This document is quite lengthy yet very important. If you manage your 401k program it contains great information. If you'd prefer we can summarize this and manage the program for you.
Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans [10/20/2010]
[PDF]
[PDF]
[Federal Register: October 20, 2010 (Volume 75, Number 202)]
[Rules and Regulations]
[Page 64909-64946]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc10-15]
[[Page 64909]]
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Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans; Final Rule
[[Page 64910]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB07
Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Final rule.
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SUMMARY: This document contains a final regulation under the Employee
Retirement Income Security Act of 1974 (ERISA) that requires the
disclosure of certain plan and investment-related information,
including fee and expense information, to participants and
beneficiaries in participant-directed individual account plans (e.g.,
401(k) plans). This regulation is intended to ensure that all
participants and beneficiaries in participant-directed individual
account plans have the information they need to make informed decisions
about the management of their individual accounts and the investment of
their retirement savings. This document also contains conforming
changes to another regulation relating to plans that allow participants
to direct the investments of their individual accounts. These
regulations will affect plan sponsors, fiduciaries, participants and
beneficiaries of participant-directed individual account plans, as well
as providers of services to such plans.
DATES: Effective Date. December 20, 2010.
Applicability Date. Notwithstanding the effective date, the final
rule and amendments will apply to individual account plans for plan
years beginning on or after November 1, 2011.
FOR FURTHER INFORMATION CONTACT: Michael Del Conte, Office of
Regulations and Interpretations, Employee Benefits Security
Administration, (202) 693-8510. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
1. General
According to the Department of Labor's (Department) most recent
data, there are an estimated 483,000 participant-directed individual
account plans, covering an estimated 72 million participants, and
holding almost $3 trillion in assets.\1\ With the proliferation of
these plans, which afford participants and beneficiaries the
opportunity to direct the investment of all or a portion of the assets
held in their individual plan accounts, participants and beneficiaries
are increasingly responsible for making their own retirement savings
decisions. This increased responsibility has led to a growing concern
that participants and beneficiaries may not have access to or, if
accessible, may not be considering, information critical to making
informed decisions about the management of their accounts, particularly
information on investment choices, including attendant fees and
expenses.
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\1\ 2007 Form 5500 Data, U.S. Department of Labor. The estimated
483,000 plans include plans that permit participants to direct the
investment of all or a portion of their individual accounts.
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Under ERISA, the investment of plan assets is a fiduciary act
governed by the fiduciary standards in ERISA section 404(a)(1)(A) and
(B), which require plan fiduciaries to act prudently and solely in the
interest of the plan's participants and beneficiaries. When a plan
assigns investment responsibilities to the plan's participants and
beneficiaries, it is the view of the Department that plan fiduciaries
must take steps to ensure that participants and beneficiaries are made
aware of their rights and responsibilities with respect to managing
their individual plan accounts and are provided sufficient information
regarding the plan, including its fees and expenses and designated
investment alternatives, to make informed decisions about the
management of their individual accounts. To some extent, disclosure of
such information already is required by plans that elect to comply with
the requirements of ERISA section 404(c) (see section 2550.404c-
1(b)(2)(i)(B)). However, compliance with section 404(c)'s disclosure
requirements is voluntary and does not extend to participants and
beneficiaries in all participant-directed individual account plans.
The Department believes that all participants and beneficiaries
with the right to direct the investment of assets held in their
individual plan accounts should have access to basic plan and
investment information. For this reason, the Department is issuing this
regulation under ERISA section 404(a), with conforming amendments to
regulations under section 404(c). This regulation under ERISA section
404(a) establishes uniform, basic disclosures for such participants and
beneficiaries, without regard to whether the plan in which they
participate is a section 404(c) plan. In addition, the regulation
requires participants and beneficiaries to be provided investment-
related information in a form that encourages and facilitates a
comparative review among a plan's investment alternatives.
2. Request for Information and Proposed Regulation
To facilitate development of the regulation, the Department first
published, on April 25, 2007, a Request for Information (RFI) in the
Federal Register \2\ requesting suggestions, comments and views from
interested persons on a variety of issues relating to the disclosure of
plan and investment-related fee and expense and other information to
participants and beneficiaries in participant-directed individual
account plans. Following its review of over 100 public comment letters
submitted in response to the RFI, the Department next published a
notice of proposed rulemaking in the Federal Register on July 23,
2008.\3\ Interested persons were again invited to submit comments on
the proposal, and, in response to this invitation, the Department
received over 90 written comments from a variety of parties, including
plan sponsors and fiduciaries, plan service providers, financial
institutions, and employee benefit plan and participant
representatives. These comments are available for review under ``Public
Comments'' on the ``Laws & Regulations'' page of the Department's
Employee Benefits Security Administration Web site at http://
www.dol.gov/ebsa.
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\2\ 72 FR 20457 (April 25, 2007).
\3\ 73 FR 43014 (July 23, 2008).
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In addition to publishing an RFI and a proposed regulation, the
Department engaged ICF International (ICF) to conduct a series of focus
group studies concerning how participants generally make choices among
their employee benefit plan's investment alternatives, and,
specifically, how participants would react to the Model Comparative
Chart for plan investment alternatives that was published as an
appendix to proposed section 2550.404a-5. ICF issued a report to the
Department concerning the results of these focus group studies, and
these results, where appropriate, have been incorporated below in the
Department's discussion of comments on the proposed regulation and
Model Comparative Chart.
Set forth below is an overview of the final regulations and a
discussion of the public comments received on the proposal.
[[Page 64911]]
B. Final Rule Sec. 2550.404a-5 Concerning Fiduciary Requirements for
Disclosure
In general, the final regulation retains the basic structure of the
proposal. Paragraph (a) of Sec. 2550.404a-5 sets forth the general
principle that, where documents and instruments governing an individual
account plan provide for the allocation of investment responsibilities
to participants and beneficiaries, a plan fiduciary, consistent with
ERISA section 404(a)(1)(A) and (B), must take steps to ensure that such
participants and beneficiaries, on a regular and periodic basis, are
made aware of their rights and responsibilities with respect to the
investment of assets held in, or contributed to, their accounts and are
provided sufficient information regarding the plan, including plan fees
and expenses, and regarding the designated investment alternatives
available under the plan, including fees and expenses attendant
thereto, to make informed decisions with regard to the management of
their individual accounts. Paragraph (b) addresses the disclosure
requirements that must be met by plan fiduciaries for plan years
beginning on or after the applicability date. Under this paragraph,
plan fiduciaries must comply with the requirements of paragraph (c),
dealing with plan-related information, and paragraph (d), dealing with
investment-related information. Paragraph (e) describes the form in
which the required information may be disclosed, such as via the plan's
summary plan description, a quarterly benefit statement, or the use of
the provided model, depending on the specific information. Paragraph
(e) recognizes the various acceptable means of disclosure; it does not
preclude other means for satisfying the disclosure duties under this
final regulation. Fiduciaries that meet the requirements of paragraphs
(c) and (d) will have satisfied the duty to make the regular and
periodic disclosures described in paragraph (a) of this section. As
indicated in the preamble to the proposal, the Department believes, as
an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose
on fiduciaries of all participant-directed individual account plans a
duty to furnish participants and beneficiaries information necessary to
carry out their account management and investment responsibilities in
an informed manner. In the case of plans that elected to comply with
section 404(c) before the applicability of this final rule, the
requirements of section 404(a)(1)(A) and (B) typically would have been
satisfied by compliance with the disclosure requirements set forth at
29 CFR Sec. 2550.404c-1(b)(2)(i)(B). However, the Department expresses
no view with respect to plans that did not comply with section 404(c)
and the regulations thereunder as to the specific information that
should have been furnished to participants and beneficiaries at any
time before this regulation is finalized and applicable.
Pursuant to Executive Order 12866, the Department evaluated the
benefits and costs of the final regulation, and concludes that the net
present value of the rule's benefits is estimated at nearly $12.3
billion. The Department estimates that the regulation will affect 72
million participants in 483,000 participant-directed individual account
plans containing assets valued at nearly $3.0 trillion.\4\ Over the
ten-year period 2012-2021, the Department estimates that the present
value of the benefits provided by the final rule will be approximately
$14.9 billion and the present value of the costs will be approximately
$2.7 billion.\5\ A significant benefit of this regulation is that it
will reduce the amount of time participants spend collecting fee and
expense information and organizing the information in a format that
allows key information to be compared; this time savings is estimated
to total nearly 54 million hours valued at nearly $2 billion in 2010
(2010 dollars). The anticipated cost of the regulation is $425 million
in 2012 (2010 dollars), arising from legal compliance review, time
spent consolidating information for participants, creating and updating
Web sites, preparing and distributing annual and quarterly disclosures,
and material and postage costs to distribute the disclosures. A more
detailed discussion of the need for this regulatory action,
consideration of regulatory alternatives, and assessment of benefits
and costs is included in Section E of this preamble, entitled
``Regulatory Impact Analysis.''
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\4\ This estimate is based on 2007 Form 5500 data, which is the
latest available data.
\5\ This calculation uses a seven percent discount rate. The
$14.9 billion of benefits and $2.7 billion of costs are valued in
2010 dollars.
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1. General; Satisfaction of Duty To Disclose
As proposed, the obligation to disclose the required information
was imposed generally on a plan fiduciary (paragraph (a) of proposed
Sec. 2550.404a-5). Commenters, however, requested guidance as to which
fiduciary is responsible for satisfying the duty to disclose. The
proposal described the party responsible for providing disclosures as
``a fiduciary (or a person or persons designated by the fiduciary to
act on its behalf)[.]'' Commenters explained that any given plan might
have many fiduciaries involved in its operation and requested
clarification as to which fiduciary must provide the rule's required
disclosures. Accordingly, consistent with other disclosure obligations
under ERISA, the Department has clarified in paragraph (a) of the final
rule that the plan administrator, as defined in ERISA section 3(16), is
responsible for complying with the rule's disclosure requirements.
Paragraph (b) of the final rule, consistent with the proposal,
addresses the disclosure requirements plan administrators must satisfy.
Paragraph (b) has been modified from the proposal to clarify, at
paragraph (b)(1), that a plan administrator will not be liable for the
completeness and accuracy of information used to satisfy these
disclosure requirements when the plan administrator reasonably and in
good faith relies on information received from or provided by a plan
service provider or the issuer of a designated investment alternative.
A footnote to the proposal included the following statement:
``[F]iduciaries shall not be liable for their reasonable and good faith
reliance on information furnished by their service providers with
respect to those disclosures required by paragraph (d)(1).'' \6\
Although commenters generally were supportive of this reliance relief
for plan administrators required to comply with the rule's disclosure
requirements, many comments asked the Department to make this relief
more prominent by including it in the text of the final rule, rather
than as a mere footnote to the Department's preamble. The Department
was persuaded that this relief should be more prominent, and the
provision therefore has been added to the text of the final rule.
Further, this provision has been expanded to enable reliance on
information received from or provided by both service providers to the
plan and, as applicable, issuers of plan designated investment
alternatives (e.g., mutual funds).
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\6\ 73 FR 43014 at 43018, n. 7 (July 23, 2008).
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Some commenters requested that the final rule clarify whether IRA-
based plans are subject to the disclosure rule. Commenters argued that
IRA-based plans under the Internal Revenue Code of 1986 (Code) such as
Code sections 408(k) simplified employee pensions (SEPs) and 408(p)
simple retirement accounts (SIMPLEs) are already subject to disclosure
regimes under the Code
[[Page 64912]]
and relevant securities laws. It also was argued that application of
the disclosure rules would add administrative complexity to
arrangements that, by their very nature, were intended to be simple and
that complicating administration of such plans may serve to discourage
employers from establishing or continuing such arrangement for their
employees. Taking into account the foregoing arguments, as well as the
fact that participants in IRA-based plans generally have considerable
flexibility in the choice of their IRA provider or the ability to roll
over their balances to an IRA provider of their choice, the Department
has determined not to extend the application of this rule to such
plans. To clarify the scope of the final rule, a new paragraph (b)(2)
has been added defining the types of arrangements that constitute a
``covered individual account plan'' for purposes of the rule. In this
regard, paragraph (b)(2) provides that a ``covered individual account
plan'' is any participant-directed individual account plan, as defined
in section 3(34) of ERISA, except that such term shall not include
plans involving individual retirement accounts or individual retirement
annuities described in sections 408(k) (``simplified employee
pension'') or 408(p) (``simple retirement account'') of the Internal
Revenue Code of 1986 (Code).
A few commenters suggested the rule be expanded to cover defined
contribution plans that do not allow for participant direction. The
Department did not adopt this suggestion. While it may be appropriate
to review the disclosure rules applicable to such plans, the Department
does not believe it has sufficient information at this time to fully
evaluate and address potential disclosure gaps in the context of this
rulemaking.
One commenter suggested that the Department exclude small plans
(for example those with fewer than 100 participants) from the scope of
the final rule. The Department did not adopt this suggestion. The
Department believes that participants in smaller plans face the same
challenges as participants in larger plans when it comes to
understanding the operations of their plans and the investment options
offered thereunder. For this reason, the Department has determined that
the final rule should apply to covered participant-directed individual
account plans without regard to size.
Several commenters suggested that the Department clarify, and in
some cases modify, the scope of the proposal as to the specific
participants and beneficiaries of covered plans to which the rule
applies. The proposed rule required disclosures to each participant and
beneficiary of the plan that ``pursuant to the terms of the plan, has
the right to direct the investment of assets held in, or contributed to
his or her individual account.'' The question presented by the
commenters was whether disclosures must be furnished to all eligible
employees or only those who actually participate in the plan.
Consistent with the definition of ``participant'' under section 3(7) of
ERISA, disclosures must be made to all employees that are eligible to
participate under the terms of the plan, without regard to whether the
participant has actually become enrolled in the plan. One commenter
recommended that the proposal be modified to require initial
disclosures to all eligible employees, but limit annual disclosures
only to those that actually enroll, make contributions, and direct
their investments. The Department has not adopted this recommendation.
The Department believes that, with regard to employees that have not
enrolled in their plan, the annual notice will serve as an important
reminder of their eligibility to participate in the plan. With regard
to notification of beneficiaries, however, the obligation to disclose
extends only to those beneficiaries that, in accordance with the terms
of the plan, have the right to direct the investment of assets held in,
or contributed to, their accounts. Such rights might arise as a result
of the death of a participant or pursuant to a qualified domestic
relations order.
2. Plan-Related Information
As noted above, paragraph (c) of the final rule addresses plan-
related information that must be disclosed to participants and
beneficiaries. Like the proposal, paragraph (c) sets forth three
general categories of plan-related information that must be disclosed
to participants and beneficiaries--general operational and
identification information (paragraph (c)(1)), administrative expenses
(paragraph (c)(2)), and individual expenses (paragraph (c)(3)). The
required disclosures must be based on the latest information available
to the plan.
a. General Operational and Identification Information
Paragraph (c)(1)(i), like the proposal, requires that certain
operational and identification information be disclosed to participants
and beneficiaries. Specifically, this paragraph requires that
participants and beneficiaries be provided: (A) An explanation of the
circumstances under which participants and beneficiaries may give
investment instructions; (B) An explanation of any specified
limitations on such instructions under the terms of the plan, including
any restrictions on transfer to or from a designated investment
alternative; \7\ (C) A description of or reference to plan provisions
relating to the exercise of voting, tender and similar rights
appurtenant to an investment in a designated investment alternative as
well as any restrictions on such rights; (D) An identification of any
designated investment alternatives offered under the plan; (E) An
identification of any designated investment managers; and (F) A
description of any ``brokerage windows,'' ``self-directed brokerage
accounts,'' or similar plan arrangements that enable participants and
beneficiaries to select investments beyond those designated by the
plan. Subparagraph (F) was added to the final rule in response to
comments requesting a clarification as to what, if anything, has to be
disclosed about brokerage windows and similar arrangements that permit
participants to invest their assets in other than designated investment
alternatives offered by the plan. It should be noted that in addition
to the general brokerage window information required by paragraph (F),
other provisions of this rule require disclosure of any fees and
expenses that participants will be expected to pay when utilizing the
brokerage window or similar arrangement (see paragraph (c)(3)(i)(A)).
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\7\ Some commenters asked whether this requirement included
limitations that are imposed at the investment or fund level. The
Department intends that the disclosure pursuant to this paragraph
would include only plan-based limitations and restrictions on a
participant's ability to direct investments or transfer to or from
designated investment alternatives. To the extent any limitations or
restrictions are imposed at the investment, fund or portfolio level,
those limitations or restrictions must be described as part of the
investment-related information required by the final rule. See
paragraph (d)(1)(iv) of the final regulation.
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A number of commenters expressed concern about the requirement(s)
that information be furnished to participants and beneficiaries ``on or
before the date of plan eligibility and at least annually thereafter.''
Specifically, the concerns focused on the compliance challenges posed
by this disclosure requirement on plans that provide for plan
eligibility as of the first day of employment, noting that employers
may not be able to furnish the required disclosure in advance of
employment and, therefore, may be required to modify their eligibility
rules to avoid noncompliance with this disclosure obligation.
Commenters suggested various
[[Page 64913]]
alternatives, such as requiring disclosure on or before enrollment in
the plan or the first investment. The Department believes that the
commenters make a valid point and, accordingly, has modified the rule
to provide more flexibility. The final rule provides in this regard
that participants and beneficiaries must be furnished the required
information on or before the date on which they can first direct their
investments. While not requiring disclosures as early as the date of
plan eligibility, the provision does operate to ensure that
participants are furnished the information either before or in
connection with their first investment direction under the plan. The
same timing issues exists with respect to those plan-related
disclosures required by paragraphs (c)(2)(i)(A), (c)(3)(i)(A) and
(d)(1) and, therefore, the Department has made identical changes to the
timing requirements of those paragraphs in the final rule.
b. Changes to General Information
The proposal required in paragraph (c)(1)(ii) that participants or
beneficiaries be furnished, not later than 30 days after the date of
adoption of any material change to the general plan information
described in paragraph (c)(1)(i), a description of such change. The
Department received several comments requesting that the timing for
furnishing a description of such a material change be determined with
reference to the effective date of the change, rather than the date of
its adoption. Commenters noted that the adoption date of a change
sometimes precedes its effective date by as much as a year or more, and
also that in some instances the date of adoption may be unclear.
Several commenters also suggested that the required description of the
change be furnished at least 30 days, but not more than 90 days, before
the effective date of the material change, in order to apprise
participants and beneficiaries of the change close to the time that it
will be useful to them. In addition, questions were raised concerning
what constitutes a ``material'' change in the required information.
With regard to the question as to what constitutes a ``material''
change, the Department is now of the view that, given the significance
of the information that has to be disclosed under paragraph (c)(1)(i),
virtually any change in the information would be a ``material'' change
because of its importance to participants and beneficiaries.
Accordingly, the Department has decided to drop the concept of
``material'' from the requirement to update plan participants and
beneficiaries of changes in the required disclosures.
The Department also decided to amend the timing requirements in
response to comments on the proposal. In this regard, the Department
agrees with commenters that suggested that participants and
beneficiaries should be notified of plan changes on the earliest
possible date and, where practical, in advance of the effective date of
the changes. In this regard, paragraph (c)(1)(ii) of the final rule
provides that if there is a change to the information described in
paragraph (c)(1)(i)(A) through (F), a description of such change(s)
must be furnished to participants and beneficiaries at least 30 days,
but not more than 90 days, in advance of the effective date of the
change(s). The final rule, however, also recognizes that there may be
circumstances when changes must be made within a time frame that
precludes compliance with the 30-day advance notice requirement, such
as the immediate elimination of an investment option when it is
determined to be no longer a prudent investment alternative. In such
cases, the rule requires that information be furnished as soon as
reasonably practicable.
In connection with the development of the final rule, the
Department also reviewed the information required to be disclosed under
paragraph (c)(2)(i)(A) (relating to administrative expenses) and
paragraph (c)(3)(i)(A) (relating to individual expenses) and concluded
that an updating rule should apply to those disclosures as well, given
the importance of the required information to participants and
beneficiaries. These new updating requirements appear at paragraphs
(c)(2)(i)(B) and (c)(3)(i)(B) of the final rule.
c. Administrative Expenses
Paragraph (c)(2)(i) of the final rule, like the proposal, requires
that participants and beneficiaries be provided an explanation of any
fees and expenses for general plan administrative services (e.g.,
legal, accounting, recordkeeping) that may be charged against their
individual accounts (whether by liquidating shares or deducting
dollars), and the basis on which such charges will be allocated (pro
rata, per capita). The provision makes clear that such charges do not
include charges that are included in the annual operating expenses of
designated investment alternatives. As noted above, this paragraph
(c)(2) has been modified to establish disclosure timing and update
requirements that conform with the requirements of paragraph (c)(1).
See paragraph (c)(2)(i)(A) and (B).
Paragraph (c)(2)(ii), also like the proposal, requires that
expenses described in paragraph (c)(2)(i) that are actually charged
against a participant's or beneficiary's account be disclosed to
participants and beneficiaries at least quarterly, along with a
description of the service(s) to which the charge or charges relate.\8\
However, in response to commenters' requests for specificity as to
which services and charges are covered by this quarterly disclosure
requirement, paragraph (c)(2)(ii)(A) both includes an explicit cross
reference to the fees and expenses for administrative services
described in paragraph (c)(2)(i) and a parenthetical noting that the
disclosed charges arise from either the liquidation of shares or the
deduction of dollars from individual accounts in compliance with
paragraph (c)(2)(i)'s requirement that such charges are not included in
the total annual operating expense of any designated investment
alternative.
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\8\ Some commenters requested that the Department reiterate its
position, discussed in the preamble to the proposed rule, that
administrative charges do not need to be broken out into service-by-
service detail on the quarterly statement. The Department continues
to agree with commenters on the proposal and the RFI who believe
that such a breakdown is not necessary, or particularly useful, to
participants and beneficiaries; the final rule therefore also allows
for ``aggregate'' disclosure of administrative expenses, as
proposed. See 73 FR 43014, 43016 (July 23, 2008).
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In a further effort to bring clarity to the disclosures provided to
participants and beneficiaries, the Department has added a new
subparagraph (C) to paragraph (c)(2)(ii) of the final rule. This new
subparagraph is intended to provide those participants in plans with
revenue sharing arrangements that serve to reduce plan administrative
costs with a better picture as to how those costs are underwritten, at
least in part, by fees and expenses attendant with investment
alternatives offered under their plans. Specifically, paragraph
(c)(2)(ii)(C) provides that, if applicable, the statement required to
be furnished pursuant to paragraph (c)(2)(ii), must include an
explanation that, in addition to the expenses reported on the
statement, some of the plan's administrative expenses for the preceding
quarter were paid from the annual operating expenses of one or more of
the plan's designated investment alternatives (e.g., through revenue
sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees). This
required statement has been included in the final rule in response to
many comments received by the Department on the provision in the
proposal that administrative expenses must be disclosed pursuant to
this paragraph
[[Page 64914]]
only ``to the extent not otherwise included in investment-related fees
and expenses[.]'' Some commenters expressed concern that participants
and beneficiaries may be misled into believing that there is little or
no administrative expense associated with their participation in the
plan when a significant portion of the cost of administrative services
is actually paid out of investment-related charges. Other commenters
disagreed and believed that, because any such administrative services
would be paid for from the total annual operating expenses of the
designated investment alternatives in which participants invest and
because such annual operating expenses are required to be separately
disclosed, participants and beneficiaries will receive comprehensive
information about the total charges, for administration and investment,
that will be assessed against their accounts. These commenters also
argue that the burden associated with attempting to attribute some
portion of total annual operating expenses to plan administrative
services would be significant and vastly outweigh any potential benefit
to participants and beneficiaries of such attribution. Most commenters,
however, agreed that it is appropriate to inform participants, when
applicable, that administrative expenses are paid from investment-
related fees and are not reflected in the reported administrative
expense amount. The Department was persuaded that some information,
even if general, would help participants to better understand the fees
and expenses attendant to operating their plan and of the fact that
some fees and expenses might be underwritten by the investment
alternatives offered by their plans.
Some commenters argued that administrative expenses charged to
participant accounts should be reported on an annual, rather than a
quarterly, basis. These commenters argued that the amounts reported as
deducted during any given quarter have the potential to both mislead
and confuse participants because such amounts are often subsequently
reduced or restored by offsets or credits from revenue sharing and
similar arrangements as part of year-end or periodic reconciliations.
The commenters further argue that eliminating this information from
quarterly disclosures will not affect the information available to
participants because participants typically have access to Web sites
where they can review the status of their account, including charges to
their accounts, on a daily basis. Other commenters supported the
quarterly disclosure requirement, noting that there is no other formal
requirement for the disclosure of such information to participants and
beneficiaries on a regular basis. After careful consideration of the
various views on this requirement, the Department has decided to retain
the requirement for quarterly disclosures of plan administrative
expenses. While the Department recognizes that some participants may
have questions concerning the debiting of charges and crediting of
offsets to their accounts during the plan year, the Department is not
persuaded that the potential for confusion and questions that might
result from the requirement outweighs the benefits of participants and
beneficiaries being informed on a regular basis of the actual amounts
taken from (or credited to) their account during the quarter and the
identification of services, albeit general, to which those amounts
relate.
d. Individual Expenses
As noted above, paragraph (c)(3) requires the disclosure of those
expenses charged against a participant's or beneficiary's account on an
individual, rather than plan-wide basis. Examples of such charges
include: Fees attendant to the processing of plan loans or qualified
domestic relations orders; fees for investment advice; front or back-
end loads or sales charges; redemption fees; and investment management
fees attendant to a participant's or beneficiary's investment that are
charged directly against the individual account of the participant or
beneficiary, rather than included in the annual operating expenses of
the investment (as might be the case, for example, with certain
unregistered designated investment alternatives, such as bank
collective investment funds). In addition to clarifying changes,
paragraph (c)(3), like paragraphs (c)(1) and (c)(2), incorporates new
disclosure timing and update requirements, which are discussed in
detail above.
A few commenters requested clarification about the quarterly
disclosure requirement for individual expenses. These commenters
explained that some individual expenses currently are disclosed by a
confirmation statement or other similar notice that is provided at the
time the charge actually is assessed to the individual participant's or
beneficiary's account; these commenters argued that the Department
should avoid duplication, and potential confusion to participants and
beneficiaries, that would result from requiring that these expenses
also be disclosed on a quarterly statement. The Department does not
intend such duplicative disclosure; the rule requires that this
information be provided ``at least quarterly,'' and the Department
anticipates that actual charges may be disclosed more frequently than
quarterly. To the extent such a charge is otherwise disclosed during a
particular quarter, for example by a confirmation statement after a
charge is deducted from an account, that charge would not have to be
disclosed again on the subsequent quarterly statement. No quarterly
statement in compliance with this paragraph (or with paragraph
(c)(2)(ii) concerning quarterly disclosure of administrative expenses)
must be furnished if there were no charges to a participant's or
beneficiary's account during the preceding quarter.
e. Disclosures On or Before First Investment
In an effort to clarify the scope of the updating requirements and
ensure that new participants were provided at least the same
information that had been provided to existing participants prior to
their participation, paragraph (d)(1)(v) of the proposal provided, for
purposes of the disclosure of investment-related information to new
participants, plan administrators could satisfy their obligation by
furnishing the most recent annual disclosure along with any required
updates furnished to participants and beneficiaries. The Department
received no objections to this provision and, accordingly, is adopting
it as proposed, with the exception of a paragraph re-designation and
changes necessary to conform to the new timing requirements applicable
to the annual disclosures. See paragraph (d)(1)(viii) of Sec.
2550.404a-5. A question was raised, however, whether a similar
clarification was needed for the plan-level disclosures required to be
furnished to new participants and beneficiaries under the regulation.
The Department found no basis for not providing similar guidance in the
context of the required plan-level disclosures and, therefore, has
added to the final rule a new paragraph (c)(4). Paragraph (c)(4)
provides that for purposes of the requirements under paragraphs
(c)(1)(i), (c)(2)(i)(A), and (c)(3)(i)(A) that plan administrators
furnish information on or before the date on which a participant or
beneficiary can first direct his or her investments, plan
administrators may satisfy their obligations by furnishing to the
participant or beneficiary the most recent annual disclosure furnished
to participants and beneficiaries pursuant
[[Page 64915]]
those paragraphs and any changes to the information furnished to
participants and beneficiaries pursuant to paragraphs (c)(1)(ii),
(c)(2)(i)(B) and (c)(3)(i)(B) of the final rule.
3. Investment-Related Information
The Department received a number of comments relating to the
disclosure of investment-related information pursuant to paragraph (d)
of the proposal, and the related definitional section in paragraph (h).
Many of the comments raised questions concerning the proposed
application of mutual fund-type disclosures to non-registered
investment vehicles. The Department has made a number of changes to
this section of the final rule (and the related definitional section in
paragraph (h)), in an effort to address the problems raised by the
commenters, while, at the same time, attempting to maintain a
reasonably uniform regime for the disclosure of investment-related
information, a disclosure regime that would enable participants to
compare competing mutual fund, insurance and banking products on a
reasonably consistent and uniform basis. In considering these issues,
the Department, in addition to considering comments and input from
financial industry representatives, consulted with other appropriate
regulators, including the Securities and Exchange Commission
(Commission), the Office of the Comptroller of the Currency, and the
Financial Industry Regulatory Authority (FINRA). The Department also
employed focus groups, as discussed above, to learn more about how
participants make investment decisions and whether the Department's
proposed Model Comparative Chart would in fact assist such decisions.
The Department believes that the investment-related disclosure
requirements of the final rule, discussed below, strike an appropriate
balance between accommodating, on one hand, the increasing innovation
and complexity of the types of investments that are available to plan
participants and beneficiaries and, on the other hand, participants'
and beneficiaries' need for complete, but concise and user-friendly,
information about their plan investment alternatives.
a. Information To Be Provided Automatically
Paragraph (d)(1) of the final rule, consistent with the proposal,
describes the investment-related information that must be provided
automatically, with respect to each designated investment alternative,
to participants and beneficiaries on or before the date they first have
the ability to direct their investments and at least annually
thereafter. The specific information that must be disclosed pursuant to
this paragraph is set forth below, as well as a discussion of how this
required information has been modified in response to commenters'
concerns. Additionally, paragraph (i) of the final rule provides
special disclosure requirements for certain types of designated
investment alternatives, which modify the requirements of paragraph
(d)(1) of the final.
b. Identifying Information
The proposed regulation, in paragraph (d)(1)(i), required that
certain identifying information be furnished with respect to each
designated investment alternative offered under the plan. The first
required piece of information, in subparagraph (A), is the name of the
designated investment alternative. This straight-forward requirement
did not generate any public comment and has been retained in the final
rule.
Subparagraph (B) of paragraph (d)(1)(i) of the proposal required
the furnishing of an Internet Web site address relating to each
designated investment alternative. The Web site requirements of the
final rule, as well as related comments on the proposal, are discussed
below in this preamble under the heading ``f. Internet Web site
address.''
Like the proposal, the final rule, at paragraph (d)(1)(i)(B),
requires identification of the type or category of the investment
(e.g., money market fund, balanced fund (stocks and bonds), large-cap
stock fund, employer stock fund, employer securities). This requirement
is unchanged from the proposal, although the examples of types or
categories in the parenthetical, which are set forth for illustrative
purposes, have been expanded in response to questions from commenters
about investment alternatives that did not clearly fall within the list
of examples included in the proposal. One commenter suggested that
fiduciaries should be permitted to utilize various commercial services
to classify the type or category of a plan's designated investment
alternatives. While the Department has not modified the proposal in
response to this suggestion, the Department anticipates that plan
administrators typically will rely on the investment issuer's
classification of the type or category of an investment alternative.
Finally, paragraph (d)(1)(i)(D) of the proposal, which required
disclosure of the type of management utilized by the investment (e.g.,
actively managed, passively managed), has been eliminated from the
final rule. Many commenters requested that this requirement be
eliminated, arguing that they do not believe this information will be
useful to most participants and beneficiaries; that some funds may not
clearly fall within either one of these two categories, either because
they have features of both or because neither category applies (for
example, an employer stock fund); and, that it may even mislead
participants and beneficiaries about the risks of a particular
designated investment alternative. Other commenters argued that this
requirement may be redundant; for example, a fund that lists its ``type
or category'' as an index fund is by definition passively managed.
Finally, the results of the Department's focus groups support the
notion that this information is not necessarily helpful, and is
potentially confusing, to participants. One focus group participant,
for example, stated that without knowing what is meant by active or
passive management, she would choose active management because it
``sounds'' better. The Department was persuaded by commenters that
providing this information, especially as required in a comparative
format, may not be meaningful to participants and beneficiaries.
Accordingly, the final rule no longer requires plan administrators to
furnish, as a separate piece of identifying information, the type of
management utilized with respect to a designated investment
alternative. The Department notes that, for participants who wish to
obtain more information about the management of a designated investment
alternative, the narrative description of an investment's objectives or
goals, and of the investment's principal strategies and principal
risks, is likely to convey more meaningful and contextual information
concerning the style of management used with respect to a designated
investment alternative.
c. Performance Data
The proposed rule, in paragraph (d)(1)(ii), required that
performance data be disclosed for designated investment alternatives
with respect to which the return is not fixed. Specifically, this
paragraph required disclosure of the average annual total return
(percentage) of the investment for the following periods, if available:
1-year, 5-years, and 10-years, measured as of the end of the applicable
calendar year, as well as a statement indicating that an investment's
past performance is not
[[Page 64916]]
necessarily an indication of how the investment will perform in the
future.
This provision, paragraph (d)(1)(ii), is being adopted generally as
proposed. Several commenters raised issues regarding the ``if
available'' language, suggesting that participants and beneficiaries
could be deprived of as much as nearly five years of valuable return
information in situations where the designated investment alternative
has been in existence for a period of time just shy of the 5- or 10-
year marks. These commenters noted that Commission rules require
performance for the ``life of the fund'' to address this issue. In
order to avoid the information gap identified by the commenters, and to
maintain appropriate consistency with Commission requirements, the
final regulation, at (d)(1)(ii)(A), requires disclosure of the average
annual total return of the investment for 1-, 5-, and 10-calendar year
periods ending on the date of the most recently completed calendar year
(or for the life of the designated investment alternative, if shorter).
In the case of designated investment alternatives with respect to
which the return is fixed for the term of the investment, paragraph
(d)(1)(ii) of the proposal required disclosure of both the fixed rate
of return and the term of the investment. While no commenters opposed
the proposed requirement, some commenters did request a clarification
as to how the disclosure requirement applied to contracts with respect
to which there is no ``term of investment.'' The commenters explain
that certain contracts, while often having a minimum guaranteed rate
for the life of the contract, permit the fixed rate to change upon
notice, but never below the minimum guaranteed rate. One commenter
suggested that, for such contracts, the pertinent information for
participants and beneficiaries is the most recent rate of return, the
minimum rate guaranteed under the contract, if any, and an explanation
that the insurer may adjust the rate of return prospectively. The
Department agrees. The most essential information for participants who
choose to invest in fixed investment alternatives is the contractual
interest rate paid to their accounts and the term of the investment
during which their monies are shielded from market price fluctuations
and reinvestment risks. The Department believes that, with respect to
such contracts, it is particularly important that participants and
beneficiaries be clearly advised of the issuer's ability to modify the
rate of return and be able to readily determine the most current rate
of return applicable to such investment. In this regard, the Department
has modified the proposal, at paragraph (d)(1)(ii)(B) of the final, to
require the disclosure of the current rate of return, the minimum rate
guaranteed under the contract or agreement, if any, and a statement
advising participants and beneficiaries that the issuer may adjust the
rate of return prospectively and how to obtain (e.g., telephone or Web
site) the most recent rate of return information available.
One commenter asked whether designated investment alternatives such
as stable value funds and money market mutual funds are to be treated
as fixed return or variable return investments for purposes of the
regulation. The fixed return provisions of the regulation are limited
to designated investment alternatives that provide a fixed or stated
rate of return to the participant, for a stated duration, and with
respect to which investment risks are borne by an entity other than the
participant (e.g., insurance company). Examples of fixed return
investments include certificates of deposit, guaranteed insurance
contracts, variable annuity fixed accounts, and other similar interest-
bearing contracts from banks or insurance companies. While money market
mutual funds and stable value funds generally aim to preserve
principal, they are not free of investment risk to the investor.
Accordingly, such investments are subject to the variable return
provisions of the regulation, even though they routinely hold fixed-
return investments.
Several commenters requested clarification on the relationship, if
any, between the disclosure requirements in the proposal and the
Securities and Exchange Commission's and FINRA's advertising rules. The
primary concern of commenters seemed to be in connection with the
requirement to disclose annually the performance data specified in
paragraph (d)(1)(ii) of the proposal and the timeliness requirements in
the Commission's advertising rules. The Department has consulted with
the staff of the Commission and FINRA on this issue. The Commission's
staff has advised that it expects to communicate its position to the
Department in a staff no-action letter, which will be issued before the
applicability date of this final rule. FINRA staff has stated that it
will apply the Commission's advertising rules in a manner that is
consistent with the Commission's staff position published in the no-
action letter. The Department and the Commission will, in turn, make
the letter available to the public on their respective Web sites.
d. Benchmarks
Paragraph (d)(1)(iii) of the proposal required, for each designated
investment alternative with respect to which the return is not fixed,
the disclosure of ``the name and returns of an appropriate broad-based
securities market index over the 1-year, 5-year, and 10-year periods *
* *'' for which performance data must be disclosed. The proposal also
provided that the benchmark could not be administered by an affiliate
of the investment provider, its investment adviser, or a principal
underwriter, unless the index is widely recognized and used.
Some commenters suggested that the Department eliminate this
requirement, while others called for permitting or requiring multiple
benchmarks for each designated investment alternative. Some commenters
suggested permitting composite or customized benchmarks. Those
commenters who favored an ability to include multiple benchmarks for
each designated investment option noted the existence of such
flexibility under SEC rules, specifically Item 22(b)(7) of Form N-
1A.\9\ (See, e.g., Instruction 6 to Item 22(b)(7), encouraging, in
addition to a required broad-based securities market index, narrowly
based indexes that reflect the market sectors in which a fund invests.)
Commenters who advocated composite benchmarks stated that a fund that
invests in both stocks and bonds (e.g., lifecycle fund or balanced
fund) should be permitted to compare itself to a benchmark consisting
of a weighted average of both an equities index and a bond index. The
commenters who favored eliminating the benchmark requirement stated
that certain investment strategies are not managed to a benchmark, and
therefore, providing benchmark information could be misleading.
Supporters of the proposal, however, maintained that participants would
benefit more from having a single recognizable benchmark for each
designated investment alternative under the plan, rather than multiple
or blended indices for each.
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\9\ Now Item 27 of Form N-1A, as revised February 2010.
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The Department continues to believe that appropriate benchmarks may
be helpful tools for participants to use in assessing the various
investment options available under their plans and, therefore, has
retained this requirement in the final rule. However, benchmarks are
more likely to be helpful when they are not subject to manipulation and
are recognizable and understandable to the average plan participant, as
is the case with broad-based indices contemplated
[[Page 64917]]
by Instruction 5 to Item 27(b)(7) of Form N-1A. For this reason, the
final rule retains the proposed requirement that a benchmark must be a
broad-based securities market index and it may not be administered by
an affiliate of the investment issuer, its investment adviser, or a
principal underwriter, unless the index is widely recognized and used.
The Department, however, notes that paragraph (d)(2)(ii) of the final
regulation permits the disclosure of information that is in addition to
that which is required by this final regulation, so long as the
additional information is not inaccurate or misleading. Thus, in the
case of designated investment alternatives that have a mix of equity
and fixed income exposure (e.g., balanced funds or target date funds),
a plan administrator may, pursuant to paragraph (d)(2)(ii) of the final
rule, blend the returns of more than one appropriate broad-based index
and present the blended returns along with the returns of the required
benchmark, provided that the blended returns proportionally reflect the
actual equity and fixed-income holdings of the designated investment
alternative. For example, where a balanced fund's equity-to-bond ratio
is 60:40, the returns of an appropriate bond index and an appropriate
equity index may be blended in the same ratio and presented along with
the benchmark returns mandated by paragraph (d)(1)(iii) of the final
rule. Presenting blended returns that do not proportionally reflect the
holdings of the designated investment alternative would, in the view of
the Department, be misleading and, therefore, not permitted pursuant to
paragraph (d)(2)(ii) of the final regulation.
e. Fee and Expense Information
Paragraph (d)(1)(iv) of the proposal required disclosure of fee and
expense information for designated investment alternatives. This
requirement has been retained in the final rule, with a few
modifications in response to public comments. Paragraph (d)(1)(iv) also
has been restructured so that subparagraph (A) addresses the fee and
expense disclosure requirements for designated investment alternatives
with respect to which the return is not fixed, and subparagraph (B)
addresses such requirements for designated investment alternatives with
respect to which the return is fixed for the term of the investment.
Consistent with the proposal, paragraph (d)(1)(iv)(A)(1) requires
disclosure of the amount and a description of each shareholder-type fee
(fees charged directly against a participant's or beneficiary's
investment, such as commissions, sales loads, sales charges, deferred
sales charges, redemption fees, surrender charges, exchange fees,
account fees, and purchase fees). No substantive changes were made to
this provision from that which was proposed. Clarifying language,
however, was added to the existing parenthetical language in order to
distinguish shareholder-type fees from other investment-related fees
and expenses. The new language provides that a fee or expense is a
shareholder-type fee to the extent it is ``not included in the total
annual operating expenses of any designated investment alternative.''
Thus, the key distinction is how the fee is ultimately being paid by
the participant or beneficiary. If the fee or expense is charged
directly against participant's or beneficiary's individual investment
or account, as is typically the case with sales loads, account fees,
and the other items delineated in the parenthetical, then the fee or
expense is to be disclosed as a shareholder-type fee. If, on the other
hand, the fee or expense is paid from the operating expenses of a
designated investment alternative, then the fee or expense is to be
included in the total annual operating expenses of a designated
investment alternative. The requirement to disclose the total annual
operating expenses of each designated investment alternative is
discussed below.
The Department recognizes that in some instances there will be an
overlap in disclosures between shareholder type fees described in
paragraph (d)(1)(iv)(A)(1), and individual expenses described in
paragraph (c)(3) of the final rule, which are discussed in detail above
under the heading ``d. Individual expenses.'' For example, a front-end
sales load imposed in connection with investing in a specific
designated investment alternative that is charged (either by share or
dollar deduction) directly against a participant's or beneficiary's
individual account would properly be covered by and require disclosures
under both paragraphs. The consequence of this overlap is that
participants and beneficiaries will not only receive general
information regarding the sales load before investing, but pursuant to
paragraph (c)(3)(ii) of the final rule, will also receive a statement
after investing showing the dollar amount actually charged against
their individual accounts.
Some commenters asked whether only fees and expenses must be
disclosed, or whether plan administrators also should notify
participants and beneficiaries of other limitations or restrictions
concerning the designated investment alternative, such as trading
restrictions or limitations on how amounts liquidated from the
designated investment alternative may be reinvested. In the
Department's view, it is appropriate in this context to inform
participants and beneficiaries of these restrictions and limitations so
that they are fully aware of the consequences of their investment
decisions. Accordingly, paragraph (d)(1)(iv)(A)(1) of the final rule
has been expanded from the proposal to require a description of any
restriction or limitation that may be applicable to a purchase,
transfer, or withdrawal of the investment in whole or in part (such as
round trip, equity wash, or other restrictions).
Paragraph (d)(1)(iv)(A)(2) requires disclosure of the total annual
operating expenses of the investment expressed as a percentage (e.g.,
expense ratio), calculated in accordance with paragraph (h)(5) of the
final rule. This requirement is unchanged from the proposal, although,
as discussed below, the definition of ``total annual operating
expenses'' has been revised in the final rule.
Paragraph (d)(1)(iv)(A)(3) of the final rule includes a new
requirement for an example illustrating the effect in dollars of each
designated investment alternative's total annual operating expenses.
Specifically, this paragraph requires disclosure of the total annual
operating expenses of the investment for a one-year period expressed as
a dollar amount for a $1,000 investment (assuming no returns and based
on the total annual operating expenses percentage disclosed for
paragraph (d)(1)(iv)(A)(2)). A significant number of commenters felt
that a dollar-based disclosure would be more useful to participants,
who cannot always convert operating expense ratios into dollars, which
commenters argue is a more helpful way for participants to understand
the significance of fees. The results of the Department's focus group
studies also support the notion that examples in dollars will help
participants to better understand how fees impact retirement savings.
The Department was persuaded by the large number of commenters
supporting inclusion of dollar-based disclosure in the context of
investment fees and, accordingly, expanded the requirements of the
final rule to provide for the disclosure of a designated investment
alternative's total annual operating expenses in dollars.
Paragraph (d)(1)(iv)(A)(4) of the final rule requires a statement
indicating that
[[Page 64918]]
fees and expenses are only one of several factors that participants and
beneficiaries should consider when making investment decisions. The
Department did not receive any comments opposing this requirement; in
fact, this required statement is consistent with the concern raised by
commenters that participants and beneficiaries should not be encouraged
to focus ``only'' on fees and expenses, since fee and expense
information must be considered in context with other information about
a plan's designated investment alternatives. This required statement
has been retained, unchanged from the proposal.
Paragraph (d)(1)(iv)(A)(5) of the final rule includes a new
required statement that the cumulative effect of fees and expenses can
substantially reduce the growth of a participant's or beneficiary's
retirement account and that participants and beneficiaries can visit
the Internet Web site of the Employee Benefits Security Administration
for information and an example demonstrating the long-term effect of
fees and expenses. This statement has been added in response to the
suggestion of commenters that participants and beneficiaries would
benefit from an understanding that, over time, fees and expenses may
substantially reduce the growth of their retirement accounts.
Finally, paragraph (d)(1)(iv)(B) of the final rule provides the fee
and expense information that must be disclosed for designated
investment alternatives with respect to which the return is fixed for
the term of the investment. Consistent with the proposal, plan
administrators must disclose the amount and a description of any
shareholder-type fees, and a description of any restrictions or
limitations that may be applicable to a purchase, transfer or
withdrawal of the investment in whole or in part. For examples of
fixed-return investments, see the discussion above in this preamble
under the heading ``c. Performance data.''
f. Internet Web Site Address
The proposed rule contained a requirement that plan fiduciaries
provide an ``Internet Web site address that is sufficiently specific to
lead participants and beneficiaries to supplemental information
regarding the designated investment alternative, including the name of
the investment's issuer or provider, the investment's principal
strategies and attendant risks, the assets comprising the investment's
portfolio, the investment's portfolio turnover, the investment's
performance and related fees and expenses[.]''
The Department received a number of comments concerning this Web
site requirement. Some commenters supported the requirement, but
requested clarifications such as who would be responsible for
maintaining the Web site address and whether participants and
beneficiaries could be referred to the Web site of a service provider
or investment issuer. Other commenters argued that the requirement
should be eliminated because Web site information is not currently
provided for all designated investment alternatives in the participant-
directed plan marketplace; for example, Web site information often is
not provided for bank collective investment funds, certain insurance
products, and employer stock.
After careful consideration of these comments, the Department has
decided to retain the Web site approach to disclosing investment-
related information. See paragraph (d)(1)(v) of the final rule. The
Department believes, in this regard, that the availability of
information via a Web site reduces the amount of information required
to be directly provided to participants and beneficiaries, without
compromising a participant's or beneficiary's access to the additional
information. While a critical objective of this rulemaking is to ensure
that all participants and beneficiaries in participant-directed
individual account plans are furnished the information they need to
make informed investment decisions, the Department remains sensitive to
the possibility that too much information may only serve to overwhelm,
rather than inform, participants and beneficiaries. The Department
believes that the Web site approach to disclosure strikes an
appropriate balance in this context, accommodating different levels of
participant interest in more detailed investment-related disclosures.
While the Department recognizes, based on the comments, that the
required Web sites may not currently be available for all investment
vehicles offered by individual account plans in today's marketplace,
the Department is not persuaded that the costs and burdens attendant to
establishing and maintaining a Web site that will satisfy the
disclosure requirements of this final rule will outweigh the benefits
of improved disclosure and ready access to more detailed and current
information by participants and beneficiaries.
Under the final rule, the responsibility for ensuring the
availability of a Web site address falls upon the plan administrator.
However, whether, and to what extent, the plan administrator is
responsible for establishing and maintaining the Web site itself will
depend on the responsibilities assumed by either the issuer of the
designated investment alternative(s) or a service provider to the plan.
That is, as provided in paragraph (b)(1) of the final rule, a plan
administrator will not be liable for the completeness and accuracy of
information used to satisfy the disclosure requirements of this
regulation when the plan administrator reasonably and in good faith
relies on information received from or provided by a plan service
provider or the issuer of a designated investment alternative.
In addition to the general comments discussed above, some
commenters expressed concern about the specific items of information
required to be made available on the Web site. Several commenters, for
example, asked whether the list of items in the proposed rule was
intended to be exclusive, or whether plans may be required, or be
permitted, to provide additional information.\10\ The final rule, at
paragraph (d)(1)(v), has been revised to make clear that the
supplemental information identified in the regulation is the only
information that is required to be contained on the Web site; this
clarification was accomplished by deleting the word ``including'' which
had been used in the proposed regulation before the list of content
items. Nonetheless, there is nothing in this final rule that precludes
a plan administrator, service provider or the issuer of a designated
investment alternative from including on the Web site additional
information that may assist participants and beneficiaries in assessing
the appropriateness of the designated investment alternative for their
plan accounts.
---------------------------------------------------------------------------
\10\ Paragraph (d)(1)(i)(B) of the proposal required disclosure
of ``supplemental information regarding the designated investment
alternative, including * * *'' (emphasis added). Some commenters
argued that use of the word ``including'' could be read as
``including, but not limited to.'' In that case, plans would be
uncertain as to whether additional information must be provided and,
if so, what information must be provided.
---------------------------------------------------------------------------
Paragraph (d)(1)(v)(A) of the final retains the requirement from
the proposal that the Web site include the name of the investment's
issuer. The Department did not receive any comments on this provision.
Paragraph (d)(1)(v)(B) contains a new content requirement for
supplemental information that is required to be contained on the Web
site. Several commenters requested that the Department add, as another
item of supplemental information available at a designated investment
alternative's Web
[[Page 64919]]
site, a description of the designated investment alternative's
objectives or goals. These commenters felt that merely disclosing the
``type or category'' of investment, as required by subparagraph
(d)(1)(i)(C) of the proposal, was not sufficient and that participants
or beneficiaries would benefit from a narrative statement of the
alternative's basic objectives or goals. The Department agrees with
these commenters that participants and beneficiaries should be apprised
of a designated investment alternative's objectives or goals and that
this information will be helpful in understanding how the alternative's
principal strategies are intended to achieve those objectives or goals.
Commenters did not demonstrate that requiring this information would be
problematic or burdensome; rather, it seems clear that investment
issuers generally already disclose this information. The final rule has
been modified from the proposal to explicitly require, in paragraph
(d)(1)(v)(B), disclosure of the investment's objectives or goals in a
manner consistent with Securities and Exchange Commission Form N-1A or
N-3, as appropriate.
Although commenters generally were not opposed to the requirement
in the proposal that the Web site for a designated investment
alternative include information about the investment's ``principal
strategies and attendant risks,'' some commenters requested
clarification as to the nature of the information that must be
disclosed in order to satisfy this requirement. For example, some
commenters asked if the Department intended to model this requirement
after the requirement in securities laws that investment companies
disclose their ``principal investment strategies'' and ``principal
risks.'' \11\ The Department believes that the ``strategies'' and
``risks'' associated with an investment alternative should be well-
understood concepts in the plan investment marketplace, and the
Department does not anticipate that plan administrators or the parties
providing the Web sites will have difficulty in satisfying this
requirement. In response to the commenters, the Department has
clarified that paragraph (d)(1)(v)(C) of the final rule requires
disclosure of the investment's ``principal strategies (including a
general description of the types of assets held by the investment) and
principal risks in a manner consistent with Securities and Exchange
Commission Form N-1A or N-3, as appropriate'' of the designated
investment alternative. The Department believes that the standards for
narrative disclosure contained in the Commission's requirements are
general enough that this information can be furnished with respect to
all designated investment alternatives.\12\
---------------------------------------------------------------------------
\11\ See Item 4(a) and (b) of Securities and Exchange Commission
Form N-1A or Item 5(c) and (e) of Securities and Exchange Commission
Form N-3.
\12\ See, e.g., Securities and Exchange Commission Form N-1A
Item 4(a) (requiring a summary of how the mutual fund intends to
achieve its investment objectives by identifying the fund's
principal investment strategies, including the type or types of
securities in which the fund will principally invest and any policy
to concentrate in securities issuers in a particular industry or
group of industries) and Item 4(b)(1) (requiring a summary of the
principal risks of investing in the fund, including risks to which
the fund's portfolio as a whole is subject and the circumstances
reasonably likely to affect adversely the fund's net asset value,
yield, or total return; Item 4(b)(1) also requires special
disclosure for money market-type funds, investments sold through
insured depository institutions, and non-diversified investments).
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Several commenters requested clarification of the requirement in
paragraph (d)(1)(i)(B) of the proposal to disclose the ``assets
comprising the investment's portfolio.'' Specifically, commenters asked
whether this requirement mandates disclosure of every individual asset
or security held by the investment alternative, which commenters argue
will not be helpful to most participants, or, more simply, disclosure
of the type or types of assets or securities held by the investment
alternative. Some commenters also recommended eliminating this
requirement, since investment alternatives that are not subject to
Commission registration do not currently compile and disclose this
information, and because the burden of compiling this information,
especially for complex investments, would not justify its benefit. The
Department did not intend that the Web site include a detailed list of
all assets and securities that comprise the investment alternative's
portfolio. The reference to ``assets comprising the investment's
portfolio'' has not been included in the final rule. In addition,
paragraph (d)(1)(v)(C) of the final rule, inside the parenthetical, now
clarifies that a discussion of the investment's principal strategies
includes ``a general description of the types of assets held'' by the
investment.\13\ This narrative description is supplemented by more
specific information that is available on request to participants under
paragraph (d)(4) of the final rule.
---------------------------------------------------------------------------
\13\ This clarification is consistent with a requirement in the
Department's 404(c) regulation, prior to its amendment herein, to
disclose ``information relating to the type and diversification of
assets comprising the portfolio''). See 29 CFR 2550.404c-
1(b)(2)(i)(B)(1)(ii).
---------------------------------------------------------------------------
Some commenters raised concerns with the proposal's requirement
that the Web site include information concerning a designated
investment alternative's portfolio turnover. These commenters
questioned what exactly must be disclosed about an investment's
portfolio turnover; for example, whether a ratio or turnover rate would
suffice. Other commenters recommended elimination of the requirement,
because investment alternatives that are not subject to Commission
registration are not currently required to disclose portfolio turnover
information. The Department was not persuaded that this requirement
should be eliminated for all designated investment alternatives. An
investment alternative's portfolio turnover indicates the frequency
with which the investment alternative is buying and selling securities.
An investment that is frequently buying and selling securities may be
generating higher trading costs. Trading costs are not included in an
alternative's expense ratio, yet the cost of trading on a portfolio
level does have an effect, in some cases a large effect, on the
alternative's rate of return. The Department, therefore, believes that
such information may be helpful to participants and beneficiaries in
assessing the appropriateness of their investment options.
While the Department recognizes that not all designated investment
alternatives available to plan participants and beneficiaries calculate
portfolio turnover rates, the Department understands that such
investment alternatives should be able to do so without significant
difficulty or costs. The final rule, at paragraph (d)(1)(v)(D),
therefore, has been revised to require that, unless expressly exempted
elsewhere in the rule, the information on the Web site must include the
investment's portfolio turnover rate in a manner consistent with
Securities and Exchange Commission Form N-1A or N-3, as
appropriate.\14\ The Department has exempted certain designated
investment alternatives, such as fixed-return and employer stock
alternatives, from the portfolio turnover requirement where the
Department has concluded that turnover rates are irrelevant to the
participants and beneficiaries. See paragraph (i) of the final rule for
special
[[Page 64920]]
rules for certain designated investment alternatives and annuity
options.
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\14\ Consistent with Instruction 4(c) to Item 13(a) of Form N-1A
and Instruction 11(e) to Item 4 of Form N-3, money market funds (and
other investment products with similar investment objectives) may
omit a portfolio turnover rate.
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A few commenters requested clarification about what information
must be disclosed on the Web site concerning ``the investment's
performance and related fees and expenses'' as required by paragraph
(d)(1)(i)(B) of the proposal. Specifically, these commenters ask to
what extent this requirement is redundant given the performance and fee
and expense information that is otherwise required to be disclosed on
the annual disclosure document; if it is not redundant, commenters
question what additional performance and fee and expense information
must be provided on the Web site. The intent of this provision was to
make available more recent information than what was provided to
participants on an annual basis. In responses to these comments, the
Department has modified the proposal to split this requirement into two
separate provisions and has clarified the updating obligation for all
supplemental information. Paragraph (d)(1)(v)(E) of the final rule
addresses the performance data that must be displayed by reference to
the return information specified in paragraph (d)(1)(ii) and requires
that such information be updated on at least a quarterly basis (as
defined in paragraph (h)(2) of the final rule), or more frequently if
required by other applicable law. Other than providing the revised
performance information on the Web site in compliance with this
updating requirement, plan administrators are not obligated to provide
any additional or different information concerning an investment's
performance. Paragraph (d)(1)(v)(F) of the final rule addresses the fee
and expense information that must be displayed by reference to the fee
and expense information specified in paragraph (d)(1)(iv). This
information must be updated in accordance with the general updating
requirement for supplemental information discussed below. Corresponding
to the content parameters for updating performance information, plan
administrators are not obligated to provide any additional or different
information concerning an investment's fees and expenses than that
required by paragraph (d)(1)(iv) of the final rule.
Commenters also requested guidance as to how often the Web site
supplemental information must be updated; the proposal did not provide
an updating requirement. In view of the fact that participants will
have continuing access to Web sites, it is the expectation that the
information made available via the Web site will be accurate and
updated by the plan administrator, service provider or the issuer of a
designated investment alternative as soon as reasonably possible
following a change, or notification thereof.
Recognizing that some participants may not have ready access to the
information required to be made available on an Internet Web site, the
final rule, at paragraph (d)(2)(i)(C), requires that participants and
beneficiaries be furnished, as part of the required comparative format
disclosure document, information about how to request, and obtain free
of charge, a paper copy of the information required to be maintained on
a Web site pursuant to paragraph (d)(1)(v) or paragraph (i), as
applicable.
g. Glossary
Although not part of the proposed rule, a number of commenters
suggested that participants and beneficiaries would benefit from a
glossary of investment and financial terms relevant to the designated
investment alternatives under the plan. Indeed, the lack of a glossary
of investment terminology in the proposed regulation was perceived as a
key weakness of the proposal by some of these commenters. One of these
commenters, for example, commissioned a nationally representative
online survey of 2,106 participants in 401(k) plans to gather feedback
on the proposal's model comparative chart. A conclusion of that survey
is that providing clear definitions of financial terminology and using
vocabulary that is not perceived as complicated may help to improve
participants' understanding of the disclosure. ICF's report to the
Department following their focus group studies further supported the
commenters and the conclusion of the online survey. The Department was
persuaded that the furnishing of a glossary or access to a glossary of
terms relevant to plan investments would be helpful to participants
and, accordingly, has included such a requirement in the final rule.
See paragraph (d)(1)(vi). Specifically, paragraph (d)(1)(vi) provides
for the furnishing of a general glossary of terms to assist
participants and beneficiaries in understanding the designated
investment alternatives, or an Internet Web site address that is
sufficiently specific to provide access to such a glossary along with a
general explanation of the purpose of the address. The Department
anticipates a number of ways to satisfy this furnishing requirement.
For example, a plan administrator could satisfy this furnishing
requirement either by including an appropriate glossary in the
comparative disclosure document or, in lieu thereof, by including an
Internet Web site address at which such a glossary may be accessed.
Alternatively, the Web site address for each designated investment
alternative, required pursuant paragraphs (d)(1)(v) and (i) of the
final rule, may contain its own glossary of terms relevant to that
specific alternative, or link to such a glossary.
Some commenters suggested that the Department prepare or make
available such a glossary. At this juncture, the Department believes
that plan administrators, in conjunction with their service providers
and issuers of investment alternatives, are in the best position to
determine the glossary (or glossaries) appropriate for their
participants, taking into consideration the investment options made
available under the plan. Nonetheless, the Department is interested in
further exploring whether the Department should develop or identify
general investment glossaries that could be utilized by plan
administrators in satisfying their obligations under the final rule.
Specifically, the Department invites interested persons to share their
views as to what terminology should be addressed in a general
investment glossary and whether, or to what extent, such glossaries
currently exist that could serve as a resource for relatively
unsophisticated participant-investors. Suggestions and views on the
development and availability of one or more such glossaries should be
addressed to e-ORI@dol.gov, subject: Participant Investment Glossary.
h. Annuity Options
The Department received a number of comments relating to the
disclosure of information with respect to investment products that
consist, in whole or in part, of annuities or annuitization guarantees.
These commenters maintain that core concepts in the proposal, such as
``average annual total return,'' ``benchmarks,'' and ``total annual
operating expenses,'' while entirely appropriate for designated
investment alternatives with respect to which returns can and do vary,
such as mutual funds, collective investment funds, and portfolio
operating companies within variable annuity contracts, are irrelevant
to annuities or annuitization guarantees. The commenters, therefore,
requested that the Department revise the proposal to require disclosure
of information more appropriate to annuity contracts, funds or
products. Some of the commenters emphasized that plan administrators
need the flexibility to
[[Page 64921]]
explain the benefits of these products which may provide annuities or
annuitization guarantees along with exposure to the equities market and
requested that the final rule allow for such explanations in the
disclosure.
In response to these comments, the Department has added two new
provisions to the final rule. The first new provision, at paragraph
(d)(1)(vii) of the final rule, is intended to address commenters'
concerns with annuity features that are contained within variable
annuity contracts, under which participants and beneficiaries have a
right to purchase an annuity with their accumulated plan savings at a
rate specified in the contract (``variable annuity''). The information
that must be disclosed pursuant to this paragraph (d)(1)(vii) for the
variable annuity complements the investment-related information
disclosed pursuant to paragraph (d)(1) for the related portfolio
operating companies. Paragraph (d)(1)(vii) is applicable to any
designated investment alternative consisting in part of a contract,
fund or product that affords participants or beneficiaries the option
to allocate contributions toward the future purchase of a stream of
retirement income payments guaranteed by an insurance company. When
applicable, paragraph (d)(1)(vii) of the final rule incorporates by
cross reference the requirements of the second new provision, a special
rule, at paragraph (i)(2)(i) through (vii) of the final regulation.
This provision requires the disclosure of information relating to the
variable annuity itself to the extent that the information is not
otherwise disclosed pursuant to paragraph (d)(1)(iv). Through the
combination of these two provisions, the Department intends for
participants and beneficiaries to receive comprehensive disclosure of
investment and annuity information pertaining to both portfolio
operating companies within a variable annuity contract and the variable
annuity itself. The special rule at paragraph (i)(2)(i) through (vii)
of the final regulation is discussed more fully below.
i. Disclosures On or Before First Investment
As discussed above, paragraph (d)(1)(v) of the proposal provided,
for purposes of the disclosure of investment-related information to new
participants, that plan administrators could satisfy this obligation by
furnishing the most recent annual disclosure along with any required
updates furnished to participants and beneficiaries. The Department
received no objections to this provision and, accordingly, is adopting
it as proposed, except that it has been re-designated as paragraph
(d)(viii) in the final rule and modified to conform with the new timing
requirements (i.e., to reflect the change from ``on or before the date
of plan eligibility'' to ``on or before the date on which the
participant or beneficiary can first direct his or her investment'').
j. Comparative Format Requirement
Paragraph (d)(2) of the proposed regulation provided that the
investment-related information required pursuant to paragraph (d)(1)
must be furnished in a chart or similar format that is designed to
facilitate comparison of such information for each designated
investment alternative offered under the plan. The Department also
included as an Appendix to the proposal a Model Comparative Chart that
could be used to satisfy this requirement. Several commenters on the
proposal specifically noted their support for the requirement that
investment-related information be disclosed in a comparative format.
Further, participants in the Department's focus group studies believe
that the Model Comparative Chart would make it easier to choose among a
plan's designated investment alternatives; these individuals felt that
the Chart is an improvement over the manner in which plan investment
information currently is made available to them and that the Chart
would encourage them, in some cases, to obtain additional information
about plan designated investment alternatives.
The Department has retained this requirement in paragraph (d)(2) of
the final rule, subject to a few minor modifications, and has also
published with the final rule a revised Model Comparative Chart which
reflects conforming changes to the final rule's disclosure
requirements. Paragraph (d)(2)(i) of the final rule requires that the
information described in paragraph (d)(1) and, if applicable, paragraph
(i), must be furnished in a chart or similar format that is designed to
facilitate a comparison of such information for each designated
investment alternative available under the plan. This paragraph of the
final rule also requires that the date of the chart be prominently
displayed. As proposed, the final rule requires in paragraphs
(d)(2)(i)(A) and (B) a statement indicating the name, address, and
telephone number of the plan administrator (or the plan administrator's
designee) to contact for the provision of the information that must be
made available upon request pursuant to paragraph (d)(4) of the final
rule and a statement that additional investment-related information
(including more current performance information) is available at the
listed Internet Web site addresses.
As noted above, a new subparagraph (C) has been added to paragraph
(d)(2)(i) of the final rule. This new subparagraph requires that the
comparative disclosure include information about how participants and
beneficiaries can request, and obtain, free of charge, paper copies of
the information required to be maintained on a Web site pursuant to
paragraph (d)(1)(v) of the final rule. This new disclosure requirement
will help to ensure that participants and beneficiaries who do not have
access to the Internet, nonetheless, can, if they so choose, obtain
supplemental information contained on the Web sites, in order to
facilitate a comprehensive consideration of the available investment
choices under the plan. Because the final rule includes special Web
site disclosure rules for certain designated investment alternatives
and annuity options (paragraph (i)(2) for annuity options and paragraph
(i)(3) for fixed-return alternatives), the new the subparagraph (C)
includes explicit references to these special rules in order to
eliminate any ambiguity as to whether the rights provided by new
subparagraph (C) extend to such investment choices. In this regard, the
Department notes that although paragraph (i)(1) contains a special rule
for qualifying employer securities, certain requirements of paragraph
(d)(1)(v) are not modified by the special rule and remain applicable to
qualifying employer securities; consequently, the rights provided by
new subparagraph (C) extend to qualifying employer securities via the
reference to paragraph (d)(1)(v) in subparagraph (C).
Paragraph (d)(2)(ii), like the proposal, provides that nothing in
the final rule precludes a plan administrator from including additional
information that the plan administrator determines appropriate for such
comparisons, provided such information is not inaccurate or misleading.
The Department believes that the technical concerns raised by
commenters on the Model Comparative Chart have been addressed in
revisions to the operative provisions of the final rule.
One procedural question raised by commenters, for example on behalf
of Code section 403(b) plans, was whether each issuer of designated
investment alternatives could prepare its own comparative chart for
distribution and send it directly to participants and beneficiaries,
such that, for example, a participant in a plan with three investment
issuers would receive three
[[Page 64922]]
charts, stating that this would greatly simplify the plan
administrator's task in meeting the comparative format requirement. It
is the view of the Department that nothing in the final regulation
precludes plan administrators from combining multiple documents for
purposes of satisfying their obligation to provide the information
required by this rule in a comparative form. For example, a chart could
be divided such that one part presented stock funds while another part
presented bond funds, as in the Department's model format. Similarly, a
chart could group investment alternatives by issuer. On the other hand,
the Department also is of the view that permitting individual
investment issuers, or others, to separately distribute comparative
charts reflecting their particular investment alternatives would not be
furnishing information in a form that would facilitate a comparison of
the required investment information and, therefore, would not comply
with the requirements of paragraph (d)(2).
k. Information To Be Provided Subsequent to Investment
Paragraph (d)(3) of the final rule requires that, when a plan
provides for the pass-through of voting, tender, and similar rights,
the plan administrator must furnish participants and beneficiaries who
have invested in a designated investment alternative with these
features any materials about such rights that have been provided to the
plan. This provision, which is unchanged from the proposal, is similar
to the requirement currently applicable to ERISA section 404(c)
plans.\15\
---------------------------------------------------------------------------
\15\ See 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(ix).
---------------------------------------------------------------------------
l. Information To Be Provided Upon Request
Paragraph (d)(4) of the final rule requires a plan administrator to
furnish certain identified information either automatically or upon
request by participants and beneficiaries, based on the latest
information available to the plan. This provision, which also is
unchanged from the proposal, is modeled on the requirements currently
applicable to ERISA section 404(c) plans with respect to information to
be furnished upon request.\16\
---------------------------------------------------------------------------
\16\ See 29 CFR 2550.404c-1(b)(2)(i)(B)(2).
---------------------------------------------------------------------------
4. Form of Disclosure
Paragraph (e) of the final rule, like the proposal, specifically
addresses the form in which the required disclosures may be made.
Commenters on the proposal generally supported the ability of plan
administrators to coordinate the requirements of this rule with other
disclosure materials. The Department notes that, like the proposal,
paragraph (e) merely recognizes various acceptable means of disclosure;
it does not preclude other means for satisfying disclosure obligations
under the final rule.
Specifically, paragraph (e)(1) makes clear that plan-related
information required to be disclosed pursuant to paragraphs (c)(1)(i),
(c)(2)(i)(A) and (c)(3)(i)(A) of this section may be provided as part
of the plan's summary plan description furnished pursuant to ERISA
section 102 or as part of a pension benefit statement furnished
pursuant to ERISA section 105(a)(1)(A)(i), if such summary plan
description or pension benefit statement is furnished at a frequency
that comports with the time frames prescribed by paragraph (c) of this
section. Paragraph (e)(2) of the final rule, like the proposal, makes
clear that the information required to be disclosed pursuant to
paragraphs (c)(2)(ii) and (c)(3)(ii) may be included as part of a
pension benefit statement furnished pursuant to ERISA section
105(a)(1)(A)(i).
Paragraph (e)(3) provides that a plan administrator that uses and
accurately completes the model in the Appendix, taking into account
each plan's specific provisions and each designated investment
alternative offered under the plan, will be deemed to have satisfied
the requirements of paragraph (d)(2) of this section.
Paragraph (e)(4) further clarifies that, except as otherwise
explicitly required herein, fees and expenses may be expressed in terms
of a monetary amount, formula, percentage of assets, or per capita
charge. Finally, paragraph (e)(5) generally requires that the
information required to be prepared by the plan administrator for
disclosure under the regulation must be written in a manner calculated
to be understood by the average plan participant.
5. Selection and Monitoring
Paragraph (f) of the final rule continues to make clear that
nothing in the regulation would relieve a fiduciary of its
responsibilities to prudently select and monitor providers of services
to the plan or designated investment alternatives offered under the
plan.\17\ This paragraph is unchanged from the proposal.
---------------------------------------------------------------------------
\17\ Also, with regard to ERISA's general fiduciary standards,
as noted in the preamble to the proposal, 73 FR 43014 at 43018, n.
8, it should be noted that there may be extraordinary situations
when fiduciaries will have a disclosure obligation beyond those
addressed by the final rule. For example, if a fiduciary knew that,
due to a fraud, information contained in a public financial report
would mislead investors concerning the value of a designated
investment alternative, the fiduciary would have an obligation to
take appropriate steps to protect the plan's participants, such as
disclosing the information or preventing additional investments in
that alternative by plan participants until the relevant information
is made public. See also Varity Corp. v. Howe, 516 U.S. 489 (1996)
(plan fiduciary has a duty not to misrepresent to participants and
beneficiaries material information relating to a plan).
---------------------------------------------------------------------------
6. Manner of Furnishing
Paragraph (g) of the proposal addressed the ``manner of
furnishing'' the disclosures required by the regulation. Specifically,
paragraph (g) of the proposal provided that the required disclosure
shall be furnished in any manner consistent with the requirements of 29
CFR 2520.104b-1, including paragraph (c) of that section relating to
the use of electronic media.
This proposal produced significant comments. A number of commenters
recommended that the Department expand the permissibility of electronic
disclosure beyond that currently addressed in the Department's safe
harbor regulation, at Sec. 2520.104b-1(c). They argued that such forms
of disclosure would be more efficient, less burdensome, and less costly
for plans and, therefore, participants. Other commenters cautioned
against broadening the electronic disclosure standards, arguing that
many workers do not have Internet access or prefer paper over
electronically disclosed materials. Important questions involve the
extent of the cost savings from expanded use of electronic disclosure
and the number of workers who would be disadvantaged from such an
expansion (which could itself take various forms, perhaps including
``opt out'' electronic disclosure).
In light of these differing views and the significance of the
issues surrounding the use of electronic disclosure, the Department has
decided to reserve paragraph (g) of the regulation while further
exploring whether, and possibly how, to expand or modify the standards
applicable to the electronic distribution of required plan disclosures.
To ensure a full review of the issue, the Department will, in the near
future, be publishing a Federal Register notice requesting public
comments, views, and data relating to the electronic distribution of
plan information to plan participants and beneficiaries. Pending the
completion of this review and the issuance of further guidance, the
Department notes that the general disclosure regulation at 29 CFR
[[Page 64923]]
Sec. 2520.104b-1 applies to material furnished under this regulation,
including the safe harbor for electronic disclosures at paragraph (c)
of that regulation. It is anticipated, however, that resolution of this
issue will occur in advance of the compliance date for this regulation,
so as to ensure for appropriate notice for plans.
7. Definitions
The proposed rule contained, in section (h), a series of
definitions for some of the terms used in the rule. These definitions
of technical terms were intended to assist plan administrators, their
service providers, and issuers of designated investment alternatives in
complying with the requirements of the rule. In response to comments
and clarifications requested by commenters, the Department made some
additions and modifications to the definitions contained in section
(h), which are discussed below in this section. One commenter suggested
that the Department should address potential changes to the cross-
references contained in the rule's definitions, which refer to rules
under the Securities and Exchange Commission's jurisdiction, for
example by referencing the Commission's Form N-1A. Absent further
guidance, it is the Department's intention that these cross-references
will refer, as appropriate, to successor rules and instructions.
The Department also received comments requesting that the rule
define some of the terms used in the Model Comparative Chart, but these
commenters appeared to focus on defining terms for the benefit of
participants and beneficiaries, for example suggesting that a glossary
or other index of terms, with ``plain English'' definitions, be
provided. In response to these commenters, and in response to
participants in the Department's focus group studies, who similarly
supported the inclusion of definitions for investment and financial
terms, the Department, at paragraph (d)(1)(vi) of the final rule, now
requires the furnishing of or access to a general glossary of terms
appropriate to assist participants and beneficiaries in understanding
their designated investment alternatives. This glossary requirement is
discussed above with the other investment-related information
requirements.
The Department did not receive any comments or questions concerning
the definitions of ``at least annually thereafter'' or ``at least
quarterly;'' accordingly, those phrases continue to be defined, as
proposed, in the final rule.
a. Average Annual Total Return
The proposal, in paragraph (h)(2), defined ``average annual total
return'' to mean the average annual profit or loss realized by a
designated investment alternative at the end of a specified period,
calculated in the same manner as average annual total return is
calculated under Item 21 of Securities and Exchange Commission Form N-
1A \18\ with respect to an open-end management investment company
registered under the Investment Company Act of 1940 (1940 Act). In
general, the commenters strongly supported the concept of providing
participants with this type of performance data. However, in response
to several technical comments as to how this definition would be
applied to products other than those that register using the Form N-1A,
the final rule, in paragraph (h)(3), contains a revised definition. As
revised, the term ``average annual total return'' means the ``average
annual compounded rate of return that would equate an initial
investment in a designated investment alternative to the ending
redeemable value of that investment calculated with the before tax
methods of computation prescribed in Securities and Exchange Commission
Form N-1A, N-3, or N-4, as appropriate, except that such method of
computation may exclude any front-end, deferred or other sales loads
that are waived for the participants and beneficiaries of the covered
individual account plan.'' The new references to Form N-3 and N-4 are
to provide additional guidance with respect to designated investment
alternatives that consist of separate accounts offering variable
annuity contracts which are registered under the 1940 Act. The sales
loads exception responds to commenters' concerns that the proposed
definition, specifically the reference to Item 21 of the Form N-1A (now
Item 26 in Form N-1A, as revised), might result in participants and
beneficiaries receiving inaccurate information about actual returns in
cases where the designated investment alternative waives sales loads;
under this exception, plan administrators may disregard any requirement
under Commission Forms to assume sales loads if they are not actually
charged to plan participants and beneficiaries. The use of this
definition is intended to assure that all participants and
beneficiaries will, taking into account the variety of investments
available through ERISA plans, receive the most uniform and comparable
performance information available for their investment options, without
regard to whether the designated investment alternative is a product
registered under the 1940 Act.
---------------------------------------------------------------------------
\18\ Now item 26 of Form N-1A, as revised, February 2010.
---------------------------------------------------------------------------
b. Designated Investment Alternatives
Several commenters expressed concern with the Department's
definition of ``designated investment alternatives'' in paragraph
(h)(1) of the proposal. Specifically, commenters questioned the
definition's exclusion of ``brokerage windows,'' ``self-directed
brokerage accounts,'' or similar plan arrangements that enable
participants and beneficiaries to select investments beyond those
designated by the plan. Commenters argued that the proposal was not
clear as to what information would in fact have to be disclosed
concerning participants' and beneficiaries' investments through such an
arrangement. The final rule retains the proposed definition of
``designated investment alternatives,'' although re-designated as
paragraph (h)(4) in the final, and therefore continues to exclude
brokerage windows and similar arrangements from the definition.
However, as discussed earlier, it is important that participants and
beneficiaries understand how brokerage windows operate and the expenses
attendant thereto when they are offered as part of the investment
platform of a plan. For this reason, the final rule includes more
specific requirements than the proposal concerning the information that
must be disclosed about brokerage windows or similar arrangements. See
paragraph (c)(1)(i)(F) of the final rule.
c. Total Annual Operating Expenses
The proposed regulation defined the term ``total annual operating
expenses'' as ``annual operating expenses of the designated investment
alternative (e.g., investment management fees, distribution, service,
and administrative expenses) that reduce the rate of return to
participants and beneficiaries, expressed as a percentage, calculated
in the same manner as total annual operating expenses is calculated
under Instruction 3 to Item 3 of the Commission's Form N-1A with
respect to an open-end management investment company registered under
the Investment Company Act of 1940.'' The Department invited comments
on what, if any, problems the proposed definition presented for
investment funds and products that are not subject to the 1940 Act and,
any suggestions for alternative definitions or approaches.
[[Page 64924]]
Some commenters questioned whether it is appropriate for the
Department to model its disclosure requirement for calculating expenses
for all designated investment alternatives in ERISA plans on a mutual
fund methodology. These commenters suggested the Department might
instead consider developing multiple methodologies that take into
account the unique characteristics of the many different types of
investment options in participant-directed individual account plans,
particularly those that are not registered under the 1940 Act. The
Department considered this suggestion and has accordingly modified the
expense calculation as discussed more fully below. A core objective of
the regulation is to ensure that participants receive uniform and
reliable information about their plan's investment options whether or
not such options are registered or unregistered under Commission
requirements. The Department believes that the final rule's revised
definition will achieve this result and produce a comparable expense
calculation across the different types of investment options offered
under ERISA plans.
Specifically, one commenter, representing the insurance industry,
noted that certain insurance products are required to be registered
under the Securities Act of 1933, 1940 Act, or both and that such
registrants must file their registration statements on the Commission's
Forms N-3 or N-4. The commenter pointed out that both of these forms
set forth a methodology for reporting the total annual expenses of the
insurance product. This commenter suggested that the Department should
consider utilizing these established methodologies with respect to
designated investment alternatives offered through variable annuity
contracts, rather than the methodology in the Commission's Form N-1A,
where appropriate, in order to reduce direct and indirect compliance
costs. The Department reviewed the methodologies in the Forms N-3 and
N-4 and concluded that while they require substantially the same
methodology as the Form N-1A, the suggested methodologies and language
offer more precision with respect to certain annual expenses unique to
variable annuity contracts (``mortality and expense risk fees''), which
are not addressed in the Form N-1A. Therefore, paragraph (h)(5)(i) of
the final rule has been revised to accommodate this commenter's
request.
Other commenters, representing the banking industry, were concerned
that the proposed definition with its reliance on Commission standards
may not work well when applied to a designated investment alternative
that consists of a bank collective investment fund because these
alternatives typically are not registered under the 1940 Act. These
commenters stated that, unlike a mutual fund, a bank collective
investment fund is not required to deduct all of its operating expenses
from the fund's assets, and may instead charge some or all of its
operating expenses directly to the plans investing in the fund. These
commenters asserted that the proposed definition would not capture such
expenses and emphasized their unfamiliarity with the required expense
calculation as well as its impact on bank collective investment funds.
The Department found these comments persuasive and, in the final rule,
added paragraph (h)(5)(ii), a separate definition of total annual
operating expenses for these unregistered alternatives. The Department
believes that this new definition will produce an expense calculation
that is substantially the same as the expense calculation for
registered alternatives while capturing the different ways that
unregistered alternatives charge plans.
Paragraph (h)(5)(ii) of the final rule defines the term ``total
annual operating expenses'' as ``the sum of the fees and expenses
described in paragraphs (h)(5)(ii)(A) through (C) of this section
before waivers and reimbursements, for the alternative's most recently
completed fiscal year, expressed as a percentage of the alternative's
average net asset value for that year.'' \19\ Paragraph (h)(5)(ii)(A)
requires the inclusion of all ``management fees as described in the
Securities and Exchange Commission Form N-1A that reduce the
alternative's rate of return.'' Paragraph (h)(5)(ii)(B) requires the
inclusion of any ``distribution and/or servicing fees as described in
the Securities and Exchange Commission Form N-1A that reduce the
alternative's rate of return.'' Paragraph (h)(5)(ii)(C) requires the
inclusion of any ``other fees or expenses not included in subparagraph
(A) or (B) that reduce the alternative's rate of return'' such as
externally negotiated investment management fees charged by bank
collective investment funds, but excludes ``brokerage costs as
described in Item 21 of Securities and Exchange Commission Form N-1A.''
\20\
---------------------------------------------------------------------------
\19\ The Department intends to achieve as much symmetry between
registered and unregistered designated investment alternatives as is
possible. For that reason, consistent with Instructions 3(d)(i) and
6(a) to Item 3 Form N-1A, paragraph (h)(5)(ii) of the final
regulation directs the calculation of total annual operating
expenses before any waivers or reimbursements.
\20\ Brokerage costs are not included in a mutual fund's expense
ratio because, under generally accepted accounting principles, they
are either included as part of the cost basis of securities
purchased or subtracted from the net proceeds of securities sold and
ultimately are reflected as changes in the realized and unrealized
gain or loss on portfolio securities in the fund's financial
statements. See 68 FR 74820.
---------------------------------------------------------------------------
The following example illustrates the requirements of paragraphs
(h)(5)(ii) of the final rule. Plan A offers Designated Investment
Alternative One (DIA 1) which invests $125 million in bank collective
investment fund XYZ, an unregistered investment alternative, with
assets of $1.2 billion. XYZ investment management fees of .22% are
deducted directly from the fund's assets. Additional investment
management fees of XYZ of .16% are invoiced directly to Plan A, which
pays the expense and then proportionately reduces the value of the
shares of Plan A participants and beneficiaries who are invested in DIA
1. Recordkeeping expenses of XYZ of $15,000 are invoiced directly to
Plan A which allocates this charge proportionally to the accounts of
Plan A participants and beneficiaries that are invested in DIA 1. XYZ
also charges a servicing fee of .10% for marketing materials it makes
available to Plan A participants and beneficiaries. These fees are
deducted directly from the fund's assets.
The provisions of paragraph (h)(5)(ii) of the final rule require
these four expenses to be included in the total annual operating
expenses of DIA 1 because they reduce the alternative's rate of return
to participants and beneficiaries. In other words, the sum of these
expenses is subtracted from the alternative's gross returns, which
indirectly reduces the value of a participant's investment in DIA 1. In
this example, the total annual operating expenses of DIA 1 are the sum
of these four expenses or .492% (represented as .49% after rounding to
the nearest hundredth of a percent). The investment management fee of
.22% and the servicing fee of .10% are included by virtue of paragraph
(h)(5)(ii)(A) and paragraph (h)(5)(ii)(B), respectively. The additional
investment management fee of .16% is included by virtue of paragraph
(h)(5)(ii)(C), and so is the recordkeeping fee of .012% (calculated as:
$15,000/$125,000,000). Thus, the annual cost to the participants and
beneficiaries who invest in DIA 1 is $4.92 for every $1,000 invested.
Under paragraph (h)(5)(ii) of the final rule, if a fee or expense
does not reduce a designated investment alternative's
[[Page 64925]]
rate of return, the fee or expense is not to be included in the total
annual operating expense of that alternative. Thus, if the
recordkeeping expenses of $15,000 in the above example were paid from
plan assets by liquidating shares of DIA 1 from participants' accounts,
rather than reducing the value of their shares, the total annual
operating expenses of DIA 1 would be .48% rather than .492%. In such
circumstances, the recordkeeping fee would instead be covered by
paragraph (c)(3) of the final regulation, not paragraph (h)(5)(ii), and
would have to be disclosed on the statement required by paragraph
(c)(3)(ii) of the final regulation.
8. Special Rules for Certain Designated Investment Alternatives
Many commenters expressed concern that the framework of the
proposed regulation as it related to investment-related information
could not be meaningfully applied to certain types of investment
options. Specifically, these commenters argued that many of the pieces
of information that the proposal mandates must be disclosed do not
apply to certain designated investment alternatives, such as employer
securities or investments that include annuity or annuitization
guarantee features, and that it would be difficult to disclose the
unique characteristics of these investment alternatives within the
framework of the proposal. Accordingly, the Department expanded the
final rule to include special rules, described below, to address these
concerns and require that plan administrators and their service
providers disclose relevant information concerning these investment
options.
a. Special Rules for Designated Investment Alternatives That Consist of
Employer Securities
Several commenters stated that investments in employer securities
should warrant separate treatment from other designated investment
alternatives under the final rule because many of the required
investment-related disclosures fail to correspond with investment
characteristics of company stock. Some commenters even argued that
investments in employer securities should be completely excluded from
the definition of designated investment alternatives. Another commenter
claimed that the proposal would create a cause of action under ERISA
section 502 for disclosure regulated by the securities laws, permitting
litigants to evade the provisions of the Private Securities Litigation
Reform Act of 1995 (``PSLRA'') and the Securities Litigation Uniform
Standards Act of 1998 (``SLUSA''). However, in the Department's view,
this rule does nothing to impair the disclosure requirements of the
securities laws, which remain in full force and effect. Causes of
action under ERISA section 502 are limited to remedying violations of
ERISA and plan provisions. This section does not allow plaintiffs to
bring suits for violations of securities law or with respect to
securities not belonging to an ERISA plan. Plaintiffs bringing suit for
violations of the securities laws continue to be subject to the PSLRA
and SLUSA.
The Department has been persuaded to modify several aspects of the
proposal for investments in employer securities rather than creating a
complete exclusion from the investment-related disclosures. The
Department has rejected a complete exclusion under the final rule
because, as stated by one commenter to the proposal, 20 million
Americans invest in stock in their companies through 401(k) plans,
based on the 2006 General Social Survey.\21\ The Department's 5500 data
for 2007 indicates that there are approximately 72.2 million
participants in individual account plans, of whom 17 million were
participants in plans that offered employer securities. In terms of
magnitude, this means approximately one fourth of all participants in
individual account plans could have invested in company stock. The
Department believes that these participants and beneficiaries are
entitled to the investment-related information for employer securities
required by paragraph (d) as modified under paragraph (i) of the final
rule.
---------------------------------------------------------------------------
\21\ Davis, James Allan; Smith, Tom W.; and Marsden, Peter V.
General social surveys, 1972-2006: cumulative codebook/Principal
Investigator, James A. Davis; Director and Co-Principal
Investigator, Tom W. Smith; Co-Principal Investigator, Peter V.
Marsden.--Chicago: National Opinion Research Center, 2007. 2,552
pp., 28 cm.--(National Data Program for the Social Sciences Series,
no. 18).
---------------------------------------------------------------------------
Consequently, the Department has developed a special provision for
investments in, or primarily in, employer securities as defined in
section 407 of ERISA, and has also exempted these investments from
certain aspects of the final rule. In making these modifications to the
proposal, the Department recognized that while certain designated
investment alternatives consist primarily of investments in employer
securities that are held as shares, other alternatives that invest
primarily in employer securities may also hold cash management
investments for liquidity purposes, so that participants and
beneficiaries acquire units of participation in a fund (i.e., a
unitized fund) rather than actual shares when they allocate their
contributions to this investment alternative.
With regard to the supplemental information that must be provided
to participants and beneficiaries through an Internet Web site address,
the Department has modified the proposed rule to exempt these
qualifying employer securities from the requirements of paragraph
(d)(1)(v)(C) concerning the disclosure of an investment's principal
strategies and risks, and instead is requiring an explanation under
paragraph (i)(1)(i) of the final rule as to the importance of a well-
balanced and diversified investment portfolio. The Department expects
that plan administrators will use the language provided in the
Department's Field Assistance Bulletin 2006-03 (FAB 2006-03) to satisfy
this requirement. The FAB language provides: ``To help achieve long-
term retirement security, you should give careful consideration to the
benefits of a well-balanced and diversified investment portfolio.
Spreading your assets among different types of investments can help you
achieve a favorable rate of return, while minimizing your overall risk
of losing money. This is because market or other economic conditions
that cause one category of assets, or one particular security, to
perform very well often cause another asset category, or another
particular security to perform poorly. If you invest more than 20% of
your retirement savings in any one company or industry, your savings
may not be properly diversified. Although diversification is not a
guarantee against loss, it is an effective strategy to help you manage
investment risk.''
As stated in paragraph (i)(1)(ii) of the final rule, the Department
is also exempting these qualifying employer securities from the
Internet Web site requirements relating to portfolio turnover required
under paragraph (d)(1)(v)(D).
Many commenters also pointed to the proposal's fee and expense
information requirement, which is preserved in paragraph
(d)(1)(iv)(A)(2) of the final rule, to disclose an investment's total
annual operating expenses, expressed as a percentage, as problematic;
essentially, these commenters maintained that an expense ratio is
irrelevant or non-calculable for investments consisting primarily of
employer securities. The Department has considered these comments and
has exempted, in paragraph (i)(1)(iv) of the final rule, qualifying
employer
[[Page 64926]]
securities from the requirement to disclose an expense ratio, provided
such designated investment alternative is not a unitized fund. As a
corollary to this exemption, these investments are also relieved, under
paragraphs (i)(1)(iii) and (v), respectively, of the final rule, from
the requirements of paragraph (d)(1)(iv)(A)(2) relating to fee and
expense information and the requirements of paragraph (d)(1)(iv)(A)(3)
relating to the expense ratio expressed as a dollar amount per $1,000
invested.
Some commenters expressed concern with the requirement that such
investments disclose performance data expressed as average annual total
return for specified periods. The Department has determined to modify
the definition of average annual total return, which is otherwise
applicable under paragraph (h)(3) of the final rule, for qualifying
employer securities that are publicly traded on a national exchange or
generally recognized market, provided such designated investment
alternative is not a unitized fund, in paragraph (i)(1)(vi) of the
final rule. For this purpose, average annual total return is defined in
paragraph (i)(1)(vi)(B) to mean the change in value of an investment in
one share of stock on an annualized basis over a 1, 5, or 10 year
period, assuming dividend reinvestment; such a return measurement is
commonly referred to as total shareholder return. This return is
calculated by taking the sum of the dividends paid during the
measurement period, plus the difference between a stock price
(consistent with section 3(18) of ERISA) at the end and the beginning
of the measurement period divided by the stock price at the beginning
of the measurement period. For example, and ignoring the reinvestment
of dividends for simplicity, if a share is $100 at the beginning of the
measurement period and $115 at the close, and dividends paid totaled $5
over the period, the disclosed return would be 20% (5 + 115 - 100/100).
Similarly, in paragraph (i)(1)(vi)(C) of the final rule, the
Department is modifying the definition of average annual total return
for qualifying employer securities that are not publicly traded on a
national exchange or generally recognized market, provided such
designated investment alternative is not a unitized fund, to require
disclosure of return information calculated using principles similar to
those for the return calculation of publicly traded securities under
paragraph (i)(1)(vi)(B). The Department anticipates that in many cases
dividends will not have been paid on such securities and that the plan
administrators will use Form 5500 plan valuation data in calculating
this return. The new reference to ERISA section 3(18) expresses the
Department's intent that the ``stock price'' used in these calculations
be consistent with the fair market value methodologies that the plan
administrator is already using under current law with respect to the
value of employer stock held by the plan.
b. Special Rules for Annuities
As discussed above, the Department, in response to comments, has
made two changes to the final rule to better ensure the disclosure of
both investment and annuity related information to plan participants
and beneficiaries. These changes appear in the final rule at paragraphs
(d)(1)(vii) and (i)(2). Paragraph (i)(2) of the final rule sets forth
the information that must be disclosed about annuity options. Paragraph
(i)(2) applies to any designated investment alternative consisting of a
contract, fund or product that affords participants or beneficiaries
the option to allocate contributions toward the current purchase of a
stream of retirement income payments guaranteed by an insurance
company. Paragraph (i)(2) addresses commenters' concerns with stand-
alone annuity options under which current participant contributions
purchase a fixed-dollar stream of income commencing at a future point
in time, typically at retirement age (``fixed-deferred annuity'').
Paragraph (d)(1)(vii), as discussed more fully above, addresses
commenters' concerns with annuity options that are contained within
variable annuity contracts, under which participants and beneficiaries
have a right to purchase an annuity with their accumulated plan savings
at a rate specified in the contract (``variable annuity''). Moreover as
noted above, the requirements in paragraph (i)(2) of the final rule
explicitly apply to variable annuities as required by the cross
reference in paragraph (d)(1)(vii) of the final rule.
When applicable, the paragraph (i)(2) special rule provides that
the plan administrator must, in lieu of the investment-related
information described in paragraph (d)(1)(i) through (vi) of the final
rule, provide each participant or beneficiary basic information about
the benefits and costs of the annuity, as well as an Internet Web site
address to lead participants and beneficiaries to additional
information. Since both variable and fixed-deferred annuities are
subject to the comparative format requirement in paragraph (d)(2) of
the final rule, the plan administrator must furnish the content
information described in paragraph (i)(2)(i) through (vi) of this
special rule in a comparative chart or similar format. The Department
believes that maintaining the comparative chart requirement will enable
participants to undertake a comparison of annuity options when a plan
includes two or more annuity options as designated investment
alternatives.
c. Special Web Site Rules for Fixed-Return Investments
As discussed above, the proposal, in paragraph (d)(1)(i)(B),
required disclosure of an Internet Web site for each designated
investment alternative offered under the plan. In response to concerns
about this Web site requirement, which were discussed earlier in this
preamble, the final rule, at paragraphs (d)(1)(v)(A) through (F), has
been revised to clarify the specific items of information that must be
made available at the required Web site address. In developing these
revisions, however, the Department concluded that many of the revised
content requirements in paragraphs (d)(1)(v)(A) through (F) simply do
not apply to designated investment alternatives with respect to which
the return is fixed for the term of the investment, e.g., portfolio
turnover rate. The final rule, therefore, includes special rules that
clarify and limit the information that that must be made available at
the required Web site address for each designated investment
alternative with respect to which the return is fixed for the term of
the investment. These special rules, at paragraph (i)(3) of the final
regulation, require disclosure of, among other things, name of the
investment's issuer; objectives or goals (e.g., to provide stability of
principal and guarantee a minimum rate of interest); performance data
updated on at least a quarterly basis (or more frequently if required
by other applicable law); and fee and expense information.
d. Special Rules for Target Date or Similar Funds
The Department intends to publish a separate notice of proposed
rulemaking that would supplement the otherwise applicable disclosures
in this rule for designated investment alternatives that are target
date-type funds. Accordingly, the Department has reserved paragraph
(i)(4) for inclusion of such guidance.
[[Page 64927]]
C. Final Amendment to Sec. 2550.404c-1
This notice also includes a final amendment to the regulation under
section 404(c) of ERISA, 29 CFR 2550.404c-1. This amendment generally
is unchanged from the proposal, except for the minor modification
discussed below. This amendment to section 2550.404c-1(b), (c), and (f)
integrates the disclosure requirements in the amended section 404(c)
regulation with the disclosure requirements in the final regulation
section 2550.404a-5 to avoid having different disclosure rules for
plans intended to comply with the ERISA section 404(c) requirements.
Similar to the proposal, this amendment eliminates references to
disclosures that are now encompassed in section 2550.404a-5 and
incorporates in paragraph (b)(2)(i)(B)(2) of the 404(c) regulation a
cross-reference to the final rule, thereby establishing a uniform
disclosure framework for all participant-directed individual account
plans.
The final 404(c) regulation has been modified in one respect from
the proposal. Specifically, the Department eliminated the reference to
``[i]dentification of any designated investment managers'' previously
required in paragraph (b)(2)(i)(B)(2) of the proposed amendment.
Commenters noted that identification of designated investment managers
also was required pursuant to paragraph (c)(1)(i)(E) of proposed
section 2550.404a-5. The Department did not intend to create a
duplicative requirement and has therefore eliminated the requirement
from the 404(c) regulation; identification of any designated investment
managers will be continue to be required for 404(c) plans because
(pursuant to paragraph (b)(2)(i)(B)(2) of the final 404(c) regulation,
published herein) such plans must satisfy all of the disclosure
requirements of the new regulation under section 404(a), which includes
identification of any designated investment managers.
Finally, as discussed further in the preamble to the proposal, at
73 FR 43018, the Department reiterates its view that a fiduciary breach
or an investment loss in connection with the plan's selection or
monitoring of a designated investment alternative is not afforded
relief under section 404(c) because it is not the result of a
participant's or beneficiary's exercise of control.\22\ The Department
has added, in paragraph (d)(2)(iv) of the final 404(c) amendment, a
statement that ``paragraph (d)(2)(i) of this section does not serve to
relieve a fiduciary from its duty to prudently select and monitor any
designated investment manager or designated investment alternative
offered under the plan.''
---------------------------------------------------------------------------
\22\ See also 57 FR 46906, n. 27 (preamble to Sec. 2550.404c-1)
(Oct. 13, 1992).
---------------------------------------------------------------------------
D. Effective and Applicability Dates; Transition Issues
A significant number of commenters expressed concern about the
establishment of an effective date that would not allow plans
sufficient time to review and implement the new disclosure
requirements. Commenters suggested that the Department should allow
affected persons twelve to eighteen months to revise their
recordkeeping and other systems to ensure that the required information
is being captured and to prepare all of the necessary disclosure
materials, including any coordination of these new requirements with
existing disclosures. In an effort to balance the importance of the
required information to plan participants with the practical burdens
and costs attendant to compliance with a new disclosure regime, the
Department is adopting these final rules with a 60-day effective date,
but deferring the application of the new rules for at least 12 months.
In this regard, the final rule will be applicable as of the beginning
of the first plan year which starts on or after the first day of the
thirteenth month following the date of publication. The Department
believes that the delayed applicability date will afford plans
sufficient time to ensure an efficient and effective implementation of
the new rules. See paragraph (j)(1) and (2).
The Department also provided transition relief, in paragraph (j)(3)
of the final rule, to assist parties in complying with the final rule.
Specifically, paragraph (j)(3)(i) provides that notwithstanding the
effective and applicability dates for the final rule, the initial
disclosures required on or before the date on which a participant or
beneficiary can first direct his or her investment must be furnished no
later than 60 days after the rule's applicability date to participants
and beneficiaries who had the right to direct the investment of assets
held in, or contributed to, their individual accounts, on the
applicability date.
Representatives of the banking industry indicated that transitional
relief from the requirement to disclose 5- and 10-year performance may
be needed for some plans that contain unregistered bank products as
designated investment alternatives, if the final regulation were to
adopt the ``total annual operating expenses'' and ``average annual
total return'' definitions set forth in paragraph (h) of the proposed
regulation. This is because the methodologies behind these definitions
depend on certain data that neither plans nor bank funds were compelled
to maintain before this final rule.
Since the final rule contains definitions similar to those in the
proposal, the Department was persuaded that transitional relief is
necessary. The final regulation, at paragraph (j)(3)(ii), therefore,
provides that for plan years beginning before October 2021, if a plan
administrator reasonably determines that it does not have the
information on expenses attributable to the plan that is necessary to
calculate, in accordance with paragraph (h)(3), the 5-year and 10-year
average annual total returns for a designated investment alternative
that is not registered under the Investment Company Act of 1940, the
plan administrator may use a reasonable estimate of such expenses. For
this purpose, the plan administrator may use the most recently reported
total annual operating expenses of the designated investment
alternative as a substitute for the actual annual expenses during the
5-year and 10-year periods if the plan administrator reasonably
determines that doing so will result in a reasonably accurate estimate
of the average annual total returns. Nothing in this paragraph
(j)(3)(ii) requires disclosure of returns for periods before the
commencement of the alternative.
E. Regulatory Impact Analysis
As discussed earlier in this preamble, this final rule establishes
a uniform basic disclosure regime for participant-directed individual
account plans. Many of the disclosures required by the final rule are
similar to those required for participant-directed individual account
plans that currently comply with ERISA section 404(c) and the
Department's regulations issued thereunder. The Department is uncertain
regarding the information that is provided to participants in plans
that are not ERISA section 404(c) compliant. Therefore, for purposes of
this regulatory impact analysis (RIA), the Department assumes that the
final rule's requirements are new for plans that are not ERISA section
404(c) compliant.
Based on the foregoing assumptions, the Department estimates that
the average incremental costs and benefits for participants in ERISA
section 404(c) compliant plans will be smaller than for those plans
that are not. Also, participants in ERISA section 404(c) compliant
plans or plans providing similar information only will receive an
incremental benefit from the rule's new disclosure requirements,
because they
[[Page 64928]]
already receive some of the information required to be disclosed under
the final rule.
1. Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an effect on the economy of $100 million
or more in any one year, or adversely and materially affecting a sector
of the economy, productivity, competition, jobs, the environment,
public health or safety, or State, local or Tribal governments or
communities (also referred to as ``economically significant''); (2)
creating serious inconsistency or otherwise interfering with an action
taken or planned by another agency; (3) materially altering the
budgetary impacts of entitlement grants, user fees, or loan programs or
the rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. The
Department has determined that this action is ``economically
significant'' under section 3(f)(1) because it is likely to have an
effect on the economy of more than $100 million in any one year.
Accordingly, the Department has undertaken, as described below, an
analysis of the costs and benefits of the final regulation. The
Department continues to believe that the final regulation's benefits
justify its costs. The present value of the benefits over the ten-year
period 2012-2021 is expected to be about $14.9 billion, with a low
estimate of $7.2 billion and a high estimate of $29.9 billion. The
present value of the costs over the same time period is expected to be
$2.7 billion, with a low estimate of $2.0 billion and a high estimate
of $3.3 billion. Overall, the Department estimates that the final
regulation will generate a net present value (or net present benefit)
of almost $12.3 billion. Table 1 shows the annualized monetized
benefits and cost of the regulations and also provides a summary of the
benefits and costs. The Department also expects the regulation to
produce substantial additional benefits, in the form of improved
investment decisions, but the Department was not able to quantify this
effect.
Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
Primary Low High Discount Period
estimate estimate estimate Year dollar rate covered
----------------------------------------------------------------------------------------------------------------
Benefits:
Annualized.................... 1,986.1 952.3 3,973.9 2010 7% 2012-2021
Monetized ($millions/year).... 1,986.1 952.3 3,973.9 2010 3 2012-2021
-----------------------------------------------------------------------------
Explanation of Monetized
Benefits..................... The regulation's disclosure requirements are expected to reduce
participants' time otherwise used for searching for fee and other investment
information.
Qualitative................... The Department expects the regulation to produce substantial additional
benefits, in the form of improved investment decisions, but the Department
was not able to quantify this effect.
-----------------------------------------------------------------------------
Costs:
Annualized.................... 353.8 265.5 442.2 2010 7 2012-2021
Monetized ($millions/year).... 352.3 264.9 439.7 2010 3 2012-2021
-----------------------------------------------------------------------------
Explanation of Monetized Costs Plans are likely to incur administrative burdens and costs in order to
comply with the requirements of the regulation. The quantified cost estimate
includes costs due to legal review of the regulation, consolidation of fee
information, creation and maintenance of a Web site, record keeping,
production and distribution of disclosures, and material and postage costs.
----------------------------------------------------------------------------------------------------------------
2. Need for Regulatory Action
Understanding and comparing investment options available in a
401(k) plan can be complicated and confusing for many participants. The
magnitude of complexity and confusion may be defined by reference to
the number of available investment options and the materials utilized
for communicating investment-related information. Moreover, the process
of gathering and comparing information may itself be time consuming.
For example, the U.S. Government Accountability Office noted in a
recent report that ``it is hard for participants to make comparisons
across investment options because they have to piece together the fees
that they pay, and assessing fees across investment options can be
difficult because data are not typically presented in a single document
that facilitates comparison.'' \23\
---------------------------------------------------------------------------
\23\ U.S. General Accounting Office, Private Pensions:
Information That Sponsors and Participants Need to Understand 401(k)
Plan Fees, p. 15, fn 20. This report may be accessed at http://
www.gao.gov/new.items/d08222t.pdf.
---------------------------------------------------------------------------
The final rule's new disclosure requirements will help a large
number of plan participants by placing investment-related information
in a format that facilitates comparison of investment alternatives.
This simplified format will make it easier and less time consuming for
participants to find and compare investment-related information. As a
result, plan participants should make better investment decisions which
will enhance their retirement income security.
Table 2 below shows the number of entities affected by the rule.
According to the 2007 Form 5500 data, the latest complete data
available, approximately 318,000 participant-directed individual
account plans covering over 58.2 million participants reported
compliance with ERISA 404(c). Approximately 165,000 participant-
directed individual account plans covering about 13.9 million
participants reported that they are not ERISA section 404(c) compliant.
In total, the rule will impact 483,000 participant-directed individual
account plans covering 72 million participants.
[[Page 64929]]
Table 2--Number of Affected Entities
------------------------------------------------------------------------
------------------------------------------------------------------------
Plans:
Number of 404(c) Compliant Plans...................... 318,000
Number of Non-404(c) Compliant Plans.................. 165,000
---------------
Number of Participant-directed Plans................ 483,000
Participants:
404(c) Plans.......................................... 58,195,000
Non-404(c) Plans...................................... 13,916,000
---------------
Number of Participants in Participant-directed Plans 72,111,000
------------------------------------------------------------------------
Note: The displayed numbers are rounded and therefore may not add up to
the totals.
3. Benefits
The Department believes the final rule will provide two primary
benefits: (1) Reduced time for plan participants to collect investment-
related information and organize it into a format that allows the
information to be compared; and (2) improved investment results for
plan participants due to the enhanced disclosures available to them.
Each benefit is discussed in further detail below; however, the
Department only was able to quantify the search time reduction benefit.
a. Reduction in Participant Search Time
As discussed above, the Department assumes that the final rule's
new disclosure requirements will benefit plan participants by reducing
the time they spend searching for and compiling fee and expense
information into a comparative format. In the RIA of the proposal, the
Department estimated that 29 percent of all participants would
experience time savings due to the easier access to information and the
unified format. However, a commenter pointed out that the Department
significantly underestimated the number of participants that will
experience time savings. The commenter suggested that all participants
who believe that fee, expense and performance information is important
for making investment decisions and read materials provided to them
most likely will experience time savings. The commenter suggested using
a result from the EBRI's 2007 Retirement Confidence Survey \24\ which
indicates that 73 percent (plus or minus 3 percent) of workers saving
for retirement used written materials received at work as a source of
information when making retirement savings and investment
decisions.\25\ The Department agrees with the commenter and has revised
its estimates to reflect that out of the 72 million participants
affected by the rule, 70 to 76 percent, or nearly 50 to 55 million
participants, will benefit from reduced search costs.
---------------------------------------------------------------------------
\24\ Employee Benefit Research Institute Issue Brief
304, April 2007. The survey found that 73 percent of
workers saving for retirement used written material received at work
as a source of information when making retirement savings and
investment decisions.
\25\ The survey notes: ``In theory, each sample of 1,252 yields
a statistical precision of plus or minus 3 percentage points (with
95 percent certainty) of what the results would be if all Americans
age 25 and older were surveyed with complete accuracy. There are
other possible sources of error in all surveys, however, that may be
more serious than theoretical calculations of sampling error. These
include refusals to be interviewed and other forms of nonresponse,
the effects of question wording and question order, and screening.
While attempts are made to minimize these factors, it is impossible
to quantify the errors that may result from them.''
---------------------------------------------------------------------------
Although the Department sought to anchor its analysis on empirical
evidence, there are a number of variables that are subject to
uncertainty. In particular, although the Department is confident that
the new disclosure format will reduce search costs, the Department does
not have empirical evidence on the magnitude of these savings. Search
time savings will vary widely depending on the type of investment
options available through the plan, the completeness of baseline
routine voluntary disclosures, the participant's sophistication, among
other factors. To illustrate the potential benefits, the Department
assumes that participants who are not receiving ERISA section 404(c)
compliant disclosures, on average, will save one-and-a-half hours,
while participants receiving such disclosures will save one hour on
average. The Department also provides a range assuming half the time
savings on the low and double the time savings on the high end.
The benefits estimate uses an average wage of $37 for private
sector workers participating in a pension plan to estimate how much the
average participants would value the time saved. It is based on hourly
wages from Panel 4 of the 2004 wave from the Survey of Income Program
Participation (SIPP) and on wage growth data for private-sector workers
that participate in a pension plan with individual accounts from the
Bureau of Labor Statistics (BLS). In the proposal the Department had
additionally adjusted the wage rate to account for the difference that
plan participants attribute to leisure versus work time. The Department
received a comment that the estimate used may not have been
representative of participants' value of leisure time and suggested
that the Department simply use the average wage rate. The Department
agrees and for the purpose of estimating a dollar value of the time
uses an average wage rate of about $37.
These assumptions result in annual time savings of approximately 26
to 112 million hours valued at $1.0 to $4.0 billion in 2012. The total
present value of this benefit is $7.2 to $29.9 billion using a seven
percent discount rate.
b. Reduction in Fees and Expenses
By reducing participants' time required to collect information and
organize fee and performance information, the final rule should
increase the amount of investment-related information participants
consider and the attention devoted to and efficiency of such
consideration. This will help participants pick appropriate investment
options that will provide the best value to them. Moreover, the
increased transparency could strengthen competition between investment
products and drive down fees.
In its RIA of the proposal, the Department estimated that fees and
expenses are higher than necessary by 11.3 basis points on average.
Some commenters on the proposal, as well as some commenters on the
Department's proposed exemptions relating to the provision of
investment advice by a fiduciary advisor to participants and
beneficiaries in participant-directed individual account plans and
beneficiaries of individual retirement accounts,\26\ dispute this
estimate. The commenters point to evidence that the pricing of
investment products and related services is competitive and efficient,
and contend that there is no credible evidence to the contrary.
---------------------------------------------------------------------------
\26\ See 73 FR 49895 (August 22, 2008) and 73 FR 49924 (August
22, 2008).
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The commenters raised several specific challenges to the
Department's analysis. First, they contend that the Department's
estimate relies inappropriately on dispersion in mutual fund expenses
as evidence that such expenses are sometimes higher than necessary and
as a basis for estimating the degree to which this is so. Dispersion in
expenses reflects differences among the investment products or the
services bundled with them, the commenters say, and therefore such
dispersion is consistent with competitive, efficient pricing. Second,
the commenters argue that the analysis draws incorrect inferences about
fees and expenses in DC plans. The analysis overlooks the role of DC
plan fiduciaries
[[Page 64930]]
in choosing reasonably priced investments and relies too much on
research that examined retail rather than DC plan experience, they say.
Third, the commenters highlight what they maintain are technical flaws
in some of the research that the Department cited as supporting the
conclusion that fees and expenses are sometimes higher than necessary,
and they take issue with the Department's interpretation of this
research.
In response to these commenters, the Department undertook to refine
and strengthen its analysis. First, the Department agrees that the RIA
of the proposal relied too heavily on mere dispersion of fees and
expenses as a basis for estimating whether and to what degree they
might be higher than necessary. The estimate that they are on average
11.3 basis points higher than necessary lacks adequate basis and should
be disregarded. Second, the Department agrees that fees and expenses
paid by DC plan participants can differ from those paid by retail
investors. Any evidence of higher than necessary expenses in the retail
sector might suggest similar circumstances in DC plans, but would not
demonstrate it. Third, the Department reviewed available research
literature in light of the commenters, and refined its analysis and
conclusions accordingly, as summarized immediately below.
Expense Sensitivity--Surveys and studies strongly suggest gaps in
awareness of and sensitivity to expenses.\27\ Other studies consider
whether investors with different levels of sophistication make
different decisions about fees. If more sophisticated investors are
more sensitive to fees, less sophisticated ones might be paying more
than would be optimal. Alternatively, they might be paying more in
order to obtain sophisticated help. Much literature suggests a negative
relationship between sophistication and expenses paid,\28\ but some
does not.\29\ Overall this literature leaves open the question of
whether investment prices are sometimes inefficiently high, but
suggests that even if prices are efficient investors may make poor
purchasing decisions. The Department believes that many individual
investors, including DC plan participants, historically have not
factored expenses optimally into their investment choices.
---------------------------------------------------------------------------
\27\ See e.g., James J. Choi et al., Why Does the Law of One
Price Fail? An Experiment on Index Mutual Funds, National Bureau of
Economic Research Working Paper W12261 (May 2006); Jeff Dominitz et
al., How Do Mutual Funds Fees Affect Investor Choices? Evidence from
Survey Experiments (May 2008) (unpublished, on file with the
Department of Labor); and John Turner & Sophie Korczyk, Pension
Participant Knowledge About Plan Fees, AARP Pub ID: DD-105 (Nov.
2004). Commenters point out that net flows are concentrated in
mutual funds with low expenses. However it is unclear whether this
reflects investor fee sensitivity or brand name recognition and
successful marketing by large, established funds whose low fees are
attributable to economies of scale.
\28\ Sebastian M[uuml]ller & Martin Weber, Financial Literacy
and Mutual Fund Investments: Who Buys Actively Managed Funds?,
Social Science Research Network Abstract 1093305 (Feb. 14, 2008)
find that more financially literate investors pay lower front-end
loads but similar management fees, and suggest that investors who
know about management fees appear not to care about them. Jeff
Dominitz et al., How Do Mutual Funds Fees Affect Investor Choices?
Evidence from Survey Experiments (May 2008) (unpublished, on file
with the Department of Labor) find that financially literate
individuals are better able to estimate fees, and better estimates
are associated with more optimal investment choices. Brad M. Barber
et al., Out of Sight, Out of Mind, The Effects of Expenses on Mutual
Fund Flows, Journal of Business, Volume 79, Number 6, 2095-2119
(2005) find that repeat investors are more sensitive to load fees
than expense ratios, but commenters point out that this finding may
be an artifact of industry load setting practices.
\29\ Mark Grinblatt et al., Are Mutual Fund Fees Competitive?
What IQ-Related Behavior Tells Us, Social Science Research Network
Abstract 1087120 (Nov. 2007) find that investors with different IQs
pay similar fees, which ``suggests that fees are set
competitively.''
---------------------------------------------------------------------------
Sector Differences--Some studies lend insight to the question of
whether investment prices are efficient by comparing prices paid or
performance in different market segments.\30\ The Department believes
that taken together, this literature suggests that there are
unexplained differences in prices and performance across sectors but
fails to demonstrate conclusively whether such differences are
systematically attributable to inefficiently high investment prices.
---------------------------------------------------------------------------
\30\ John P. Freeman & Stewart L. Brown, Mutual Fund Advisory
Fees: The Cost of Conflicts of Interest, The Journal of Corporate
Law, Volume 26, 609-673 (Spring 2001) found that the price paid by
mutual funds for equity fund management is higher than that paid by
pension funds. Based on this and other evidence they argue that
mutual fund fees are often excessive. John C. Coates & R. Glenn
Hubbard, Competition in the Mutual Fund Industry: Evidence and
Implications for Policy, Social Science Research Network Abstract
1005426 (Aug. 2007) challenge Freeman and Brown's methods and
conclusions, arguing that these differences in prices are
attributable to differences in services for which Freeman and Brown
did not account. They offer evidence that fees are competitive.
Alicia H. Munnell et al., Investment Returns: Defined Benefits vs.
401(k) Plans, Center for Retirement Research Issue Brief Number 52
(Sept. 2006) find higher returns in DB plans than in DC plans and
offer that ``part of the explanation may rest with higher fees''
that are paid by DC plan participants. Rob Bauer & Rik G.P. Frehen,
The Performance of U.S. Pension Funds, Social Science Research
Network Abstract 965388 (Jan. 2008) find that DC and DB plans both
perform close to benchmarks while mutual funds underperform, and
point to hidden costs in mutual funds as the most likely reason.
Diane Del Guercio & Paula A. Tkac, The Determinants of the Flow of
Funds of Managed Portfolios: Mutual Funds vs. Pension Funds, The
Journal of Financial and Quantitative Analysis, Volume 37, Number 4,
523-557 (Dec. 2002) find that ``in contrast to mutual fund
investors, pension clients punish poorly performing managers by
withdrawing assets under management and do not flock
disproportionately to recent winners.''
---------------------------------------------------------------------------
Market Power--At least one study suggests that mutual funds may
wield market power to mark up prices to inefficient levels.\31\
---------------------------------------------------------------------------
\31\ Guo Ying Luo, Mutual Fund Fee-Setting, Market Structure and
Mark-Ups, Economica, Volume 69, Number 274, 245-271 (May 2002)
exploits differences in market concentration across different narrow
mutual funds categories, and finds that mark-ups average 30 percent
of fees across all categories of no load funds and more than 70
percent across load funds (assuming a 5-year holding period).
---------------------------------------------------------------------------
What Expenses Buy--A number of studies consider the degree to which
expense dispersion is a function of product features and bundled
services, and if it is, whether that dispersion is justified by
differences in observable attendant financial benefits such as
performance. Some of this literature also considers the degree to which
investors choose investments where expenses are so justified. In the
Department's view this literature taken together suggests that a
substantial portion of expense dispersion is attributable to
distribution expenses, including compensation of intermediaries and
advertising.\32\ It casts doubt on whether such expenses are duly
offset by observable financial benefits. Most studies are consistent
with the possibility that such expenses are at least partly offset by
unobserved benefits such as reduced search costs and other support for
novice and unsophisticated investors, but most are also consistent with
the possibility that some expenses are not so offset and that
investors, especially unsophisticated ones, sometimes pay inefficiently
high prices.\33\ The authors of some studies expressly interpret their
failure to identify offsetting financial benefits as evidence that
prices are inefficiently high. Some suggest that conflicted
intermediaries may serve their own and
[[Page 64931]]
fund managers' interests, thereby generating inefficiently high profits
for either or both. Others disagree, believing that investors
efficiently derive a combination of financial and intangible benefits
for their expense dollars.\34\
---------------------------------------------------------------------------
\32\ The literature also attributes much expense dispersion to
differences in the cost of managing different types of funds. For
example, active equity management is more expensive than passive and
management of foreign or small cap equity funds is more expensive
than management of large cap domestic equity funds. Investors
therefore might optimally diversify across funds with different
levels of investment management expense. Some studies question
whether active management delivers observable financial benefits
commensurate to the associate expense. For example, Kenneth R.
French, The Cost of Active Investing, Social Science Research
Network Abstract 1105775 (Apr. 2008) finds that investors spend 0.67
percent of aggregate U.S. stock market value each year searching for
superior return, and characterizes this as society's cost of price
discovery.
\33\ Both of these hypotheses are also consistent with
literature finding a negative link between sophistication and
expenses.
\34\ The following is a sampling of findings and interpretations
reported in various studies that the Department reviewed. The
Department observes that some of these studies have been published
in peer-reviewed journals, while others have not. Some are working
papers subject to later revision. Some research is visibly supported
by industry or other interests, and some may be independent. Very
little of this research separately examines DC plan investing.
Nearly all of it examines mutual fund markets to the exclusion of
certain competing insurance company or bank products. Some of it
examines foreign experience. The Department believes it must be
cautious in drawing inferences from this research as to whether
investment prices paid by participants are efficient.
Daniel B. Bergstresser et al., Assessing the Costs and Benefits
of Brokers in the Mutual Fund Industry, Social Science Research
Network Abstract 616981 (Sept. 2007) find that investors who pay to
purchase funds via intermediaries realize inferior returns, and say
this result is consistent with either intangible benefits for
investors or inefficiently high prices due to conflicts.
Ralph Bluethgen et al., Financial Advice and Individual
Investors' Portfolios, Social Science Research Network Abstract
968197 (Mar. 2008) find that advisers (who are mostly compensated by
commission) improve diversification and allocation across classes
while increasing fees and turnover. They say these findings are
consistent with ``honest advice.''
Susan Christoffersen et al., The Economics of Mutual-Fund
Brokerage: Evidence from the Cross Section of Investment Channels,
Science Research Network Abstract 687522 (Dec. 2005) identify some
financial benefits reaped by investors who pay to invest through
intermediaries.
Sean Collins, Fees and Expenses of Mutual Funds, 2006,
Investment Company Institute Research Fundamentals, Volume 16,
Number 2 (June 2007) reports that mutual fund fees and expenses are
declining.
Sean Collins, Are S&P 500 Index Mutual Funds Commodities?,
Investment Company Institute Perspective, Volume 11, Number 3 (Aug.
2005) argues that S&P 500 index funds are not uniform commodities.
For example, they are distributed in different ways. He finds that
91 percent of the variation in these funds' expense ratios can be
explained by a combination of fund asset size, investor account
size, fee waivers and separate fees, and investor advice that is
bundled into expense ratios. He argues that these funds
competitively pass economies of scale along to investors, and
reports that assets and flows are concentrated in low-cost funds.
Henrik Cronqvist, Advertising and Portfolio Choice, Social
Science Research Network Abstract 920693 (July 26, 2006) finds that
fund advertising steers investors toward ``portfolios with higher
fees, more risk, more active management, more `hot' sectors, and
more home bias.'' He suggests that ``with the use of advertising,
funds can differentiate themselves and therefore charge investors
higher fees than the lowest-cost supplier in the industry.''
Daniel N. Deli, Mutual Fund Advisory Contracts: An Empirical
Investigation, The Journal of Finance, Volume 57, Number 1, 109-133
(Feb. 2002) finds that differences in investment advisers' marginal
compensation reflect differences in their marginal product,
difficulty in measuring adviser performance, control environments,
and scale economies. Based on this finding, he suggests that
investment prices are efficient and recommends caution in any
regulatory effort to influence such prices.
Edwin J. Elton et al., Are Investors Rational? Choices Among
Index Funds, The Journal of Finance, Volume 59, Number 1, 261-288
(Feb. 2004) find that flows into high expense (and therefore
predictably low performance) S&P 500 index mutual funds are higher
than would be expected in an efficient market. They conclude that
because investors are not perfectly informed and rational, inferior
products can prosper. Commenters, however, contend that because the
authors scaled flows by fund size and smaller funds have higher
expenses, these findings exaggerate the degree to which flows are
directed to high expense funds.
Javier Gil-Bazo & Pablo Ruiz-Verd[uacute], Yet Another Puzzle?
Relation Between Price and Performance in the Mutual Fund Industry,
Social Science Research Network Abstract 947448 (March 2007) find
that ``funds with worse before-fee performance charge higher fees.''
They hypothesize that lower performing funds lose sophisticated
investors to higher performing funds, then are left with relatively
unsophisticated investors who are not as responsive to price.
John A. Haslem et al., Performance and Characteristics of
Actively Managed Retail Equity Mutual Funds with Diverse Expense
Ratios, Financial Services Review, Volume 17, Number 1, 49-68 (2008)
find that funds with lower expenses have superior returns. John A.
Haslem et al., Identification and Performance of Equity Mutual Funds
with High Management Fees and Expense Ratios, Journal of Investing,
Volume 16, Number 2 (2007) find that certain performance measures
vary negatively with fees and, on that basis, suggest that mutual
funds do not compete strongly on price and that expenses are too
high.
Sarah Holden & Michael Hadley, The Economics of Providing 401(k)
Plans: Services, Fees and Expenses 2006, Investment Company
Institute Research Fundamentals, Volume 16, Number 4 (Sept. 2007)
report that 401(k) mutual fund investors tend to pay lower than
average expenses and that 401(k) assets are concentrated in low cost
funds.
Ali Hortacsu & Chad Syverson, Product Differentiation, Search
Costs, and Competition in the Mutual Fund Industry: A Case Study of
S&P 500 Index Funds, Quarterly Journal of Economics, 403 (May 2004)
document dispersion in S&P 500 Index Fund expense ratios, and report
that low-cost funds have a dominant, but falling, market share. They
conclude that an influx of novice investors who must defray search
costs explains dispersion in expenses and flows to high expense
funds.
Todd Houge & Jay W. Wellman, The Use and Abuse of Mutual Fund
Expenses, Social Science Research Network Abstract 880463 (Jan.
2006) find that load funds charge higher 12b-1 and management fees.
They attribute this to abusive market segmentation that extracts
excessive fees from unsophisticated investors.
Giuliano Iannotta & Marco Navone, Search Costs and Mutual Fund
Fee Dispersion, Social Science Research Network Abstract 1231843
(Aug. 2008) analyze the effect of search costs on mutual fund fees
with data on broad U.S. domestic equity funds. They estimate the
portion of the expense ratio that is not justified by the quality of
service provided, by the cost structure of the investment company,
or by the specificities of the clientele served by the fund and find
that its dispersion is lower for highly visible funds and for funds
that invest heavily in marketing. In the case of the U.S. mutual
fund market, they argue, the dispersion of this residual
demonstrates the extent to which some firms can charge a ``non-
marginal'' (that is higher than competitive) price.
Marc M. Kramer, The Influence of Financial Advice on Individual
Investor Portfolio Performance, Social Science Research Network
Abstract 1144702 (Mar. 2008) finds that advised investors take less
risk and thereby reap lower returns. Risk-adjusted performance is
similar. Adjusting further for investor characteristics, advised
investors perform slightly worse.
Erik R. Sirri & Peter Tufano, Costly Search and Mutual Fund
Flows, The Journal of Finance, Volume 53, Number 5, 1589-1622 (Oct.
1998) find that investors are ``fee sensitive in that lower-fee
funds and funds that reduce fees grow faster.'' Investors' fee
sensitivity is not symmetric, however.
Edward Tower & Wei Zheng, Ranking Mutual Fund Families: Minimum
Expenses and Maximum Loads as Markers for Moral Turpitude, Social
Science Research Network Abstract 1265103 (Sept. 2008) find a
negative relationship between expense ratios and gross performance.
The Division of Investment Management: Report on Mutual Fund
Fees and Expenses, U.S. Securities and Exchange Commission (Dec.
2000), at http://www.sec.gov/news/studies/feestudy.htm describes
mutual fund fees and expenses and identifies major factors that
influence fee levels but does not assess whether prices are
efficient.
Xinge Zhao, The Role of Brokers and Financial Advisors Behind
Investment Into Load Funds, China Europe International Business
School Working Paper (Dec. 2005), at http://www.ceibs.edu/faculty/
zxinge/brokerrole-zhao.pdf finds that funds with higher loads
receive higher flows, and suggests that conflicted intermediaries
enrich themselves at investors' expense.
---------------------------------------------------------------------------
In light of this literature and public commenters, the Department
believes that the available research provides an insufficient basis to
confidently determine whether or to what degree participants pay
inefficiently high investment prices. Market conditions that may lead
to inefficiently high prices--namely imperfect information, search
costs and investor behavioral biases--certainly exist in the retail IRA
market and likely exist to some degree in particular segments of the DC
plan market. The Department believes there is a strong possibility that
at least some participants pay inefficiently high investment prices. If
so, the Department would expect these actions to reduce that
inefficiency. This would increase participants' welfare by transferring
surplus from producers of investment products and services to them and
by reducing dead weight loss. The Department additionally believes that
even where investment prices are efficient, participants often make bad
investment decisions with respect to expenses--that is, they buy
investment products and services whose marginal cost exceed the
associated marginal benefit to them.\35\ The Department expects these
actions to reduce such investment errors, improving participant and
societal welfare. However, the Department has no basis
[[Page 64932]]
on which to quantify such errors or improvements.
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\35\ It is possible that the converse could sometimes occur:
Participants might fail to buy efficiently priced products and
services whose marginal cost lags the associated marginal benefit to
them. In that case advice, by correcting this error, might lead to
higher expenses, but would still improve welfare. Because research
suggests that participants are insensitive to fees rather than
excessively sensitive to them the Department believes that this
converse situation is likely to be rare.
---------------------------------------------------------------------------
In addition to the benefits that participants will derive from the
disclosure of investment-related information in a comparative format,
they also will benefit from a retrospective disclosure of plan
administrative fees actually charged to their accounts in the prior
quarter. Previous RFI comments from participant advocates, plan
sponsors and service providers support such a disclosure
requirement.\36\ However, one comment to the contrary on behalf of
service providers was received by the Department in response to the
proposal. The commenter expressed concern that ``the value of quarterly
statements to the participant does not justify the cost of providing
the data.'' \37\ The Department continues to believe, as it did in
connection with the proposal, that participants who are trying to plan
for retirement are entitled to a comprehensive disclosure that includes
not only information about fee and expenses that may occur depending on
investment options selected, but also information on other fees that
were actually assessed against their accounts in the previous quarter.
Information about actual charges to participants' accounts may, among
other things, help participants understand their current reported
account balance, detect errors in prior charges by the plan, handle
general household budgeting and retirement planning, and insure that
the charges are reasonable. In addition, this information already
should be available in some form as part of ordinary plan recordkeeping
that tracks participant account balances.
---------------------------------------------------------------------------
\36\ These comments on the RFI can be found under http://
www.dol.gov/ebsa/regs/cmt-feedisclosures.html.
\37\ Comments on the proposal can be found under http://
www.dol.gov/ebsa/regs/cmt-fiduciaryrequirements.html.
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4. Costs
The Department estimates that the regulation may result in the
following additional administrative burdens and costs \38\ for plans
(or plan sponsors).\39\
---------------------------------------------------------------------------
\38\ The Department's estimate of these costs are highly
uncertain, discussed in more detail in the Uncertainty section,
reflecting especially uncertainty about the average time plans will
spend on performing their task.
\39\ For purposes of this analysis the Department assumes that
these costs are borne by plans, even though they might be initially
incurred by service providers.
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a. Costs Due to Upfront Review and Updating of Plan Documents
In the RIA of the proposal, the Department estimated costs of about
$30.3 million for participant-directed individual accounts plans to
review the regulation upfront and to prepare the disclosures. Using
updated in-house labor rates for professional and clerical employees,
the Department has increased the estimated costs to about $35.0 million
in 2012. Costs to update plan documents to take into account plan
changes, such as new investment alternatives, changes in general plan
administrative expenses, and changes in individual expenses are
estimated to be approximately $20.3 million in subsequent years.
b. Costs Due to Production of Quarterly Dollar Amount Disclosures
The final regulation will require plan administrators to send out
disclosures about administrative charges to participants' accounts and
engage in recordkeeping on both a plan-wide as well as a participant-
specific basis. The Department estimates that the cost to produce the
actual dollar disclosure is approximately $30.5 million for 2012 \40\
and $10.7 million in subsequent years.
---------------------------------------------------------------------------
\40\ The Department did not account for additional paper costs,
given that no additional pages need be added as long as this
information is included as part of the quarterly benefit statement.
---------------------------------------------------------------------------
c. Costs Due to Assembling Required Information for Chart and Web Site
Additional administrative burdens and costs are likely to arise
because of the need for plans to consolidate information from more than
one source to prepare the required comparative chart. In the proposal,
the Department estimated that it takes a person with a financial
background about one hour per plan to consolidate the information from
multiple sources for the comparative chart. The Department acknowledges
that some plans with non-mutual fund designated investment alternatives
may require more time to prepare the required information for the chart
and the Web site. Therefore, the Department has quintupled the time
estimate to five hours per plan, on average, for the first year and
quadrupled the time estimate to four hours per plan, on average, for
subsequent years. This results in estimated costs for the consolidation
of fee information from multiple sources of approximately $151.5
million in 2012 and $121.2 million in subsequent years.\41\
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\41\ This number also includes a small update of the in-house
wage rate for a financial professional.
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d. Costs Due to the Web Site Requirement
The regulation does not require plans to create and maintain a Web
site. Rather, paragraph (d)(1)(v) of the rule requires plan
administrators to disclose on the required comparative chart an
Internet Web site address that is sufficiently specific to lead
participants to supplemental information about each investment option
offered under the plan. The Department received comments that many non-
mutual fund products may not presently maintain a Web site, therefore
additional costs will be incurred. In response to these comments, the
Department has quantified the cost of creating and maintaining a Web
site, below as an upper bound.
For purposes of quantifying the cost of creating and maintaining a
Web site, the Department assumes that about 50 percent of plans, or
employers sponsoring such plans, already maintain a Web site where plan
information may be found.\42\ For these plans, some information will
likely be required to be added to existing Web sites, which will have
to be updated periodically. The Department assumes that 241,000 plans,
or employers sponsoring such plans, already maintain Web sites with
plan-related information and that for each such plan on average, an IT
professional will spend one hour updating the Web site for the required
information. In addition, the Department assumes that the plan will
update the information about three additional times during the year,
which will require one-half hour of an IT professional's time for each
update. The estimated 241,000 plans that do not currently maintain a
Web site with plan information will require, on average, two hours of
an IT professional's time to create a basic Web site and one-half hour
to update the information on the Web site three times in the first
year.\43\ In addition, the 241,000 plans presently without Web sites
will have to rent server space. This is estimated to cost plans, on
average, $240 a year, resulting in an aggregate cost of $159.4 million
in the first year to create and update Web sites.
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\42\ The Department lacks representative survey information on
the number of plans that have a Web site, but believes that an
average rate of 50 percent is reasonable. In estimating this rate,
the Department has taken into account that plans that offer only
non-mutual fund options might not have Web sites currently and that
plans that offer a combination of mutual funds and non-mutual fund
investment options are less likely to have Web sites than plans
offering only mutual funds. In addition, commenters estimated that
about half of plans use a third party administrator or independent
record keeper. Due to this uncertainty, the Department's estimate of
the resulting costs is also highly uncertain.
\43\ The hourly labor cost of an IT professional is assumed to
be $70.
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In subsequent years, only new plans will incur the cost of
developing a Web
[[Page 64933]]
site. Existing plans are assumed to update the information on the Web
site four times per year requiring one-half hour of an IT
professional's time for each update. Plans also will incur server space
rental cost estimated at $240 per plan, resulting in a total cost in
each subsequent year of $142.6 million.
e. Costs of Distribution and Materials for Disclosures
The final rule's required disclosures, as well as any materials the
plan receives regarding voting, tender or similar rights (``pass-
through materials''), are usually sent to plan participants on an
annual or quarterly basis.\44\ Using updated in-house wage rates, this
leads to an estimate of about $39.2 million in labor costs.\45\ Plans
will also bear materials and postage costs of about $9.0 million in
2012. The Department believes that plans have pass-through materials
readily available for participants who must receive such disclosures;
therefore, it has attributed no cost to gather this information.
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\44\ As in the RIA of the proposal, this section does not
include distribution or material costs for the disclosures of
administrative fees charged to participants' accounts as the
Department assumes that this information can be included as part of
the quarterly benefit statement.
\45\ Some of this information is already required for 404(c)
compliant plans and by the Department's Qualified Default Investment
Alternative regulation. In addition, a large majority of plans
voluntarily provide this information to its participants. As a
result, the Department estimates that only 577,000 participants will
receive this information for the first time because of the final
regulation, and 38% percent of participants will receive the
information electronically.
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In total, the Department estimates that in 2012, participant-
directed individual account plans will incur increased administrative
costs of approximately $424.6 million.
f. Discouragement of Some Employers From Sponsoring a Retirement Plan
Increased administrative burdens may discourage some employers,
particularly small employers, from sponsoring a retirement plan. For
small plan sponsors, the administrative burden is felt
disproportionately because of their limited resources. Small business
owners who do not have the resources to analyze plan fees or to hire an
analyst may be discouraged from offering a plan at all.
Regulatory burden is one among many reasons small businesses do not
to sponsor a retirement plan. According to the 2000, 2001, and 2002
Employee Benefit Research Institute (EBRI)'s Small Employer Retirement
Surveys, about 2.7 percent of small employers cited ``too many
government regulations'' as the most important reason they do not offer
a retirement plan.\46\ A commenter on the proposed rule supported this
assertion, but did not provide a specific estimate of its impact. Due
to very limited data on this issue, the Department is not able to
quantify its impact.\47\
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\46\ The survey defines small employers as those having up to
100 full-time workers. Other reasons small employers do not offer a
retirement plan are that workers prefer wages or other benefits,
that a large portion of employees are seasonal, part-time, or high
turnover, and that revenue is too low or uncertain. See http://
www.ebri.org/surveys/sers for more detail.
\47\ It also is possible that rather than discouraging employers
from sponsoring or continuing to sponsor a retirement plan,
increased administrative burden could instead influence some
employers to offer less investment options in their participant-
directed individual account plans.
---------------------------------------------------------------------------
g. Summary of Costs
The quantified total costs are shown in Table 3 below. Column (A)
reports the estimated costs of up-front review of the regulation,
Column (B) reports the costs to update plan documents, and Column (C)
reports the cost to produce quarterly dollar amounts for administrative
fees charged to participant accounts. The cost to assemble the required
information, create and update Web sites, and associated distribution
and material costs are reported in columns (D), (E), (F) and (G). The
total present value of these costs is estimated at $2.7 billion over
the ten year period 2012 to 2021. As discussed in more detail in the
uncertainty section below, a range of possible cost estimates was
constructed by decreasing and increasing key cost assumptions by 50
percent. This led to a range for the cost estimates of $2.0 to $3.3
million.
Table 3--Total Discounted Costs of Proposal Reported in $Millions/Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
Production Assembling
of the Staff cost
Up-front Update plan quarterly required Creation/ Distribution to
Year review cost documents dollar chart and updating of materials distribute Total costs
amount Web site Web site costs disclosures
disclosures information
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (G) A+B+C+D+E+F+G
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012..................................... 35.0 0.0 30.5 151.5 159.4 9.0 39.2 424.6
2013..................................... 5.1 13.8 10.0 113.3 133.3 8.4 36.6 320.5
2014..................................... 4.8 12.9 9.3 105.9 124.6 7.9 34.2 299.6
2015..................................... 4.5 12.1 8.7 99.0 116.4 7.4 32.0 280.0
2016..................................... 4.2 11.3 8.1 92.5 108.8 6.9 29.9 261.7
2017..................................... 3.9 10.5 7.6 86.4 101.7 6.4 27.9 244.5
2018..................................... 3.7 9.8 7.1 80.8 95.0 6.0 26.1 228.5
2019..................................... 3.4 9.2 6.6 75.5 88.8 5.6 24.4 213.6
2020..................................... 3.2 8.6 6.2 70.6 83.0 5.2 22.8 199.6
2021..................................... 3.0 8.0 5.8 65.9 77.6 4.9 21.3 186.6
--------------------------------------------------------------------------------------------------------------
Total with 7% Discounting............ ........... ........... ........... ........... ........... ............ ........... 2,659.2
Total with 3% Discounting............ ........... ........... ........... ........... ........... ............ ........... 3,095.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded and therefore may not add up to the totals.
h. Uncertainty in the Cost Estimates
Although the Department made adjustments to the analysis in
response to comments, the Department remains uncertain regarding the
exact magnitude of the costs of these changes. The variables with the
most uncertainty in the cost estimates are:
[[Page 64934]]
The time required for legal professionals, clerical
professionals \48\ and accountants to perform their tasks;
---------------------------------------------------------------------------
\48\ The clerical time to distribute disclosures remains
unchanged in this sensitivity analysis.
---------------------------------------------------------------------------
The cost to obtain the actual dollar amounts of
participant's administrative and individual expenses; and
The labor cost to create and maintain Web sites.
To estimate the influence of these variables on the analysis, the
Department re-estimated the costs of the final regulation under
different assumptions for these uncertain variables. Increasing the
variables of concern by 25 percent resulted in a present value of $3.0
billion. Increasing the variables by 50 percent resulted in a present
value of $3.3 billion. Increasing the key variables by 75 percent
results in a $3.6 billion present value for the final regulation.
5. Net Benefits
As the analysis above shows, our low end benefit estimate of $7.2
billion exceeds our high end cost estimate of $3.3 billion. Thus, the
Department remains highly confident in its conclusion expressed in the
RIA for the proposal that increased fee disclosure can induce changes
in participant behavior and reductions in plan fees. Several public
comments on the proposal reinforce these conclusions.
6. Comments and Revisions
The Department received several comments questioning various
assumptions on which its estimates of the benefits were based and
suggesting that it had underestimated the costs of the proposal. In
response to these comments, as discussed above, the Department
reevaluated the quantified benefits resulting from a reduction of fees
and increased its estimate of the costs to account for the creation and
updating of Web sites and the complexity of retrieving the information
needed to produce the comparative chart and obtain required
supplemental information. In addition, the Department updated its
estimates of labor costs.
7. Alternatives
In formulating this final rule, the Department considered several
alternative approaches, which are discussed in detail in the RIA of the
proposal. The Department did not adopt any of the alternatives
discussed in the RIA of the proposal, because it did not receive any
sufficiently persuasive comments suggesting that it should. Some
commenters suggested alternatives the Department had not considered.
For example, a commenter suggested that plans should be allowed to
provide supplemental information required to be disclosed by the rule
in a written document rather than on a Web site, because many companies
do not have access to a Web site. Another, commenter asked the
Department to clarify whether the proposal applies to IRAs that provide
for employer contributions--that is, ``Simplified Employee Pension
Retirement Account'' (SEP) and ``Savings Incentive Match Plan for
Employees'' (SIMPLE) plans. The Department did not adopt the first
commenter's suggestion, but it did clarify in the final rule that SEP
and SIMPLE IRAs are excluded from the rule. The Department's decisions
regarding these regulatory alternatives are discussed earlier in this
preamble.
8. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601, et seq.) (RFA)
imposes certain requirements with respect to Federal rules that are
subject to the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551, et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. At the proposed rule stage, the Department prepared an
initial RFA analysis, because it did not have enough information to
certify that the rule would not have a significant effect on a
substantial number of small entities, although the Department stated
that it considered it unlikely that the proposed rule would
significantly affect such entities.
In connection with the final rule, the Department has prepared a
final RFA in compliance with section 604 of the RFA. For purposes of
this analysis, EBSA continues to consider a small entity to be an
employee benefit plan with fewer than 100 participants. The basis of
this definition is found in section 104(a)(2) of ERISA, which permits
the Secretary to prescribe simplified annual reports for pension plans
that cover fewer than 100 participants. The Department used this
standard in the proposed rule and consulted with the Small Business
Administration Office of Advocacy concerning its use of this standard
for RFA purposes and requested public comments on this issue. The
Department did not receive any comments that addressed its use of the
participant count standard.
The following subsections address specific requirements of the RFA.
a. Need for and Objectives of the Rule
With the proliferation of participant-directed individual account
plans, such as 401(k) plans, which afford participants and
beneficiaries the opportunity to direct the investment of all or a
portion of the assets held in their individual plan accounts,
participants and beneficiaries are increasingly responsible for making
their own retirement savings decisions. This increased responsibility
has led to a growing concern that participants and beneficiaries may
not have access to, or if accessible, may not be considering
information critical to making informed decisions about the management
of their accounts, particularly information on investment choices,
including attendant fees and expenses. This rule requires participants
and beneficiaries to be provided investment-related information in a
form that encourages and facilitates a comparative review among
investment options. The Department believes that the rule will provide
beneficial information to participants and beneficiaries that will
allow them to make informed decisions with regard to investing assets
in their individual accounts.
The reasons for and objectives of this final regulation are
discussed in detail in Section A of this preamble, ``Background,'' and
in section ``Need for Regulatory Action'' of the Regulatory Impact
Analysis (RIA) above. The legal basis for the rule is set forth in the
``Authority'' section of this preamble, below.
b. Public Comments
A public comment on the proposed rule suggested that the Department
underestimated the cost to small service providers to comply with the
proposed rule. Specifically, the commenter stated that the Department
underestimated the time required for an attorney or other legal
professional to review the rule and the disclosures, and the hourly
rate for an attorney to perform this service. In response to the first
comment, the Department would like to clarify that the time estimate
for legal review is an average estimate spread across all plans that
must comply with the rule and is not the time estimate that is
applicable only to small plans. With regard to the second issue, the
Department would like to clarify that the estimated hourly wage rate is
not a billable rate; it is an in-house wage rate that includes profit
or overhead and is based on the National Occupational Employment Survey
(May 2008, Bureau of Labor Statistics) and the Employment Cost Index
(June, 2009, Bureau of Labor
[[Page 64935]]
Statistics), which is the most reliable data the Department has to
support its cost estimates. The commenter also stated that the
Department underestimated the time small plan sponsors will have to
spend gathering information to comply with the disclosure requirements
of the final rule. As further discussed under the Cost section of the
RIA, the Department has increased its estimate of the hours it will to
take to gather and consolidate information required for the disclosure
from one hour to four hours.
Finally, the commenter implored the Department to apply a delayed
effective date for small plans of at least one year following the
effective date for large plans in order to allow such plans to develop
the systems necessary to comply with the disclosure requirements of the
final rule. While the Department did not adopt the commenter's
suggestion, as stated above in the preamble, the Department has set
January 1, 2012, as the applicability date for calendar year plans to
comply with the rule, which should provide plans with sufficient time
to develop the necessary systems for compliance.
c. Affected Small Entities
The Department estimates that the final rule will apply to
approximately 419,000 small plans covering approximately 9.5 million
participants.
d. Estimating Compliance Requirements for Small Entities/Plans
The Department continues to believe that the effects of this final
rule will be to increase retirement savings by providing participants
and beneficiaries with enhanced information about their plans, which is
expected to allow them to make more informed investment decisions. The
Department also believes that small plans will benefit from the rule,
because it will clarify the information that must be disclosed to plan
participants in order for plan fiduciaries to meet their fiduciary duty
under ERISA.
While small and large plans will incur administrative costs due to
the final rule, these costs are reasonable compared to the benefits and
will probably be borne by the participants who will also receive the
benefits under the rule. From industry comments, the Department
inferred that participants in larger plans, more often than
participants in smaller plans, have access to needed investment
information. The Department continues to believe that participants in
small plans need as much information about their plan investments as
participants in larger plans.
Assuming that the plan incurs the average costs for all disclosure
activities that are considered in the RIA section above, the following
calculation illustrates how large the costs of the disclosures would be
for a very small plan (one-participant plan). As can be seen in Table
4, the total cost of compliance for a one-participant plan amounts to
less than $873 in the first year and less than that amount in the
subsequent years. The costs in 2012 include a review cost of about $73
per plan (one-half hour of a legal professional's time plus one-half
hour of a clerical professional's time), labor costs of $314 for
consolidating the information for the comparative chart (five hours),
costs of, on average, $485 for the creation and maintenance of a Web
site, $0.40 per participant for recordkeeping and disclosure of
information, additional annual labor cost for distribution of $0.90 in
section 404(c) compliant plans or plans that already provide similar
information ($1.50 in plans that do not already provide section 404(c)
compliant or similar information), and material and postage costs of
$0.15 in 404(c) compliant plans or plans that already provide similar
information ($2.40 in plans that do not already provide section 404(c)
compliant or similar information).
These cost estimates should be considered an estimate of the upper
bound on plan expenses. To the extent that small plans rely on third
party administrators or independent record keepers that have economies
of scale, plan costs could be lower. To the extent that plans use
record keepers that already provide plan Web sites changes by the
record keeper to comply with the final rule will likely impose few, if
any, additional costs for plans. In addition, if plans use investment
alternatives like mutual funds that already provide much of the
required information, Web site costs would be less, as would the cost
to gather information for the Web site and the comparative chart.
Small plans may be able to find lower cost options to comply with
the rule. If, for example, server space for the Web site is provided by
the service provider at almost no cost and the plan is not required to
spend as much time gathering the required information because it chose
plan options for which the information is more readily available, a
one-participant plan could experience first year costs of $310 and $240
in subsequent years.
Table 4--Costs For One-Participant Plan (Undiscounted)
----------------------------------------------------------------------------------------------------------------
404(c) plans and plans with Non-404(c) plans without
similar information similar information
Type of cost ---------------------------------------------------------------
Subsequent Subsequent
Initial year year Initial year year
----------------------------------------------------------------------------------------------------------------
Plan Review..................................... 73 36 73 36
Consolidation of Information.................... 314 251 314 251
Cost of Web site................................ 485 380 486 381
Actual Dollar Disclosure........................ 0.40 0.15 0.40 0.15
Labor Cost for Distribution..................... 0.90 0.90 1.50 1.50
Material Cost................................... 0.15 0.15 2.40 2.40
---------------------------------------------------------------
Total....................................... $873 $669 $876 $672
----------------------------------------------------------------------------------------------------------------
The displayed numbers are rounded and therefore may not add up to the totals.
e. Duplicative, Overlapping, and Conflicting Rules
ERISA section 404(c) and the regulations thereunder contain
disclosure requirements for plan fiduciaries of certain participant-
directed account plans that are to some extent similar to the ones that
are contained in the proposed regulation. As explained in more detail
in the Background section of this preamble, the Department amended the
regulations under section 404(c) in order to establish a uniform set of
basic disclosure requirements and to ensure
[[Page 64936]]
that all participants and beneficiaries in participant-directed
individual account plans have access to the same investment-related
information.
In addition, the Department has consulted with the Securities and
Exchange Commission to avoid duplicative, overlapping, or conflicting
requirements. The Department is unaware of any additional relevant
Federal rules for small plans that duplicate, overlap, or conflict with
this final rule.
9. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the proposed rule solicited
comments on the information collections included therein. The
Department also submitted an information collection request (ICR) to
OMB in accordance with 44 U.S.C. 3507(d), contemporaneously with the
publication of the proposal for OMB's review. No public comments were
received that specifically address the paperwork burden analysis of the
information collections.
The Department submitted an ICR to OMB for its request of a new
information collection. OMB approved the ICR on October 5, 2010, under
OMB Control Number 1210-0090, which will expire on October 31, 2013.
The final rule requires plan- and investment-related fee and
expense information to be disclosed to participants and beneficiaries
in participant-directed individual account plans. This ICR pertains to
two categories of information that are required to be disclosed:
``Plan-related'' and ``investment-related'' information. The
information collection provisions of the rule are intended to ensure
that fiduciaries provide participants and beneficiaries with sufficient
information regarding plan fees and expenses and designated investment
alternatives to make informed decisions regarding the management of
their individual accounts. The calculation of the estimated hour and
cost burden of the ICR were discussed in detail in the proposed rule
and are summarized below.
The Department estimates that disclosing and distributing plan- and
investment-related information to participants and beneficiaries as
required by the rule will require approximately 6.6 million burden
hours with an equivalent cost of approximately $347 million and a cost
burden of approximately $221 million in the first year. In each
subsequent year, the total labor burden hours are estimated to be
approximately 5.5 million hours with an equivalent cost of
approximately $275 million and the cost burden is estimated at
approximately $201 million per year.
The Department's estimate of the total burden in the final rule has
increased from the proposal due to four factors: (1) Counts of plans
and participants were updated to account for more recent data; (2) wage
rates were updated to account for more recent data; (3) the hour and
cost burden associated with creating and maintaining a Web site to
comply with the regulatory requirements was added; and (4) the estimate
of the average hour burden to gather information for the comparative
chart and Web site was increased. The first two changes resulted only
in a slightly higher burden, while the other two changes increased the
burden significantly as discussed in more detail below.
Increased burden due to Web site requirement: The estimated burden
includes 1.4 million burden hours ($101 million in equivalent costs) in
the first year, and 1.1 million burden hours ($76 million equivalent
costs) in subsequent years for plans to engage an information
technology professional to comply with the rule's requirement for plans
to provide a Web site to disclose supplemental information to
participants and beneficiaries. The estimated annual cost of the Web
site is approximately $116 million. This hour and cost burden
associated with providing a plan Web site was not estimated at the
proposed rule stage.
Increased burden due to increase in average hour burden estimate of
gathering information for the comparative chart and Web site: The
estimated burden reported above also includes 1.9 million in added
burden hours in the first year ($121 million in added equivalent costs)
to consolidate information from multiple sources for the comparative
chart and Web site. In the proposal, the Department estimated that this
requirement could take, on average, one hour per plan; in response to
comments, the final RIA uses an estimate of five hours, on average, per
plan in the first year, and four hours, on average in subsequent years.
These paperwork burden estimates are summarized as follows:
Type of Review: New collection (Request for new OMB Control
Number).
Agency: Employee Benefits Security Administration, Department of
Labor.
Titles: Fiduciary Requirements for Disclosure in Participant-
Directed Individual Account Plans.
Affected Public: Business or other for-profit, not-for-profit
institutions.
Estimated Number of Respondents: 483,000.
Estimated Number of Annual Responses: 738,207,000.
Frequency of Response: Initially, Annually, Upon Request, Updating.
Estimated Total Annual Burden Hours: 6,583,000 hours in the first
year; 5,520,000 in each subsequent year.
Estimated Total Annual Burden Cost: $221,040,000 for the first
year; $201,225,000 for each subsequent year.
10. Congressional Review Act
The final rule is subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the
Comptroller General for review. The final rule is a ``major rule'' as
that term is defined in 5 U.S.C. 804, because it is likely to result in
an annual effect on the economy of $100 million or more.
11. Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, the final rule does not
include any Federal mandate that may result in expenditures by State,
local, or Tribal governments in the aggregate of more than $100
million, adjusted for inflation, or increase expenditures by the
private sector of more than $100 million, adjusted for inflation.
12. Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism, and requires the adherence to specific
criteria by Federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. The final rule does not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated, that the provisions of Titles I and
IV of ERISA supersede any and all laws of the States as they relate to
any employee benefit plan covered under ERISA.
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Fiduciaries, Investments, Pensions,
Disclosure,
[[Page 64937]]
Reporting and recordkeeping requirements, and Securities.
0
For the reasons set forth in the preamble, the Department is amending
Subchapter F, Part 2550 of Title 29 of the Code of Federal Regulations
as follows:
Subchapter F--Fiduciary Responsibility Under the Employee Retirement
Income Security Act of 1974
PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
0
1. The authority citation for part 2550 continues to read as follows:
Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115
Stat.38; and Secretary of Labor's Order No. 1-2003, 68 FR 5374 (Feb.
3, 2003). Sec. 2550.401b-1 also issued under sec. 102,
Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3
CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3,
1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c-1 also issued under 29
U.S.C. 1101. Sections 2550.404c-1 and 2550.404c-5 also issued under
29 U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 1107.
Sec. 2550.408b-1 also issued under 29 U.S.C. 1108(b)(1) and sec.
102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332,
effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978
Comp. 332. Sec. 2550.412-1 also issued under 29 U.S.C. 1112.
0
2. Add Sec. 2550.404a-5 to read as follows:
Sec. 2550.404a-5 Fiduciary requirements for disclosure in
participant-directed individual account plans.
(a) General. The investment of plan assets is a fiduciary act
governed by the fiduciary standards of section 404(a)(1)(A) and (B) of
the Employee Retirement Income Security Act of 1974, as amended
(ERISA), 29 U.S.C. 1001 et seq. (all section references herein are
references to ERISA unless otherwise indicated). Pursuant to section
404(a)(1)(A) and (B), fiduciaries must discharge their duties with
respect to the plan prudently and solely in the interest of
participants and beneficiaries. When the documents and instruments
governing an individual account plan, described in paragraph (b)(2) of
this section, provide for the allocation of investment responsibilities
to participants or beneficiaries, the plan administrator, as defined in
section 3(16), must take steps to ensure, consistent with section
404(a)(1)(A) and (B), that such participants and beneficiaries, on a
regular and periodic basis, are made aware of their rights and
responsibilities with respect to the investment of assets held in, or
contributed to, their accounts and are provided sufficient information
regarding the plan, including fees and expenses, and regarding
designated investment alternatives, including fees and expenses
attendant thereto, to make informed decisions with regard to the
management of their individual accounts.
(b) Satisfaction of duty to disclose. (1) In general. The plan
administrator of a covered individual account plan must comply with the
disclosure requirements set forth in paragraphs (c) and (d) of this
section with respect to each participant or beneficiary that, pursuant
to the terms of the plan, has the right to direct the investment of
assets held in, or contributed to, his or her individual account.
Compliance with paragraphs (c) and (d) of this section will satisfy the
duty to make the regular and periodic disclosures described in
paragraph (a) of this section, provided that the information contained
in such disclosures is complete and accurate. A plan administrator will
not be liable for the completeness and accuracy of information used to
satisfy these disclosure requirements when the plan administrator
reasonably and in good faith relies on information received from or
provided by a plan service provider or the issuer of a designated
investment alternative.
(2) Covered individual account plan. For purposes of paragraph
(b)(1) of this section, a ``covered individual account plan'' is any
participant-directed individual account plan as defined in section
3(34) of ERISA, except that such term shall not include plans involving
individual retirement accounts or individual retirement annuities
described in sections 408(k) (``simplified employee pension'') or
408(p) (``simple retirement account'') of the Internal Revenue Code of
1986.
(c) Disclosure of plan-related information. A plan administrator
(or person designated by the plan administrator to act on its behalf)
shall provide to each participant or beneficiary the plan-related
information described in paragraphs (c)(1) through (4) of this section,
based on the latest information available to the plan.
(1) General. (i) On or before the date on which a participant or
beneficiary can first direct his or her investments and at least
annually thereafter:
(A) An explanation of the circumstances under which participants
and beneficiaries may give investment instructions;
(B) An explanation of any specified limitations on such
instructions under the terms of the plan, including any restrictions on
transfer to or from a designated investment alternative;
(C) A description of or reference to plan provisions relating to
the exercise of voting, tender and similar rights appurtenant to an
investment in a designated investment alternative as well as any
restrictions on such rights;
(D) An identification of any designated investment alternatives
offered under the plan;
(E) An identification of any designated investment managers; and
(F) A description of any ``brokerage windows,'' ``self-directed
brokerage accounts,'' or similar plan arrangements that enable
participants and beneficiaries to select investments beyond those
designated by the plan.
(ii) If there is a change to the information described in paragraph
(c)(1)(i)(A) through (F) of this section, each participant and
beneficiary must be furnished a description of such change at least 30
days, but not more than 90 days, in advance of the effective date of
such change, unless the inability to provide such advance notice is due
to events that were unforeseeable or circumstances beyond the control
of the plan administrator, in which case notice of such change must be
furnished as soon as reasonably practicable.
(2) Administrative expenses. (i)(A) On or before the date on which
a participant or beneficiary can first direct his or her investments
and at least annually thereafter, an explanation of any fees and
expenses for general plan administrative services (e.g., legal,
accounting, recordkeeping), which may be charged against the individual
accounts of participants and beneficiaries and are not reflected in the
total annual operating expenses of any designated investment
alternative, as well as the basis on which such charges will be
allocated (e.g., pro rata, per capita) to, or affect the balance of,
each individual account.
(B) If there is a change to the information described in paragraph
(c)(2)(i)(A) of this section, each participant and beneficiary must be
furnished a description of such change at least 30 days, but not more
than 90 days, in advance of the effective date of such change, unless
the inability to provide such advance notice is due to events that were
unforeseeable or circumstances beyond the control of the plan
administrator, in which case notice of such change must be furnished as
soon as reasonably practicable.
(ii) At least quarterly, a statement that includes:
(A) The dollar amount of the fees and expenses described in
paragraph (c)(2)(i)(A) of this section that are
[[Page 64938]]
actually charged (whether by liquidating shares or deducting dollars)
during the preceding quarter to the participant's or beneficiary's
account for such services;
(B) A description of the services to which the charges relate
(e.g., plan administration, including recordkeeping, legal, accounting
services); and
(C) If applicable, an explanation that, in addition to the fees and
expenses disclosed pursuant to paragraph (c)(2)(ii) of this section,
some of the plan's administrative expenses for the preceding quarter
were paid from the total annual operating expenses of one or more of
the plan's designated investment alternatives (e.g., through revenue
sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees).
(3) Individual expenses. (i)(A) On or before the date on which a
participant or beneficiary can first direct his or her investments and
at least annually thereafter, an explanation of any fees and expenses
that may be charged against the individual account of a participant or
beneficiary on an individual, rather than on a plan-wide, basis (e.g.,
fees attendant to processing plan loans or qualified domestic relations
orders, fees for investment advice, fees for brokerage windows,
commissions, front- or back-end loads or sales charges, redemption
fees, transfer fees and similar expenses, and optional rider charges in
annuity contracts) and which are not reflected in the total annual
operating expenses of any designated investment alternative.
(B) If there is a change to the information described in paragraph
(c)(3)(i)(A) of this section, each participant and beneficiary must be
furnished a description of such change at least 30 days, but not more
than 90 days, in advance of the effective date of such change, unless
the inability to provide such advance notice is due to events that were
unforeseeable or circumstances beyond the control of the plan
administrator, in which case notice of such change must be furnished as
soon as reasonably practicable.
(ii) At least quarterly, a statement that includes:
(A) The dollar amount of the fees and expenses described in
paragraph (c)(3)(i)(A) of this section that are actually charged
(whether by liquidating shares or deducting dollars) during the
preceding quarter to the participant's or beneficiary's account for
individual services; and
(B) A description of the services to which the charges relate
(e.g., loan processing fee).
(4) Disclosures on or before first investment. The requirements of
paragraphs (c)(1)(i), (c)(2)(i)(A), (c)(3)(i)(A) of this section to
furnish information on or before the date on which a participant or
beneficiary can first direct his or her investments may be satisfied by
furnishing to the participant or beneficiary the most recent annual
disclosure furnished to participants and beneficiaries pursuant those
paragraphs and any updates to the information furnished to participants
and beneficiaries pursuant to paragraphs (c)(1)(ii), (c)(2)(i)(B) and
(c)(3)(i)(B) of this section.
(d) Disclosure of investment-related information. The plan
administrator (or person designated by the plan administrator to act on
its behalf), based on the latest information available to the plan,
shall:
(1) Information to be provided automatically. Except as provided in
paragraph (i) of this section, furnish to each participant or
beneficiary on or before the date on which he or she can first direct
his or her investments and at least annually thereafter, the following
information with respect to each designated investment alternative
offered under the plan--
(i) Identifying information. Such information shall include:
(A) The name of each designated investment alternative; and
(B) The type or category of the investment (e.g., money market
fund, balanced fund (stocks and bonds), large-cap stock fund, employer
stock fund, employer securities).
(ii) Performance data. (A) For designated investment alternatives
with respect to which the return is not fixed, the average annual total
return of the investment for 1-, 5-, and 10-calendar year periods (or
for the life of the alternative, if shorter) ending on the date of the
most recently completed calendar year; as well as a statement
indicating that an investment's past performance is not necessarily an
indication of how the investment will perform in the future; and
(B) For designated investment alternatives with respect to which
the return is fixed or stated for the term of the investment, both the
fixed or stated annual rate of return and the term of the investment.
If, with respect to such a designated investment alternative, the
issuer reserves the right to adjust the fixed or stated rate of return
prospectively during the term of the contract or agreement, the current
rate of return, the minimum rate guaranteed under the contract, if any,
and a statement advising participants and beneficiaries that the issuer
may adjust the rate of return prospectively and how to obtain (e.g.,
telephone or Web site) the most recent rate of return required under
this section.
(iii) Benchmarks. For designated investment alternatives with
respect to which the return is not fixed, the name and returns of an
appropriate broad-based securities market index over the 1-, 5-, and
10-calendar year periods (or for the life of the alternative, if
shorter) comparable to the performance data periods provided under
paragraph (d)(1)(ii)(A) of this section, and which is not administered
by an affiliate of the investment issuer, its investment adviser, or a
principal underwriter, unless the index is widely recognized and used.
(iv) Fee and expense information. (A) For designated investment
alternatives with respect to which the return is not fixed:
(1) The amount and a description of each shareholder-type fee (fees
charged directly against a participant's or beneficiary's investment,
such as commissions, sales loads, sales charges, deferred sales
charges, redemption fees, surrender charges, exchange fees, account
fees, and purchase fees, which are not included in the total annual
operating expenses of any designated investment alternative) and a
description of any restriction or limitation that may be applicable to
a purchase, transfer, or withdrawal of the investment in whole or in
part (such as round trip, equity wash, or other restrictions);
(2) The total annual operating expenses of the investment expressed
as a percentage (i.e., expense ratio), calculated in accordance with
paragraph (h)(5) of this section;
(3) The total annual operating expenses of the investment for a
one-year period expressed as a dollar amount for a $1,000 investment
(assuming no returns and based on the percentage described in paragraph
(d)(1)(iv)(A)(2) of this section);
(4) A statement indicating that fees and expenses are only one of
several factors that participants and beneficiaries should consider
when making investment decisions; and
(5) A statement that the cumulative effect of fees and expenses can
substantially reduce the growth of a participant's or beneficiary's
retirement account and that participants and beneficiaries can visit
the Employee Benefit Security Administration's Web site for an example
demonstrating the long-term effect of fees and expenses.
(B) For designated investment alternatives with respect to which
the return is fixed for the term of the investment, the amount and a
description of any shareholder-type fees
[[Page 64939]]
and a description of any restriction or limitation that may be
applicable to a purchase, transfer or withdrawal of the investment in
whole or in part.
(v) Internet Web site address. An Internet Web site address that is
sufficiently specific to provide participants and beneficiaries access
to the following information regarding the designated investment
alternative:
(A) The name of the alternative's issuer;
(B) The alternative's objectives or goals in a manner consistent
with Securities and Exchange Commission Form N-1A or N-3, as
appropriate;
(C) The alternative's principal strategies (including a general
description of the types of assets held by the investment) and
principal risks in a manner consistent with Securities and Exchange
Commission Form N-1A or N-3, as appropriate;
(D) The alternative's portfolio turnover rate in a manner
consistent with Securities and Exchange Commission Form N-1A or N-3, as
appropriate;
(E) The alternative's performance data described in paragraph
(d)(1)(ii) of this section updated on at least a quarterly basis, or
more frequently if required by other applicable law; and
(F) The alternative's fee and expense information described in
paragraph (d)(1)(iv) of this section.
(vi) Glossary. A general glossary of terms to assist participants
and beneficiaries in understanding the designated investment
alternatives, or an Internet Web site address that is sufficiently
specific to provide access to such a glossary along with a general
explanation of the purpose of the address.
(vii) Annuity options. If a designated investment alternative is
part of a contract, fund or product that permits participants or
beneficiaries to allocate contributions toward the future purchase of a
stream of retirement income payments guaranteed by an insurance
company, the information set forth in paragraph (i)(2)(i) through
(i)(2)(vii) of this section with respect to the annuity option, to the
extent such information is not otherwise included in investment-related
fees and expenses described in paragraph (d)(1)(iv).
(viii) Disclosures on or before first investment. The requirement
in paragraph (d)(1) of this section to provide information to a
participant or beneficiary on or before the date on which the
participant or beneficiary can first direct his or her investments may
be satisfied by furnishing to the participant or beneficiary the most
recent annual disclosure furnished to participants and beneficiaries
pursuant to paragraph (d)(1) of this section.
(2) Comparative format. (i) Furnish the information described in
paragraph (d)(1) and, if applicable, paragraph (i) of this section in a
chart or similar format that is designed to facilitate a comparison of
such information for each designated investment alternative available
under the plan and prominently displays the date, and that includes:
(A) A statement indicating the name, address, and telephone number
of the plan administrator (or a person or persons designated by the
plan administrator to act on its behalf) to contact for the provision
of the information required by paragraph (d)(4) of this section;
(B) A statement that additional investment-related information
(including more current performance information) is available at the
listed Internet Web site addresses (see paragraph (d)(1)(v) of this
section); and
(C) A statement explaining how to request and obtain, free of
charge, paper copies of the information required to be made available
on a Web site pursuant to paragraph (d)(1)(v), paragraph (i)(2)(vi),
relating to annuity options, or paragraph (i)(3), relating to fixed-
return investments, of this section.
(ii) Nothing in this section shall preclude a plan administrator
from including additional information that the plan administrator
determines appropriate for such comparisons, provided such information
is not inaccurate or misleading.
(3) Information to be provided subsequent to investment. Furnish to
each investing participant or beneficiary, subsequent to an investment
in a designated investment alternative, any materials provided to the
plan relating to the exercise of voting, tender and similar rights
appurtenant to the investment, to the extent that such rights are
passed through to such participant or beneficiary under the terms of
the plan.
(4) Information to be provided upon request. Furnish to each
participant or beneficiary, either at the times specified in paragraph
(d)(1), or upon request, the following information relating to
designated investment alternatives--
(i) Copies of prospectuses (or, alternatively, any short-form or
summary prospectus, the form of which has been approved by the
Securities and Exchange Commission) for the disclosure of information
to investors by entities registered under either the Securities Act of
1933 or the Investment Company Act of 1940, or similar documents
relating to designated investment alternatives that are provided by
entities that are not registered under either of these Acts;
(ii) Copies of any financial statements or reports, such as
statements of additional information and shareholder reports, and of
any other similar materials relating to the plan's designated
investment alternatives, to the extent such materials are provided to
the plan;
(iii) A statement of the value of a share or unit of each
designated investment alternative as well as the date of the valuation;
and
(iv) A list of the assets comprising the portfolio of each
designated investment alternative which constitute plan assets within
the meaning of 29 CFR 2510.3-101 and the value of each such asset (or
the proportion of the investment which it comprises).
(e) Form of disclosure. (1) The information required to be
disclosed pursuant to paragraphs (c)(1)(i), (c)(2)(i)(A), and
(c)(3)(i)(A) of this section may be provided as part of the plan's
summary plan description furnished pursuant to ERISA section 102 or as
part of a pension benefit statement furnished pursuant to ERISA section
105(a)(1)(A)(i), if such summary plan description or pension benefit
statement is furnished at a frequency that comports with paragraph
(c)(1)(i) of this section.
(2) The information required to be disclosed pursuant to paragraphs
(c)(2)(ii) and (c)(3)(ii) of this section may be included as part of a
pension benefit statement furnished pursuant to ERISA section
105(a)(1)(A)(i).
(3) A plan administrator that uses and accurately completes the
model in the Appendix, taking into account each designated investment
alternative offered under the plan, will be deemed to have satisfied
the requirements of paragraph (d)(2) of this section.
(4) Except as otherwise explicitly required herein, fees and
expenses may be expressed in terms of a monetary amount, formula,
percentage of assets, or per capita charge.
(5) The information required to be prepared by the plan
administrator for disclosure under this section shall be written in a
manner calculated to be understood by the average plan participant.
(f) Selection and monitoring. Nothing herein is intended to relieve
a fiduciary from its duty to prudently select and monitor providers of
services to the plan or designated investment alternatives offered
under the plan.
(g) Manner of furnishing. Reserved.
(h) Definitions. For purposes of this section, the term--
[[Page 64940]]
(1) At least annually thereafter means at least once in any 12-
month period, without regard to whether the plan operates on a calendar
or fiscal year basis.
(2) At least quarterly means at least once in any 3-month period,
without regard to whether the plan operates on a calendar or fiscal
year basis.
(3) Average annual total return means the average annual compounded
rate of return that would equate an initial investment in a designated
investment alternative to the ending redeemable value of that
investment calculated with the before tax methods of computation
prescribed in Securities and Exchange Commission Form N-1A, N-3, or N-
4, as appropriate, except that such method of computation may exclude
any front-end, deferred or other sales loads that are waived for the
participants and beneficiaries of the covered individual account plan.
(4) Designated investment alternative means any investment
alternative designated by the plan into which participants and
beneficiaries may direct the investment of assets held in, or
contributed to, their individual accounts. The term ``designated
investment alternative'' shall not include ``brokerage windows,''
``self-directed brokerage accounts,'' or similar plan arrangements that
enable participants and beneficiaries to select investments beyond
those designated by the plan.
(5) Total annual operating expenses means:
(i) In the case of a designated investment alternative that is
registered under the Investment Company Act of 1940, the annual
operating expenses and other asset-based charges before waivers and
reimbursements (e.g., investment management fees, distribution fees,
service fees, administrative expenses, separate account expenses,
mortality and expense risk fees) that reduce the alternative's rate of
return, expressed as a percentage, calculated in accordance with the
required Securities and Exchange Commission form, e.g., Form N-1A
(open-end management investment companies) or Form N-3 or N-4 (separate
accounts offering variable annuity contracts); or
(ii) In the case of a designated investment alternative that is not
registered under the Investment Company Act of 1940, the sum of the
fees and expenses described in paragraphs (h)(5)(ii)(A) through (C) of
this section before waivers and reimbursements, for the alternative's
most recently completed fiscal year, expressed as a percentage of the
alternative's average net asset value for that year--
(A) Management fees as described in the Securities and Exchange
Commission Form N-1A that reduce the alternative's rate of return,
(B) Distribution and/or servicing fees as described in the
Securities and Exchange Commission Form N-1A that reduce the
alternative's rate of return, and
(C) Any other fees or expenses not included in paragraphs
(h)(5)(ii)(A) or (B) of this section that reduce the alternative's rate
of return (e.g., externally negotiated fees, custodial expenses, legal
expenses, accounting expenses, transfer agent expenses, recordkeeping
fees, administrative fees, separate account expenses, mortality and
expense risk fees), excluding brokerage costs described in Item 21 of
Securities and Exchange Commission Form N-1A.
(i) Special rules. The rules set forth in this paragraph apply
solely for purposes of paragraph (d)(1) of this section.
(1) Qualifying employer securities. In the case of designated
investment alternatives designed to invest in, or primarily in,
qualifying employer securities, within the meaning of section 407 of
ERISA, the following rules shall apply--
(i) In lieu of the requirements of paragraph (d)(1)(v)(C) of this
section (relating to principal strategies and principal risks), provide
an explanation of the importance of a well-balanced and diversified
investment portfolio.
(ii) The requirements of paragraph (d)(1)(v)(D) of this section
(relating to portfolio turnover rate) do not apply to such designated
investment alternatives.
(iii) The requirements of paragraph (d)(1)(v)(F) of this section
(relating to fee and expense information) do not apply to such
designated investment alternatives, unless the designated investment
alternative is a fund with respect to which participants or
beneficiaries acquire units of participation, rather than actual
shares, in exchange for their investment.
(iv) The requirements of paragraph (d)(1)(iv)(A)(2) of this section
(relating to total annual operating expenses expressed as a percentage)
do not apply to such designated investment alternatives, unless the
designated investment alternative is a fund with respect to which
participants or beneficiaries acquire units of participation, rather
than actual shares, in exchange for their investment.
(v) The requirements of paragraph (d)(1)(iv)(A)(3) of this section
(relating to total annual operating expenses expressed as a dollar
amount per $1,000 invested) do not apply to such designated investment
alternatives, unless the designated investment alternative is a fund
with respect to which participants or beneficiaries acquire units of
participation, rather than actual shares, in exchange for their
investment.
(vi)(A) With respect to the requirement in paragraph (d)(1)(ii)(A)
of this section (relating to performance data for 1-, 5-, and 10-year
periods), the definition of ``average annual total return'' as defined
in paragraph (i)(1)(vi)(B) of this section shall apply to such
designated investment alternatives in lieu of the definition in
paragraph (h)(3) of this section if the qualifying employer securities
are publicly traded on a national exchange or generally recognized
market and the designated investment alternative is not a fund with
respect to which participants or beneficiaries acquire units of
participation, rather than actual shares, in exchange for their
investment.
(B) The term ``average annual total return'' means the change in
value of an investment in one share of stock on an annualized basis
over a specified period, calculated by taking the sum of the dividends
paid during the measurement period, assuming reinvestment, plus the
difference between the stock price (consistent with ERISA section
3(18)) at the end and at the beginning of the measurement period, and
dividing by the stock price at the beginning of the measurement period;
reinvestment of dividends is assumed to be in stock at market prices at
approximately the same time actual dividends are paid.
(C) The definition of ``average annual total return'' in paragraph
(i)(1)(vi)(B) of this section shall apply to such designated investment
alternatives consisting of employer securities that are not publicly
traded on a national exchange or generally recognized market, unless
the designated investment alternative is a fund with respect to which
participants or beneficiaries acquire units of participation, rather
than actual shares, in exchange for their investment. Changes in value
shall be calculated using principles similar to those set forth in
paragraph (i)(1)(vi)(B) of this section.
(2) Annuity options. In the case of a designated investment
alternative that is a contract, fund or product that permits
participants or beneficiaries to allocate contributions toward the
current purchase of a stream of retirement income payments guaranteed
by an insurance company, the plan administrator shall, in lieu of the
[[Page 64941]]
information required by paragraphs (d)(1)(i) through (d)(1)(v), provide
each participant or beneficiary the following information with respect
to each such option:
(i) The name of the contract, fund or product;
(ii) The option's objectives or goals (e.g., to provide a stream of
fixed retirement income payments for life);
(iii) The benefits and factors that determine the price (e.g., age,
interest rates, form of distribution) of the guaranteed income
payments;
(iv) Any limitations on the ability of a participant or beneficiary
to withdraw or transfer amounts allocated to the option (e.g., lock-
ups) and any fees or charges applicable to such withdrawals or
transfers;
(v) Any fees that will reduce the value of amounts allocated by
participants or beneficiaries to the option, such as surrender charges,
market value adjustments, and administrative fees;
(vi) A statement that guarantees of an insurance company are
subject to its long-term financial strength and claims-paying ability;
and
(vii) An Internet Web site address that is sufficiently specific to
provide participants and beneficiaries access to the following
information--
(A) The name of the option's issuer and of the contract, fund or
product;
(B) Description of the option's objectives or goals;
(C) Description of the option's distribution alternatives/
guaranteed income payments (e.g., payments for life, payments for a
specified term, joint and survivor payments, optional rider payments),
including any limitations on the right of a participant or beneficiary
to receive such payments;
(D) Description of costs and/or factors taken into account in
determining the price of benefits under an option's distribution
alternatives/guaranteed income payments (e.g., age, interest rates,
other annuitization assumptions);
(E) Description of any limitations on the right of a participant or
beneficiary to withdraw or transfer amounts allocated to the option and
any fees or charges applicable to a withdrawal or transfer; and
(F) Description of any fees that will reduce the value of amounts
allocated by participants or beneficiaries to the option (e.g.,
surrender charges, market value adjustments, administrative fees).
(3) Fixed-return investments. In the case of a designated
investment alternative with respect to which the return is fixed for
the term of the investment, the plan administrator shall, in lieu of
complying with the requirements of paragraph (d)(1)(v) of this section,
provide an Internet Web site address that is sufficiently specific to
provide participants and beneficiaries access to the following
information--
(i) The name of the alternative's issuer;
(ii) The alternatives objectives or goals (e.g., to provide
stability of principal and guarantee a minimum rate of return);
(iii) The alternative's performance data described in paragraph
(d)(1)(ii)(B) of this section updated on at least a quarterly basis, or
more frequently if required by other applicable law;
(iv) The alternative's fee and expense information described in
paragraph (d)(1)(iv)(B) of this section.
(4) Target date or similar funds. Reserved.
(j) Dates. (1) Effective date. This section shall be effective on
December 20, 2010.
(2) Applicability date. This section shall apply to covered
individual account plans for plan years beginning on or after November
1, 2011.
(3) Transitional rules. (i) Notwithstanding paragraphs (b), (c) and
(d) of this section, the initial disclosures required on or before the
date on which a participant or beneficiary can first direct his or her
investment must be furnished no later than 60 days after such
applicability date to participants or beneficiaries who had the right
to direct the investment of assets held in, or contributed to, their
individual account on the applicability date.
(ii) For plan years beginning before October 1, 2021, if a plan
administrator reasonably and in good faith determines that it does not
have the information on expenses attributable to the plan that is
necessary to calculate, in accordance with paragraph (h)(3) of this
section, the 5-year and 10-year average annual total returns for a
designated investment alternative that is not registered under the
Investment Company Act of 1940, the plan administrator may use a
reasonable estimate of such expenses or the plan administrator may use
the most recently reported total annual operating expenses of the
designated investment alternative as a substitute for such expenses.
When a plan administrator uses a reasonable estimate or the most
recently reported total annual operating expenses as a substitute for
actual expenses pursuant to this paragraph, the administrator shall
inform participants of the basis on which the returns were determined.
Nothing in this section requires disclosure of returns for periods
before the inception of a designated investment alternative.
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[[Page 64942]]
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BILLING CODE 4510-29-C
[[Page 64946]]
0
3. In Sec. 2550.404c-1 revise (b)(2)(i)(B), (c)(1)(ii), and (f)(1),
and add (d)(2)(iv) to read as follows:
Sec. 2550.404c-1 ERISA section 404(c) plans.
* * * * *
(b) * * *
(2) * * *
(i) * * *
(B) The participant or beneficiary is provided or has the
opportunity to obtain sufficient information to make informed
investment decisions with regard to investment alternatives available
under the plan, and incidents of ownership appurtenant to such
investments. For purposes of this paragraph, a participant or
beneficiary will be considered to have sufficient information if the
participant or beneficiary is provided by an identified plan fiduciary
(or a person or persons designated by the plan fiduciary to act on his
behalf):
(1) An explanation that the plan is intended to constitute a plan
described in section 404(c) of the Employee Retirement Income Security
Act, and 29 CFR 2550.404c-1, and that the fiduciaries of the plan may
be relieved of liability for any losses which are the direct and
necessary result of investment instructions given by such participant
or beneficiary;
(2) The information required pursuant to 29 CFR 2550.404a-5; and
(3) In the case of plans which offer an investment alternative
which is designed to permit a participant or beneficiary to directly or
indirectly acquire or sell any employer security (employer security
alternative), a description of the procedures established to provide
for the confidentiality of information relating to the purchase,
holding and sale of employer securities, and the exercise of voting,
tender and similar rights, by participants and beneficiaries, and the
name, address and phone number of the plan fiduciary responsible for
monitoring compliance with the procedures (see paragraphs
(d)(2)(ii)(E)(4)(vii), (viii) and (ix) of this section).
* * * * *
(c) * * *
(1) * * *
(ii) For purposes of sections 404(c)(1) and 404(c)(2) of the Act
and paragraphs (a) and (d) of this section, a participant or
beneficiary will be deemed to have exercised control with respect to
voting, tender or similar rights appurtenant to the participant's or
beneficiary's ownership interest in an investment alternative, provided
that the participant's or beneficiary's investment in the investment
alternative was itself the result of an exercise of control; the
participant or beneficiary was provided a reasonable opportunity to
give instruction with respect to such incidents of ownership, including
the provision of the information described in 29 CFR 2550.404a-5(d)(3);
and the participant or beneficiary has not failed to exercise control
by reason of the circumstances described in paragraph (c)(2) with
respect to such incidents of ownership.
* * * * *
(d) * * *
(2) * * *
(iv) Paragraph (d)(2)(i) does not serve to relieve a fiduciary from
its duty to prudently select and monitor any service provider or
designated investment alternative offered under the plan.
* * * * *
(f) * * *
(1) Plan A is an individual account plan described in section 3(34)
of the Act. The plan states that a plan participant or beneficiary may
direct the plan administrator to invest any portion of his individual
account in a particular diversified equity fund managed by an entity
which is not affiliated with the plan sponsor, or any other asset
administratively feasible for the plan to hold. However, the plan
provides that the plan administrator will not implement certain listed
instructions for which plan fiduciaries would not be relieved of
liability under section 404(c) (see paragraph (d)(2)(ii) of this
section). Plan participants and beneficiaries are permitted to give
investment instructions during the first week of each month with
respect to the equity fund and at any time with respect to other
investments. The plan administrator of Plan A provides each participant
and beneficiary with the information described in paragraph
(b)(2)(i)(B) of this section, including the information that must be
provided on or before the date on which a participant or beneficiary
can first direct his or her investments and at least annually
thereafter pursuant to 29 CFR 2550.404a-5, and provides updated
information in the event of any change in the information provided.
Subsequent to any investment by a participant or beneficiary, the plan
administrator forwards to the investing participant or beneficiary any
materials provided to the plan relating to the exercise of voting,
tender or similar rights attendant to ownership of an interest in such
investment (see paragraph (b)(2)(i)(B)(3) of this section and 29 CFR
2550.404a-5(d)(3)). Upon request, the plan administrator provides each
participant or beneficiary with copies of any prospectuses (or similar
documents relating to designated investment alternatives that are
provided by entities that are not registered under the Securities Act
of 1933 or the Investment Company Act of 1940), financial statements
and reports, and any other materials relating to the designated
investment alternatives available under the plan in accordance with 29
CFR 2550.404a-5(d)(4)(i) through (iv). Also upon request, the plan
administrator provides each participant and beneficiary with other
information required by 29 CFR 2550.404a-5(d)(4) with respect to the
equity fund, which is a designated investment alternative, including a
statement of the value of a share or unit of the participant's or
beneficiary's interest in the equity fund and the date of the
valuation. Plan A meets the requirements of paragraph (b)(2)(i)(B) of
this section regarding the provision of investment information.
* * * * *
Signed at Washington, DC, this 7th day of October 2010.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2010-25725 Filed 10-14-10; 12:45 pm]
BILLING CODE 4510-29-P
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