September 24, 2015

Email: e-ORI@dol.gov; e-OED@dol.gov

Office of Regulations and Interpretations Office of Exemption Determinations

Employee Benefits Security Administration Employee Benefits Security Administration

Room N-5655 Attention: D11712

U.S. Department of Labor U.S. Department of Labor

200 Constitution Avenue N.W. 200 Constitution Avenue, N.W., Suite 400

Washington, DC 20210 Washington, DC 20210

Re: RIN 1210-AB32: Regulatory Impact Analysis; Definition of the Term 

“Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice/ZRIN 

1210-ZA25: Proposed Best Interest Contract Exemption 

Dear Madam or Sir:

The Investment Company Institute1 appreciates the opportunity to supplement our July 21 

comment letter regarding the Department of Labor’s (the “Department”) Regulatory Impact Analysis 

of its proposed rulemaking regarding the definition of “fiduciary” under the Employee Retirement 

Income Security Act of 1974 (“ERISA”).2 We also appreciate having had the opportunity to testify 

about the Regulatory Impact Analysis at the Department’s public hearing on its proposed rulemaking. 

In this letter, we address three issues—two that arose during our testimony about the 

Regulatory Impact Analysis and a third issue raised in a Question and Answer that the Department 

posted about “small savers.”3 This supplemental letter4 explains why the asset-weighted average return

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 The Investment Company Institute is a leading, global association of regulated funds, including mutual funds, exchangetraded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States, and similar funds offered to 

investors in jurisdictions worldwide. ICI seeks to encourage adherence to high ethical standards, promote public 

understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers. ICI’s U.S. fund 

members manage total assets of $18.2 trillion and serve more than 90 million U.S. shareholders.

2 See U.S. Department of Labor, Employee Benefits Security Administration, Fiduciary Investment Advice Regulatory Impact 

Analysis (April 14, 2015), available at www.Department.gov/ebsa/pdf/conflictsofinterestria.pdf. The Institute provided 

previous comment on the Regulatory Impact Analysis in a letter dated July 21, 2015, available at 

www.ici.org/pdf/15_ici_dol_fiduciary_reg_impact_ltr.pdf. 

3 See U.S. Department of Labor, Q&A on Small Savers, available at www.dol.gov/QandAsmallsavers.
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for categories of mutual funds, rather than the simple average, is the appropriate measure for assessing 

the overall experience of investors using broker-sold funds. We then explain how, in our July 21 

comment letter regarding the Regulatory Impact Analysis, we adjusted fund returns for risk. We also 

provide additional detail about why a large share of IRA investors will not be able to get access to feebased advice under the Department’s proposed rules, even if those advisers also manage taxable 

investable assets on behalf of these households. 

I. Why Asset-Weighted Returns Appropriately Measure Investor Experience with BrokerSold Funds

During the public hearing, a senior Department official asked ICI Senior Economist Sean 

Collins about ICI’s use of asset-weighted relative performance in our comment letter.5 As Mr. Collins 

explained during the hearing,6 we provided the Department with asset-weighted performance and fee 

data in response to the Regulatory Impact Analysis’ statement that “IRA holders receiving conflicted 

investment advice can expect their investments to underperform by an average of 100 basis points per 

year over the next 20 years.”7 The Department applied “this performance gap to the current IRA 

marketplace,”8 meaning the assets invested in broker-sold funds.9 These calculations require the use of 

an asset-weighted average to correctly estimate the total cost to IRA investors of using broker-sold 

funds. Using a simple average provides undue weight to funds with extremely low (or high) 

performance, regardless of how little these funds hold in IRA assets.

Our comment letter provided a variety of comparisons challenging the Department’s 

characterization that IRA investors using brokers “underperformed” by 100 basis points a year. We 

compared performance data for broker-sold share classes relative to their respective Morningstar 

category returns by computing the relative return for each front-end load share class. We weighted that 

relative return both by the assets and by the gross sales for that share class, to provide two market-based 

views of relative performance. As we demonstrated, “investors in front-end load share classes earned 

returns (net of expenses) that exceeded their Morningstar category return by 27 basis points”10 on a 

sales-weighted basis. This is contrary to the Department’s assertion that investors are experiencing a 

“performance gap.”

Our comment letter also provided asset-weighted relative returns for retail no-load mutual 

funds and found that, after adjusting for fees that compensate brokers, the “difference in returns 

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 4 The Institute filed a separate supplemental letter on the proposed Conflict of Interest Rule and proposed Best Interest 

Contract Exemption (“BIC Exemption”), available at www.ici.org/pdf/15_ici_dol_rule_comment.pdf

5 See Public Hearing Transcript (August 11, 2015) at pp. 414-419.

6 Id. at p. 417.

7 See Regulatory Impact Analysis at p. 7.

8 Id. at p. 98.

9 Id. at p. 116. 

10 See ICI July 21 comment letter at p. 5.
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between front-end load funds and retail no-load funds...[is] 7 basis points on an asset-weighted” basis.11

The comparison between asset-weighted returns among broker-sold and no-load funds is the 

comparison that the senior Department official seemed to be seeking at the hearing. The small

difference in returns contradicts the Department’s claim that investors in broker-sold funds

underperform by an average of 100 basis points a year. Our approach of comparing asset-weighted 

returns for broker-sold funds with those for no-load funds is the same technique found in Bergstresser, 

Chalmers, and Tufano (2009), which the Department cites in its Regulatory Impact Analysis.12 

To be quite clear, our analysis demonstrates – using recent real-world data – that the experience 

of investors in front-end load funds since 2007 is dramatically different from the experience described 

in the Regulatory Impact Analysis. We find no evidence to support the Department’s assertion that 

there is a “substantial failure of the market.”13

II. How the ICI Adjusted Fund Returns for Risk

At the hearing, the Department’s Chief Economistasked Mr. Collins whether ICI adjusted 

returns for risk in our analysis of the relative returns of broker-sold funds.14 In fact, we did so by

comparing returns of broker-sold funds with returns of funds in the same Morningstar category. As Mr. 

Collins pointed out, this is one of the techniques used in several of the papers cited in the Regulatory 

Impact Analysis. For example, Christoffersen, Evans and Musto (2013) compare performance of 

broker-sold funds with the performance of other funds in the same Morningstar category.15 Bergstresser 

et al, also compare returns for broker-sold funds against a benchmark return. 

We note that Bergstresser et al, also calculate Sharpe ratios,

16 and that the Department’s Chief 

Economist inquired about those measurements.17 Bergstresser et al find that there is no material 

difference in the Sharpe ratios between broker-sold funds and funds sold without the help of a broker. 

This finding contradicts the Department’s claim of underperformance of broker-sold funds.

III. Why Many IRA Investors Will Lose Access to Advisers Under the Department’s Proposal

Our July 21 comment letter pointed to a fundamental flaw in the Department’s Regulatory 

Impact Analysis: the analysis does not measure any harm to IRA investors if the Department adopts the 

proposed rule. For example, IRA investors would be harmed if they lost access to advice and 

information that they currently rely on to meet their savings goals. 

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 11 See ICI July 21 comment letter at p. 21.

12 See Daniel Bergstresser, John Chalmers, and Peter Tufano, “Assessing the Costs and Benefits of Brokers in the Mutual 

Fund Industry,” Review of Financial Studies 22, no. 10 (2009): 4129-4156. 

13 See Regulatory Impact Analysis at pp. 3, 7, and 211.

14 See Public Hearing Transcript (August 11, 2015) at pp. 396-398.

15 See Susan Christoffersen, Richard Evans, and David Musto, “What Do Consumers’ Fund Flows Maximize? Evidence 

from Their Broker’s Incentives,” Journal of Finance 68 (2013): 201-235.

16 See Bergstresser et al., at p. 4145. 

17 See Public Hearing Transcript (August 11, 2015) at p. 396.
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We said that if the Department does not correct the many flaws with the proposed rules, we 

expect that significant numbers of investors could lose access to the guidance, products, and services 

that they currently receive from brokers. The unfortunate result of the Department’s rules will be that 

many retirement investors may be left with no choice but to seek asset-based fee accounts to obtain the 

investment assistance that they need. Fee-based accounts, however, may not be available to many 

investors who cannot meet minimum account balance requirements. Currently, fee-based advisers 

often require minimum account balances of $100,000.18 We provided data demonstrating that 76

percent of traditional IRA accounts had less than $100,000.19

The Department recently published a Q&A on “small savers,” which it defines as holders of 

IRAs with balances of less than $25,000. That Q&A states that “[m]ore than two-thirds of small-IRA 

owners are wealthy and upper-middle-class households for whom these IRAs generally represent only a 

single component of a larger financial portfolio . . . These are households that generally own their own 

homes as well as other types of financial assets such as job-based defined-contribution plans, stocks, and 

mutual funds.”20 The Department then states that is “unlikely that the financial services industry will 

walk away from the billions of dollars held in small IRAs.”21

Using data from the Federal Reserve Board’s 2013 Survey of Consumer Finances, which the 

Department cites,22 we tested the Department’s implied conclusion that most owners of small IRAs 

could obtain financial advice by combining their IRA balances with other parts of “a larger financial 

portfolio” to meet fee-based advisers’ minimum account balances. We find that among households with 

IRAs, 64 percent have total household IRA balances (combining traditional and Roth IRAs) of less 

than $100,000 (see figure below). Even after including taxable investable assets that IRA investors could 

bring to a financial adviser, half of IRA-owning households would not have sufficient assets to meet the

typical $100,000 minimum account balance required by fee-based advisers.

23 This finding is not 

surprising because, except among the very wealthiest households, net worth is largely composed of 

home equity and job-based retirement assets, neither of which is an investable asset for the purposes of 

engaging a fee-based adviser. We still conclude that significant numbers of investors will lose access to 

guidance, products, and services that they currently receive from brokers and will suffer significant 

harm if the problems with the proposed fiduciary rule are not addressed. 

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 18 See ICI July 21 comment letter at p. 27.

19 See ICI July 21 comment letter, Figure 9, at p. 28.

20 See DOL Q&A at p. 1.

21 See DOL Q&A at p. 3.

22 See DOL Q&A at p. 1.

23 The data on average account sizes in our comment letter were for individual traditional IRA accounts. The Survey of 

Consumer Finance data are for all IRAs (traditional and Roth) held within a household. 
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Household Holdings of IRAs and Taxable Investable Assets by Amount of Assets 

Percentage of IRA-owning households, 2013

Note: IRAs include traditional and Roth IRA assets held by the household. Components do not add to 100 percent because 

of rounding. 

Source: Investment Company Institute tabulation of Federal Reserve Board 2013 Survey of Consumer Finances

* * * * 

We appreciate the opportunity to comment again on the Department’s Regulatory Impact 

Analysis. If you have any questions regarding our comments or would like additional information, 

please contact Brian Reid, Chief Economist, at (202) 326-5917 or brian.reid@ici.org; Sean Collins, 

Senior Director of Industry and Financial Analysis, at (202) 326-5882 or sean.collins@ici.org; or David 

Blass, General Counsel, at (202) 326-5815 or david.blass@ici.org. 

Sincerely, 

/s/ Brian Reid /s/ David Blass

Brian Reid David Blass

Chief Economist General Counsel

Investment Company Institute Investment Company Institute

Cc: Joseph Piacentini

Director, Office of Policy and Research and Chief Economist
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U.S. Department of Labor, Employee Benefits Security Administration

G. Christopher Cosby

Office of Policy and Research, Division of Regulatory Policy Analysis

U.S. Department of Labor, Employee Benefits Security Administration