April 12, 2011

Joe Canary Submitted to: e-ORI@dol.gov

Acting Director

Jeffrey Turner

Acting Deputy Director

Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor 

200 Constitution Avenue NW

FP Building, Room N-5655

Washington, DC 20210

Re: Public Hearing on Definition of Fiduciary

Dear Mr. Canary and Mr. Turner:

AARP appreciates this opportunity to respond to the written comments and oral 

testimony previously provided to the Department of Labor concerning the definition of 

fiduciary. Although we certainly appreciate the additional tools that the proposed 

regulation provides to plan trustees and administrators, especially for small employer 

plans, AARP is most concerned about the impact of this rule on individual participants and 

beneficiaries. 

I. THE DEPARTMENT SHOULD SUBJECT ALL SERVICE PROVIDERS THAT 

OFFER INVESTMENT ADVICE TO ERISA PLANS AND PARTICIPANTS 

TO ERISA’S FIDUCIARY STANDARD.

The distinction between broker-dealers and registered investment advisors is not 

well understood by average investors, especially individual plan participants. All investors 

believe that investment advice they receive should be in their best interest, and this 

expectation should be met in practice. AARP believes that imposition of ERISA‘s fiduciary 

status upon all financial services professionals who deal with retirement plans, plan assets 

and retirement plan participants and beneficiaries is the principal vehicle through which the 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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Department should foster the creation of a more investor-friendly financial services 

marketplace.

II. THE DEPARTMENT OF LABOR SHOULD REJECT THE USE OF A 

DISCLOSURE-ONLY SCHEME FOR PROTECTING PLANS AND 

PARTICIPANTS FROM CONFLICTED INVESTMENT ADVICE.

Some commenters have argued for a disclosure-only scheme regarding investment 

advisers especially for broker–dealers. AARP submits that the Department should reject 

such a scheme for four reasons.

A. Participants View The Purchase Of Securities In A Retirement Plan 

Differently Than In The Open Market. 

Retirement plan participants engage in a different evaluative approach compared to 

individuals who independently purchase securities in the open market. Individuals

purchasing securities in the open market do so with the knowledge that any transaction 

occurs at an arm‘s length. Accordingly they know they must actively protect their personal 

interests when choosing an investment. In contrast, rather than being on notice of the 

need to actively protect their interests, plan participants choose investments from a 

predetermined list of options the plan provides. Many individuals believe that because the 

plan or employer has selected these investments as options, the plan or the employer has 

certified these investments as being ―good‖ investments, at least implicitly. Therefore, 

rather than choosing investments based solely on their own evaluation, plan participants

certainly weigh, and likely solely rely upon, employers‘ endorsement of the plan options 

when making investment decisions. ERISA serves to protect plan participants as a result 

of participants‘ natural reliance on the employers‘ implicit endorsement of plans‘

investment options. 

B. The Department Should Ensure That Retirement Plans And Participants 

Are Protected From Conflicted Investment Advice To Ensure That Tax 

Expenditures Are Used For The Purposes For Which They Were 

Enacted.

Congress has used tax incentives to encourage the offering and participation in 

retirement plans in order to achieve the goal of improved income security in retirement; in 

contrast, there are no similar tax incentives to purchase securities outside of a retirement 

plan. Employers and employees may deduct their contributions from their current year‘s 

income, while investment income accrues without any taxes. The amount of this income 

exclusion is estimated to total over $515 billion in tax expenditures
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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for Fiscal Years 2010-2014.

1

 See STAFF OF THE JOINT COMMITTEE ON TAXATION, ESTIMATES 

OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 2010-2014 at 49 (Comm. Print JCS-3-10 

2010). ERISA plays a crucial role in ensuring the protection of funds subsidized by 

taxpayers so that participants have money for a secure and adequate retirement. 

Because the Department of Labor must ensure that tax expenditures are used to 

further the purposes for which they were granted, see subsection II.C., infra, service 

providers are not entitled to rules under ERISA that are necessarily the same as rules 

under the SEC or CFTC. Cf. In re CMS Energy ERISA Litigation, 312 F. Supp. 2d 898, 

915 ((E.D. Mi. 2004), citing In re Worldcom, 2001 U.S. Dist. LEXIS 17450, 2002 WL 

31640557 at *4 (N. D. Cal. July 26, 2002)) (―existence of duties under one federal statute 

does not, absent express congressional intent to the contrary, preclude the imposition of 

overlapping duties under another federal statutory regime‖); see generally EMPLOYEE 

BENEFITS LAW (2d ed.) – 2010 Cum. Supp. at 679-680 (2010). However, these service 

providers are entitled to rules that are not in conflict with each other. We commend the 

Department of Labor for its continued cooperation and coordination with the SEC and 

other agencies on these related but distinct issues.

C. When It Enacted ERISA, Congress Rejected Using A Mere Disclosure 

Scheme Because Such A Scheme Under The WPPDA Had Failed To 

Protect Plans And Participants.

Congress attempted to use disclosures to remedy the abuses in private pension 

plans by enacting the Welfare and Pension Plans Disclosure Act (―the WPPDA‖). See P.L. 

836, 85th Cong., 2d Sess. (Aug. 28, 1958). This statute required the plan administrator to 

file an annual plan description and financial report, but this information was only available 

to plan participants upon request. See id. When the WPPDA became law, it was widely 

recognized that the WPPDA would not have the corrective effect necessary in the private 

pension system. For instance, when signing the legislation, President Eisenhower 

remarked that ―Congress has failed to respond effectively to the pleas for action in this 

field, and I am sure that the public is as disappointed with [the WPPDA] as I am.‖ James 

A. Wooten, THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 49 (Univ. of Cal. 

Press 2004).

Fifteen years after its passage, Congress recognized that the WPPDA and its 

disclosure requirements failed to address the abuses in private pension plans. Congress 

explained that: 

It was expected that the knowledge thus disseminated would enable 

participants to police their plans. . . . Experience in the decade . . . has 

demonstrated the inadequacy of the Welfare and Pension Plans 

Disclosure Act in regulating the private pension system for the purpose of 

 

1

This figure takes into account the tax expenditures that exclude from income employee contributions to 

defined benefit and defined contribution plans. See Estimate of Tax Expenditures, supra, 49. 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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protecting rights and benefits due to workers. It is weak in its limited 

disclosure requirements and wholly lacking in substantive fiduciary 

standards. Its chief procedural weakness can be found in its reliance 

upon the initiative of the individual employee to police the management of 

his plan.

S. Rep. No. 93-127 (1973). 

In response to the ongoing abuses in private pension plans, Congress enacted the 

Employee Retirement Income Security Act (―ERISA‖). See S. Rep. No. 92-634 (1972). 

Congress recognized the chief weakness of the WPPDA was its reliance on individual plan 

participants to monitor the plan through disclosure. As a result, Congress changed the 

disclosure and oversight approach of the WPPDA. Congress added ―a new section setting 

forth responsibilities and proscriptions applicable to persons occupying a fiduciary 

relationship to employee benefit plans, including a  ̳prudent man‘ standard for evaluating 

the conduct of all fiduciaries.‖ See id. And, ERISA provides substantive rights to 

employees. See Wooten, supra, at 49; Title I of ERISA. 

Clearly, the WPPDA revealed the insufficiency of disclosure-only requirements and 

the need for a strong fiduciary standard. Disclosure-only requirements concerning 

fiduciary duties would wholly fail to guarantee the stronger protections and substantive 

rights provided by ERISA. Consequently, arguments that the Department should adopt a 

disclosure-only scheme instead of substantive rules concerning fiduciaries fly in the face of 

Congress‘ findings and intent, and should be rejected as being inconsistent with the 

purposes of ERISA. 

D. Because Many Americans Have Low Financial Literacy Skills, 

Heightened Disclosure Requirements Alone, Without More, Are Not The 

Solution To The Financial Literacy Gap. 

As 401(k) plans became more predominant in the workplace, scholars began 

examining the impact of financial literacy on participants‘ saving and investing behavior. 

What they found was sobering. Early research warned of the lack of financial literacy 

among savers and investors and the implications for individuals‘ economic security. See

Annamaria Lusardi, NBER Working Paper No. 13824, Household Saving Behavior: The 

Role of Financial Literacy, Information and Financial Education Programs at 7 (Feb. 2008), 

http://www.nber.org/papers/w13824. In response to these findings, financial education 

programs were developed and promoted. Matthew Martin, Federal Reserve Bank of 

Richmond Working Paper No. 07-3, Literature Review on the Effectiveness of Financial 

Education at 3 (June 2007), http://www.richmondfed.org/publications/research/

working_papers/2007/wp_07-3.cfm; Annamaria Lusardi, Financial Literacy: An Essential 

Tool for Informed Consumer Choice? at 10 (Jan. 2008), www.dartmouth.edu/~alusardi

/.../Lusardi_Informed_Consumer.pdf. Although there have been significant attempts to 

promote financial education, id. at 21, financial literacy remains low. See Financial 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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Industry Regulatory Authority Investor Education Foundation, Financial Capability in the 

United States: National Survey–Full Report (Dec. 2009), http://www.finrafoundation.org/

resources/research/p120478. 

In a recently completed study to evaluate financial knowledge, respondents were 

exposed to a battery of questions covering fundamental concepts of economics and 

finance impacting everyday life, such as calculations involving interest rates and inflation, 

principles relating to risk and diversification, the relationship between bond prices and 

interest rates and the impact that a shorter term can have on total interest payments over 

the life of a mortgage. While the correct response to any single question sometimes 

exceeded 60%, fewer than half of respondents (46%) correctly answered both a question 

about interest rates and a question about inflation. Less than one-third (30%) correctly 

answered those questions plus a question about risk and diversification correctly. And, 

fewer than 10% of respondents were able to answer all questions correctly. For example, 

less than two thirds of respondents (64%) were able to correctly identify that the money in 

an account earning 1% interest during a year with 2% inflation would be able to buy less 

than today. Only one in five respondents (21%) knew that if interest rates rise, bond prices 

will typically fall. See id. at 37-41.

A more disturbing finding is that a significant portion of defined contribution plan 

participants could not even describe how their retirement assets were invested. For 

example, 17% did not know whether the assets in their retirement plan were invested in 

stocks or stock mutual funds, and 37% did not know whether their assets were invested 

primarily in a life-cycle or target-date fund. See id. at 27-28. And of equal concern is the 

observation that plan participants demonstrate a woeful lack of understanding concerning 

fee structures in 401(k) plans. A substantial number of them actually believe that they are 

paying none. AARP, 401(k) Participants’ Awareness and Understanding of Fees (July 

2007), http://assets.aarp.org/rgcenter/econ/401k_fees.pdf.

Of particular import to AARP is a study of individuals over the age of 55 showing 

that they lacked even a rudimentary understanding of stock and bond prices, risk 

diversification, portfolio choice, and investment fees. Annamaria Lusardi, Olivia S. 

Mitchell, and Vilsa Curto, Financial Literacy and Financial Sophistication Among Older 

Americans (Nov. 2009), http://www.nber.org/papers/w15469. 

Finally, in a 2008 GfK Roper Public Affairs Survey concerning whether individuals 

understood financial jargon well enough to explain it to a friend, less than one-third of 

individuals understood the concept of rebalancing, expense ratio or dollar cost averaging, 

less than one-quarter understood what an index fund was and less than twenty percent 

understood what a basis point meant. GfK Roper Public Affairs, The Costs of Financial 

Jargon (February 2008). 

Because financial literacy is only achieved over time (as the financial literacy 

programs have demonstrated), and most participants currently possess poor financial 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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literacy, a disclosure-only scheme will not protect them. Instead, providing participants 

with non-conflicted, independent quality investment advice is crucial. ORC/Infogroup, U.S. 

Investors & The Fiduciary Standard: A National Opinion Survey (September 15, 2010), 

http://www.cfp.net/down loads/ US Investors Opinion Survey 2010-09-16.pdf.

III. AARP ALSO SUPPORTS COMPREHENSIVE DISCLOSURE REQUIREMENTS 

CONCERNING INVESTMENT ADVISORS TO AID PLAN SPONSORS AND 

ADMINISTRATORS IN THEIR CHOICE OF SERVICE PROVIDERS.

The financial literacy gap does not pertain only to plan participants and 

beneficiaries. AARP believes that special care must be taken also to address the need for 

thoroughness and clarity in the financial service community‘s communications to plan 

sponsors and other plan fiduciaries, such as plan administrators and plan administrative 

committee members. This is especially important for small employers who may not have 

the resources to obtain independent advice on fiduciary and administrative issues. The 

Department has acknowledged the Government Accountability Office‘s (GAO) report which 

cites various conflicts of interest that may arise in the employee benefits area and 

recommending certain steps that the Department should take to mitigate such potential 

conflicts. See GAO, Report to Ranking Member, Committee on Education and the 

Workforce, House of Representatives, 401(k) Plans Improved Regulation Could Better 

Protect Participants from Conflicts of Interest at 70-72 (GAO-11-219 Jan. 2011). Among 

those recommendations is GAO‘s suggestion that the Department change the definition of 

a fiduciary for purposes of investment advice. The upshot of that recommendation is that 

the pertinent regulation should require financial service providers‘ written disclosures to 

plan sponsors to specify, when appropriate, that the financial service provider is not 

undertaking to provide impartial investment advice. Comprehensive disclosure is 

necessary so that the plan sponsor is able to distinguish sales pitches from advice and to 

otherwise fulfill its fiduciary duties under ERISA. AARP heartily concurs in that approach 

to setting the standard for disclosures to plan sponsors, as we believe that it comports with 

a proper ERISA standard. 

IV. AARP SUBMITS THAT INVESTMENT ADVICE TO PARTICIPANTS 

CONCERNING THE ROLLOVER OF PLAN ASSETS TO IRAS SHOULD BE 

CONSIDERED FIDUCIARY ACTION. 

AARP is particularly concerned with the Department‘s role in regulating financial 

service providers‘ practices involving plan distributions by way of transfers, rollovers, or 

purchases of financial products that are intended to land outside of a retirement plan upon 

completion of the transaction. It is AARP‘s position that to the extent that any such 

transaction is funded by retirement plan assets then the Department has both the authority 

and the interest in setting the applicable standard for the financial service professional‘s 

conduct. In this connection, AARP urges the Department to exercise its regulatory 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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expertise to protect plan participants by requiring financial service professionals to disclose 

in a consistent and prominent manner, prior to the point of sale, any financial incentive 

they may have in the outcomes of such transactions and, since disclosure itself is 

insufficient, to subject any such investment advice to ERISA fiduciary standards.

V. AARP SUGGESTS THAT THE DEPARTMENT REVISE THE REGULATION TO 

MORE ACCURATELY REFLECT ITS INTENT. 

The Department‘s proposed interpretation of the definition of investment ―fiduciary‖ 

has drawn many negative comments from those who have focused on the breadth of the 

proposed regulation. Certain of those commenters have posited interpretations of 

language in the proposed rule that appears to be beyond any of the Department‘s targeted 

conduct or intent. Based upon the written comments submitted prior to and following the 

March hearings on the proposed regulation, as well as exchanges during the hearings 

themselves, AARP recognizes that there remain several language revisions and 

refinements to be performed on the proposed regulation so as to cure potential 

misinterpretations and avoid unintended consequences. We also emphasize that we 

expect that the implementation of the regulation will engender further interpretive guidance 

from the Department through the initiation, development, and issuance of Technical 

Guidance such as Advisory Opinions, Exemptions, Field Assistance Bulletins (FAB), etc. 

This regulatory and guidance process is not new. Thus, the perceived lack of certainty as 

to how the Department will interpret and enforce the rule should not effectively stall a 

regulatory response where the Department has identified actual and potential abuses 

pertaining to retirement plan investment advice. 

VI. AARP SUBMITS THAT THE DEPARTMENT SHOULD REJECT CRITICISMS OF 

ITS ECONOMIC AND PAPERWORK REDUCTION ACT ANALYSIS BECAUSE 

THE UNDERLYING ASSUMPTIONS OF THESE CRITICS IGNORE POTENTIAL 

BENEFITS IN THEIR ANAYSIS. 

AARP is aware that in addition to its recently released fee regulations, the 

Department is currently assessing the advisability of requiring a consistent and summary 

format to be used by financial services providers to disclose to plans their direct and 

indirect compensation from plan investments and fiduciary status. See GAO, Report to 

Ranking Member, Committee on Education and the Workforce, House of Representatives,

401(k) Plans Improved Regulation Could Better Protect Participants from Conflicts of 

Interest (GAO-11-219 Jan. 2011). AARP acknowledges that it is useful to weigh the 

anticipated costs with the benefits that may be anticipated from the requirement, to the 

extent that such costs may be predictable. Absent a compelling demonstration that the 

costs far outweigh the benefits, AARP favors the requirement for disclosure of information 

regarding compensation from all sources to fiduciaries in a format that is likely to be useful 

to plan sponsors and other parties responsible for plan administration. AARP believes that 
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AARP Comments on 

 Public Hearing on Definition of Fiduciary 

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contentions by certain financial service industry advocates that the costs far exceed the 

benefits may be overblown. 

For example, the assumptions underlying the SIFMA cost study that was previously 

submitted to the SEC are debatable. The OW-SIFMA brief (which is a deck of slides) 

argues that even under conservative assumptions regarding the implications of a broader 

coverage of fiduciary duty, the costs that brokers pay to do business would increase 

significantly. The estimates this study derives are based on a sample of 17 firms with over 

35 million clients.

The study assumes that the contemplated broadening of fiduciary coverage would 

result in increases in costs from two sources. First, the shift to fee-based compensation 

would increase charges, even without brokers taking any action to comply with the new 

law. Second, costs would increase because of the additional time and effort of account 

advisors to comply with the law.

The estimate of the first component of the projected increase in costs is taken from 

a comparison of charges of fee-based brokerage versus commission-based brokerage 

activities. For an investor with assets of $500,000, the extra cost is estimated to be 37 

basis points, or $1,850 per year. This component of the increase does not assume any 

increase in brokers‘ costs. It results from a mechanical application of current pricing 

structures.

The second component of the increase in costs is derived in two steps. The first 

step is to calculate the hourly cost, including overhead, of investment advisor time. The 

estimated figure is about $200 and is derived from estimates of median advisor 

compensation and the ratio of overhead to labor costs. By assuming that the new

regulations would require two additional hours of advisor time per year, the cost of which 

would be passed on to the client, an investor with assets of $500,000 is estimated to suffer 

an additional decline in his or her annual return of 8 basis points. Investors with larger 

portfolios would suffer less of a decline, and smaller investors a greater one.

The OW-SIFMA brief contends that the two-hour estimate for additional account 

advisor time is conservative. The broader fiduciary standard could require increases in a 

range of activities, including advisor training, production and mailing of disclosures, the 

preparation of an investment plan, documentation of discussions with the client, etc.

There are three basic problems with the brief‘s method of estimating the impact on 

net returns. The first is the assumption that fee-based charges—excluding the increase 

due to increased compliance efforts—would not change. If, however, the cost of servicing 

accounts with a commission-based charge is lower than the cost of servicing accounts with 

a fee-based charge, competitive pressures could be expected to lower fee-based charges 

to bring them into line with commission-based charges. 
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 Public Hearing on Definition of Fiduciary 

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Second, the assumption that every account will require an average of two extra 

hours of an advisor‘s time takes no account of the possibility that compliance can be 

achieved in other ways: for example, by a safe harbor investment alternative as exists with 

401(k) plans. (The assumption that the same amount of advice would be needed every 

year of the investing life cycle is also questionable.) 

Finally, the approach attaches no value to the advice received. In effect, it assumes 

that the additional advice is only a costly legal formality. There are costs, but no benefits 

to the additional advice. This assumption cannot be correct. The benefit might take the 

form of a higher gross return, or of reduced risk for a given expected return. In more 

technical parlance, the additional advice should put the investor closer to his ―risk-return 

frontier,‖ or should position him at a spot on that frontier that he or she prefers. Sound 

advice would improve the individual investor‘s portfolio choices, and should be worth 

paying for.

In order to gain a working model for estimating the costs of the proposed action, 

AARP encourages the Department to undertake independent assessment of the cost 

factor.

* * * * *

AARP appreciates this opportunity to provide its views on the proposed amendment 

to the regulation related to the definition of a fiduciary. If you have any questions, please 

do not hesitate to contact Jay Sushelsky at 202.434.2151 or Tom Nicholls at 

202.434.3765.

Sincerely,

David Certner

Legislative Counsel & Legislative Policy Director

Government Relations & Advocacy