1050 17th Street N.W. · Suite 725 · Washington, DC 20036-5503 · (202) 293-4222 ph · (202) 293-4223 fx · www.investmentadviser.org

May 5, 2010 

Via Electronic Filing 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

Washington, DC 20210 

 Attn: 2010 Investment Advice Proposed Rule 

Ladies and Gentlemen: 

 The Investment Adviser Association1 appreciates the opportunity to provide comments 

concerning the Department of Labor’s proposed rule relating to the provision of investment 

advice to participants and beneficiaries in participant-directed individual account plans.2 The 

proposed rule – and the provisions of the Pension Protection Act of 2006 (“Pension Protection 

Act”) that the rule seeks to implement – are intended to expand the availability of investment 

advice to participants in defined contribution plans. We strongly support this goal. We write 

only with respect to aspects of the Department’s proposal and request for comments regarding 

the conditions applicable to computer models that may have broader implications for the 

provision of investment advice generally. 

 As the Department notes, with the rise in the number of employees participating in 

defined contribution plans, millions of plan participants are responsible for making 

investment decisions to assure their own retirement security. Policymakers are increasingly 

recognizing that professional investment advice assists participants in making better 

investment decisions and avoiding errors, such as inappropriate trading strategies or 

inadequate diversification. The availability of professional investment advice has been 

limited by prohibited transaction restrictions under ERISA that prevent a fiduciary from 

providing advice about investment options with respect to which it is affiliated or that 

otherwise result in an additional fee to the fiduciary.

3

 In enacting the Pension Protection Act, 

 

1

 The Investment Adviser Association is a not-for-profit association that represents the interests of SECregistered investment advisers. Founded in 1937, the Association’s membership today consists of more than 475 

firms that collectively manage in excess of $9 trillion for a wide variety of individual and institutional clients. 

For more information, please visit our website: www.investmentadviser.org. 

2

 Investment Advice – Participants and Beneficiaries, 75 Fed. Reg. 9360 (2010) (“Proposal”). 

3

 ERISA section 406. 
2

Congress sought to increase the availability of professional advice to participants and 

beneficiaries in participant-directed individual account plans by providing an exemption from 

these restrictions accompanied by strong safeguards and conditions to address the conflicts of 

interest presented by these arrangements.4

 This statutory exemption permits the provision of advice that would otherwise be 

subject to the prohibited transaction restrictions either through an adviser that is compensated 

on a “level fee” basis or through use of a computer model that is certified as unbiased by an 

independent expert. Although not supported by the provisions specified in the statute, the 

proposed implementing rule would mandate that any computer model be designed to avoid 

investment recommendations that inappropriately distinguish among investment options 

within a single asset class on the basis of a factor that cannot be expected to persist in the 

future. In discussing this requirement, the preamble states that “differences in historical 

performance are less likely to persist in the future and therefore are less likely to constitute 

appropriate criteria for asset allocation.” This statement appears to call into question 

investment advisers’ consideration of historical performance in analyzing potential 

investments. 

 In addition, the Department specifically requests comment on a series of issues related 

to generally accepted investment theories and appropriate criteria and factors for allocating 

assets in computer models, including whether the Department should designate particular 

theories or criteria in the final rule. For example, the preamble poses questions regarding, 

among other things, the role of historical data in computer models; whether a fund’s past 

performance relative to the average for the asset class is an appropriate criterion for allocating 

assets to the fund and whether a fund with superior performance may be recommended over a 

fund with average performance but lower fees; on what, if any, basis a fund’s superior past 

performance can be proven to derive from factors likely to persist in the future; and how, if at 

all, a model should take into account investment management style (e.g., should a model 

ascribe different levels of risk to passively and actively managed investment options). 

 We are concerned about the implications of the Department’s comments on these 

issues beyond investment advice programs that take advantage of the computer model 

approach under the exemption. Read broadly, the views the Department may express in the 

final rule regarding generally accepted investment theories and considerations for investment 

recommendations could also affect existing computer model arrangements and all other 

investment decisions for plans and plan participants, such as which investment options are 

selected for a 401k plan menu and the conditions under which investment managers are 

permitted to manage defined benefit plan assets. For example, the Department’s discussion 

regarding the relative risks of active and passive management and its focus on costs could 

lead plan sponsors to overweight passively managed funds in 401k plan menus. The 

Department’s potential foray into the investment decision-making process is not appropriate 

for a number of reasons. 

 

4

 ERISA sections 408(b)(14) and 408(g). 
3

First, the Department’s discussion goes beyond the scope of the statute and the 

implementing rule, which are intended to address conflicts of interest implicated by certain 

advice arrangements. As fiduciaries under ERISA, investment professionals owe both a duty 

of loyalty and a duty of care to the plan participants to whom they provide investment advice. 

The prohibited transaction provisions of ERISA are designed to ensure that fiduciaries do not 

breach their duty of loyalty by providing biased or conflicted advice to participants. 

Exemptions from these provisions – including the Pension Protection Act exemption this 

proposed rule is intended to implement – are carefully crafted to provide safeguards against 

conflicts of interest. 

 

 Analytically distinct from the duty of loyalty, a fiduciary’s duty of care under ERISA 

involves acting with the care, skill, prudence, and diligence under the circumstances then 

prevailing that a prudent person acting in a like capacity and familiar with such matters would 

use in similar circumstances (a “prudent person standard”).5 The Department consistently has 

interpreted this duty over the years under ERISA as focused on the procedures followed 

during the decision-making process rather than the results of that process.6

 This standard is 

not a one-size-fits-all standard, but rather permits innovation and differing views on 

investment theories. We respectfully submit that consistent with the statutory exemption 

provided in the Pension Protection Act, the Department should focus its rulemaking on the 

duty of loyalty and conflicts of interest. A rulemaking that fundamentally alters the standard 

of care by mandating certain investment theories, styles, or decisions is not appropriate or 

called for by the legislation. 

Second, investment professionals are in the best position to evaluate generally 

accepted investment theories and the factors to consider in making investment decisions. The 

proposed rule seeks to enumerate the specific factors that fiduciaries are permitted to consider 

in developing computer models.7 The final rule instead should require fiduciaries to use 

unbiased or objective factors generally. The independent expert would then be required to 

analyze and certify that the model is indeed constructed in an unbiased fashion. Restricting a 

fiduciary’s investment decision-making in a substantive manner (i.e. other than assuring that 

the process is untainted by conflicts) inappropriately interferes with an investment adviser’s 

professional skill and judgment. As discussed above, the adviser’s exercise of this 

professional judgment is subject to the prudent person standard under ERISA, which provides 

substantial protection for plan participants. 

 

 In the same vein, the Department’s request for comments focuses on whether it should 

specify “generally accepted investment theories” and “require their application” or designate 

some and not other criteria as appropriate and objective for computer models to consider. 

Again, we do not think the Department should specify generally accepted investment theories. 

The criteria for investment decisions should be determined by investment professionals, who 

are best positioned to evaluate and can respond to new information and changes in the 

 

5

 ERISA section 404(a)(1)(B). 

6 E.g., 29 CFR§ 2550.404a-1. 

7 E.g., Proposal at section (b)(4)(i)(E)(3). 
4

marketplace when providing advice. Criteria codified in regulations are not flexible or readily 

modified based on changing circumstances. It is not prudent for the Department to set 

investment theories or criteria in stone, potentially hindering a fiduciary’s ability to make 

decisions in the best interests of plans or plan participants. 

Third, the historical performance of an investment is an important consideration in the 

evaluation of both the investment itself and the investment within the overall mix of 

investments. Clients routinely request information about past performance in RFP processes 

and periodic reporting. Clients’ review of whether to renew investment advisory agreements 

or continue to offer certain investment options in their plans typically incorporates 

performance data. Indeed, the Pension Protection Act and the proposed implementing 

disclosure requires fiduciaries to provide plan participants with information about past 

performance and historical rates of return of the designated investment options available 

under the plan.8 Similarly, while the SEC requires mutual funds to caution that past 

performance is not necessarily an indication of how the fund will perform in the future, the 

SEC specifically requires that such funds disclose their past performance data to investors in 

the funds’ prospectus. Although historical performance may not always be likely to persist in 

the future, investment managers should not be precluded from taking it into account in their 

overall analysis. Historical performance traditionally has been considered in the investment 

decision-making process and is certainly a “generally accepted” criterion in investment 

selection. 

 The Department’s discussion of the relative merits of superior past performance and 

lower fees is particularly troubling. We respectfully submit that the least expensive option is 

not necessarily the best option for each investor. An investment professional might wish to 

consider a number of relevant criteria regarding each investment option, including expenses, 

historical data, benchmarks, investment objectives, portfolio holdings, turnover, relative risk, 

and risk-adjusted performance. As the Department itself recognizes in its proposed model 

disclosure, while fees and expenses are important factors, “it is also important to consider 

additional information .... such as performance, investment strategies, and risks.”9

 

Fourth, the Department’s questions regarding fees and investment management style 

may implicitly favor passive investing over active investing. The selection of management 

style should be left to the judgment of investment professionals based on all relevant criteria 

and circumstances related to both the investor and the potential investments. Active 

management is unquestionably a generally accepted investment strategy and can be an 

appropriate part of a plan participant’s mix of investments. Indeed, most investment 

managers employ active management styles. The final rule should not be interpreted to 

require that computer models or other asset allocation advice prioritize investments based 

principally on fees or style. Such investments may not result in better overall performance 

over time and could lead investors to miss opportunities for better risk-adjusted returns or 

more appropriate diversification. Plan sponsors and investment professionals are in a better 

position than regulators to make these substantive investment decisions. 

 

8

 Proposal at section (b)(7)(i)(B). 

9

Proposal at 9370.
5

 For all of these reasons, we urge the Department to avoid regulating specific 

investment decision-making criteria that are otherwise untainted by conflicts of interest. We 

would be pleased to work with the Department to further the goal of expanding the 

availability of professional investment advice for participants in defined contribution plans 

while providing appropriate safeguards for plan participants. 

 We appreciate the opportunity to provide our views on these issues. Please do not 

hesitate to contact the undersigned if you need additional information. 

Respectfully submitted, 

Karen L. Barr 

General Counsel