July 20, 2015

By email: e-ORI@dol.gov

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Re: Response to Conflicts of Interest Proposed Rule (RIN 1210-AB32)

Dear Sir or Madam:

I am writing regarding the U.S. Department of Labor’s (DOL) proposed Conflicts of Interest Rule 

(Proposed Rule) and related Exemptions, which address conflicts of interest in financial advice on 

pension-related assets. The Proposed Rule makes appropriate and important updates to the 

framework that governs the provision of investment advice. It is particularly needed now, as more 

Americans than ever before rely on 401(k) plans and IRAs as their primary vehicles for retirement 

savings. The exorbitant costs that conflicted advice imposes on retirement savers are well 

documented in the DOL’s regulatory impact analysis. Rather than repeat that thorough analysis, in 

this letter I write to address five specific matters.

1. Investment Education. According to the Proposed Rule, providers of investment education or 

retirement education would not become fiduciaries solely due to the provision of that education. The 

Proposed Rule’s provisions on this point would supersede the DOL’s Interpretative Bulletin 96-1 (IB 

96-1) and are important to ensure that investment advice is not given under the guise of being 

education.

The Proposed Rule excludes from the definition of investment education all communications that 

recommend investment products, specific plan or IRA alternatives, etc. (Proposed Rule Section 

2510.3-21(b)(6)). The Proposed Rule provides that references to specific investment products or 

types of accounts, even as examples, result in the communication being ineligible for the investment 

education carve-out. This provision is particularly important and should be included in the final rule.

As proposed, the rule means that providers of investment education that is coupled with references 

to particular investments as illustrations or examples are fiduciaries and thus subject to applicable 

requirements of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and the 

Internal Revenue Code. This outcome is appropriate since some retirement savers would view such

references or examples as investment advice even if it is not so intended by the provider. That could 

happen because a saver is not financially sophisticated. Or, it could happen as a result of normal 

human behaviors. Research shows that the anchoring effects of examples change the behavior of 

Dana M. Muir

Arthur F. Thurnau Professor of Business Law

Tel 734.763.3091 Fax 734.936.8715

dmuir@umich.edu

www.bus.umich.edu
July 20, 2015

Page 2

even financially sophisticated retirement savers. Anchoring effects occur when an investor treats a 

reference point as implicit advice.1

In sum, the final rule should retain the exclusion from the definition of investment education of 

communications that refer to specific investment products, account types, etc.

2. Advice and Recommendations. ERISA states that: “render[ing] investment advice for a fee or 

other compensation . . .”2causes the provider of that advice to become a fiduciary. Proposed Rule 

Section 2510.3-21(a) sets out a series of circumstances under which “recommendations” 

constitute advice and give rise to fiduciary status. Of particular importance is the inclusion of 

recommendations regarding investments, asset management, and valuations in IRAs. IRAs now 

hold more of Americans’ retirement assets than any other single type of retirement account or plan 

subject to DOL oversight. IRA holders are particularly vulnerable to the costs that flow from advisory 

conflicts of interest because, unlike most 401(k)s and other employer-sponsored plans, neither the 

employer nor any other plan fiduciary plays an intermediary role in selecting an investment menu for 

IRAs.

Data indicate that retirement savers are particularly vulnerable to recommendations to roll over 

assets in 401(k) or other employer-sponsored plans into an IRA or regarding distributions from IRA 

assets. A survey by the Committee on Investment of Employee Benefit Assets (CIEBA) found that 

most distributions from plans sponsored by CIEBA members were rolled over into an IRA. Forty 

percent of the assets rolled over from CIEBA plans went to IRAs maintained by the recordkeeper for 

the plan making the distribution. Such rollovers are not often in in the best interest of the plan 

participant. IRAs typically carry higher fees than employer-sponsored plans such as 401(k)s. Not 

only do they pay higher fees because they chose to rollover, it appears that many participants fail to 

comparison shop among IRA providers. If they did, we would not expect to see forty percent of the 

rollovers going to whichever recordkeeper the 401(k) plan happened to use.

To protect the interests of all retirement savers, including those who save through IRAs where there 

is no employer intermediation of investments, the final rule must cover all aspects of advice given 

regarding IRAs, from the decision on whether or not to establish one or contribute assets, through 

the investment of those assets, and into the distribution phase. 

3. Best Interest Contract. The Proposed Rule contemplates the adoption of a “Best Interest 

Contract” prohibited transaction exemption, which would give advice providers the flexibility to 

continue to receive compensation in the nature of commissions, 12b-1 fees, and revenue sharing.

The Best Interest Contract exemption is based on fiduciary concepts in traditional trust law and 

requires that advice provided to retirement savers be in compliance with impartial conduct 

standards. To qualify for the Best Interest Contract exemption, the adviser and retirement saver

(and, if there is one, the adviser’s institution) must have a contractual relationship, the nature of 

which is described in the Proposed Rule. In preparing the final rule, the DOL should be mindful of 

two potential issues. 

 

1

See B. Douglas Bernheim et al., The Welfare Economics of Default Options in 401(k) Plans, 11, March 27, 2015, 

http://andreyfradkin.com/assets/Defaults-and-Welfare-Complete.pdf (forthcoming AMERICAN ECONOMIC REVIEW) 11 

(explaining that anchoring effects cause participants to view a plan’s default contribution rate as having a “stamp 

of approval”) .

2

ERISA § 21(A)(ii).
July 20, 2015

Page 3

a. Low Fee Exemption. The DOL requested comment on whether a streamlined 

version of the Best Interest Contract exemption should be available for advisers offering high-quality, 

low-fee investment products. I have concerns about any streamlined exemption but if the DOL 

decides to provide one, it should be limited to mutual funds that register under the Investment 

Company Act. As the DOL notes in the Proposed Rule, a condition of a streamlined exemption for 

mutual funds could be based on the fees and expenses required to be reported in each fund’s 

prospectus. 

I have three concerns with providing a streamlined exemption to mutual funds that qualify as highquality, low-fee investments. First, defining “high-quality” will be challenging, both on a conceptual 

and technical level. One conceptual approach, which may in itself not fully capture the meaning of 

“high-quality,” may focus solely on fee levels. Here, if “low-fee” is defined with reference to the fee 

and cost categories defined by the Securities and Exchange Commission (SEC), it will be important 

to account for the complexity of those categories. That complexity may permit mutual funds to shift 

their business models and, thus, shift fees among categories to qualify as a low-fee investment. For 

example, if the definition of low-fee excludes mutual funds that charge a sales load (or a load above 

a specified amount), the mutual fund may simply restructure to shift the revenue formerly received 

through the load charges to another category of fee or expense. Also, some funds, such as targetdate funds, embed the advice in the product. That makes it difficult to compare those funds on an 

apples-to-apples basis with funds that do not embed advice. Finally, the calculation of fees often 

requires the assumption of a holding period in order to compare fees that are charged per period 

with one-time fees such as a load charge. The accuracy of the comparison depends on the accuracy 

of the holding period assumption.

Second, defining what constitutes a “low fee” fund may inadvertently cut off aggressive fee 

competition. Funds may little incentive to try to reduce fees below the low-fee threshold.

Third, retirement savers who invest without receiving investment advice may view all funds that 

meet that standard as appropriate for their personal circumstances even though the funds may vary 

in risk and other important characteristics. 

Finally, it is not appropriate at this time for the DOL to adopt a streamlined exemption for any types 

of investments other than straightforward mutual funds. Any suggestions submitted during this 

comment period for additional products to be covered by a streamlined exemption should be 

considered at a later date. Qualifying additional products for a streamlined exemption would 

increase the risk that the final rule would be gutted by exceptions as financial institutions develop 

inappropriate products that fall within the technical definitions of eligibility. Instead, the DOL should 

review suggested additions after the DOL has had experience with and data from the Best Interest 

Contract exemption.

b. Enforcement. Enforcement is an important element in the creation of a 

comprehensive plan to protect retirement savers. I have studied and written extensively on ERISA 

remedies for more than 20 years. The statute is not a model of clear drafting and, as currently 

interpreted leaves some injured plan participants without any remedy. I have come to realize that 

appropriate civil remedies for injured individuals are critical to provide redress and to encourage 

compliance. This is at least as true in the context of investment advice as it is in any other 

regulatory context. 
July 20, 2015

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The Proposed Rule’s requirement, as part of the Best Interest Contract exemption, of a written 

contract that meets a minimum standard ensures that IRA owners have an individual right of action 

for breach of the impartiality standards or warranties. Retirement savers who receive advice on 

ERISA plan investments would have rights of action under ERISA’s remedial sections and under 

contract law. For both IRA and ERISA plan investors, the contractual rights fulfill the critical 

functions of ensuring redress for injury and providing incentives for compliance. These provisions 

must be retained in the final rule to protect the rights of retirement savers. 

4. DOL Regulation. It is important for DOL to move forward at this time with the Proposed Rule

instead of waiting for the SEC to act on fiduciary regulation. Having appropriate regulation in place 

is necessary for the DOL to fulfill its mission of protecting retirement savers. As I have written 

elsewhere: “Changing workforce demographics, plan typology, and ERISA jurisprudence have all 

played a role in causing fiduciary principles to become integral to—and integrated in—the larger 

statutory framework.”

3

Fiduciary standards, including the prohibited transactions provisions, have 

become the workhorse of pension regulation. 

Retirement savers hold about $17 trillion in private sector employer-sponsored retirement plans and 

IRAs. ERISA’s protection of those retirement savers is situated in a policy landscape that provides 

tax incentives for workers to save for retirement. The tax incentives constitute some of the largest 

items in the federal tax expenditure budget. The government and all taxpayers have a particular 

interest in protecting the assets saved with the support of those incentives from predatory or other 

self-interested behavior. 

Some opponents of the Proposed Rule argue that the DOL should not regulate the provision of 

investment advice, but, instead should cede regulatory authority to the SEC. Those opponents are 

wrong. Under ERISA and Reorganization Plan No. 4 of 1978, DOL is charged with regulatory 

authority over the meaning of investment advice and the prohibited transaction exemptions. To 

fulfill its mission of protecting tax-favored retirement accounts, DOL must define the scope of 

fiduciary status. Disclosure and honesty, the hallmark of SEC regulation, is necessary but 

insufficient in the retirement savings universe. The Proposed Rules are not rules to ensure a fair 

playing field and to keep markets honest, as would be the SEC’s focus—they are rules to ensure 

that tax-supported savings are used to provide those who earned those savings with financial 

security in retirement.

ERISA’s regulation of investment advice under the fiduciary standards and prohibited transaction 

rules was neither an error nor a mirror of the SEC’s mission to regulate advice under the Investment 

Adviser’s Act. The SEC only has authority to regulate advice given on securities. Retirement savers 

invest in many categories of assets other than securities, including real estate, commodities, 

precious metals, etc. What makes sense from a uniformity of regulation standpoint is that advice 

given on all categories of investments in 401(k)s and IRAs be subject to the same fiduciary 

standards. Only regulation by the DOL can provide that uniformity. And, only the DOL can regulate 

advice on whether to roll over assets from an employer plan to an IRA. The SEC has no authority to 

regulate advice on that decision, which, as discussed above is a decision on which savers appear to 

be particularly vulnerable to conflicted advice. 

 

3

Dana M. Muir, Reflections on ERISA’s Fiduciary Provisions: An Integral and integrated part of the Statute, 6 DREXEL 

L. REV. 539, 543 (2014). 
July 20, 2015

Page 5

Some opponents of the Proposed Rule seem to be arguing that it is too much to expect all 

professional providers of investment advice to act in the best interest of their clients when providing 

advice on retirement savers. They claim that if all advisers are held to that standard then advice will 

suddenly become unavailable to many retirement savers. 

Outside the advisory industry, however, a broad range of individuals and entities for many years 

have successfully provided services to retirement plans while complying with the fiduciary 

standards. That list includes employers, large and small, trustees, company board members, 

investment committee members, and many, many investment advisers. It is difficult to believe that 

the rest of the financial services industry, which has shown remarkable adaptability in its ability to 

provide services at a profit, will not find efficient ways to provide advice that puts clients first. 

5. Alternative Proposals. Some organizations, including the Securities Industry and Financial 

Markets Association (SIFMA) and the Financial Services Roundtable (FSR), have made proposals 

that they characterize as providing protections similar to those that would be provided by the 

Proposed Rule. When read carefully, though, the SIFMA and FSR proposals fail to provide the level 

of protection needed by retirement savers. Specifically, although the SIFMA proposal is written in 

terms of client ‘best interest,’ the carve out for the sale of proprietary or an otherwise limited range 

of products permits any adviser at any time to evade the best interest rule by limiting the products 

on which advice is provided. And, the proposal’s requirement that advice be given with “care, skill, 

prudence, and diligence” does not solve the problem of conflicts of interest. Traditional fiduciary 

standards are composed of two separate requirements. One is the duty of care, which is what the 

language just quoted imposes. The other is the duty of loyalty – that a fiduciary act in the best 

interest of the client. The SIFMA proposal makes loyalty optional. Optional obligations are not 

obligations. 

Thank you for your consideration of these comments.

Yours truly,

Dana M. Muir

Arthur F. Thurnau Professor of Business Law