[Federal Register Volume 72, Number 239 (Thursday, December 13, 2007)]
[Notices]
[Pages 70893-70896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-24063]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

RIN 1210-ZA13


Proposed Class Exemption for Plan Fiduciaries When Plan Service 
Arrangements Fail To Comply With ERISA Section 408(b)(2)

AGENCY: Employee Benefits Security Administration.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (the Act or ERISA). If granted, the 
proposed exemption would relieve a plan fiduciary from engaging in a 
transaction that constitutes a prohibited furnishing of services to an 
employee benefit plan. The exemption would apply to a plan fiduciary 
who enters into (or extends or renews) a written contract or 
arrangement for the provision of services to an employee benefit plan 
by a service provider to the plan when the resulting contract or 
arrangement between the plan and the service provider fails to 
constitute a ``reasonable contract or arrangement'' due to the service 
provider's failure to comply with its contractual obligation to 
disclose certain information as required by 29 CFR Sec.  2550.408b-
2(c)(1), as amended (``disclosure obligations''). The proposed 
exemption, if granted, would also affect participants and beneficiaries 
of employee benefit plans to the extent such plans enter into any 
contracts or arrangements for ``necessary services'' with entities that 
do not provide sufficient disclosures to the plan to enable the 
responsible plan fiduciary to determine that there is a ``reasonable 
contract or arrangement'' that complies with ERISA section 408(b)(2).

DATES: Written comments must be received by the Department on or before 
February 11, 2008.

ADDRESSES: To facilitate the receipt and processing of comment letters, 
the Employee Benefits Security Administration (EBSA) encourages 
interested persons to submit their comments electronically by e-mail to 
[email protected], or by using the Federal eRulemaking portal at http://www.regulations.gov (follow instructions for submission of comments). 
Persons submitting comments electronically should not submit paper 
copies. Persons interested in submitting paper copies should send or 
deliver their comments to the Office of Regulations and 
Interpretations, Employee Benefits Security Administration, Attn: Plan 
Fiduciary Class Exemption for Section 408(b)(2) Amendment, Room N-5655, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. All comments will be available to the public, without charge, 
online at http://www.regulations.gov or http://www.dol.gov/ebsa and at 
the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Fil Williams, Office of Regulations 
and Interpretations, Employee Benefits Security Administration, (202) 
693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: This document contains a notice of pendency 
before the Department of a proposed class exemption from the 
restrictions of section 406(a)(1)(C) of the Act. The Department is 
proposing the class exemption on its own motion pursuant to section 
408(a) of the Act, and in accordance with the procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).

I. Executive Order 12866

    Under Executive Order 12866, the U.S. Department of Labor (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 likely will result 
in a rule: (1) Having an annual effect on the economy of $100 million 
or more, 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.
    It has been determined that the proposed exemption is significant 
under section 3(f)(1) of the executive order because it likely will 
materially affect a sector of the economy. Accordingly, the proposed 
exemption has been reviewed by OMB.
    As explained in the preamble above, the proposed exemption will 
only be used in connection with the proposed regulation published in 
this same Federal Register entitled ``Reasonable Contract or 
Arrangement Under Section 408(b)(2)--Fee Disclosure.'' The Department 
conducted a Regulatory Impact Analysis (RIA) for the proposed 
regulation, published elsewhere in this issue of the Federal Register. 
The RIA discusses the costs and benefits of the proposed regulation and 
quantifies the costs to service providers. In considering costs to 
plans, the Department determined that, because fiduciaries already have 
a duty to evaluate the reasonableness of contracts and arrangements 
with service providers, the proposed regulation generally reduces the 
time and effort fiduciaries need to spend to obtain the necessary 
information. The Department acknowledges that some plans may incur 
increased costs from the proposed

[[Page 70894]]

regulation if they need to review unnecessary or increasingly detailed 
disclosure information. The Department concluded that any additional 
effort on the part of fiduciaries due to the proposed regulation would 
be offset by the reduced effort fiduciaries would need to spend to 
obtain the required information from service providers. The Department 
thus did not attempt to quantify these additional costs. The proposed 
class exemption could result in additional costs to plans due to the 
requirement that fiduciaries must notify the service provider and 
possibly the Department upon discovering an inadequate disclosure. The 
Department determined that these additional costs, which likely would 
accrue to only a small percentage of plan fiduciaries, were still 
within the range of what would be reasonably offset by the reduced 
costs for plans under the proposed regulation. The Department therefore 
did not attempt to quantify the costs of the proposed exemption for 
plan fiduciaries.

II. Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a pre-clearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, the reporting burden 
(time and financial resources) is minimized, and the Department can 
properly assess the impact of collection requirements on respondents.
    The proposed exemption, if granted, will be used only by plan 
fiduciaries that have unknowingly entered into a contract or 
arrangement which is not reasonable according to the requirements of 
the proposed regulation (published elsewhere in this issue of the 
Federal Register). The Department has combined the paperwork burdens 
for the proposed regulation and the proposed class exemption under one 
Information Collection Request (ICR). By combining the two collections 
of information, the Department believes that the general public will 
gain a better understanding of the burden impact as it relates to 
different kinds of respondents. The specific burden for the proposed 
exemption includes labor and materials costs of fiduciaries' written 
requests to service providers and notifications to the Department. The 
hour and cost burdens for the ICR are described more fully in the 
preamble to the proposed regulation, ``Reasonable Contract or 
Arrangement Under Section 408(b)(2)--Fee Disclosure,'' under the 
section on the Paperwork Reduction Act.

III. Background

    The Department has published in today's Federal Register a proposal 
to amend its regulations under ERISA section 408(b)(2). Specifically, 
the Department is proposing to amend its regulations at 29 CFR Sec.  
2550.408b-2(c) to provide that any contract or arrangement for services 
to an employee benefit plan by certain service providers, in order to 
be considered a ``reasonable contract or arrangement'' in compliance 
with such regulations, must require specific written disclosures 
regarding the service provider's compensation, fees and conflicts of 
interest that might affect its performance of services.
    The service providers affected by the proposed regulation, as 
discussed therein, include those who: (i) Provide or may provide 
services to an employee benefit plan pursuant to a written contract or 
arrangement as a fiduciary, within the meaning of section 3(21) of 
ERISA or under the Investment Advisers Act of 1940; (ii) provide or may 
provide any one or more of the following services to the plan pursuant 
to the contract or arrangement: Banking, consulting, custodial, 
insurance, investment advisory (plan or participants), investment 
management, recordkeeping, securities or other investment brokerage, or 
third-party administration; or (iii) receive or may receive indirect 
compensation or fees, as described in proposed Sec.  2550.408b-
2(c)(1)(iii)(A)(1), in connection with the following services to the 
plan: Accounting, actuarial, appraisal, auditing, legal, or valuation.
    As noted in the preamble to the proposed regulation, as published 
in today's Federal Register, when selecting service providers, a 
fiduciary must have enough information to make informed decisions about 
the services to be provided, the costs of those services, and potential 
conflicts of interest. The proposed regulation requires that a 
``reasonable contract or arrangement'' for certain services under 
section 408(b)(2) must be in writing and that the terms of the contract 
or arrangement must require the service provider to disclose specific 
information. The regulation further requires that the service provider 
furnish the appropriate plan fiduciary with the specified information 
in accordance with the terms of the contract or arrangement.
    As also discussed in the preamble to the proposed regulation, a 
failure to satisfy the conditions of the regulation will, among other 
things, cause the responsible plan fiduciary to violate the prohibited 
transaction provisions of ERISA section 406(a)(1)(C) because the 
transaction would not satisfy the statutory exemption under section 
408(b)(2) of ERISA. A failure to comply with the regulation would also 
result in a prohibited transaction under section 4975(c)(1)(C) of the 
Internal Revenue Code (the Code) because the transaction would not 
satisfy the Code's parallel statutory exemption for services at 26 
U.S.C. Sec.  4975(d)(2). A prohibited transaction under section 4975 of 
the Code subjects the service provider as a ``disqualified person'' to 
excise taxes as described in section 4975(a) and (b) of the Code.
    The Department recognizes that there may be circumstances when a 
plan fiduciary enters into a contract or arrangement that appears to 
meet the requirements of the regulation for relief under ERISA section 
408(b)(2), but unbeknownst to the plan fiduciary, the service provider 
fails to disclose information consistent with the terms of the 
regulation and the contract or arrangement. In the absence of an 
exemption providing otherwise, the service provider's failure to comply 
will result in a prohibited transaction by both the service provider 
and the plan fiduciary. In an effort to address this situation, the 
Department proposes to adopt a class exemption that would relieve the 
plan fiduciary from liability for a prohibited transaction resulting 
from the service provider's failure to comply with the regulation. A 
description of the proposed class exemption follows.

IV. Description of the Proposed Class Exemption

    The proposed exemption consists of three parts. Section I sets 
forth the general exemption and describes the transactions covered. 
Section II contains specific conditions applicable to transactions 
described in section I and requires the plan fiduciary to notify the 
Department under certain circumstances of the service provider's 
failure to comply with their disclosure obligations. Section III sets 
forth the timing, content and other requirements applicable to the 
notice required to be filed with the Department by the

[[Page 70895]]

responsible plan fiduciary pursuant to section II.\1\
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    \1\ As with any exemption from ERISA's prohibited transaction 
provisions, the party seeking to avail itself of the relief provided 
by the exemption has the burden of demonstrating compliance with the 
conditions of the exemption.
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    The exemption set forth in section I would, upon adoption, provide 
relief from the restrictions of section 406(a)(1)(C) of ERISA to a plan 
fiduciary with authority to cause the plan to enter into, extend or 
renew a written contract or arrangement for the provision of necessary 
services (``the responsible plan fiduciary''), notwithstanding the 
service provider's initial or subsequent failure to comply with its 
disclosure obligations, provided that the conditions set forth in 
section II are met. As noted below, once the responsible plan fiduciary 
discovers that the service provider failed to meet its disclosure 
obligations, the fiduciary must, as a condition for relief under the 
exemption, take steps to address the failure.
    Section II.A. of the proposed exemption requires that the 
responsible plan fiduciary, taking into account all of the information 
available at the time the contract or arrangement was entered into, 
extended or renewed, reasonably believed that the contract or 
arrangement met the requirements of 29 CFR Sec.  2550.408b-2(c)(1). In 
addition, at the time referred to above, the responsible plan fiduciary 
must not know, or have reason to know, that the service provider 
failed, or would fail, to comply with its disclosure obligations. This 
condition reinforces the principle that the plan fiduciary must have 
entered into the contract or arrangement with a reasonable belief that 
the contract or arrangement met the requirements for a reasonable 
contract or arrangement under Sec.  2550.408b-2(c)(1) and without 
knowing of the service provider's disclosure failures.
    Section II.B.1 of the proposal requires that, upon discovery that 
the service provider failed to comply with its disclosure obligations, 
the responsible fiduciary shall, if it has not already received the 
information that the service provider failed to disclose under its 
disclosure obligations, request in writing that the service provider 
furnish the information. If the service provider fails to comply with 
the plan fiduciary's written request within 90 days, section II.B.2 
provides that the plan fiduciary shall notify the Department. The 
Department believes that this condition will increase the likelihood 
that service providers will furnish plan fiduciaries the information 
they need to make informed decisions about the contract or arrangement 
with the service provider.\2\
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    \2\ The notice requirement will not relieve a plan administrator 
of the obligation to report a prohibited transaction in accordance 
with the instructions to the Annual Report Form 5500 Series, without 
regard to whether the service provider furnishes information in 
response to the fiduciary's request.
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    Section II.C. of the proposal further provides that, after the 
responsible plan fiduciary discovers that the service provider failed 
to comply with its disclosure obligations, the fiduciary shall 
determine whether to terminate or continue the contract or arrangement. 
In this regard, it is expected that responsible plan fiduciaries would 
evaluate the nature of the particular disclosure failure and determine 
the extent of the actions necessary under the facts and circumstances. 
Such fiduciary should consider, among other factors, the availability, 
qualifications and costs of potential replacement service providers, 
and the responsiveness of the service provider in furnishing the 
missing information. Section II.C., however, does not abrogate or 
supersede the duties imposed upon the fiduciary by section 404(a) of 
ERISA, which also require the fiduciary to consider what steps to take 
in response to the service provider's nondisclosure.
    Section III of the proposal sets forth the timing, content and 
other requirements applicable to notifying the Department of a service 
provider's failure to meet its disclosure obligations. Specifically, 
section III.B. provides that the responsible plan fiduciary shall file 
a notice with the Department not later than 30 days following the 
earlier of: (i) The service provider's refusal to furnish the requested 
information; or (ii) the date which is 90 days after the date the 
written request referred to in Section II.B.1 is made. In this context, 
a service provider's refusal to provide information to the responsible 
plan fiduciary, following such fiduciary's written request, shall 
constitute a service provider's failure to meet its disclosure 
obligations prior to the end of the 90-day period. The notice to the 
Department must contain the following information: (i) The name of the 
plan; (ii) the three digit plan number used for the plan's Annual 
Report; (iii) the plan sponsor's name, address, and EIN; (iv) the name, 
address and telephone number of the responsible plan fiduciary; (v) the 
name, address, phone number, and, if known, EIN of the service 
provider; (vi) a description of the services provided to the plan; 
(vii) a description of the information that the service provider failed 
to furnish; (viii) the date on which such information was requested in 
writing from the service provider; and (ix) a statement as to whether 
the service provider continues to provide services to the plan. This 
notice should be sent to the U.S. Department of Labor, Employee 
Benefits Security Administration, Office of Enforcement, 200 
Constitution Ave., NW., Suite 600, Washington, DC 20210. Such notices 
may also be sent electronically to: [email protected].
    The Department will provide specific information for the written or 
electronic submission of the required notice as part of the final 
exemption. The Department also anticipates development of a model 
notice by the Department that will facilitate compliance with the 
notification requirement.

V. Effective Date

    The Department is proposing an effective date for the proposed 
class exemption which is 90 days after the publication of the final 
exemption in the Federal Register. This date corresponds with the 
effective date for the proposed amendments to the Department's 
regulations at 29 CFR 2550.408b-2(c).

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act does not relieve a fiduciary or other 
party in interest or disqualified person from other provisions of the 
Act, including any prohibited transaction provisions to which the 
exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of the Act. Section 404 requires, among other 
things, that a fiduciary discharge its duties with respect to the plan 
prudently and solely in the interests of the plan's participants and 
beneficiaries. A transaction's qualification for an exemption also does 
not affect the requirement of section 401(a) of the Code that the plan 
must operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act, the Department must find that the exemption is administratively 
feasible, in the interests of the plans and their participants and 
beneficiaries and protective of the rights of participants and 
beneficiaries of such plans;
    (3) If granted, the proposed exemption will apply to a transaction 
only if the conditions specified in the exemption are met; and

[[Page 70896]]

    (4) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act, including 
statutory or administrative exemptions and transitional rules.

Proposed Exemption

    The Department has under consideration the grant of the following 
class exemption under the authority of section 408(a) of the Act and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 Fed Reg. 32836, 32847, August 10, 1990).

Section I--Exemption for the Plan Fiduciary Entering Certain Contracts 
or Arrangements With a Service Provider

    Effective [90 days after publication of the final exemption in the 
Federal Register], the restrictions of section 406(a)(1)(C) of the Act 
shall not apply to a plan fiduciary who uses its authority to cause an 
employee benefit plan to enter into (extend or renew) a written 
contract or arrangement for the provision of services (``the 
responsible plan fiduciary''), notwithstanding the service provider's 
initial or subsequent failure to comply with its contractual obligation 
to disclose certain information as required by 29 CFR 2550.408b-2(c)(1) 
(``disclosure obligations''), provided that the conditions set forth in 
section II below are met.

Section II--Conditions

    A. The responsible plan fiduciary, taking into account all of the 
information available at the time the contract or arrangement was 
entered into, extended or renewed, reasonably believed that the 
contract or arrangement met the requirements of 29 CFR Sec.  2550.408b-
2(c)(1) and did not know, or have reason to know, that the service 
provider failed or would fail to comply with its disclosure 
obligations; B.1. The responsible plan fiduciary, upon discovering that 
the service provider failed to comply with its disclosure obligations, 
shall, if it has not already received the information that the service 
provider failed to disclose under its disclosure obligations, request 
in writing that the service provider furnish the information;
    2. If the service provider fails to comply with the plan 
fiduciary's written request within 90 days of the date of that request, 
the responsible plan fiduciary shall, in accordance with Section III, 
notify the Department of Labor of the service provider's failure; and
    C. The responsible plan fiduciary, following discovery that the 
service provider failed to comply with its disclosure obligations, 
shall determine whether to terminate or continue the contract or 
arrangement. The responsible plan fiduciary will evaluate the nature of 
the particular disclosure failure and determine the actions necessary 
under the facts and circumstances. Such fiduciary shall consider, among 
other factors, the availability, qualifications and costs of potential 
replacement service providers, and the responsiveness of the service 
provider in furnishing the information that the service provider should 
have disclosed, but did not, under its disclosure obligations.

Section III--Notice Requirements

    A. The notice required by Section II.B.2 shall contain the 
following information: (i) The name of the plan; (ii) the three digit 
plan number used for the plan's Annual Report; (iii) the plan sponsor's 
name, address, and EIN; (iv) the name, address, and telephone number of 
the responsible fiduciary; (v) the name, address, phone number, and, if 
known, EIN of the service provider; (vi) a description of the services 
provided to the plan; (vii) a description of the information that the 
service provider failed to furnish; (viii) the date on which such 
information was requested in writing from the service provider; and 
(ix) a statement as to whether the service provider continues to 
provide services to the plan;
    B. The notice required by Section II.B.2 shall be filed with the 
Department not later than 30 days following the earlier of: (i) The 
service provider's refusal to furnish the requested information; or 
(ii) the date which is 90 days after the date the written request 
referred to in Section II.B.1 is made; and
    C. The notice required by Section II.B.2 shall be sent to the 
following address: U.S. Department of Labor, Employee Benefits Security 
Administration, Office of Enforcement, 200 Constitution Ave., NW., 
Suite 600, Washington, DC 20210; or may be sent electronically to [email protected].

    Signed at Washington, DC, this 7th day of December, 2007.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E7-24063 Filed 12-12-07; 8:45 am]
BILLING CODE 4510-29-P