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200 Constitution Avenue, N.W. Washington, D.C. 20210

Washington, D.C. 20210

Re: Conflict of Interest Rule — Retirement Investment Advice RIN 121 0-AB32

Ladies and Gentlemen:

Financial Engines respectfully submits the following comments in response to the Department of Labor’s

proposed regulation entitled Definition ofthe Term ‘Fiduciary; Conflict ofhiterest Rule — Retirement

Investment Advice, “published in the April 20, 2015 Federal Register.’ We applaud the Department’s

proposal to update the definition of fiduciary under 29 CFR 2510.3-21(c), and support the objective of

improving protections for retirement investors by seeking to ensure that persons providing investment

advice are subject to ERISA’s standards of fiduciary conduct. We share the concern that the currentregulation may not adequately protect the interests of retirement investors and may limit unnecessarily the

scope of ERISA’s fiduciary protections. ERISA’s fiduciary standards provide important protections

against conflicts of interest and self-dealing and, particularly in light of changes in the financial industry,

it is crucial now more than ever to re-examine the types of relationships that should give rise to fiduciaryduties under ERISA and to apply these protections broadly.

We thank the Department for encouraging input on the proposed regulation. The Department’s public

comments have provided additional helpful clarification as to the intended objectives and interpretation of

the proposed regulation. We are respectfully submitting these comments to provide responses to several

ofthe questions posed by the Department, and to offer specific proposals to address a few potentialambiguities and areas where there may be unintended consequences. We have provided marked changes

to the proposed regulation, in the hopes of making our suggestions somewhat easier to follow.

Financial Engines

Financial Engines Advisors L.L.C.. a wholly owned subsidiary of Financial Engines, Inc., is a registered

investment adviser that provides personalized investment advice and management services to retirement

investors. Financial Engines provides such services as a fiduciary under the Employee RetirementIncome Security Act of 1974, as amended (“ERISA”) and the parallel prohibited transaction restrictions

of the Internal Revenue Code.2 Financial Engines is the leading provider of independent advisory services to large plan sponsors, working with many of the nation’s largest employers and retirement

service providers to provide access to advisory services to over 9 million participants in 401(k) andsimilar plans. Notably, while Financial Engines may be best known for providing discretionary

investment management through our ProfessionaL Management service (managed accounts program)

since September 2004, the company was founded to provide non-discretionary investment advice, and

continues to do so today.

$0 Fed. Reg. 21928 (Apr. 20,2015). 2 Except as expressly noted, references in this letter to ERISA should be read to include the corresponding provisions of the Internal Revenue Code.

#41586

1050 Enterprise Way, 3 Floor. Sunnyvale, CA 94089 office 408.498.6000 I tax 408.498.6010
portfolio from among the investment choices available in their employer’s 401(k) plan.

We can either professionally manage an employee’s 401(k) account on a discretionary basis or provide

online advice through expert recommendations, interactive tools and certified advisors. For employees

who decide to rollover their 401(k) when retiring or leaving their employer, we can also manage the

employee’s, or their spouse’s, individual retirement accounts (“IRA”) assets. Annually, Financial Enginesprovides a retirement readiness assessment, including estimated annual retirement income from Social

Security. 401(k)s, IRAs, and pensions, if applicable, to all employees in the plans we serve. For

employees selecting the lncome+ feature of Financial Engines® Professional Management service, we

will manage the portfolio to be ready to generate retirement income, and can generate steady payouts that

are designed to last for life with the purchase ofan optional out-of plan fixed annuity. Financial Engines

is not affiliated with any other financial services entity, does not manufacture or sell investment products,

and does not accept commissions or product-based revenue sharing.

Financial Engines believes that our history and growth support the conclusion that it is neither onerous

nor impossible for service providers to provide high quality services in a fiduciary capacity to largenumbers of plans and participants. We have a proven track record of providing high-quality independent

investment advice. Financial Engines is America’s largest independent registered investment advisor.3

Financial Engines works with more than 600 large employers (including 146 of the FORTUNE 500) and8 of the largest retirement plan providers serving the defined contribution market. As a result, over threemillion people have used Financial Engines Online Advice3, and approximately 900,000 have their

retirement account professionally managed by the company5. Nearly 240,000 of our discretionarymanaged account service clients have less than $20,000 in their 401(k) portfolio, and the median balance

is $57,000.6 Over 77% of the professionally managed portfolios are unique to the individual. The median

balance for the more than 9 million plan participants with access to our services is $32,000, and

approximately 43% of those participants have less than $25,000 in their 401(k) portfolio.7

I. The preamble to the proposed regulation and proposed exemptions provide useful clarification

and context relative to existing advisory opinions and other guidance.

With a regulatory regime as complex as ERISA, it is often difficult to interpret the impact ofproposed new regulation on existing interpretations and guidance. We appreciate the Department’s

specific confirmation, in the preamble to the Proposed Best Interest Contract Exemption,t that the

Department is not retracting the views expressed in Advisory Opinion 2001-09A (the “SunAmerica

Letter”). We also appreciate the Department’s clarification that the proposed regulation is directed to

For independence methodology and ranking, see InvestmentNews RIA Data Center.

(http://data.investmentnews.com/ria’).

‘As of December 31,2014, the number of people who have accepted our online services agreement.

As of March 31, 2015.

6 As of March 31,2015.

As of March 3 I, 20 15.

‘80 Fed. Reg.2l960 (Apr. 20,2015).
investment advisers to present their services to an individual retirement investor.

A. Concern: An investment adviser’s conversation with a retirement investor about the

fiduciary advisory services it makes available could be construed as a “recommendation” of

such advisory services, triggering fiduciary status with respect to that initial conversation

and, potentially causing a prohibited transaction if the retirement investor uses suchservices and the adviser then receives fees, even when those fees are reasonable, fully

disclosed, and free of potential conflicts of interest. Unless clarified, this could make it

difficult for an investment adviser to present its fiduciary services to a retirement investor.

The Department has long recognized the need for investment advice directed to retirement

investors. Further, Congress and the Department have also recognized that retirement investors do

not always use the help that is available to them. To reach retirement investors who need help, itis essential that advisers be able to provide information to retirement investors about their

services. These communications may take the form of in-person presentations, printed mailings,

electronic communications, social media, and phone or email contacts. We believe it is beneficial

to retirement investors to receive information in a form that suits their particular needs, and

through a wide variety of channels or approaches to engage retirement investors with different

communications preferences. In the case of registered advisers, any such communications would

be delivered in compliance with applicable securities laws.

We understand the Department’s intent with the proposed regulation is to increase the access a

retirement investor has to obtaining investment advice within a fiduciary relationship. However,

unless clarified, the proposed regulation may block the initial contacts with retirement investorsnecessary for an investment adviser to engage such individuals in a fiduciary relationship, Under

the proposal, some of these communications, especially one-on-one conversations with an

adviser’s representatives, in person, or by phone, email, or “chaf’, could be characterized as

providing a recommendation of a fiduciary adviser, and thus could be characterized as fiduciary

investment advice at the time of such discussions and presentation of services. Under such an

interpretation ofthe proposed regulation, fiduciary status is immediately triggered, and, unless an

exemption is available, a prohibited transaction may result if the adviser then receives fees, even

when those fees are reasonable, fully disclosed, and free of potential conflicts of interest. We are

not aware of an existing exemption that would serve in the circumstances described. Theproposed “Best Interest Contract Exemption”, which is primarily designed to permit the receipt of

conflicted fees for recommending certain investment products, if certain conditions are met,

would also not be applicable.

This interpretation is based on the current language of section 2510.3-21(a)(l)(ii), which provides

that investment advice includes “[a] recommendation as to the management ofsecurities or other

These advisory relationships may be established by an agreement between a plan sponsor or other authorized plan fiduciary on behalf of a plan participant, as reflected in the Department’s regulation on qualified default investment

alternatives. Default Investment Alternatives Under Participant Directed Individual Account, 72 Fed. Reg. 60452 (Oct. 24. 2007).
It also is importanl 10 address the situation of advisers who are already acting in a fiduciary

capacity relative to a particular retirement investor. This arises when an adviser offers different

types of advisory services. For example, Financial Engines may act as a fiduciary for an

individual who is using one of our services, such as our non-discretionary online advice service,

who wishes to explore using our discretionary managed accounts service. Changing to a different

service can be appropriate for an advice recipient whose circumstances have changed over time:perhaps he or she is now closer to retirement and wishes to have additional help, or no longer has

the time to manage investments themselves. ERISA has long been understood to permit service

providers to act as a fiduciary for some, but not all of the services provided, and we believe that

the Department should continue to recognize this important distinction.’0

B. Proposal: Clarify that only recommendations of “another” constitute investment advice and

that “recommendation” excludes an entity’s presentation of its own services

As stated in the proposing release, “the proposal is intended to ensure that small plan fiduciaries,

plan participants, beneficiaries and IRA owners would be able to obtain essential information

regarding important decisions they make regarding their investments without the providers ofthat

information crossing the line into fiduciary status.”’ We believe that the Department’s intent with

paragraph (iv) is to ensure fiduciary protections for retirement plans and retirement investors

where advice regarding the selection of an investment advisor is being made by a third party that

will receive compensation for such recommendation. Given the Department’s comment that call

center employees, “and possibly their employers”2 should be treated as fiduciaries unless they

meet the conditions of one of the carve-outs, it would be useful to use language permitting an

employee to present or explain the available services, as the agent of his or her employer. Thus,

paragraph (iv) could be amended to clarify that the “person” referred to in paragraph (iv) is a

person other than the one referred to in the first instance in 2510.3-21(a):

“(iv) A recommendation ofa third party, other than such person’s employer, who is also

going to receive a fee or other compensation for providing if any of the types of advicedescribed in paragraphs (i) through (iii) are provided; and”

Further clarity would be achieved by also including within the definition of “recommendation” aspecific exclusion for a “presentation of services” by the provider of such potential services. As

the Department recognized, it can be faithful to the overall purpose of ERISA to exclude specifictypes of communications that would not be treated as investment advice, where the activities donot “implicate relationships of trust and expectations of impartiality,” rather than adding

additional elements that must be met in all instances. Retirement investors would still have the

W The Department has long recognized that a person may act as a fiduciary with respect to a plan and still offer to

perform additional services to the plan in a non-fiduciary capacity. See 29 CFR 2550.408b-2(fl, Examples I and 2.

80 Fed. Reg. 21928, 29142 (April 20,2015).

280 Fed. Reg. 21946 (April 20, 2015).
action. 

Service Offering

means those written and/or oral communications between an

advice recipient and a provider of services, which is intended to convey information that theadvice recipient in the ordinary course would deem relevant in the evaluation of such

service(s), including without limitation scope of services. oroposed fees, termination rights,fiduciary status ofservice provider if selected, and other attributes ofthe services that enable

informed decision making by an advice recipient.”

Ill. The proposed rule may create confusion over what content will be deemed to constitute

representing or acknowledging that a person is a fiduciary within the meaning of the Act

A. Concern: Certain comments in the proposing release imply that use of certain phrases by

an adviser when communicating with retirement investors about the advisory services it

makes available, could immediately trigger fiduciary status and potentially result in a

prohibited transaction if the adviser receives fees for its advisory services, even when thosefees are reasonable, fully disclosed, and free of potential conflicts of interest.

Similar to our comments under Part 11 above, advisers who fully intend to become fiduciaries and

to manage investments as a fiduciary may trigger such status prematurely if Section (2)0) is

interpreted broadly, to encompass not just the adviser’s actual use of the word “fiduciary”, but

also the adviser’s use of words such as “personalized,” or indications that the adviser will act in

the individual’s “best interests.” We arc basing this interpretation on the proposing release, which

notes that: “Thus, at the same time that marketing materials may characterize the financial

adviser’s relationship with the customer as one-on-one, personalized, and based on the client’sbest interest, footnotes and legal boilerplate disclaim the requisite mutual agreement,

arrangement, or understanding that the advice is individualized or should serve as a primary basisfor investment decisions.”3 Further, the use of the word “indirect” implies that the provision

could be construed broadly. We believe that the Department intends that such phrases and

positioning should not be used where the adviser simultaneously, or later, disclaims fiduciaryresponsibility, but that the intent is not to prevent an adviser from describing the relationship that

!ffl result once the adviser begins to provide investment management services.

B. Proposal: Clarify that advisers that intend to offer fiduciary advisory services will not

become fiduciaries prematurely merely by virtue of using phrases that attempt to convey

the meaning of fiduciary duty and responsibility.

Paragraph (2) can be amended to remove the reference to “indirectly”:

“(2) Such person, either directly or indircctly (c.g., through or together with any affiliate),

(i) Represents or acknowledges that it is acting as a fiduciary within the meaning of the

Act with respect to the advice described in paragraph (a)( I) of this section; or”

‘ago Fed. Reg. 21951 (April 20, 2015).
advice recipient and a provider ofservices; intended to convey information that the advice

recipient in the ordinary course would deem relevant in the evaluation of such service(s).

including without limitation scope of services, proposed fees, termination rights, fiduciarystatus of service provider if selected, and other attributes of the services that enable informed

decision making by an advice recipient.”

IV. Additional Comments

A. The Department has requested comment on whether it is appropriate to omit the provisions

of lB 96-1 relating to specific investment products and alternatives available under the plan.

We believe that the educational carve-out is appropriate and will help retirement investorsget needed information and assistance, without including specific investment products and

alternatives in the carve-out.

We agree with the Department’s definition of educational materials. It is especially important,

and appreciated, that the Department specified that educational material may continue to be

provided without triggering fiduciary status irrespective of whether such educational materials areprovided by the plan sponsor or by service providers. In addition, it is especially useful that the

Department specified that materials could be provided in any form including individually or on a

group basis, in writing or orally, or via call center, video or computer software. We believe it is

appropriate that the Department excluded asset allocation models that identify specific investmentproducts available under the plan or IRA from the description of educational materials. However.

there may be circumstances in which the identification of specific investment products does notcreate a conflict of interest. We suggest that the language be modified to allow presentation of

specific investment products, if either one of two additional criteria are met’3, perhaps withappropriate caveat language to make it clear that the examples may not be the only choice for a

particular investor: (I) all of the investment products or alternatives available under the plan or

IRA applicable to a specific asset class are presented, or (2) only investment products or

alternatives with respect to which the education provider has no conflicts from differential

compensation arrangements are shown.

“(iii) Asset allocation models

(C) Such models do not include or identify any specific investment product or specific

alternative available under the plan or IRA, unless including or identifying all of the

investment products or specific alternatives available under the plan or IRA for an identified

asset class, or including or identifying only one or more investment products or specific

alternatives available under the plan or IRA for an identified asset class with respect towhich such person and its affiliates will not receive any differential compensation; and

14 While cost is an important factor in the selection of investments, we would not recommend allowing identification

of specific products or investment alternatives based on cost alone. A provider acting as a fiduciary could make a fiduciary determination as to which products or investment alternatives to identify based on consideration of all of

the product’s attributes, but cost alone might not be a sufficient indicator of quality and potential benefit.
or estimate, and if some, but not all, specific investment products or specific alternatives

available under the plan or IRA are identified pursuant to clause (C). that other products or

alternatives with similar risk and return characteristics may be available and identifvin

where information about those alternatives can be obtained.”

We suggest a few additions to the language in (i) “Plan information” and (ii) “General financial,investment and retirement information” to convey additional types of information that would not

constitute investment advice under the proposed regulation.

“0) Plan information. Information and materials that, without reference to the

appropriateness of any individual investment alternative or any individual benefitdistribution option of the plan or IRA, or a particular participant or beneficiary or IRA

owner, describe the terms of operation of the plan or IRA, inform a plan fiduciary,participant, beneficiary, or IRA owner about the benefits of plan or IRA participation, the

benefits of increasing plan or IRA contributions, the impact of preretirement withdrawals on

retirement income, retirement income needs, varying forms of distributions available from

the plan or IRA, including rollovers, annuitization and other forms of lifetime income

payment options (e.g., immediate annuipc deferred annuity, or incremental purchase of

deferred annuity or other strateiav for systemic withdrawals), advantages, disadvantages and

risks of different forms of distributions (such as required minimum distributions and relative

costs of investments associated with the different forms of distributions) or describe

investment objectives and philosophies, risk and return characteristics, historical returninformation or related prospectuses of investment alternatives under the plan or IRA.

(ii) General financial, investment and retirement information

(H) General methods and strategies for managing assets in retirement (e.g., systematic

withdrawal payments, annuitization. guaranteed minimum withdrawal benefits), including

those offered outside the plan or IRA and including the impact of other retirement benefits

such as Social Security or defined benefit payments.”

Educational materials and models are by their nature often designed for general information,

without offering individualized information. Clearly, educational materials or a model would be

less helpful to retirement investors without information about the underlying assumptions, such as

whether inflation is taken into account, or whether estimates of future income streams assume

continued contributions to the plan or IRA. However, it would be helpful ifthe Department couldprovide additional clarity on how advisers should assess what is “material” in the context of facts

and assumptions relating to educational materials, as it could be difficult for service providers to

know ifsufficient information had been provided. We also believe it would be useful to clarii

that service providers can use alternate means of providing access to these material facts and

assumptions. We are hopeful that the Department is intending that the material facts and

assumptions cover information that is material to the intended recipients overall, rather thanassessing and describing every circumstance in which an individual’s outcome might vary.

Individuals who require advice tailored to and taking into consideration their own personal
provisions relating to asset allocation models and interactive investment materials. The language

in the laner is useful to convey that the required disclosure should be viewed from the perspective

of facts and assumptions that are likely to affect a participant’s perspective, as opposed to all of

the underpinnings of the model or interactive materials. For example, it should not be necessary

to include macroeconomic or capital market assumptions, such as the estimated volatilities for

various assets or asset classes used in the model or materials. We would suggest the following

revisions:

“(iii) Asset allocation models. Information and materials (e.g., pie charts, graphs, or case

studies) that provide a plan fiduciary, participant or beneficiary, or IRA owner with models

of asset allocation portfolios of hypothetical individuals with different time horizons (which

may extend beyond an individual’s retirement date) and risk profiles, where--

(B) -All-material facts and assumptions on which such models are based (e.g.,

retirement ages, life expectancies, income levels, financial resources, replacement income

ratios, inflation rates, rates of return, expected future contributions) that typically affect a

participant’s, beneficiary’s or IRA owner’s assessment of such model are provided, or arespecified by the participant. beneficiary or IRA owner;

(iv) Interactive investment materials. Questionnaires, worksheets, soffivare, and similar

materials which provide a plan fiduciary, participant or beneficiary, or IRA owners the

means to estimate future retirement income needs and assess the impact of different asset

allocations on retirement income; questionnaires, worksheets, software and similar materialswhich allow a plan fiduciary, participant or beneficiary, or IRA owners to evaluate

distribution options, products or vehicles by providing information under paragraphs(b)(6Xi) and (ii) of this section; questionnaires, worksheets, software, and similar materials

that provide a plan fiduciary, participant or beneficiary, or IRA owner the means to estimate

a retirement income stream that could be generated by an actual or hypothetical account

balance, where — (D) AW material facts and assumptions (e.g., retirement ages, life expectancies,

income levels, financial resources, replacement income ratios, inflation rates, rates of return,expected future contributions and other features and rates specific to income annuities or

systematic withdrawal plan) that may typically affect a participant’s, beneficiary’s or IRA

owner’s assessment ofthe different asset allocations or different income streams accompany

Urn matcrials are provided, or are specified by the participant, beneficiary or IRA owner;”
(Suitability)

of the term 

recommendation

in the context of asset allocation models and general

investment strategies.

As shown in our suggested revisions above, we believe it would be useful to clari& that the

determination of whether a suggestion is fiduciary advice should be made objectively rather than

subjectively, consistent with FINRA Regulatory Notice 11-02. However, we suggest it could besource of confusion if the Department were to adopt FINRA standards, or to imply that they are

incorporated by reference into the proposed regulation, since many of the advisers subject to the

proposed regulation are not regulated by FINRA. It may be difficult for such advisers to anticipate

and interpret any future changes to FINRA’s standards.

Conclusion

Financial Engines supports the Department’s actions in seeking to better protect retirement investors andbeneficiaries. We appreciate the opportunity to comment on the proposed regulation and welcome the

opportunity to work with the Department and to provide any further assistance that may be required.

Please contact us should you have any questions.

Christopher Jones

Executive Vice President of Investment Management and Chief Investment Officer

Very truly yours,