Reasonable Contract or Arrangement Under Section 408(b)(2)-Fee Disclosure, 41600-41638 [2010-16768]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 75, Number 136 (Friday, July 16, 2010)]
[Rules and Regulations]
[Pages 41600-41638]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16768]



[[Page 41599]]

-----------------------------------------------------------------------

Part III





Department of Labor





-----------------------------------------------------------------------



Employee Benefits Security Administration



-----------------------------------------------------------------------



29 CFR Part 2550



 Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee 
Disclosure; Interim Final Rule

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

[[Page 41600]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB08


Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee 
Disclosure

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Interim final rule with request for comments.

-----------------------------------------------------------------------

SUMMARY: This document contains an interim final regulation under the 
Employee Retirement Income Security Act of 1974 (ERISA or the Act) 
requiring that certain service providers to employee pension benefit 
plans disclose information to assist plan fiduciaries in assessing the 
reasonableness of contracts or arrangements, including the 
reasonableness of the service providers' compensation and potential 
conflicts of interest that may affect the service providers' 
performance. These disclosure requirements are established as part of a 
statutory exemption from ERISA's prohibited transaction provisions. 
This regulation will affect employee pension benefit plan sponsors and 
fiduciaries and certain service providers to such plans. Interested 
persons are invited to submit comments on the interim final regulation 
for consideration by the Department of Labor.

DATES: Effective date. This interim final rule is effective on July 16, 
2011.
    Comment date. Written comments on the interim final rule must be 
received by August 30, 2010.

ADDRESSES: To facilitate the receipt and processing of comments, EBSA 
encourages interested persons to submit their comments electronically 
to e-ORI@dol.gov, or by using the Federal eRulemaking portal https://www.regulations.gov (following instructions for submission of 
comments). Persons submitting comments electronically are encouraged 
not to submit paper copies. Persons interested in submitting comments 
on paper should send or deliver their comments (preferably three 
copies) to: Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5655, U.S. Department of 
Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attention: 
408(b)(2) Interim Final Rule. All comments will be available to the 
public, without charge, online at https://www.regulations.gov and https://www.dol.gov/ebsa, and at the Public Disclosure Room, Employee Benefits 
Security Administration, U.S. Department of Labor, Room N-1513, 200 
Constitution Avenue, NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: For further information on the interim 
final regulation, contact Allison Wielobob or Fil Williams, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

1. General

    In recent years, there have been a number of changes in the way 
services are provided to employee benefit plans and in the way service 
providers are compensated. Many of these changes may have improved 
efficiency and reduced the costs of administrative services and 
benefits for plans and their participants. However, the complexity 
resulting from these changes also has made it more difficult for plan 
sponsors and fiduciaries to understand what service providers actually 
are paid for the specific services rendered.
    Despite these complexities, section 404(a)(1) of ERISA requires 
plan fiduciaries, when selecting or monitoring service providers and 
plan investments, to act prudently and solely in the interest of the 
plan's participants and beneficiaries and for the exclusive purpose of 
providing benefits and defraying reasonable expenses of administering 
the plan. Fundamental to a plan fiduciary's ability to discharge these 
obligations is the availability of information sufficient to enable the 
plan fiduciary to make informed decisions about the services, the 
costs, and the service provider. Although the Department of Labor 
(Department) has issued technical guidance and compliance assistance 
materials relating to the obligations of plan fiduciaries in selecting 
and monitoring service providers,\1\ the Department continues to 
believe that, given plan fiduciaries' need for complete and accurate 
information about compensation and revenue sharing, both plan 
fiduciaries and service providers would benefit from regulatory 
guidance in this area. For this reason, the Department published a 
notice of proposed rulemaking in the Federal Register (72 FR 70988) on 
December 13, 2007. On the same day, the Department also published a 
proposed class exemption from the restrictions of section 406(a)(1)(C) 
of ERISA in the Federal Register (72 FR 70893). The Department proposed 
the exemption on its own motion pursuant to section 408(a) of the Act, 
and in accordance with the procedures set forth in 29 CFR part 2570, 
subpart B (55 FR 32836, August 10, 1990).
---------------------------------------------------------------------------

    \1\ See, e.g., Field Assistance Bulletin 2002-3 (November 5, 
2002), Advisory Opinions 97-16A (May 22, 1997) and 97-15A (May 22, 
1997),  https://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html, 
and https://www.dol.gov/ebsa/newsroom/fs053105.html.
---------------------------------------------------------------------------

2. Public Comments on Proposed Regulation and Class Exemption

    The Department's proposal required that reasonable contracts and 
arrangements between employee benefit plans and certain providers of 
services to such plans include specified information to assist plan 
fiduciaries in assessing the reasonableness of the compensation paid 
for services and the conflicts of interest that may affect a service 
provider's performance of services. The proposal also was designed to 
assist plan fiduciaries and administrators in obtaining the information 
they need from service providers to satisfy their reporting and 
disclosure obligations.\2\ Interested persons were invited to submit 
comments on the proposal. In response to this invitation, the 
Department received over 100 written comments on the proposed 
regulation and class exemption from a variety of parties, including 
plan sponsors and fiduciaries, plan service providers, financial 
institutions, and employee benefit plan and participant industry 
representatives. These comments are available for review under ``Public 
Comments'' on the ``Laws & Regulations'' page of the Department's 
Employee Benefits Security Administration Web site at https://www.dol.gov/ebsa.
---------------------------------------------------------------------------

    \2\ The Department also implemented changes to the information 
required to be reported concerning service provider compensation as 
part of the Form 5500 Annual Report. These changes to Schedule C of 
the Form 5500 complement the interim final rule under ERISA section 
408(b)(2) in assuring that plan fiduciaries have the information 
they need to monitor their service providers consistent with their 
duties under ERISA section 404(a)(1). See 72 FR 64731; see also 
frequently asked questions on Schedule C, at https://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html and https://www.dol.gov/ebsa/faqs/faq_scheduleC.html.
---------------------------------------------------------------------------

    Due to the large number of public comments received, the importance 
of this regulatory initiative, and its potentially significant effects 
on the provision of services to employee benefit plans, the Department 
held a public hearing on March 31 and April 1, 2008, in order to 
further develop the public record and the Department's understanding of 
the issues raised in the

[[Page 41601]]

public comments. As a result of the public hearing, the Department 
received a significant number of additional comments to supplement the 
public record for this regulatory initiative. These supplemental 
materials also are available for review on the Department's Web site.
    Set forth below is an overview of the interim final regulation and 
the public comments received on the proposal and during the 
Department's public hearing.

B. Overview of Interim Final Regulation Under ERISA Section 408(b)(2) 
and Public Comments

    The Department's interim final regulation (for simplicity, the 
interim final regulation also is referred to herein as the final 
regulation) retains the basic structure of the proposal by requiring 
that covered service providers satisfy certain disclosure requirements 
in order to qualify for the statutory exemption for services under 
ERISA section 408(b)(2). The furnishing of goods, services, or 
facilities between a plan and a party in interest to the plan generally 
is prohibited under section 406(a)(1)(C) of ERISA. As a result, a 
service relationship between a plan and a service provider would 
constitute a prohibited transaction, because any person providing 
services to the plan is defined by ERISA to be a ``party in interest'' 
to the plan. However, section 408(b)(2) of ERISA exempts certain 
arrangements between plans and service providers that otherwise would 
be prohibited transactions under section 406 of ERISA. Specifically, 
section 408(b)(2) provides relief from ERISA's prohibited transaction 
rules for service contracts or arrangements between a plan and a party 
in interest if the contract or arrangement is reasonable, the services 
are necessary for the establishment or operation of the plan, and no 
more than reasonable compensation is paid for the services. Regulations 
issued by the Department clarify each of these conditions to the 
exemption.\3\
---------------------------------------------------------------------------

    \3\ See 29 CFR 2550.408b-2.
---------------------------------------------------------------------------

    This rule amends the regulation under ERISA section 408(b)(2) to 
clarify the meaning of a ``reasonable'' contract or arrangement for 
covered plans. Currently, the regulation at 29 CFR 2550.408b-2(c) 
states only that a contract or arrangement is not reasonable unless it 
permits the plan to terminate without penalty on reasonably short 
notice. The final regulation establishes a requirement under section 
408(b)(2) that, in order for certain contracts or arrangements for 
services to be reasonable, the covered service provider must disclose 
specified information to a responsible plan fiduciary, defined as a 
fiduciary with authority to cause the plan to enter into, or extend or 
renew, a contract or arrangement for the provision of services to the 
plan. The specific disclosure requirements are described in more detail 
below.
    The final regulation differs from the proposal in a number of 
significant respects, each discussed in this rule. First, unlike the 
proposal, the final rule does not require a formal written contract or 
arrangement delineating the disclosure obligations, even though the 
disclosures must be made in writing. The final rule focuses instead on 
the substance of the disclosure that must be provided. Second, the 
final rule treats separately pension and welfare plans. Paragraph 
(c)(1) of the rule published today provides disclosure requirements 
applicable to contracts or arrangements with pension plans. The 
Department reserves paragraph (c)(2) of the rule for future guidance on 
disclosure with respect to welfare plans.
    Third, the final rule modifies the categories of service providers 
that must comply with the disclosure requirements, including 
fiduciaries, investment advisers, and recordkeepers or brokers who make 
investment alternatives available to a plan. It also applies to 
providers of other specified services who receive either ``indirect 
compensation'' (generally from sources other than the plan or plan 
sponsor) or certain types of payments from affiliates and 
subcontractors. The final rule includes in its definition of ``covered 
service providers'' fiduciaries to investment vehicles that hold plan 
assets and in which a covered plan has a direct equity investment. 
However, the definition makes clear that furnishing non-fiduciary 
services to such vehicles, or services to vehicles that do not hold 
plan assets will not cause a person to be a covered service provider. 
In addition, the regulation requires fiduciaries to plan asset 
investment vehicles in which plans make direct equity investments, as 
well as parties that offer designated investment alternatives to a 
participant-directed individual account plan as part of a platform, to 
furnish investment-related compensation information.
    Fourth, the final rule, unlike the proposal, does not contain 
specific narrative conflict of interest disclosure provisions, but 
rather relies on full disclosure of the circumstances under which the 
covered service provider will be receiving compensation from parties 
other than the plan (or plan sponsor), the identification of such 
parties, and the compensation that is expected to be received. As 
discussed below, the Department is persuaded that plan fiduciaries will 
be in a better position to assess potential conflicts of interest by 
reviewing these specific parties and the actual or expected 
compensation to be received from such parties. Fifth, the final rule 
includes a new provision requiring that certain providers of multiple 
services disclose separately the cost to the covered plan of 
recordkeeping services. Sixth, the final rule specifically addresses 
the application of the requirements of the regulation to section 4975 
of the Internal Revenue Code (the Code). And, lastly, the exemptive 
relief for plan sponsors or other responsible plan fiduciaries, 
originally proposed as a separate exemption, is now incorporated into 
the final rule for ease of reference and consideration by interested 
parties. A more detailed discussion of the final rule, including these 
changes, is set forth below.
    As required by Executive Order 12866, the Department evaluated the 
benefits and costs of this final rule. The Department believes that 
mandatory proactive disclosure will reduce sponsor information costs, 
discourage harmful conflicts, and enhance service value. Additional 
benefits will flow from the Department's enhanced ability to redress 
abuse. Although the benefits are difficult to quantify, the Department 
is confident they more than justify the cost. The Department estimated 
costs for the rule over a ten-year time frame for purposes of this 
analysis and used information from the quantitative characterization of 
the service provider market presented below as a basis for these cost 
estimates. This characterization did not account for all service 
providers, but it does provide information on the segments of the 
service provider industry that are likely to be most affected by the 
rule (i.e., those with contracts listed on the Form 5500). In addition 
to the costs to service providers, the Department also considered, and 
discusses below, the potential costs to plans.
    In accordance with OMB Circular A-4,\4\ Table 1 below depicts an 
accounting statement showing the Department's assessment of the 
benefits and costs associated with this regulatory action.
---------------------------------------------------------------------------

    \4\ Available at https://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.

[[Page 41602]]



                                            Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
                                                      Primary                                         Period
                    Category                         estimate       Year dollar    Discount rate      covered
----------------------------------------------------------------------------------------------------------------
Benefits
                                                 ---------------------------------------------------------------
Annualized Monetized ($millions/year)...........  Not Quantified.
----------------------------------------------------------------------------------------------------------------
Qualitative: The final regulation will increase the amount of information that service providers disclose to
 plan fiduciaries. Non-quantified benefits include information cost savings, discouraging harmful conflicts of
 interest, service value improvements through improved decisions and value, better enforcement tools to redress
 abuse, and harmonization with other EBSA rules and programs.
----------------------------------------------------------------------------------------------------------------
Costs
Annualized Monetized ($millions/year)...........            58.7            2010              7%       2011-2020
                                                            54.3            2010              3%       2011-2020
----------------------------------------------------------------------------------------------------------------
Qualitative: Costs include costs for service providers to perform compliance review and implementation, for
 disclosure of general, investment-related, and additional requested information, for responsible plan
 fiduciaries to request additional information from service providers to comply with the exemption and to
 prepare notices to DOL if the service provider fails to comply with the request.
----------------------------------------------------------------------------------------------------------------
Transfers.......................................  Not Applicable.
----------------------------------------------------------------------------------------------------------------

    A more detailed discussion of the need for this regulatory action, 
consideration of regulatory alternatives, and assessment of benefits 
and costs are included in Section K--``Regulatory Impact Analysis'' 
below.

1. General

    The final regulation, like the proposal, amends paragraph (c) of 
Sec.  2550.408b-2 by moving, without change, the current provisions of 
paragraph (c) to a newly designated paragraph (c)(3) and adding new 
paragraphs (c)(1) and (2) to address the disclosure requirements 
applicable to a ``reasonable contract or arrangement.'' Paragraph 
(c)(1) describes the disclosure requirements for pension plans. 
Paragraph (c)(2) has been reserved for future guidance concerning the 
disclosure requirements for welfare plans.
    The general paragraph of the final rule, paragraph (c)(1)(i), 
provides that no contract or arrangement for services between a covered 
plan and a covered service provider, nor any extension or renewal, is 
reasonable within the meaning of ERISA section 408(b)(2) and this 
regulation unless the requirements of the regulation are satisfied. The 
terms ``covered plan'' and ``covered service provider'' are defined in 
paragraph (c)(1)(ii) and (iii), respectively. The general paragraph 
also provides that the regulation's disclosure requirements are 
independent of a fiduciary's obligations under section 404 of ERISA.

2. Scope--Covered Plans

    Paragraph (c)(1)(ii) defines a ``covered plan'' to mean an employee 
pension benefit plan or a pension plan within the meaning of ERISA 
section 3(2)(A) (and not described in ERISA section 4(b)), except that 
such term shall not include a ``simplified employee pension'' described 
in section 408(k) of the Code, a ``simple retirement account'' 
described in section 408(p) of the Code, an individual retirement 
account described in section 408(a) of the Code, or an individual 
retirement annuity described in section 408(b) of the Code.
    Under the proposal, all employee benefit plans subject to Title I 
of ERISA, including employee pension benefit plans and welfare benefit 
plans, were subject to the regulation's disclosure requirements. The 
Department received many comments and heard testimony from parties 
concerned about the implications of subjecting defined benefit plans, 
welfare benefit plans, and individual retirement accounts (IRAs) to the 
regulation.\5\
---------------------------------------------------------------------------

    \5\ A few commenters suggested that the Department not extend 
the final rule to small plans (for example, those with less than 100 
participants). The Department was not persuaded that any policy 
rationale exists for excluding small plans.
---------------------------------------------------------------------------

    Commenters questioned the proposal's application to defined benefit 
plans for a variety of reasons, suggesting that the Department consider 
separate guidance for defined benefit plans. Commenters argued that 
sponsors of defined benefit plans and their service providers have only 
recently joined the public policy discussion regarding fee disclosure 
for retirement plans. They believe that a thorough examination of the 
issues that affect defined benefit plans is warranted before disclosure 
rules apply with respect to their service providers.
    In advocating for separate rules for defined benefit plans, some 
commenters focused on the differences in the legal structures of 
defined benefit plans and defined contribution plans. In addition, 
commenters noted that services are provided to defined benefit plans in 
ways that are materially different than they are for defined 
contribution plans. Other commenters noted that employers have 
incentives to monitor and negotiate service provider fees and expenses 
for defined benefit plans, because these plans primarily rely on 
employer contributions; excessive fees and expenses would make it more 
expensive for the employer to fund promised benefits. In contrast, 
defined contribution plans are funded primarily by employee 
contributions, and employers may pass on up to 100 percent of plan 
costs to employees.
    After careful review of the comments, the Department is not 
persuaded that the information fiduciaries of defined benefit plans 
need to make informed decisions about their service providers is 
fundamentally different from the information fiduciaries of defined 
contribution plans need to make informed decisions. Nor is the 
Department persuaded that the service provider relationships between 
the two types of plans are so different as to justify exclusion of 
defined benefit plans from the regulation's disclosure requirements. 
Moreover, the Department does not believe that compliance with the 
disclosure requirements, particularly as modified from the proposal, 
will present any unreasonable compliance burdens for service providers 
to defined benefit plans. For these reasons, the final rule, like the 
proposal, applies to contracts and arrangements with covered service 
providers to both defined contribution and defined benefit plans.
    The Department also received many comments concerning the 
applicability of the proposal to welfare benefit plans. Many commenters 
recommended their exclusion from the scope of the final

[[Page 41603]]

rule. Some commenters believe that the Department's rationales for the 
proposed rule apply to pension plans but not to welfare benefit plans. 
Other commenters maintain that, if the Department creates a disclosure 
regime for welfare benefit plan service providers, it should be 
promulgated separately.
    Commenters articulated specific concerns relating to welfare 
benefit plans, including the potential for negative effects on the 
insurance industry, which, they argue, is highly regulated by State 
laws. Many commenters asserted that, considering the high level of 
State regulation, subjecting welfare benefit plans to the disclosure 
regulation would be unnecessary and redundant because the disclosures 
contemplated in the regulation are already made available to plan 
fiduciaries through State regulatory processes. Other commenters 
pointed out that most State insurance laws do not require the types of 
disclosures addressed under the proposed rule and even where such State 
laws exist, they are loosely enforced. Still others asserted that there 
are ``transparency problems'' in general in the health and welfare 
industry.
    Some commenters expressed views relating to prohibited transaction 
exemption (PTE) 84-24,\6\ which they indicated is often misinterpreted 
and improperly utilized by service providers to suit their purposes. 
Those in favor of subjecting welfare benefit plans to the regulation 
said that it would eliminate the limitations of PTE 84-24. Other 
commenters asserted that PTE 84-24 has worked well and that welfare 
benefit plans should be allowed to continue without the impact of new 
disclosure obligations under the proposal.
---------------------------------------------------------------------------

    \6\ 49 FR 13208 (Apr. 3, 1984); amended at 71 FR 5887 (Feb. 3, 
2006) (providing prohibited transaction relief for service 
arrangements and related plan transactions involving insurance 
agents and brokers, pension consultants, insurance and investment 
companies, and investment company principal underwriters; for 
example, PTE 84-24 permits these parties to place insurance products 
with plans when they are fiduciaries, or affiliated with 
fiduciaries, to the plans if certain conditions are met).
---------------------------------------------------------------------------

    Still other commenters addressed specific concerns of pharmacy 
benefit managers (PBMs), which are intermediaries between drug 
manufacturers and health insurance plans. They believe that the reasons 
for disclosure discussed in the preamble to the proposed rule are 
inapplicable to PBMs. According to some commenters, the Federal Trade 
Commission has thoroughly evaluated the industry, finding that market 
forces provide sufficient information to plan fiduciaries and that 
excessive mandatory disclosure could weaken competition, such that the 
proposed regulation would negatively affect the delivery of 
prescription drugs to plan beneficiaries. Other commenters disputed the 
idea that PBMs should not be subject to the regulation, arguing that 
the discounts and rebates they received from drug companies were 
examples of undisclosed indirect compensation. Commenters offering this 
point of view did not present any further official comment or testimony 
at the public hearing.
    In spite of these arguments, the Department believes that 
fiduciaries and service providers to welfare benefit plans would 
benefit from regulatory guidance in this area for the same reasons that 
apply to defined contribution plans and defined benefit plans. However, 
the Department is persuaded, based on the public comment and hearing 
testimony, that there are significant differences between service and 
compensation arrangements of welfare plans and those involving pension 
plans and that the Department should develop separate, and more 
specifically tailored, disclosure requirements under ERISA section 
408(b)(2) for welfare benefit plans. Accordingly, the interim final 
rule published today includes a new paragraph (c)(2), which has been 
reserved for a comprehensive disclosure framework applicable to 
``reasonable'' contracts or arrangements for services to welfare plans 
to be developed by the Department. The Department notes, however, that 
in the meantime, ERISA section 404(a) continues to obligate fiduciaries 
to obtain and consider information relating to the cost of plan 
services and potential conflicts of interest presented by such service 
arrangements.
    Several commenters requested clarification regarding the 
regulation's application to IRAs or similar accounts. In some cases, 
commenters argued that the Department should exclude such accounts, as 
well as other plans that are not subject to Title I of ERISA, from the 
scope of the final regulation. The commenters observed that there are 
significant categories of arrangements that are subject to the 
prohibited transaction provisions of section 4975 of the Code, but not 
those of ERISA, and that do not have a fiduciary overseeing the plan. 
The comments asserted that owners of IRAs and other individual 
arrangements are more like individual plan participants than plan 
fiduciaries and that it would be inappropriate to impose the service 
provider-to-plan disclosure requirements in the context of non-ERISA 
arrangements. In contrast to participant-directed individual account 
plans, which typically offer a limited number of investment options, 
many IRAs offer a large number of investment options, such as brokerage 
accounts with essentially unlimited choices. Providing the disclosures 
set forth in the proposal could be quite burdensome and costly as a 
result. These costs, commenters argue, may drive service providers to 
limit the number of investment choices available in IRAs. In addition, 
some commenters pointed out that, under securities laws, the IRA 
accountholder is treated as the actual owner of the securities held in 
his or her IRA and is entitled to all securities law disclosures in the 
same manner as if the accountholder owned those securities directly. In 
contrast, with ERISA-covered plans, disclosure obligations under the 
securities laws extend only to the plan itself, not to individual plan 
participants.
    The Department does not believe that IRAs should be subject to the 
final rule, which is designed with fiduciaries of employee benefit 
plans in mind. An IRA account-holder is responsible only for his or her 
own plan's security and asset accumulation. They should not be held to 
the same fiduciary duties to scrutinize and monitor plan service 
providers and their total compensation as are plan sponsors and other 
fiduciaries of pension plans under Title I of ERISA, who are 
responsible for protecting the retirement security of greater numbers 
of plan participants. Moreover, IRAs generally are marketed alongside 
other personal investment vehicles. Imposing the regulation's 
disclosure regime on IRAs could increase the costs associated with IRAs 
relative to similar vehicles that are not covered by the regulation. 
Therefore, although the final rule cross references the parallel 
provisions of section 4975 of the Code, paragraph (c)(1)(ii) provides 
explicitly that IRAs and certain other accounts and plans are not 
covered plans for purposes of the rule.

3. Scope--Covered Service Providers

    The categories of service providers covered by the final rule, in 
paragraph (c)(1)(iii), vary slightly from those described in the 
proposal. The proposed regulation generally included service providers 
falling into one of the following categories: (1) Fiduciary service 
providers, whether under ERISA or under the Investment Advisers Act of 
1940; (2) service providers that will perform banking, consulting, 
custodial, insurance, investment advisory, investment management, 
recordkeeping,

[[Page 41604]]

or third party administration services for the plan; or (3) service 
providers that will receive indirect compensation in connection with 
providing accounting, actuarial, appraisal, auditing, legal, or 
valuation services to the plan. The Department believed that these 
service arrangements, and their associated compensation structures, 
were the most likely to give rise to conflicts of interest.
    The Department received a number of comments requesting 
clarification as to which entities were intended to be ``service 
providers'' for purposes of the proposal, both in terms of which 
service providers are responsible for complying with the proposal's 
written contract requirement, and who is considered a service provider 
such that their compensation and conflict of interest information must 
be disclosed to the responsible plan fiduciary. Some commenters argued 
that the proposal's disclosure requirements should be limited to 
service providers that deal directly with employee benefit plans, or 
that customarily are in contractual privity with the plan, and 
questioned the application of the rule to indirect service providers. 
These commenters were concerned that the proposed rule appears to 
apply, potentially without limit, to ``indirect'' service providers, 
for example a service provider to a direct service provider, or a 
service provider to an investment provider or mutual fund company; in 
some cases, they argue, the services provided by these indirect 
providers bear little or no relation to the particular plan service 
arrangement in question. For example, commenters questioned whether the 
proposed disclosure requirements would apply to a copy service, if a 
plan recordkeeper subcontracts with that copy service to perform 
administrative functions for both the recordkeeper and its plan 
clients, or to legal counsel to a registered investment company, when 
counsel's role is limited to ensuring that the company complies 
generally with applicable securities laws.
    In connection with their request that the Department clarify 
whether providers of services to a plan service provider, or to an 
investment provider, are themselves service providers to the plan for 
purposes of the disclosure requirements of the proposed rule, some 
commenters note that confusion on this issue may stem from language of 
the proposed rule that adopted the view taken by the Department as to 
who is a ``service provider'' for purposes of reporting service 
provider compensation on the recent Form 5500, Schedule C, revisions. 
The new Schedule C reporting requirements are not limited to 
information concerning the compensation of persons with direct service 
provider relationships to a plan but also include compensation 
information regarding persons who provide services to investment 
vehicles in which plans invest. Commenters questioned whether a similar 
position is appropriate in the context of a prohibited transaction for 
which relief is obtained under section 408(b)(2).
    Other commenters raised concerns about the proposal insofar as it 
was interpreted as raising technical issues under the Department's plan 
asset guidance.\7\ For example, several commenters questioned whether 
and how the proposed disclosure requirements would apply to service 
providers to ``non-plan asset'' vehicles, an issue that often arises in 
the context of plan investments. For instance, commenters observed that 
mutual funds, real estate operating companies, venture capital 
operating companies, and private equity funds that do not have 
significant equity participation by ``benefit plan investors'' (i.e., 
25% or more of any class of equity interest held by such investors) are 
not plan asset vehicles, and thus managers of these entities are not 
ERISA fiduciaries. These commenters argued that the proposed disclosure 
requirements also should not apply to any person who is providing 
services to a non-plan asset vehicle.
---------------------------------------------------------------------------

    \7\ See 29 CFR 2510.3-101.
---------------------------------------------------------------------------

    The Department believes that the definition of covered service 
provider contained in the final rule addresses the ambiguities raised 
by the commenters and reflects the Department's intent to focus on 
contracts or arrangements between covered plans and fiduciaries, 
platform providers and other specified service providers dealing 
directly with covered plans who may receive indirect compensation or 
certain compensation from related parties. The Department notes that 
the parties that must be reported as service providers for Schedule C 
purposes will not necessarily be the same as the parties that will be 
covered service providers for purposes of this rule.
    The Department continues to believe that requiring every service 
provider to a plan to satisfy the disclosure requirements of this 
regulation may not be appropriate or yield helpful information to plan 
fiduciaries. The Department also believes that certain service 
providers, because of the nature of the services that they provide to 
pension plans, the potential influence they have on plan fiduciaries' 
decisions and on the plan services that they ultimately will provide, 
or the complexity of their compensation arrangements, must provide 
comprehensive information to plan fiduciaries about the compensation 
that they will be paid for their services. The Department is sensitive 
to the technical and practical issues raised by commenters about how 
the scope of this rule will be applied to various parties in the 
employee benefit plan industry. The Department also agrees with 
commenters that service providers and plan fiduciaries would benefit 
from more certainty as to whether any particular service contract or 
arrangement will be required to comply with this rule. The Department 
believes that the interim final rule, in terms of defining the service 
providers covered by the rule, responds to the concerns of these 
commenters. However, the Department welcomes comments from interested 
persons who continue to have concerns about the scope of service 
providers covered by the interim final rule.
    Paragraph (c)(1)(iii) of the final rule defines the term ``covered 
service provider.'' Among other changes, the final rule establishes a 
$1,000 threshold for service providers otherwise coming within the 
definition of a covered service provider (regardless of whether the 
threshold is met by compensation received by the covered service 
provider, an affiliate, or a subcontractor that is performing one or 
more of the services to be provided under the contract or arrangement 
with the covered plan). A ``covered service provider'' is a service 
provider that enters into a contract or arrangement with the covered 
plan and reasonably expects to receive $1,000 or more in compensation, 
direct or indirect, to be received in connection with providing one or 
more specified services. The Department included the $1,000 threshold 
in response to commenters' request that the final rule exclude 
contracts or arrangements that involve de minimis amounts of 
compensation. In these circumstances, the Department is persuaded that 
the parties to these relatively small service contracts or arrangements 
may not need to provide the detailed disclosures required under this 
rule in order to ensure that plan fiduciaries have the information they 
need to make informed decisions about the services and cost of the 
services to be provided. Commenters did not suggest a particular 
minimum amount for such contracts or arrangements, but the Department 
believes that $1,000 is a reasonable threshold amount to address their 
concerns. As this is an interim final rule, the Department welcomes

[[Page 41605]]

additional input from commenters on our decision.
    The types of service providers covered by the final regulation fall 
into three categories, and each category is discussed below. A service 
provider may be a covered service provider under the final rule even if 
some or all of the services provided pursuant to the contract or 
arrangement are performed by affiliates of the covered service provider 
or subcontractors. Further, as noted in paragraph (c)(1)(iii)(D)(1), 
service providers do not become ``covered service providers'' solely as 
a result of services that they perform in their capacity as an 
affiliate of the covered service provider or a subcontractor.
    The first category of covered service providers, in paragraph 
(c)(1)(iii)(A), includes those providing services as an ERISA fiduciary 
or as an investment adviser registered under either the Investment 
Advisers Act of 1940 (Advisers Act) or any State law. This category is 
split into three subsections. Subparagraph (1) includes ERISA 
fiduciaries providing services directly to the covered plan.
    Subparagraph (2) includes ERISA fiduciaries providing services to 
an investment contract, product, or entity that holds plan assets and 
in which the covered plan has a direct equity investment. These service 
providers are ERISA fiduciaries by virtue of providing services to a 
plan asset investment vehicle, rather than providing services directly 
to the covered plan. The Department placed these fiduciaries of plan 
asset vehicles in a separate subcategory because, under the final rule, 
these fiduciaries have an additional obligation to disclose 
compensation information about the investment vehicle for which they 
serve as a fiduciary.
    This subcategory includes fiduciaries to the initial-level 
investment vehicle in which the covered plan makes a direct equity 
investment and which holds plan assets. However, it does not include 
fiduciaries to that initial vehicle's underlying investments, even 
though such down-level investment vehicles also may hold ``plan 
assets.'' The determination of whether an investment contract, product, 
or entity holds ``plan assets'' is made under sections 3(42) and 401 of 
ERISA and the regulation at 29 CFR 2510.3-101. The regulation uses the 
term ``direct equity investment'' to distinguish the covered plan's 
initial-level investment in an investment contract, product, or entity 
from investments made by such initial-level contract, product or entity 
in which the plan invests, without regard to whether the underlying, 
second-tier investment vehicles hold plans assets. Specifically, the 
regulation provides that a direct equity investment does not include 
investments made by the investment contract, product, or entity in 
which the covered plan invests.
    Subparagraph (3) includes investment advisers providing services 
directly to the covered plan. This provision has been modified from the 
proposal to require disclosure from an investment adviser 
``registered'' under either the Advisers Act or State law, rather than 
a ``fiduciary'' under the Advisers Act.
    The Department received a number of comments concerning the 
requirement to identify services as ``fiduciary'' services under ERISA 
or the Advisers Act. In general, commenters argued that whether such 
services will be provided may be unclear, given the facts-and-
circumstances nature of fiduciary status under section 3(21) of ERISA, 
creating an unnecessary level of uncertainty for both plan fiduciaries 
and service providers in terms of compliance with the regulation. 
Commenters also argued that by including fiduciaries under the Advisers 
Act, the proposal included advisers that may not be registered under 
the Advisers Act, thereby adding a degree of uncertainty as to which 
service providers might be covered by the rule. Other commenters argued 
that plan sponsors may be confused as to whether a particular service 
provider is acting as a fiduciary under ERISA or as a fiduciary under 
the Advisers Act. The Department believes that the modifications 
reflected in paragraph (c)(1)(iii)(A) of the final rule respond to 
these concerns. The Department continues to believe, however, that it 
is important for plan fiduciaries to know whether a party will be 
providing or reasonably expects to provide services to the plan as an 
ERISA fiduciary or as a registered investment adviser.\8\ See paragraph 
(c)(1)(iv)(B) relating to the requirement that this status be disclosed 
to the responsible plan fiduciary.
---------------------------------------------------------------------------

    \8\ To the extent a service provider is a ``dual registrant'' 
(i.e., an investment adviser registered under the Advisers Act and a 
broker-dealer registered under the Securities Exchange Act of 1934, 
as amended), the service provider would be a covered service 
provider under paragraph (c)(1)(iii)(A)(3) only when acting as an 
investment adviser to a covered plan, and not when acting merely as 
a broker-dealer to such plan. However, broker-dealers to covered 
plans may be covered service providers under paragraph 
(c)(1)(iii)(B) or (C), as discussed further below.
---------------------------------------------------------------------------

    The second category of covered service providers, in paragraph 
(c)(1)(iii)(B), includes providers of recordkeeping services or 
brokerage services to a covered plan that is an individual account plan 
(under ERISA section 3(34)) and that permits participants and 
beneficiaries to direct the investment of their accounts, if one or 
more designated investment alternatives will be made available (e.g., 
through a platform or similar mechanism) in connection with such 
recordkeeping services or brokerage services. This category encompasses 
recordkeepers and brokers that offer, as part of their contract or 
arrangement, a platform of investment options, or a similar mechanism, 
to a participant-directed individual account plan. This category also 
encompasses service providers who provide recordkeeping or brokerage 
services that include designated investment alternatives independently 
selected by the responsible plan fiduciary and which are later added to 
the covered plan's platform. Under the proposal, these service 
providers had no disclosure obligations beyond those directly relating 
to the services they were providing as recordkeepers or brokers for the 
plan. Under the interim final rule, however, covered service providers 
in this category, as discussed later, must disclose to the responsible 
plan fiduciary compensation information regarding each of the 
designated investment alternatives for which they provide recordkeeping 
or brokerage services. See paragraphs (c)(1)(iii)(B) and (c)(1)(iv)(G). 
The term ``designated investment alternative'' is defined in paragraph 
(c)(1)(viii)(C), discussed below.
    The third category of covered service providers, in paragraph 
(c)(1)(iii)(C), includes those providing specified services to the 
covered plan when the covered service provider (or an affiliate or a 
subcontractor) reasonably expects to receive ``indirect'' compensation 
or certain payments from related parties. As discussed below, the terms 
``affiliate'', ``indirect compensation,'' and ``subcontractor'' are 
defined in paragraph (c)(1)(viii) of the final regulation. The services 
included in this category are accounting, auditing, actuarial, 
appraisal, banking, consulting (i.e., consulting related to the 
development or implementation of investment policies or objectives, or 
the selection or monitoring of service providers or plan investments), 
custodial, insurance, investment advisory (for plan or participants), 
legal, recordkeeping, securities or other investment brokerage, third 
party administration, or valuation services provided to the covered 
plan.
    The services in the final rule's third category generally are the 
same as those in the proposal. However, whether or not these services 
will cause a service provider to be a covered service

[[Page 41606]]

provider under the rule depends upon the expectation by the covered 
service provider, its affiliate, or a subcontractor of receiving 
certain types of compensation, namely indirect compensation or 
compensation paid by related parties. A few commenters asked the 
Department to define the types of services referenced in the proposal. 
Although the Department understands that there may be, in some 
instances, subtle differences in how employee benefits services are 
described and, therefore, some clarification may be helpful, the 
Department also is concerned that too much specificity may have the 
undesirable effect of narrowing the application of the regulation 
solely on the basis of an overly technical definition. The Department 
believes that the financial industry and employee benefits community 
have a reasonable understanding of the services referenced in the 
regulation and that any remaining ambiguity will not result in undue 
burdens attendant to compliance with the final rule.
    Nonetheless, the Department, in response to commenters, has 
attempted to narrow the scope of the term ``consulting'' by adding a 
parenthetical clarifying that ``consulting'' as used in the final 
regulation is consulting related to the development or implementation 
of investment policies or objectives, or the selection or monitoring of 
service providers or plan investments. Also, it should be noted that 
investment advisory services are included in both the first and third 
categories of covered service providers, but the investment advisers 
who are covered in each category may be different. The first category 
includes only registered investment advisers, even if they receive only 
direct compensation from the covered plan. The third category includes 
investment advisers that reasonably expect to receive compensation that 
is indirect or paid from related parties, whether or not they are 
registered investment advisers.
    Paragraph (c)(1)(iii)(D) of the final regulation clarifies that, 
notwithstanding the preceding categories of ``covered service 
providers,'' no person or entity is a ``covered service provider'' 
solely by providing services (1) as an affiliate or a subcontractor 
that is performing one or more of the services to be provided under the 
contract or arrangement with the covered plan (see paragraph 
(c)(1)(iii)(D)(1)), or (2) to an investment contract, product, or 
entity in which the covered plan invests, regardless of whether or not 
the investment contract, product, or entity holds assets of the covered 
plan, other than services as a fiduciary described in paragraph 
(c)(1)(iii)(A)(2) (see paragraph (c)(1)(iii)(D)(2)). In other words, 
paragraph (c)(1)(iii)(D)(1) clarifies that the concept of a ``covered 
service provider'' captures only the party directly responsible to the 
covered plan for the provision of services under the contract or 
arrangement, even though some or all of such services may be performed 
by an affiliate or subcontractor. In the view of the Department, the 
service provider directly responsible to the plan for the provision of 
services is the appropriate party to ensure that the required 
disclosures under the regulation are made. Paragraph (c)(1)(iii)(D) 
addresses the possibility of multiple disclosure obligations with 
respect to the same services.
    Paragraph (c)(1)(iii)(D)(2) further clarifies that, other than 
providers of fiduciary services to an investment contract, product, or 
entity holding plan assets with respect to which the covered plan has a 
direct equity investment (described above), the term ``covered service 
provider'' does not include a mere provider of services to an 
investment contract, product, or entity (regardless of whether or not 
the investment contract, product, or entity holds assets of the covered 
plan).
    The Department believes that these clarifications resolve much of 
the uncertainty raised by commenters about the intended application of 
the proposal in the context of plan investments. Other than a fiduciary 
described in paragraph (c)(1)(iii)(A)(2), service providers that only 
provide non-fiduciary administrative, legal or other services to an 
investment vehicle, even one holding plan assets, are not covered 
service providers. For example, a recordkeeper servicing a collective 
investment fund is not a covered service provider to a plan investing 
in the fund merely because the fund holds plan assets. On the other 
hand, if that same recordkeeper provides services directly to a covered 
plan and receives indirect compensation or certain compensation from 
related parties, then it would be a covered service provider. Its 
covered status, however, would derive from the services it provides 
directly to the plan, not to the collective investment fund. A similar 
analysis would apply to an investment vehicle that does not hold plan 
assets, such as a registered investment company.

4. Contracts or Arrangements Not Covered by Interim Final Regulation

    The Department notes that some contracts or arrangements will fall 
outside the scope of the final regulation because they do not involve a 
``covered plan'' and a ``covered service provider.'' ERISA nonetheless 
requires such contracts or arrangements to be ``reasonable'' in order 
to satisfy the ERISA section 408(b)(2) statutory exemption. ERISA 
section 404(a) also obligates plan fiduciaries to obtain and carefully 
consider information necessary to assess the services to be provided to 
the plan, the reasonableness of the fees and expenses being paid for 
such services, and potential conflicts of interest that might affect 
the quality of the provided services.\9\
---------------------------------------------------------------------------

    \9\ See, e.g., Field Assistance Bulletin 2002-3 (November 5, 
2002), Advisory Opinion 97-15A (May 22, 1997), Advisory Opinion 97-
16A (May 22, 1997), Understanding Retirement Plans Fees and 
Expenses, (https://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.), and Selection and Monitoring Pension 
Consultants--Tips for Plan Fiduciaries, (https://www.dol.gov/ebsa/newsroom/fs053105.html.)
---------------------------------------------------------------------------

5. Initial Disclosure Requirements

a. Overview of Initial Disclosure Requirements; Request for Comments on 
Format Requirement for Initial Disclosures
    The proposed regulation would have required that the terms of the 
contract or arrangement for services between the covered plan and the 
covered service provider be in writing and that the writing delineate 
the specific disclosure obligations of the covered service provider 
under the regulation. The Department received a number of comments on 
the requirement that contracts and arrangements, as well as the 
disclosure obligations thereunder, must be in writing. Many commenters 
argued that such written documents are not used with respect to the 
provision of many services and that requiring formal written contracts 
adds complexity and costs, as well as potentially raising concerns 
under State contract law, without affecting the quality of such 
services. For example, these points were made by providers of insurance 
products and services, who explained that any amendments to their 
contracts, which are approved and regulated by State insurance 
agencies, would have to be submitted to such agencies; this would be a 
lengthy and burdensome process with an outcome that is not within the 
service providers' control.
    While the interim final rule continues to require that the 
responsible plan fiduciary be furnished the required disclosures in 
writing, the rule does not require that a formal contract or 
arrangement itself be in writing or that any representations concerning 
the

[[Page 41607]]

specific obligations of the service provider be included in such 
written contract or arrangement. The Department is persuaded that, 
given the varying relationships between plans and their service 
providers, requiring such a formal contract or arrangement in every 
instance may result in unnecessary burdens, complexity, and costs. The 
Department continues to believe, however, that setting forth a covered 
service provider's disclosure obligations under the regulation in 
writing generally will help ensure that both the responsible plan 
fiduciary and the service provider clearly understand their respective 
responsibilities for purposes of compliance with the statutory 
exemption.
    As discussed above, neither the proposal nor the interim final rule 
requires the covered service provider to make disclosures in any 
particular manner or format. Further, the preamble to the proposal 
specifically noted that the covered service provider could disclose 
using different documents from separate sources as long as the 
documents, collectively, contained all of the required information. 
Commenters on the proposal disagreed as to whether or not this would 
lead to an effective presentation to responsible plan fiduciaries, 
especially those for small plans. Commenters also disagreed as to the 
anticipated costs and burdens associated with more stringent format 
requirements and the extent to which those costs would be absorbed by 
service providers or passed through to plans, and therefore potentially 
to participants and beneficiaries. Some commenters encouraged the 
Department to retain its flexible approach, arguing that it is best 
left to the parties to service contracts or arrangements to determine 
the optimal way to fulfill the substantive disclosure requirements. 
Other commenters encouraged the Department to adopt a model form for 
disclosure or to otherwise mandate that the required information be 
conveyed in a summary or consolidated fashion, arguing that this would 
lead to more consistency in the way that information is disclosed and 
make it easier for responsible plan fiduciaries to review and analyze 
information received from plan service providers.
    At this time, the Department has not determined whether it is 
feasible, as part of this regulation, to provide specific and 
meaningful standards for the format in which the required information 
must be disclosed, given the large variety of plan service arrangements 
that are covered by the interim final regulation and the variation in 
the way service providers currently disclose information to plan 
fiduciaries. The Department is persuaded that plan fiduciaries may 
benefit from increased uniformity in the way that information is 
presented to them. However, the Department does not want to 
unnecessarily increase the cost and burden for service providers to 
furnish required information, especially to the extent such cost may be 
passed along to plan participants and beneficiaries, unless it is clear 
that the benefit to plan fiduciaries outweighs such cost and burden. If 
the Department is convinced that the benefits would outweigh the costs, 
the final regulation may be revised. Specifically, the Department is 
considering adding a requirement that covered service providers furnish 
a ``summary'' disclosure statement, for example limited to one or two 
pages, that would include key information intended to provide an 
overview for the responsible plan fiduciary of the information required 
to be disclosed. The summary also would be required to include a 
roadmap for the plan fiduciary describing where to find the more 
detailed elements of the disclosures required by the regulation.
    To assist the Department in its decision whether to include such a 
requirement in the final rule, interested persons are encouraged to 
submit comments on three issues: first, the likely cost and burden to 
covered service providers, and to any other parties, of complying with 
such a requirement; second, the anticipated benefits to responsible 
plan fiduciaries, whether due to time savings, cost savings, or other 
factors, of including a summary disclosure statement; and third, how to 
most effectively construct the requirement for a summary disclosure 
statement to ensure both its feasibility and its usefulness in helping 
the Department achieve its objectives.
    As to the substance of the information required to be disclosed, 
the proposal generally required the disclosure of information intended 
to assist plan fiduciaries in understanding the services that will be 
furnished and in assessing the reasonableness of the compensation, 
direct and indirect, that the service provider would receive in 
connection with the provision of such services. The proposal also 
required the disclosure of specific information intended to assist plan 
fiduciaries in assessing any real or potential conflicts of interest 
that may affect the quality of the services to be provided. As 
discussed above, the proposal did not require that the information be 
furnished in any particular format. While the proposal did require that 
the required disclosures be furnished in advance of entering into a 
contract or arrangement, along with a representation that all of the 
required disclosures had been furnished to the responsible fiduciary, 
the proposal did not designate any specific time period for making such 
advance disclosure.
    The proposal broadly defined compensation or fees \10\ to include 
money and any other thing of monetary value received by the service 
provider or its affiliates in connection with the services provided to 
the plan or the financial products in which assets are invested. As 
noted, the proposal required the disclosure of both direct and indirect 
compensation, the latter including fees that the service provider 
receives from parties other than the plan, the plan sponsor, or the 
service provider. Service providers also would have been required to 
disclose compensation received by their affiliates from third parties. 
The proposal also addressed the manner in which compensation could be 
disclosed, permitting the use of formulas, references to a percentage 
of the plan's assets, or per capita charges.
---------------------------------------------------------------------------

    \10\ For ease of reference, the interim final regulation refers 
only to ``compensation'' and not ``compensation or fees'' or 
``compensation and fees.'' Given the broad definition of 
``compensation'' contained in the final regulation, the Department 
does not intend any substantive distinction by changing from the 
phrase ``compensation or fees'' or ``compensation and fees'' to the 
term ``compensation.''
---------------------------------------------------------------------------

    With regard to the disclosure of compensation generally, the 
proposal contained a special rule for providers of multiple services 
(commonly referred to as ``bundles'' of services). In the case of 
bundled service arrangements, the proposal required only that the 
provider of the bundle make the prescribed disclosures. In such 
instances, the bundled service provider would be required to disclose 
information concerning all of the services to be provided in the 
bundle, regardless of who actually performs the service. Further, the 
bundled provider would be required to disclose the aggregate direct 
compensation that will be paid for the bundle, as well as all indirect 
compensation that will be received by the service provider, or its 
affiliates or subcontractors within the bundle, from third parties. The 
preamble explained that generally the bundled provider would be 
required to break down the aggregate compensation among the individual 
services comprising the bundle only when the compensation was 
separately charged against the plan's investment (such as management 
fees and 12b-1 fees) or was set on a

[[Page 41608]]

transaction basis (such as finder's fees and brokerage commissions).
    While the Department retained many of the disclosure concepts of 
the proposal, the interim final rule contains a number of changes made 
in response to issues raised by commenters. Paragraph (c)(1)(iv) of the 
final rule describes the initial disclosure requirements that must be 
satisfied, in writing, by the covered service provider; paragraph 
(c)(1)(v) describes the timing requirements applicable to the initial 
disclosures and when changes to the initial disclosures must be 
furnished; paragraph (c)(1)(vi) describes the requirement that a 
covered service provider disclose information requested by the 
responsible plan fiduciary or covered plan administrator to comply with 
ERISA's reporting and disclosure requirements; and paragraph 
(c)(1)(vii) addresses inadvertent errors and omissions in disclosing 
the required information.
b. Description of Services
    Paragraph (c)(1)(iv)(A) requires a description of the services to 
be provided to the co