model 

parameters. They explained that 

economic and investment theories and 

practices continually evolve over time 

in response to changes and 

developments in academic and expert 

thinking, technology, and financial 

markets. Some commenters explained 

that additional specificity would 

facilitate compliance determinations. 

Other commenters described theories 

and practices they believed to be 

generally accepted. 

After carefully considering the 

comments, the Department decided not 

to change the provision in the final rule. 

The Department is concerned that 

attempting to provide additional 

specificity in this area, such as by 

prescribing an acceptable list of theories 

and practices, may result in significant 

unintended consequences. Specific 

requirements might limit advisers’ 

ability to select or apply the most 

current or effective investment theories, 

and thereby impede beneficial 

innovations in investment advice and 

reduce the economic benefits of the 

statutory exemption. The Department 

also believes that the final rule’s 

computer model requirements, taken 

together, are sufficient to safeguard 

against application of investment 

theories that are not generally accepted. 

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

2010 proposal requires a computer 

model to take into account all 

‘‘designated investment options’’ 

available under the plan without giving 

inappropriate weight to any investment 

option. The term ‘‘designated 

investment option’’ is defined 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. 

Under paragraph (b)(4)(i)(F)(2) of the 

proposal, a computer does not have to 

make recommendations relating to the 

acquisition, holding or sale of the 

following: qualifying employer 

securities; an investment 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 or level of risk of the 

participant or beneficiary; and 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. 

The Department considered retaining 

this provision in the corresponding 

provision of the final rule, paragraph 

(b)(4)(i)(G). However, the Department 

has decided to remove qualifying 

employer securities and asset 

allocations funds from the list of 

excepted options. Based on comments 

received in response to the proposal, the 

Department believes that it is feasible to 

develop a computer model capable of 

addressing investments in qualifying 

employer securities, and that plan 

participants will significantly benefit 

from this advice. For example, DC plan 

participants sometimes concentrate 

their assets excessively in stock of their 


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70Mitchell, Olivia S., and Stephen P. Utkus. 

October 2002. ‘‘The Role of Company Stock in 

Defined Contribution Plans.’’ NBER Working Paper 

No. W9250. Citing EBRI/ICI data, the authors find 

that, of those participants who are offered company 

stock through their 401(k), 48 percent of them hold 

over 20 percent of their 401(k) assets in company 

stock and approximately one third of them hold 

over 40 percent of their 401(k) assets in company 

stock. The authors acknowledge that there are 

potential productivity gains attributable to 

employee stock ownership. However, diversifying 

assets, on average, decreases wealth volatility. 

While not explicitly pointed out in this article, the 

volatility argument is particularly relevant when a 

participant holds a high concentration of one’s own 

company stock because company financial distress 

will correspond directly with both lower job 

security and decreased financial returns. 

71Meulbroek, Lisa. 2002. ‘‘Company Stock in 

Pension Plans: How Costly is it?’’ Harvard Business 

School Working Paper 02–058. 72This figure is based upon an estimate from 

Meulbroek (2002) where if 10 percent of DC plan 

assets are held in employer stock, the DC plan is 

one-half total wealth, and the holding period is 10 

years, investors lose out on 14 percent of riskadjusted value. 

73Benartzi, Shlomo and Richard Thaler. 2007. 

‘‘Heuristics and Biases in Retirement Savings 

Behavior’’ The Journal of Economic Perspectives, 

Vol. 21, Summer, pp. 81–104. Citing a Boston 

Research Group (2002) study of individuals (most 

of whom were highly aware of the Enron scandal), 

half of the respondents said their company stock 

carries less risk than a money market fund. Another 

study, that included the coauthors, found that only 

33 percent of the respondents who own company 

stock realize that it is riskier than a ‘‘diversified 

fund with many stocks.’’ Employees’ investment 

decisions reflect a belief that strong past 

performance by their company means that they 

should invest more in employee stock. Yet, this 

seems to have little bearing on future performance. 

74Mottola, Gary and Stephen Utkus. 2007. ‘‘Red, 

Yellow, and Green: A Taxonomy of 401(k) Choices’’ 

Pension Research Council Working Paper, PRC WP 

2007–14. Examining Vanguard’s database of 2.9 

million participants, the authors found that 17.2 

percent of participants had invested more than 20 

percent of their assets in company stock. A subset 

of 12,000 participants adopted managed account 

services. The authors were able to compare this 

subset’s behavior before and after adopting the 

services. Before adoption, 11 percent of the 

participants had over 20 percent of their portfolio 

in company stock; a year after adoption, only 2 

percent of the participants did. 

75Choi, James, David Laibson, and Brigitte 

Madrian. 2005. Brookings Papers on Economic 

Activity, Vol. 2005, No. 2, pp. 151–198. Participants 

view the offering of the employee stock as a 

recommendation to purchase the stock. Loyalty to 

one’s company may also be a factor. 

employer.70 Participant investments in 

employer securities can undermine 

diversification and thereby cause 

participants to bear uncompensated 

risk. This uncompensated risk comes at 

a cost.71 According to 2008 Department 

estimates, holding employer stock 

instead of a diversified portfolio of 

investments cost DC plan participants 

$3 billion in risk-adjusted value 

annually.72 Yet, participants often seem 

unaware of this uncompensated risk and 

falsely believe that they can gauge how 

their company stock will perform in the 

future.73 Good investment advice can 

benefit participants by promoting 

appropriate diversification 74 and 

combat some of the false perceptions of 

participants concerning employer 

stock.75

The Department also decided to 

remove asset allocation funds from the 

list of excepted options. Asset allocation 

funds generally are designed to 

maintain a particular asset allocation 

that takes into account the time horizon 

or risk tolerance of the participant. 

Some commenters to the Department’s 

2008 proposed rule opined that it served 

no purpose to include such funds in an 

investment advice model’s unrelated, 

overlaying asset allocation analysis. 

However, the Department’s subsequent 

consideration of asset allocation funds 

has demonstrated that: (1) The asset 

allocation and associated risk and return 

characteristics of different funds 

targeted at similar participants varies 

widely; (2) the risk and return 

preferences of participants vary widely 

with factors other than the time 

horizons that are the sole targeting 

factor for many asset allocation funds; 

(3) participants investing in asset 

allocation funds sometimes do not 

understand the funds’ risk and return 

characteristics; and (4) as a result of the 

forgoing, the risk and return 

characteristics of the asset allocation 

funds participants invest in are 

sometimes poorly aligned with the 

participants’ own risk and return 

preferences. Because investment advice 

models will take into account 

designated investment options’ true risk 

and return characteristics as well as 

participant characteristics and 

circumstances beyond time horizons, 

the Department believes that 

participants will benefit from 

investment advice that considers any 

asset allocation funds that are available 

to them. 

The Department notes that a provision 

added to the final rule, paragraph 

(b)(4)(i)(G)(2)(ii), provides that a 

computer model will not fail to satisfy 

the requirements of paragraph 

(b)(4)(i)(G)(1) merely because it does not 

provide a recommendation with respect 

to an investment option that a 

participant or beneficiary requests to be 

excluded from consideration in such 

recommendations. Therefore, 

participants may express a preference 

for asset allocation funds to be excluded 

from a recommendation. This would be 

relevant in situations where participants 

do not want to include asset allocation 

funds in computer model investment 

advice, because such products 

themselves rely on a fund manager to 

maintain a particular asset allocation 

taking into account their time horizons 

(retirement age, life expectancy) and 

risk tolerance. 

The Department, however, has 

decided to retain the exception for inplan annuity products. It might be 

challenging for a computer model that is 

designed to select the optimal asset 

allocation for a participant’s 

investments to also incorporate an 

option about whether the participant 

should purchase an in-plan annuity and 

how much of the portfolio should be 

dedicated to such a product. Annuities 

differ from other investments across 

several dimensions. For example, one 

valuable benefit to a lifetime annuity is 

that it provides an insurance-like feature 

of a guaranteed income stream that will 

last as long as one lives. It is difficult 

to know, however, how that should be 

valued within the context of a computer 

model. Similarly, participants’ 

preferences about annuities may vary 

depending on their preferences 

regarding bequests. Another factor 

participants must consider is that the 

annuity may lock them in, either by 

preventing them from pulling out their 

accumulated value and investing it 

elsewhere or by imposing a penalty for 

doing so. Typically other investment 

options offer more liquidity. All of these 

features of annuities mean that it might 

be difficult to design a computer model 

that could produce a recommendation 

for a participant regarding the optimal 

selection of assets and purchase of 

annuities. 

As an additional approach to ensuring 

that investment advice is not tainted by 

conflicts of interest, paragraph 

(b)(4)(i)(E)(3) of the March 2010 

proposal provides that a computer 

model must be designed and operated to 

avoid investment recommendations that 

inappropriately distinguish among 

investment options in a single asset 

class on the basis of a factor that cannot 

confidently be expected to persist in the 

future. 

A number of commenters requested 

that the Department remove paragraph 

(b)(4)(i)(E)(3). Some opined that the test 

contained in that provision—which 

applies on an asset-class by asset-class 

basis—lacks sufficient clarity because it 

fails to define the essential term ‘‘asset 

class’’. Some commenters also requested 

removal of this provision unless the 

Department clarifies that it would be 

acceptable for a computer model to take 

into account historical performance 

data. According to these commenters, 

the proposal’s discussion of paragraph 

(b)(4)(i)(E)(3) and related computer 

model questions has been construed as 

strictly prohibiting, or strongly 

cautioning against, any consideration of 

historical performance data, even if 


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Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 66159 

76See e.g., Russ Wermers, ‘‘Mutual Fund 

Performance: An Empirical Decomposition Into 

Stock-Picking Talent, Style, Transaction Costs And 

Expenses,’’ The Journal of Finance (Aug., 2000). 

This study finds that fund managers choose stocks 

that outperform their relevant benchmark by an 

average of 71 basis points per year. However, nonstock components, expense ratios, and transaction 

costs explain why the returns on these active funds 

are not as high on average as index funds. 

77See e.g., Eugene Fama and Kenneth French, 

‘‘Luck Versus Skill in the Cross Section of Mutual 

Fund Returns,’’ Journal of Finance (Sept. 21, 2010), 

at http://www.afajof.org/afa/forthcoming/6311.pdf. 

This study finds that approximately 10 percent of 

managers demonstrate higher returns before fees 

than what random chance would generate. Yet, after 

fees are taken into account, this share declines to 

1 percent. 

See also Robert Kosowski, Allan Timmermann, 

Russ Wermers and Hal White, ‘‘Can Mutual Fund 

‘Stars’ Really Pick Stocks? New Evidence from a 

Bootstrap Analysis,’’ The Journal of Finance, 

Volume LXI, Number 6 (Dec. 2006). The authors 

find a larger share of fund managers demonstrating 

significant skill. Fama and French believe this 

analysis suffers from some of the same selection 

biases that industry prospectuses do. 

See also John Hughes, Jing Liu and Mingshan 

Zhang, ‘‘Overconfidence, Under-Reaction, and 

Warren Buffett’s Investments,’’ at http:// 

papers.ssrn.com/sol3/papers.cfm

?abstract_id=1635061. This study finds that 

mimicking Warren Buffett’s position, or that of 

other top performing investment managers, can 

generate additional returns. The fact that following 

another fund’s lead can be a credible exercise may 

be an argument in favor of looking at prior returns 

of some funds. However, the fact that winning 

strategies do get mimicked is an argument made by 

some that success cannot be indefinitely sustained. 

Copycats potentially drive up the price of the 

underlying assets over time. 

See e.g., Jonathan B. Berk, and Richard C. Green, 

‘‘Mutual Fund Flows and Performance in Rational 

Markets,’’ Journal of Political Economy, Volume 

112, pp. 1269–1295 (2004). 

78The Department maintains the 2006 baseline 

numbers used in the 2008 Proposal (73 FR 49896 

(Aug. 22, 2008), at http://webapps.dol.gov/Federal

Register/HtmlDisplay.aspx?DocId=21243&

AgencyId=8&DocumentType=1). The baseline 

assessment was based on the Department’s reading 

of Hewitt Associates LLC, Survey Findings: Hot 

Topics in Retirement, 2007 (2007), at http:// 

www.hewittassociates.com/Lib/MBUtil/Asset

Retrieval.aspx?guid=CE3EEF86-50E7-4EEC-8C32-

82FD055690A6; Profit Sharing/401(k) Council of 

America, 50th Annual Survey of Profit Sharing and 

401(k) Plans (2007); and Deloitte Development LLC, 

Annual 401(k) Benchmarking Survey, 2005/2006 

Edition (2006), at http://www.google.com/url

?sa=t&source=web&cd=5&ved=0CDUQFjAE

&url=http%3A%2F%2Fwww.ifebp.org%2Fpdf%

2Fresearch%2F2005-06Annual401kSurvey.pdf&ei=

_76UTYSXMY6y0QHBjZmADA&usg=AFQ

jCNFsUmmwPpFA_EoBDUGyB9uypfFCCQ. 

considered in conjunction with other 

information. These commenters opined 

that a complete disregard of historical 

performance data would be inconsistent 

with generally accepted investment 

theories. 

Additionally, some cautioned that, by 

limiting consideration to only those 

factors that can confidently be expected 

to persist in the future, a computer 

model might be limited to 

distinguishing between investment 

options solely on the basis of fees and 

expenses. A commenter noted that, 

other than fees, it could not identify any 

other factor with the necessary 

likelihood of persistence required under 

the proposal. Although commenters 

generally agreed that fees are an 

important consideration, most 

recognized they should not be the only 

factor taken into account. 

A number of commenters expressed 

concern that this provision of the 

proposal, with its focus on historical 

performance data, superior past 

performance and fees, appeared to 

suggest that it would be impermissible 

under any circumstances for a plan 

fiduciary to pursue an active 

management style, or that a plan 

fiduciary would bear a very high burden 

of justification. Commenters also stated 

that the Department’s proposal appeared 

to demonstrate a clear bias in favor of 

passive investment styles over active 

styles, which they believe to be 

premature because it is the subject of 

ongoing debate among investment 

experts. 

Other commenters, however, 

questioned the utility of historical 

performance data beyond estimating 

future performance of an entire asset 

class. They further noted that, because 

the regulation permits a fiduciary 

adviser to provide investment 

recommendations to plan participants 

when the adviser has an interest in the 

investment options being 

recommended, there is the potential that 

the computer model might be designed 

to favor certain options by giving undue 

weight to historical performance data. 

They therefore stressed the importance 

of scrutinizing the use of historical 

performance data and supported the 

inclusion of paragraph (b)(4)(i)(E)(3). 

As discussed above, the provision is 

not intended to prohibit a computer 

model from any consideration of an 

investment option’s historical 

performance, as some commenters 

interpreted. Based on its review of 

relevant academic literature, the 

Department does not believe such a 

prohibition is warranted. Although the 

academic literature indicates that there 

is skill in the investment community,76

there is considerable disagreement 

amongst academics as to how much 

persistent skill fund managers exhibit.77

Without further clarification, a 

fiduciary adviser might not consider any 

factors whose persistence is in doubt, 

such as historical performance, but 

instead would consider only factors that 

are essentially fixed, such as fees and 

expenses, solely because she is 

unwilling to risk noncompliance with 

that provision. That is, fiduciary 

advisers might omit from consideration 

factors that would be beneficial to 

consider, even when there is a sound 

empirical basis to justify their 

consideration. The Department believes 

that the final rule should not discourage 

consideration of factors whose 

predictive properties can be 

demonstrated. Accordingly, the 

Department has clarified application of 

this provision at paragraph (b)(4)(i)(C). 

Uncertainty 

The Department is highly confident in 

its conclusion that investment errors are 

common and often large, producing 

large avoidable losses (including 

foregone earnings) for participants. It is 

also confident that participants can 

reduce errors substantially by obtaining 

and following good advice. While the 

precise magnitude of the errors and 

potential reductions therein are 

uncertain, there is ample evidence that 

that magnitude is large. 

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 final rule would change in 

response to alternative assumptions 

regarding the availability, use, and 

quality of advice. Table 7 the results of 

these tests.78

TABLE 7—UNCERTAINTY IN ESTIMATE OF INVESTMENT ERROR REDUCTION

After PPA/Final Rule: Impact 

of PPA 

Impact 

of all 

advice 

Remaining 

errors Advice eliminates: Advice reaches: 

25% of errors ................................ 14% of DC and 50% of IRA ............................................................... $7 $21 $107 

50% of errors * .............................. 16% of DC and 67% of IRA* ............................................................. 13 28 101 


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79EBSA has consulted with the SBA Office of 

Advocacy concerning use of this participant count 

standard for RFA purposes. See 13 CFR 121.903(c). 

TABLE 7—UNCERTAINTY IN ESTIMATE OF INVESTMENT ERROR REDUCTION—Continued 

After PPA/Final Rule: Impact 

of PPA 

Impact 

of all 

advice 

Remaining 

errors Advice eliminates: Advice reaches: 

75% of errors ................................ 17% of DC and 80% of IRA ............................................................... 18 33 96 

Note: Primary estimates denoted.* 

The Department is 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. For example, to what extent 

will arrangements pursuant to this final 

rule displace alternative arrangements? 

Will advice arrangements operating 

pursuant to this final rule be more, less, 

or equally effective as alternative 

arrangements? 

This analysis has assumed that all 

types of permissible advice 

arrangements are equally effective at 

reducing investment errors, and that 

none will increase errors (there will be 

no very bad advice). This assumption 

may not hold, however. The Department 

notes that if users of advice are fully 

informed and rational then more cost 

effective arrangements will dominate 

the market. This final rule establishes 

conditions to ensure that prospective 

users of advice available pursuant to it 

will have the opportunity to become 

fully informed. 

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. 

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 

currently 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 

currently lacks bases to estimate include 

financial market impacts of changes in 

investor behavior and related 

macroeconomic effects. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

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

certain requirements with respect to 

Federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

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

are likely to have a significant economic 

impact on a substantial number of small 

entities. For purposes of analysis under 

the RFA, the Department proposes to 

continue its usual practice of 

considering a small entity to be an 

employee benefit plan with fewer than 

100 participants.79 The Department 

estimates that approximately 100,000 

small plans, a significant number, will 

voluntarily begin offering investment 

advice to participants as a result of this 

final regulation. 

The primary effect of this final 

regulation will be to reduce 

participants’ investment errors. This is 

an effect on participants rather than on 

plans. The impact on plans generally 

will be limited to increasing the means 

by which they may make advice 

available to participants, and this 

impact will be similar and proportionate 

for small and large plans. Therefore the 

Department certifies that the impact on 

small entities will not be significant. 

Pursuant to this certification the 

Department has refrained from 

preparing an Initial Regulatory 

Flexibility Analysis of this final 

regulation. 

Notwithstanding this certification, the 

Department did separately consider the 

impact of this final regulation on 

participants in small plans. 

As noted above, prior to 

implementation of the PPA smaller plan 

sponsors offered advice generally, and 

in-person advice in particular, more 

frequently than larger plan sponsors. 

The Department believes that exemptive 

relief provided by both the PPA and this 

final regulation will promote wider 

offering of advice by small and large 

plans sponsors alike. Accordingly the 

Department estimated the impacts on 

small plans assuming that they 

generally will be proportionate to those 

on large plans. However, because 

smaller plan sponsors are more likely to 

offer in-person advice, their average cost 

for advice and the proportion of 

participants using advice may both be 

higher. The Department estimates that 

the PPA and this final regulation will 

reduce small DC plan participant 

investment errors respectively by 

between $169 million and $299 million 

annually, at a cost of between $38 

million and $67 million annually. The 

estimated impacts on small plans and 

their participants are summarized in 

Table 8 below. 

TABLE 8—SMALL DC PLAN PARTICIPANT IMPACTS

Pre-PPA 

PPA 

Low 

estimate 

Primary 

estimate 

High 

estimate 

Dollars advised ($billions) ................................................................................................................ $50 $71 $79 $87 

Investment errors ($billions) ............................................................................................................ $7.9 $7.7 $7.7 $7.6 


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80 75 FR 9360, 9364–65 (Mar. 2, 2010), at http:// 

webapps.dol.gov/FederalRegister/Html

Display.aspx?DocId=23559&Agency

Id=8&DocumentType=1. 

TABLE 8—SMALL DC PLAN PARTICIPANT IMPACTS—Continued 

Pre-PPA 

PPA 

Low 

estimate 

Primary 

estimate 

High 

estimate 

Incremental: 

Errors reduced by advice ($millions) ........................................................................................ $416 $169 $234 $299 

Advice cost ($millions) .............................................................................................................. $93 $38 $52 $67 

Advice cost rate (bps, average) ............................................................................................... 18 18 18 18 

Error reduced per $1 of advice, average ................................................................................. $4.49 $4.49 $4.49 $4.49 

Cumulative (combined with policies to the left): 

Errors reduced by advice ($millions) ........................................................................................ $416 $585 $650 $715 

Advice cost ($millions) .............................................................................................................. $93 $130 $145 $159 

Advice cost rate (bps, average) ............................................................................................... 18 18 18 18 

Error reduced per $1 of advice, average ................................................................................. $4.49 $4.49 $4.49 $4.49 

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. 

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. 

Compliance with the terms and 

condition of the final rule is a condition 

of relief from the prohibited transaction 

provisions of ERISA and the Code. Such 

exemptive relief would allow a 

fiduciary adviser to receive 

compensation from providers of 

recommended investments. As such, 

this final rule does not include any 

Federal mandates that will require 

expenditures by the private sector per 

se. 

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. 

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 comments on the information 

collections included therein. The 

Department also submitted an 

information collection request (ICR) to 

OMB in accordance with 44 U.S.C. 

3507(d), contemporaneously with the 

publication of the NPRM, for OMB’s 

review. Although no public comments 

were received that specifically 

addressed the paperwork burden 

associated with the ICR, the Department 

welcomes public comments on its 

estimates and any suggestions for 

reducing the paperwork burdens. 

In connection with the publication of 

this final rule, the Department 

submitted an ICR to OMB for a revised 

information collection. An agency may 

not conduct or sponsor, and a person is 

not required to respond to, a collection 

of information unless it displays a 

currently valid OMB control number. 

OMB approved the ICR on October 18, 

2011 under OMB Control Number 1210– 

0134, which will expire on October 31, 

2014. A copy of the ICR may be 

obtained by contacting the PRA 

addressee: G. Christopher Cosby, Office 

of Policy and Research, U.S. Department 

of Labor, Employee Benefits Security 

Administration, 200 Constitution 

Avenue, NW., Room N–5718, 

Washington, DC 20210. Telephone: 

(202) 693–8410; Fax: (202) 219–2745. 

These are not toll-free numbers. E-mail: 

ebsa.opr@dol.gov. ICRs submitted to 

OMB also are available at reginfo.gov 

(http://www.reginfo.gov/public/do/ 

PRAMain). 

In order to use the statutory 

exemption to provide investment advice 

to participants, fiduciary advisers are 

required to make disclosures to 

participants, authorizing fiduciaries, 

and hire an independent auditor to 

conduct a compliance audit and issue 

an audit report every year. Fiduciary 

advisers who satisfy the conditions of 

the exemption based on the provision of 

computer model-generated investment 

advice are required to obtain 

certification of the model from an 

eligible investment expert. These 

paperwork requirements are designed to 

safeguard the interests of participants in 

connection with investment advice 

covered by the rule. 

The Department calculated the 

estimated hour and cost burden of the 

ICRs under the final rule using the same 

methodology that was used in making 

such estimate in the March 2010 

proposal.80 The Department has made a 

minor increase to the estimated number 

of DC plan sponsors offering advice, the 

number of DC plan participants utilizing 

advice, and the labor hour rates used to 

estimate the hour burden based on more 


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81The increase in the estimated number of DC 

plans offering advice and DC plan participants 

utilizing advice is due to updating the count to 

reflect 2008 Form 5500 data, the latest year for 

which Form 5500 data is available. The counts in 

the 2010 Proposed Rule were based on 2006 Form 

5500 data. 

82The Department estimates that no additional 

hour or cost burden will be associated with this 

disclosure, because it will be provided in the 

normal course of engaging in an eligible investment 

advice engagement. 

83This estimate is derived from Current 

Population Survey October 2003 School 

Supplement probit equations applied to the 

February 2005 Contingent Worker Supplement. 

These equations show that approximately 81 

percent of workers aged 19 to 65 had internet access 

either at home or at work in 2005. The Department 

further assumes that one percent of these 

participants will elect to receive paper documents 

instead of electronic, thus 20 percent of participants 

receive disclosures through paper media. 

84Hourly wage estimates are based on data from 

the Bureau of Labor Statistics Occupational 

Employment Survey (May 2009) and the Bureau of 

Labor Statistics Employment Cost Index (October 

2010). Clerical wage and benefits estimates are 

based on metropolitan wage rates for executive 

secretaries and administrative assistants. Financial 

manager wage and benefits estimates are based on 

metropolitan wage estimates for financial managers. 

Legal professional wage and benefits estimates are 

based on metropolitan wage rates for lawyers. 

Computer programmer wage and benefits estimates 

are based on metropolitan wage rates for 

professional computer programmers. 

current data.81 The Department also has 

taken into account a new requirement in 

paragraph (b)(8) of the final rule, which 

requires fiduciary advisers to provide 

written notification to authorizing 

fiduciaries stating that it: (i) Intends to 

comply with the conditions of the 

statutory exemption under ERISA 

sections 408(b)(14) and 408(g) and these 

final regulations; (ii) will be audited 

annually by an independent auditor for 

compliance with the conditions of the 

exemption and regulations; and, (iii) 

that the auditor will furnish the 

authorizing fiduciary with a copy of the 

auditor’s findings within 60 days of 

completion of the audit.82 All other 

calculations remain the same as in the 

March 2010 proposed rule. 

The Department made several specific 

basic assumptions in order to establish 

a reasonable estimate of the paperwork 

burden of this information collection: 

• The Department assumes that 80% 

of disclosures 83 will be distributed 

electronically via means already in 

existence as a usual and customary 

business practice and the costs arising 

from electronic distribution will be 

negligible. 

• The Department assumes that 

investment advisory firms will use 

existing in-house resources to prepare 

most disclosures and to maintain the 

recordkeeping systems. This assumption 

does not apply to the computer model 

certification, the audit or the computer 

program used to generate disclosures for 

IRA participants. 

• The Department assumes a 

combination of personnel will perform 

the information collections with an 

hourly wage rate for 2011 of 

approximately $111, including both 

wages and benefits, for a financial 

manager and approximately $27 for 

clerical personnel.84 Legal professional 

time is similarly assumed to be almost 

$124 per hour, and computer 

programming time is estimated at $72 

per hour. 

The Department assigned an hour 

burden (with associated ‘equivalent 

costs’ derived from multiplying the hour 

burden by the estimated employee 

compensation) and a cost burden (the 

actual monetary expenses of the entity, 

i.e. material and postage costs and fees 

paid to outside entities) to this final 

regulation. The total costs of this final 

regulation are calculated by adding the 

mutually exclusive hour burden 

equivalent costs and the cost burden. 

These PRA costs are a subset of the 

overall costs of this final regulation. The 

Department estimates that the thirdparty disclosures, computer model 

certification, and audit requirements for 

the final statutory exemption will 

require approximately 5.2 million 

burden hours (with an associated 

equivalent cost of approximately $602 

million) and a cost burden of 

approximately $580 million in the first 

year. In each subsequent year the total 

burden hours are estimated to be 

approximately 2.8 million hours (with 

an associated equivalent cost of 

approximately $314 million) and the 

cost burden is estimated at 

approximately $431 million. 

These paperwork burden estimates 

are summarized as follows: 

Type of Review: Revised Collection. 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Titles: Final Statutory Exemption for 

the Provision of Investment Advice to 

Participants and Beneficiaries of 

Participant-Directed Individual Account 

Plans and IRAs. 

OMB Control Number: 1210–0134. 

Affected Public: Business or other forprofit. 

Estimated Number of Respondents: 

16,000. 

Estimated Number of Annual 

Responses: 20,684,000. 

Frequency of Response: Initially, 

Annually, Upon Request, when a 

material change. 

Estimated Total Annual Hour Burden: 

5,179,000 hours in the first year; 

2,849,000 hours in each subsequent year 

(with associated three year annualized 

hour burden of 3,626,000). 

Estimated Total Annual Cost Burden: 

$580,272,000 in the first year; 

$430,973,000 for each subsequent year 

(with associated three year annualized 

cost burden of $480,739,000). 

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, Chapter XXV, subchapter F, 

part 2550 of Title 29 of the Code of 

Federal Regulations is amended as 

follows: 

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. 6–2009, 74 FR 21524 

(May 7, 2009). Secs. 2550.401b–1, 

2550.408b–1, 2550.408b–19, 2550.408g–1, 

and 2550.408g–2 also issued under sec. 102, 

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

App. 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(c)(2), Pub. 

L. 107–16, 115 Stat. 38, 136 (2001)). Sec. 

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

1108(b)(1). Sec. 2550.408b–19 also issued 

under sec. 611(g)(3), Public Law 109–280, 

120 Stat. 780, 975 (2006). 

■ 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. The requirements 

and conditions set forth in this section 

apply solely for the relief described in 

paragraph (b) 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. 


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(2) Nothing contained in ERISA 

section 408(g)(1), Code section 

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

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 fee leveling. 

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 risks and 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) No fiduciary adviser (including 

any employee, agent, or registered 

representative) that provides investment 

advice receives from any party 

(including an affiliate of the fiduciary 

adviser), directly or indirectly, any fee 

or other compensation (including 

commissions, salary, bonuses, awards, 

promotions, or other things of value) 

that varies depending on the basis of a 

participant’s or beneficiary’s selection of 

a particular investment option; and 

(ii) The requirements of paragraphs 

(b)(5), (6), (7), (8) and (9) and paragraph 

(d) 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), (8) and (9) and paragraph (d) are 

met. 

(i) A computer model shall be 

designed and operated to— 

(A) Apply generally accepted 

investment theories that take into 

account the historic risks and 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) Appropriately weight the factors 

used in estimating future returns of 

investment options; 

(D) 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; 

(E) Utilize appropriate objective 

criteria to provide asset allocation 

portfolios comprised of investment 

options available under the plan; 

(F) 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 

(G)(1) Except as provided in 

paragraph (b)(4)(i)(G)(2) of this section, 

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 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; or 

(ii) The participant or beneficiary 

requests to be excluded from 

consideration in such 

recommendations. 

(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, 

obtain a new certification from an 

eligible investment expert that the 


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66164 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

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; or develops a computer 

model utilized by the fiduciary adviser 

to satisfy this paragraph (b)(4). 

(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) of this 

section, 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) of this section 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) of this 

section, 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, that— 

(1) Identifies the fiduciary adviser, 

(2) Indicates the type of arrangement 

(i.e., fee leveling, computer models, or 

both), 

(3) If the arrangement uses computer 

models, or both computer models and 

fee leveling, indicates the date of the 

most recent computer model 

certification, and identifies the eligible 

investment expert that provided the 

certification, and 

(4) Sets 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, U.S. 

Department of Labor, Employee Benefits 

Security Administration, Room N–1513, 

200 Constitution Ave., NW., 

Washington, DC 20210, or submit a 

copy electronically to 

InvAdvNotification@dol.gov. 

(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, and does not have any role in 

the development of the investment 

advice arrangement, or certification of 

the computer model utilized under the 

arrangement. 

(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 to participants. (i) The 

fiduciary adviser must provide, without 

charge, to a participant or a beneficiary 

before the initial provision of 


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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 

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; 

(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 2520.104b– 

1, 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) Disclosure to authorizing 

fiduciary. The fiduciary adviser shall, in 

connection with any authorization 

described in paragraph (b)(5)(i) of this 

section, provide the authorizing 

fiduciary with a written notice 

informing the fiduciary that: 

(i) The fiduciary adviser intends to 

comply with the conditions of the 

statutory exemption for investment 

advice under section 408(b)(14) and (g) 

of the Employee Retirement Income 

Security Act and this section; 

(ii) The fiduciary adviser’s 

arrangement will be audited annually by 

an independent auditor for compliance 

with the requirements of the statutory 

exemption and related regulations; and 

(iii) The auditor will furnish the 

authorizing fiduciary a copy of that 

auditor’s findings within 60 days of its 

completion of the audit. 

(9) 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. 

The term ‘‘designated investment 

option’’ has the same meaning as the 

term ‘‘designated investment 

alternative’’ as defined in 29 CFR 

2550.404a–5(h). 

(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 paragraphs (c)(2)(i)(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. 


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66166 Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 

(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; 

(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; 

(vii) A ‘‘simplified employee 

pension’’ described in section 408(k) of 

the Code; or 

(viii) A ‘‘simple retirement account’’ 

described in section 408(p) of the Code. 

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

means— 

(i) Any person directly or indirectly 

owning, controlling, or holding with 

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) 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. 

(e) 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 paragraph 

(b) 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) of this 

section 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. 

(f) Effective date and applicability 

date. This section shall be effective 

December 27, 2011. This section shall 

apply to transactions described in 

paragraph (b) of this section occurring 

on or after December 27, 2011. 

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 of 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 


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Federal Register / Vol. 76, No. 206 / Tuesday, October 25, 2011 / Rules and Regulations 66167 

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] 

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 no material affiliation with or 

receive no 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 paragraph (b) 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 person 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(d). 

Signed at Washington, DC, this 5th day of 

October 2011. 

Phyllis C. Borzi, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2011–26261 Filed 10–24–11; 8:45 am] 

BILLING CODE 4510–29–P 


sroberts on DSK5SPTVN1PROD with RULES