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Insured Retirement Institute

 1101 New York Avenue NW | Suite 825

Washington, DC 20005

www.IRIonline.org

t 202.469.3000

f 202.898.5786

February 3, 2011

By Electronic Delivery

The Office of Regulations and Interpretations 

Employment Benefits Security Administration 

Attn: Definition of Fiduciary Proposed Rule

R N-5655

U.S. Department of Labor 

200 Constitution Avenue, N.W.

Washington, DC 20210

Dear Sir or Madam:

The Insured Retirement Institute (IRI) 1appreciates the opportunity to provide comments 

regarding the Department of Labor’s (―Department‖) proposed regulation defining an investment 

advice fiduciary under the Employee Retirement Income Security Act of 1974 (―ERISA‖) and 

the Internal Revenue Code of 1986 (―Code‖) which applies to both employer-sponsored plans 

governed by ERISA and individual retirement arrangements (―IRAs‖). 

 

1 The Insured Retirement Institute (IRI) is a non-profit organization dedicated to the growth and better 

understanding of guaranteed lifetime income products. IRI represents the entire supply chain of the 

annuity, insured retirement product and retirement planning industries with over 300 member organizations, 

including insurance companies representing over 85% of the market, distribution firms, including brokerdealers and banks, investment management firms, and industry service providers. IRI’s mission is to 

promote consumer confidence in the value and viability of insured retirement strategies by: supporting and 

encouraging industry adherence to high ethical standards; promoting better understanding of the insured 

retirement value proposition; developing and promoting best practice standards to improve value delivery; 

and advocating before public policy makers on critical issues affecting insured retirement strategies. 
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Given the broad impact of these rules on the retail marketplace, we are concerned that these rules 

have not been harmonized with regulations expected to be issued by the Securities and Exchange 

Commission (―SEC‖) which are expected to create a fiduciary standard for broker-dealers and 

other financial professionals. We urge the Department to coordinate its efforts with the SEC and 

the Financial Industry Regulatory Authority (―FINRA‖) to establish a consistent set of rules that 

apply to financial professionals who work with clients holding investments in 401(k) plans, IRAs 

and non-qualified accounts. We are concerned that applying two different fiduciary standards to 

the exact same recommendations will be incredibly confusing for clients who naturally expect 

the same level of service with respect to all of their investment accounts. And since assets are 

fungible, it will be impossible to ensure that recommendations relating to a non-qualified account 

are not followed with respect to a retirement account. We fear that the result of these regulations 

will be to take away the freedom IRA and small business owners have today to make their own 

investment choices. Our experience is that IRA owners prefer to control their own accounts and 

maintain the ability to work with the financial professional of their choice. We believe that a 

strong retirement system must encourage private savings outside of a publicly managed pension 

system. We agree with the World Bank that it is important for capital formation and economic 

growth to have a privately managed, voluntary funded retirement system (referred to as the 

―third pillar‖) in addition to a public retirement system. We oppose any regulatory effort that 

would discourage private retirement saving and correspondingly negatively impact the economy 

and jobs. 

We believe that, particularly in light of the sweeping coverage of this proposed regulation, clarity 

and certainty will be even more important for all market participants. For that reason, we hope 

that the final guidance would provide clarity on the following broader points: that nothing in the 

regulation is intended to suggest that the parties—generally, the plan sponsor and a designated 

plan fiduciary—cannot continue to define the scope of the fiduciary’s responsibilities in their 

agreements. Thus: a trustee may still be either directed or discretionary; and a party may be an 

investment advisor to one participant while providing non-fiduciary education and guidance to 

another and/or sales recommendations to another; or to the same participant at different times or 

for different purposes. 

We look forward to working with the Department to make modifications to the proposal that will 

ensure that participants, plan sponsors, and IRA owners have access to the services and 

information they need to make informed decisions and avoid major increases in the costs and 

litigation that could be a result of the proposed rule.
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Impacts upon 401(k) Plan Participants and IRA Owners 

Overall we are concerned about the unintended consequences of the proposed regulations - less 

choice, reduced access, and increased costs for products and services needed by 401(k) plan 

participants and individual retirement account (―IRA‖) owners:

Clients will have limited or no access to financial planning and commission-based 

products, including annuities and loaded mutual funds. This is especially true for IRA 

clients who do not have a plan fiduciary to assist them. Annuities often have a lifetime 

income component, so they are buy and hold investments that are usually best paid for 

via a commission or transaction based compensation, versus an ongoing wrap fee, which 

is calculated and recalculated upon the value of the same assets, plus any earnings.

Clients will likely be required to enter into a wrap program in order to receive advice or

do without advice altogether:

o Since advisory-fee based accounts typically require minimum investment of 

amounts between $50,000 to $250,000 (depending upon the services and whether

it is a retirement account), commission-based programs are often the only way in 

which investors with less to invest can obtain any form of investment advice.2

o Wrap programs, which charge ongoing fees based upon assets under management,

can be more expensive and are generally not a good choice for buy and hold 

investors, such as those investors who seek options for rolling over and obtaining 

investment advice for their accumulated 401(k) assets. 

o Indeed, FINRA and the SEC do not consider wrap programs suitable for investors 

who do not trade very often. Firms are directed to move such investors to 

brokerage accounts making the Department’s regulations unworkable under 

existing SEC and FINRA regulations.

o Annuities are generally sold on a commission basis and will not be sold in a wrap, 

decreasing a client’s opportunity for guaranteed retirement income.

Clients will no longer be able to engage in principal trading, which will increase costs for 

them. Principal trading is often beneficial to clients who would otherwise pay both a 

mark-up and commission for agency trades.

Clients should not be limited in making IRA rollover decisions and requiring brokerdealer advisors and insurance company agents to become fiduciaries will limit assistance. 

 

2

According to the Employee Benefit Research Institute and the Investment Company Institute analysis of 4.3 

million consistent 401(k) participants, the median 401(k) account held $59,831 at the end of 2009, up from 

$46,338 in 2008. However, over half (52%) of 401(k) participants have less than $20,000 in their accounts, while 

17% have more than $100,000 saved for retirement. 
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IRA owners should be permitted to work with the financial professional of their choice, 

which in many cases may be the one associated with their retirement plan.

Clients should not be deprived of recommendations on product types, e.g., whether to 

invest assets in an annuity versus mutual fund versus wrap account. 

o Recommendations among product types, but not of a particular product, is much 

more analogous to the types of asset class information described in IB 96-1, than 

to specific investment recommendations contemplate by the regulation. If a 

recommendation on product types is considered advice, the regulations are not

workable. 

o With reference to the PPA investment advice rules, we are not aware of any 

computer model available or possible that can choose amongst different types of 

products and nor do we believe it is likely to be possible in most instances to 

make product compensation level across different product types.

Overreaching in the scope of investment advice fiduciary status can have additional 

unintended consequences. For example, clients may face higher fees for sweep accounts 

if sweeping uninvested cash into an account is considered investment advice. 

o Charging a wrap fee on a sweep account will be much higher than the current 

pricing in a brokerage account. 

o The Department has recognized that sweep accounts provide clients with a 

beneficial method for handling uninvested cash. 

o Bank sweep products are particularly beneficial to clients as they offer FDIC 

protection but the new regulations will make it difficult for brokers to offer these 

accounts if they are deemed to be a fiduciary. 

Clients should have access to the best options within discretionary accounts, which 

options may be limited under the proposed regulations. 

o The common practice of the ―soft-offset‖ is more administratively feasible for 

firms, thereby keeping client costs lower. 

o A dollar for dollar ―hard offset‖ increases the advisor’s conflict rather than 

reducing it. It deters the advisor from recommending affiliated mutual funds even 

if they are the best choice for the client. 

Advisors should be able to seek strategies and advice from wholesalers in order to offer 

the best investment choices to the client. 

o There is no workable solution allowing for important wholesaler support if they 

are considered fiduciaries.
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o Clients understand that company wholesalers are ―biased‖ toward their own 

company’s products. For example, a client is not surprised to be sold a Ford when 

visiting a Ford dealership.

Clients should be able to receive valuations of hard-to-value securities, which may not be 

included on client statements if their inclusion makes an investment provider a fiduciary. 

o We believe that final guidance should clarify that merely putting a value of a 

hard-to-value assets received from a third party on a client statement should not 

be considered ―advice.‖ 

o If doing so results in fiduciary status, IRA custodians will not permit an IRA 

owner to hold hard-to-value securities or they will charge fees that may be 

prohibitively expensive to clients.

I. There should be separate rules for IRAs and Keogh Plans

A. IRAs and Keogh Plans are fundamentally different – there is no plan fiduciary 

limiting choice

The Department’s proposed regulations appear to be designed with employer sponsored 401(k) 

plans in mind. Such plans generally contain a limited number of investment options and have a 

plan fiduciary separate from the plan participant who is responsible for narrowing the universe of 

funds and other investments available to the plan participant. Contrast that structure with IRAs 

and Keogh Plans. For these plans, there is no plan fiduciary that narrows the universe of funds 

available to the IRA owner or Keogh owner. Instead, the account owner either chooses a product 

with a pre-defined investment lineup, or chooses from a virtually unlimited universe of product 

offerings. When that universe of investments is virtually unlimited, it also can be nearly 

impossible to design a computer model to take into account that whole universe or to construct a 

level compensation structure across all investment alternatives. Furthermore, IRA owners are 

protected by way of their individual rights in their agreements and direct relationships with 

financial institutions. We would also point out that since these plans are not subject to ERISA’s 

fiduciary standards, the only impact of the regulations would be to subject service providers to 

the Internal Revenue Code’s complex prohibited transaction rules. We would note that the 

Department has no jurisdiction to enforce these rules nor are we aware of any request by the 

Department of Treasury to expand the reach of the prohibited transaction rules. 

B. The definition of advice does not fit neatly into the IRA and Keogh Plan 

marketplace 

Under the proposed regulations, there are three types of recommendations or advice that can 

result in investment advice fiduciary status: (1) advice, appraisals or fairness opinions 
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concerning the value of securities or property, (2) recommendations as to the advisability of 

investing in, purchasing, holding or selling securities or other property, and (3) providing advice 

or recommendations as to the management of securities or other property. These categories do 

not fit squarely with the reality of working with IRA owners. Generally, a broker or agent would 

sit down with a client or prospect and discuss the client’s goals and objectives. Based on that 

conversation, the broker might explain the pros and cons of various investment vehicles 

including variable annuities, mutual funds, brokerage accounts, banking products, fixed 

annuities, alternative investments and several types of advisory accounts. Within each of these 

types of securities and property, brokers can usually recommend several different specific 

securities that may have different features. Although extremely difficult, it is feasible in some 

cases to design different product types so that they pay brokers the same compensation. It is 

virtually impossible to do so across product types. For instance, the commissions paid for 

executing a stock trade are much different than for selling a variable annuity to a client. 

If it is the Department’s intent to require fee leveling across product types, then the new 

regulations would eliminate the ability of brokers to offer products on a commission basis. We 

saw nothing in the preamble to the regulations and the economic impact analysis that suggested 

that the intent of the regulations was to end all commission-based sales. We would suggest that a 

generic recommendation to invest in mutual funds or to open a brokerage account should not be 

considered a recommendation to purchase a specific security but rather a recommendation to 

purchase a type of security or open a type of account. 

With respect to the 401(k) plan marketplace, the Department has provided considerable guidance 

regarding the line between activities that would result in fiduciary investment advice as opposed 

to activities that would be deemed non-fiduciary investment education. The proposed regulation 

specifically references Interpretive Bulletin 96-1 (29 CFR 2509.96-1) to preserve this safe-harbor 

for ERISA individual account plans. Some commentators may suggest that this safe harbor be 

expanded to include IRAs. We feel that this action would not sufficiently address the problem. 

Interpretive Bulletin 96-1 was drafted under the assumption that the investment education being 

provided related to an ERISA individual account plan with a limited number of investment 

options. It speaks of asset allocation recommendations but does not discuss choices between 

annuity products, mutual funds, REITs, brokerage accounts, or an advisory wrap program to 

name just a few of the products offered in the IRA and Keogh plan marketplace. We believe that 

providing recommendations at a ―product‖ level should be viewed as ―investment education‖ 

rather than investment advice, and that it would be beneficial to the entire marketplace if this 

were clarified by the Department both in respect to accumulation and decumulation (spend 

down) under the plan or IRA. At a minimum, we believe it is fundamentally unfair for the 

Department to issue regulations impacting the $4.2 trillion IRA marketplace without fully 

addressing this issue. We would request that prior to issuing final regulations that apply to the 

IRA and Keogh plan marketplace, the Department further study this marketplace and issue 
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additional guidance specifically addressing investment education in the IRA and Keogh plan 

marketplace. At the very least, the Department should clarify that all of the limitations that apply 

to individual account plans (including the platform safe harbor) also apply to IRAs. It would 

make no sense and the Department has provided no rationale to justify the result that the exact 

same recommendations be considered to be fiduciary advice when provided to an IRA owner but 

not when provided to a 401(k) participant. 

These regulations could also have a dramatic impact on the ability of financial service providers 

to provide comprehensive financial planning to retail clients. To be effective, such financial 

plans should cover all elements of a client’s financial situation including cash, protection, taxes, 

and investments to name a few. We have heard some commentators recommend that such 

financial plans could simply ignore the client’s 401(k) and IRA assets. For most clients, 

ignoring their 401(k) plan or IRA account or IRA annuity would be to ignore a significant 

portion of their assets. The proposed regulations should clarify that recommendations around 

product types and asset classes would not be deemed to be investment advice when provided as 

part of a general financial plan. This is particularly important because even though the cost of 

the financial plan may be a fixed fee that does not vary depending on the recommendations, 

clients will often choose to implement the plan by purchasing products and services from the 

financial advisor who provided the financial plan. 

C. The application of prior exemptions and the issuance of new exemptions must be 

clarified prior to issuing final regulations

It is impossible to accurately reflect the economic impact this rule would have without first 

understanding which exemptions can be relied upon in order to sell products within an IRA 

account or Keogh plan. First, the Department has issued letters that place into doubt whether a 

broker can sell third party and affiliated mutual funds under CPTE 75-1, 84-24 and 86-128. 

With respect to unaffiliated mutual funds, it would appear that CPTE 75-1 should be available 

and cover all types of compensation received by a broker-dealer (including loads, 12b-1s, 

commissions and revenue sharing). However, it is unclear whether the exemption applies to 

mutual fund sales that are not completed on a principal basis. Since open-end mutual funds do 

not have a finite number of shares, determining whether the sale is on a principal or agency basis 

is an irrelevant and pointless exercise except to the extent that the Department believes it is 

determinative as to whether the exemption is available. If the sale is determined to be on an 

agency basis, CPTE 86-128 would apply but it is unclear whether that exemption would apply to 

revenue sharing payments. Finally, for affiliated mutual funds, the Department provided a 

specific exemption (CPTE 84-24) but issued a letter suggesting that the exemption only covers 

commissions and does not cover any other fees including advisory fees. Although it is unclear 

what the Department’s intent was when writing this letter, the literal reading would suggest that 

the exemption would only work for cases where a broker sold a mutual fund with an affiliated 
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principal underwriter and an unaffiliated mutual fund investment manager. Although that 

situation might arise occasionally, it was neither common back in 1984 when the exemption was 

granted nor is it common today. Without clarification regarding how these exemptions apply to 

mutual fund sales, it is impossible for brokers to determine the impact of this regulation on their 

business models. We believe any economic impact assessment would be incomplete without an 

assumption as to whether brokers would be able to rely on these exemptions for sales of 

affiliated and third party mutual funds. 

Another product that brokers sell to IRA owners is annuities. Again, the Department has 

provided what appears to be a broad exemption for their sale (CPTE 84-24). We would 

appreciate the Department’s confirmation that this exemption is still available and would cover 

sales of affiliated and unaffiliated annuities as well as any compensation received by an affiliated 

insurance company, affiliated money managers of variable annuity subaccounts, and any revenue 

sharing paid to the broker. 

A very popular program for cash sweep accounts is the so-called deposit sweep program, which 

sweeps idle cash to bank deposits of multiple firms so that all deposits are covered by FDIC 

insurance. Given recent economic turbulence, one can understand why investors (including IRA 

owners and Keogh plan owners) would desire and benefit from unlimited FDIC insurance 

coverage. Under such a program, the broker receives a spread from the interest paid. As a 

fiduciary, it would not be able to receive that fee, so clients would be foreclosed from this 

alternative. Another alternative for cash sweep is the free credit balance, where the broker pays 

interest on idle cash in the account. Because the free credit balance program is a use of plan 

assets, a fiduciary may not permit a plan or IRA account to participate in the program. The 

likely result of this is that IRA owners and Keogh plans will be presented only with a money 

market fund cash sweep alternative. In today’s market, the very low rate of interest generally 

available on cash will fall to almost imperceptible returns for plans and IRAs, unless the 

Department provides exemptions for such programs. Worse still, brokers would likely need to 

charge an administrative fee in order to recoup part of the revenue lost from other sweep options. 

The end result would be higher costs and less insurance coverage for individual investors. The 

Department has provided one exemption for a free credit balance program and we would urge 

the Department to provide a class exemption for both free credit balance and deposit sweep 

insurance programs prior to finalizing these regulations, at least to the extent that the regulations 

cover IRAs and Keogh plans. 

We would point out that the last time a new fiduciary standard was created to govern sales of 

products by brokers and other investment advisers (i.e., 1974), the Department responded by 

immediately issuing a number of exemptions applicable to broker-dealer activity to prevent the 

potential economic collapse that would have likely resulted from the new standard. We believe 

that this new regulatory effort by the Department should be viewed similarly. As the Department 
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points out in its preambles, brokers and other investment professionals have been designing their 

compliance programs to protect against being held to a fiduciary standard and acting as a party in

interest for the past 35 years. Creating a bright-line test to determine who is an advice fiduciary 

is a laudable goal. However, the bright-line test should not end at the determination of who is a 

fiduciary but rather extend to the determination as to whether such advice creates a prohibited 

transaction when the broker or other financial professional receives fully disclosed direct or 

indirect compensation from such sale or service. 

D. Fee Leveling and Computer Models do not work in the IRA and Keogh Plan 

marketplace

As mentioned above, it is virtually impossible for brokers and other investment professionals to 

charge level fees across different product types. Even if the Department determines that 

recommendations regarding product types (i.e., mutual funds versus annuities) is not investment 

advice, it would still be difficult or impossible to make compensation level at the advisor level. 

With respect to annuities, each insurance company offers several different products with 

differing compensation schedules depending on the features selected and the length of time 

surrender charges are assessed. With respect to mutual funds, it is virtually impossible to make 

loaded mutual funds into a fee level product. For one thing, front-end and back-end loads vary 

from fund family to fund family. Even if mutual fund companies moved to a uniform fee, rights 

of accumulation or ―break-points‖ will advantage the pricing of mutual funds already held by the 

client or the client’s household.

E. Conclusion

While we respect the Department’s authority to issue guidance related to the IRA and Keogh 

plan marketplace, we note that the Department has not devoted much attention to this 

marketplace over the past 35 years. Rather than treat this marketplace as an afterthought, the 

Department should either defer to other regulators who better understand it (i.e., the SEC) or 

invest significant time and energy into developing regulations specifically tailored to it. 

Assuming the Department decides to do the latter and does not want to significantly delay the 

issuance of these regulations on the ERISA-governed marketplace, we would ask the Department 

to consider removing IRAs and Keogh plans from the scope of the regulations until such time as 

the Department has (i) considered the economic impact on the non-ERISA marketplace, (ii) 

educated itself on the structure of this marketplace, (iii) provided a meaningful investment 

education safe harbor tailored to this marketplace, and (iv) clarified the application of existing 

exemptions and/or issued new exemptions tailored to this marketplace. We believe that this 

would be similar to the Department’s decision to remove welfare benefit plans from the recently 

issued 408(b)(2) regulations. We understand that the Department has held hearings and is close 
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to issuing newly proposed regulations governing fee disclosure for welfare benefit plans. We see 

no reason why the same approach would not also work for IRAs and Keogh plans. 

II. We need a broad seller’s exception that encompasses agency trading as well as the sale 

of advisory services

A. The proposed rule does not provide sufficient certainty

We applaud the Department’s goal of providing more certainty so that service providers know 

whether they are acting in a fiduciary capacity. We believe increased clarity around who is an 

investment advice fiduciary and how advice can be provided in a fiduciary capacity is essential 

to ensure a level playing field for all advisers. We believe that the regulations accomplish this 

clear line in a thoughtful way. For those who acknowledge fiduciary status they will be a 

fiduciary. For those who are acting in a selling capacity, they will disclaim fiduciary status. 

Market factors will determine whether employers, plan participants and IRA owners will choose 

to pay a separate fee for fiduciary advice or work with a commission-based broker or agent.

However, the proposed regulation does not facilitate this type of certainty. 

B. A broad Seller’s Exception is consistent with securities law requirements

We were pleased to see that the Department provided for a seller’s exception to fiduciary status 

in paragraph (c)(2)(i) (the ―seller’s exception‖). The seller’s exception recognizes that sellers 

and agents of sellers provide information and recommendations to buyers and that such advice 

should not cause the seller or the seller’s agent to become a fiduciary. Brokers often act as the 

agent for mutual fund and life insurance companies and receive a commission for those sales. 

With proper disclosure, this selling activity should not be viewed as fiduciary advice under 

ERISA. We are concerned however, that some may interpret the seller’s exception more 

narrowly. For instance, there is not universal alignment as to whether a sale of shares of an 

open-end mutual fund is done on an agency or principal basis. In the open-end mutual fund 

context, the distinction between an agency sale and a principal sale is irrelevant since the mutual 

fund company simply creates more shares when an investor makes a purchase. We are also 

concerned that the seller’s exception might not apply to agency trades of stocks and bonds where 

the broker is purchasing the securities on the open market.3 It is not clear that the broker would 

be viewed as an agent of the seller in that circumstance. We would urge the Department to 

clarify that the seller’s exception applies to all situations where a broker sells a product or 

 

3 We note that the Department has issued a class prohibited transaction exemption that permits brokers to receive 

commissions for the sale of securities even if the broker is acting in a fiduciary capacity. If the Department were to 

narrow the seller’s exemption with the result being to turn brokers into fiduciaries with respect to agency trades, we 

would request the Department to clarify that CPTE 86-128 would be available for brokers and would cover any 

compensation received by the broker as long as the conditions are met. 
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security and receives a commission for the sale, regardless of whether the sale is on an agency or 

principal basis. 

C. Narrowing the Seller’s Exception would have a negative impact on small 

employers, participants with small account balances and IRA owners

We understand that the Department is considering narrowing the seller’s exception. We think 

this would be a mistake and have an enormous impact on capital markets, the likelihood of small 

employers to adopt retirement plans, and the ability of rank-and-file participants and IRA owners 

to receive assistance in making investment decisions. We urge the Department to leave the 

Seller’s exception broad. In the event that the Department were to decide to narrow the Seller’s 

exception we would expect to see three things (i) such a massive change should result in the 

regulations being re-proposed so that brokers, insurance agents and other impacted service 

providers would have an opportunity to comment; (ii) that the DOL would reassess the economic 

impact of such a dramatic change; and (iii) that the Effective Date would be moved out from 6 

months to at least 2 years to provide brokers and insurance agents an opportunity to restructure 

every commission-based account they currently have and to create a new business model going 

forward. 

Without a carve-out for broker-dealers and insurance agents, commission-based sales would be 

in jeopardy. Although the Department may believe that an asset-based advisory fee contains 

fewer inherent conflicts, commission-based sales are often less expensive for retail clients4and 

are generally the only option for small plans and participants with small accounts. 

Small employers work with brokers to establish retirement plans for their employees. Small 

employers generally are unwilling to pay thousands of dollars to a fee-only advisor to help them 

establish a plan for their employees. If the selling exception were to be eliminated for brokers, 

fewer small employers would establish retirement plans for their employees. 

Once a plan is established, brokers often provide investment education to plan participants. 

Typically this is the only interaction that plan participants have with a human being that is 

knowledgeable about the funds available within the plan. The reality is that plan participants do 

not want investment education any more than the typical consumer wants car repair education 

when they take their car to the mechanic. For a typical participant that has an account balance of 

less than $25,000, the only assistance they can access is the assistance that the broker is able to 

provide. Most brokers are eager to provide as much help as they legally can without creating a 

prohibited transaction or an ongoing duty to monitor any recommendations they make. 

 

4 An Oliver Wyman Study entitled ―Standard of Care Harmonization: Impact Assessment for SEC‖ that was 

completed in October 2010,found that costs for clients to switch from commissions-based accounts to advisorybased accounts would be 23-27 bps. 
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Preventing such brokers from receiving IRA rollovers from participants would be another way to 

ensure that brokers do not help participants. Rather than ―fix‖ a problem that does not exist, we 

are hopeful that these new regulations would permit brokers to do more to help plan participants 

with their investment decisions. 

With respect to brokers who provide education and guidance to 401(k) plan participants, the 

Department has not shown any actual harm from such ―conflicted‖ advice. For example, let’s 

assume that the broker receives 50 bps if the participant invests in Fund A (a large cap growth 

fund), 25 bps if the participant invests in Fund B (a bond fund) or 0 bps if the participant invests 

in Fund C (a money market account). The Department seems to believe that brokers are steering 

participants into Fund A even when it may be better for the participant to invest in a more 

conservative portfolio. The reality is that most participants do not have enough saved in their 

retirement plan to create a meaningful conflict. Consider a typical participant who has $10,000 

in her account. A recommendation to put all assets into Fund A would result in compensation of 

$50 to the advisor. A balanced portfolio of 60% stocks and 40% bonds would result in 

compensation to the advisor of $40. Does the Department believe that brokers are steering 

participants to Fund A for an extra $10? If the Department were to narrow the seller’s exception, 

the broker will not provide any advice at all to the participant who will then have to decide where 

to put his or her money without any professional assistance. In that case, the participant will 

likely place all of her account in the money market account resulting in lower fees but also a 

lower return. Alternatively, the participant could pay a fee-only advisor $500 to get the same 

recommendations the broker would have provided for $50. The economics of small plans and 

small accounts make it so that the only advice that participants can afford is the incidental advice 

provided by brokers. It is hard to see how the average participant would not be significantly 

harmed by the Department’s attempt to eliminate advice provided by brokers to participants.

We have a hard time understanding why the Department would permit those with the greatest 

conflict to provide advice after giving a disclaimer but would not permit this same treatment to 

those with a lesser conflict. When sales are made on a principal basis from a dealer’s inventory, 

there clearly is conflict and potential for abuse. Because of these issues, the SEC requires 

disclosure and consent for principal sales made within an advisory account. The SEC recognizes 

that principal sales need closer regulation and the Department’s proposal would carve those sales 

out entirely while placing a higher standard of care on agency based trades. This inconsistency 

does not make sense to us. We believe that a broad seller’s exception is appropriate for 

everyone. 

We are also concerned that if a seller’s exception is limited to principal trades that insurance 

companies, brokers and other financial professionals would be incentivized to only offer 

proprietary products which may be considered to be sold on a principal basis. We think this 

would be detrimental to retirement plan clients who benefit from open platforms.
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D. We believe that employers, plan participants and IRA owners should be given a 

choice

Under the Department’s 408(b)(2) regulations, plan fiduciaries will have to determine if the 

services provided by brokers are reasonable in light of the services the broker provides. Many 

commentators have speculated that the new 408(b)(2) regulations will force brokers to 

acknowledge fiduciary status in order to compete with RIAs. We believe that in most cases, 

brokers and insurance agents will be a better solution for small employers and middle class retail 

investors due to the lack of scale in these markets. Small employers and small investors cannot 

afford to pay a fee-only adviser’s fixed rate fee. That fact will not change even if the 

Department removes commission-based brokers from contention. Fee-only planners are very 

excited about the potential to remove brokers from the playing field, but not so they can start 

competing with small employers and small investors. Fee-only planners want to be able to get a 

larger market share of the larger employers and larger investors. 

We would urge the Department to consider the impact of these regulations on small employers 

and middle income individuals who often have account balances of less than $25,000 in their 

401(k) or IRA. Brokers and insurance agents have developed a business model that permits 

them to provide assistance to these two groups in an economical, professional and efficient 

manner. To make that possible, member firms receive commissions, investment management 

fees from proprietary products, and revenue sharing from non-proprietary products that desire to 

be on their platform. If a client desires to pay for an advisory relationship, they charge a basis 

point advisory fee or a fixed rate and offset this revenue. Many clients do not choose an 

advisory relationship because they are ―buy-and-hold‖ investors and do not wish to pay an 

ongoing advice fee which may be more expensive over the long term. In fact, the SEC and 

FINRA prohibit member firms from pushing clients to an advisory fee relationship because a 

commission-based relationship is often less costly to buy-and-hold investors. Many investors 

who are saving for retirement would fit in that category. The upshot for retail investors if the 

selling exception is narrowed would be higher fees for the same investment strategy. 

E. The Seller’s Exception should be expanded to include recommendations to hire 

money managers

While we understand why the Department wants to expand the definition of investment advice to 

include money manager recommendations, this expansion creates some unintended problems 

that need to be resolved within the regulations. For instance, if a fee only investment adviser 

recommends that a plan hire him or her, presumably the Department did not intend to make the 

investment adviser a fiduciary prior to being hired. However, it is hard to see how the 

recommendation to hire oneself as a money manager is not a prohibited transaction under this 
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regulation. Certainly recommending oneself to be hired would be recommending the 

―management of securities or other property‖. So under the regulation, this recommendation 

would potentially trigger fiduciary status. Furthermore, the advice provider would likely be an 

RIA so that would conclusively make the recommendation a fiduciary act under the 

Department’s proposed regulations. Recommending oneself to act as a money manager clearly 

is conflicted advice since the prospective money manager receives more compensation if he or 

she is hired by the plan. We are aware of no prohibited transaction exemption to cover this 

newly created prohibited transaction.5 The solution, it seems to us, would be to broaden the 

seller’s exception to cover the ―sale‖ of advisory services. 

Broadening the seller’s exception to cover advisory services would also permit brokers to help 

IRA clients choose between a loaded mutual fund account and an advisory wrap account. With 

respect to those recommendations, the SEC, FINRA, and state regulators already supervise RIAs, 

brokers and insurance agents relating to product recommendations. There are comprehensive 

SEC/FINRA requirements for the recommendation of an investment product. Among other 

requirements, a financial professional must have a reasonable basis to conclude that a product is 

―suitable‖ for the client based upon very specific information that the financial professional is 

required to gather from the client. In addition to the SEC and FINRA requirements, it is 

important to note the wide range of state regulations and protections. Many of these state 

regulations address similar issues of customer protection including requirements for full 

disclosure about the risks of products, regulation of sales practices, and extensive supervision of 

financial professionals. In some cases, financial professionals can be subject to all three levels of 

requirements depending on the types of products and services they offer. 

Some bundled 401(k) providers have suggested that plan sponsors hire an independent 

investment manager (i.e. an investment manager not affiliated with any of the funds and who 

receives no compensation from third parties) who will select the fund line-up and monitor it as a 

―3(38)‖ fiduciary. Such an arrangement would seem to meet the Department’s goal of removing 

conflicts. However, under the proposed regulations, if a broker or recordkeeper recommended 

hiring the investment manager that would trigger fiduciary status. We would like to see a carveout for investment managers who are hired to select investment options for a plan. 

 

5

One might argue that advice provided before being hired by the plan or participant is not covered by a fiduciary 

standard. Even if one subscribes to this theory, it does not help where the money manager is already providing 

services to the plan or is competing with other money managers to keep his or her job. What an interesting 

dynamic that would make where the challengers are able to recommend themselves and the incumbent cannot.
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F. The Seller’s Exception should be modified to change the burden of proof and 

more accurately disclose the potential conflicts

Although we strongly support a broad seller’s exception, we believe that it needs to be modified 

slightly in order to be useful to brokers, insurance agents and other financial professionals. To 

begin with, the proposal places the burden of proof on the financial professional to prove what 

the client ―reasonably understood‖. This subjective standard does not fit within the 

Department’s stated goal of providing bright lines. We would propose that instead, the exception 

require that the financial professional disclose that he or she is paid to sell products and services 

and is not paid if the client does not purchase products or services from the financial 

professional. The disclosure would also need to state that the financial professional is not 

providing fiduciary advice and that the financial professional’s compensation varies depending 

on the product or service purchased by the client. This disclosure should be provided at time of 

sale in a prominent manner. Once the disclosure is provided, the financial professional should be 

able to rely conclusively on the seller’s exception unless the financial professional has 

acknowledged fiduciary status in another document. 

One problem with the proposal is that it requires that the client reasonably understand that the 

seller’s interests are ―adverse‖ to the clients. We believe that this would overstate the case in 

many instances. For instance, where a financial professional recommends an annuity and is paid 

a commission, the financial professional’s interests are not adverse to the client’s. In fact it 

would often be in the best interests of the client to purchase an annuity. We are concerned that 

the SEC will soon be issuing a regulation that will subject brokers and other financial 

professionals to a fiduciary standard of care.6 It is not clear to us whether a broker would be 

permitted to sell products to clients under the SEC’s fiduciary standard of care if it were 

determined that the broker’s interests were adverse to the clients. It seems unlikely. Therefore, 

the end result is that if the broker’s interest must be adverse and the broker is held to a fiduciary 

standard of care then the seller’s exception would be unavailable to brokers under the SEC’s new 

standard of care. This would be exactly opposite of the result Congress intended. Congress, 

after careful consideration, has directed the SEC to study whether brokers should be held to a

fiduciary standard of care. If the SEC does decide to issue such regulations, Congress has

directed that such a fiduciary standard of care should permit brokers to sell proprietary products 

and sell securities on a principal basis. Therefore, it seems unlikely that Congress viewed a 

broker’s interest as being ―adverse‖ to its clients. We would request that the word ―adverse‖ be 

stricken from the proposal and that the financial professional simply disclose that it is not acting 

as a fiduciary and only receives compensation by selling products and services.

 

6

Congress, after careful consideration, has directed the SEC to issue regulations creating a fiduciary standard of 

care that would explicitly permit brokers to sell proprietary products and sell securities on a principal basis. 
16

G. The investment advice exemptions provided under the Pension Protection Act 

are not sufficient

Without a broad Seller’s Exception, the new investment advice fiduciary definition will turn 

brokers and insurance agents into fiduciaries. The Department may believe that brokers can rely 

on the investment advice exemption that was included as part of the Pension Protection Act of 

2006. Unfortunately, that exemption has three significant limitations. 

First, it does not apply to discretionary advice. This can be problematic for advisors who use a 

discretionary wrap product that may utilize some proprietary products. 

Second, it does not apply to advice provided to employers. This is particularly problematic in 

the owner-only context where the owner is both the employer and the participant. It also creates 

a problem for brokers affiliated with mutual fund complexes who wish to offer their proprietary 

funds on a level playing field. If the advisor is a fiduciary and if the proprietary fund is the 

cheapest and best performing alternative, recommending the proprietary fund would be a 

prohibited transaction, at least based on the Department’s guidance. The only way the advisor 

could recommend the proprietary fund would be if the advisor offsets the management fee 

against the advisor’s fees. Advisors are often paid 25 bps to help an employer choose and 

monitor its investment line-up. It is hard (and unfair) to require the advisor to offset a 

management fee that may be 50 bps or higher against a 25 bps advisory fee. If the fee-leveling 

exemption were available for advice provided to the employer, then the advisor would not have 

to offset the management fee within the proprietary mutual fund. Unfortunately, that is not the 

case. 

Third, a computer model will not work in the retail marketplace and most IRA owners and plan 

participants are not comfortable relying on them. Last year, Charles Schwab released a study 

entitled ―The New Rules for Engagement for 401(k) Success‖ which combined an in-depth 

behavioral analysis of 401(k) plans serviced by Schwab and a nationwide attitudinal survey of 

more than 1,000 participants. According to the study, the majority of 401(k) investors surveyed 

say they prefer a personalized touch over online tools. There is nothing wrong with computer 

models. However, most employers, retirement plan participants and IRA owners are not 

comfortable relying solely on a computer model. Computer models became a popular ―musthave‖ feature for retirement plans shortly after the Department’s SunAmerica advisory opinion 

back in 2001. In the mid-2000’s companies sponsoring a large market retirement plan bundled 

product began adding this feature to their plans. Although plan sponsors preferred to permit 

participants to choose whether to pay for the service, none of the providers would permit them to 

do so. Why? Because the uptake rate was so low that it would not be economical for the 

provider to price it that way. In fact, their experience was that even when a computer model was 

made available ―for free‖ (i.e., the cost was already built into the investments), about 1% of the 
17

plan participants used the computer model. Even for those participants who want to use a 

computer model, most would want to discuss the results with a human being, especially when the 

markets are turbulent. When the Dow drops 20%, you can’t call a computer model and ask it 

what to do. 

H. Conclusion

With respect to the ERISA-governed marketplace, we would respectfully request that the 

Department re-propose the regulations after incorporating our comments. We believe reproposing the regulations is necessary given the number of issues raised by us and other groups, 

the flaws in the economic impact assessment we have pointed out, and the dramatic impact these 

regulations would have on the IRA and ERISA-governed marketplace.

III. There should be one standard regardless of status

The Department’s proposal would create a separate standard for investment recommendations 

depending on the status of the person making the recommendation or the status of the person’s 

affiliates. For persons who are, or are affiliated with someone who is, an RIA or already an 

ERISA fiduciary to the plan in some capacity, recommendations automatically become 

investment advice without regard to whether the recommendations are individualized or there is 

any mutual understanding that the recommendations will form any basis for the individual’s 

investment decisions. For instance, under the proposal, if an RIA sends out a newsletter to paid 

subscribers that includes buy, sell or hold recommendations relating to a particular security, that 

would be fiduciary investment advice under the regulation. Furthermore, if a broker provides 

buy, sell, hold recommendations for stocks on its website, that broker would automatically be 

considered a fiduciary with respect to any clients who happen to have IRAs with the broker if the 

client followed any of those recommendations and the broker was either affiliated with another 

RIA or was dually registered as an RIA and a broker-dealer. We would recommend that the 

Department consider the guidance provided by its own Assistant Secretary on January 4, 2011 

and focus its regulation on the functional activity rather than labels such as RIA: ―the primary 

focus of the proposal is on function – providing investment advice and recommendations – and 

not labels such as lawyers, accountants and brokers.‖ We would recommend that the regulations 

be revised to remove the status test completely and apply one universal standard regardless of 

whether the person providing a recommendation is an RIA, affiliated with an RIA, an ERISA 

fiduciary or affiliated with an ERISA fiduciary, the recommendation would not be considered 

advice unless it is both individualized to the recipient and there is a mutual understanding that 

the recommendation is to be used as a basis for the recipient’s investment decisions. 
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IV. Distributions

The Department’s proposal excludes from the types of activities that may result in invest advice 

recommendations relating to distributions. The Department specifically requested comments on 

this point. We believe that the Department has correctly interpreted the statute to limit 

investment advice to advice regarding investments rather than distributions. We are not aware of 

any legislative history nor any plain reading of the statute that would suggest that a 

recommendation to take a distribution from a plan is advice relating to an investment. 

In addition to excluding recommendations regarding distribution requests, we urge the 

Department to provide much needed clarity with respect to its position expressed in Advisory 

Opinion 2005-23a (the ―Deseret letter‖). In that letter, the Department suggests that while IRA 

distribution advice is not generally investment advice giving rise to fiduciary status, if the person 

providing the recommendation is already a fiduciary to the plan and recommends an IRA 

rollover to an affiliated IRA, the transaction might be a self-dealing transaction. In the small 

plan marketplace serviced today primarily by brokers, the Deseret letter has had the unfortunate 

impact of preventing brokers from providing fiduciary services to employers and plan 

participants. 

To resolve the issues left unanswered by the Deseret letter, we would suggest that the 

Department clarify that the Seller’s exception would be available to financial professionals if the 

conditions of the exception are met and the financial professional has not acknowledged 

fiduciary status to the participant who is receiving the recommendation. In other words, if the 

financial professional acknowledges fiduciary status with respect to recommendations made to 

the plan sponsor regarding which investment options to make available to participants, the same 

financial professional should be able to disclaim fiduciary status to plan participants under the 

Seller’s exception with respect to recommendations made with respect to both IRA rollovers and 

mutual fund investments.

IV. Valuation issue under proposed definition of “fiduciary”

The proposed regulation would for the first time make appraisals a fiduciary act. It is hard to see 

how the term ―investment advice‖ could be construed to cover appraisals and we are not aware 

of any legislative intent to suggest otherwise. Therefore, it is not clear to us that the Department 

has statutory authority to expand investment advice to cover appraisals. However, even if the 

Department does have such authority, we believe that the structure of the current proposed 

regulations would lead to unintended consequences that would have a negative impact on the 

plan participants and IRA owners the Department seeks to protect. Such an expansion would be 

bad policy for the reasons discussed below. Therefore, we would ask the Department to remove 

the changes regarding ―valuation‖ made to the proposed regulation (both in (c)(1)((i)(2) and the 

―limitation‖ in (c)(2)(iii)) and reserve them for addressing the issue in a separate DOL 
19

rulemaking. This will allow additional time to review the scope of proposed regulation and 

address the apparent unintended consequences discussed below.

With respect to life insurance separate accounts and other ERISA ―plan asset‖ vehicles that 

invest in real estate, the proposal would have the effect of making real estate appraisers into 

ERISA fiduciaries. For this reason, appraisers are threatening to stop doing appraisals for 

ERISA plans and those that continue to provide appraisals will surely increase their fees given 

their increased liability. If this occurs, there would be severe market disruption for both plans 

seeking to invest in real estate and insurers. At the very least, the cost to manage these funds 

will increase and therefore the returns enjoyed by plan participants and IRA owners will 

decrease. Furthermore, in many cases there is already a plan fiduciary that has a duty to ensure 

that the fund does not overpay for real estate investments. Under the existing rules, if a 

discretionary money manager overpays for a real estate investment then that money manager will 

have breached its fiduciary duty.

The same issues apply to ERISA ―plan asset‖ vehicles that invest in other hard-to-value property 

such as collateralized debt obligations, structured notes, and thinly traded or closely held stock to 

name a few. Again, the money manager already has a fiduciary duty to prudently manage these 

funds which would include not overpaying for these assets. What this regulation would do is 

merely drive up the cost of managing these funds as appraisers, sub-custodians and others who 

provide values would become a fiduciary to the plan and charge higher fees due to this increased 

liability.

The Department has included a limitation for service providers who provide values as part of

―general reports...provided for purposes of compliance with the reporting and disclosure 

requirements‖. This limitation is potentially very narrow. Many insurers provide reports and 

statements more frequently than ERISA reporting requirements strictly require (e.g., daily online 

account value access to plan participants, interim reports provided to plan investment 

committees). Second, and more importantly, the limitation does not cover reports on assets for 

which there is ―not a generally recognized market‖ if the value is used as a basis on which a plan 

makes distributions. 

In addition to insurers, the proposal would also appear to sweep into the fiduciary world 

custodians and recordkeepers who report the value of these investments on quarterly statements 

and on year-end reports. The values that they report come from unrelated third parties. These 

parties do not advise the plan to buy, sell or hold these hard-to-value investments and do not 

currently view themselves as fiduciaries with respect to the investments or their value. There is 

no basis for making these entities fiduciaries and the result will be that many will refuse to hold 

these assets or increase their fees at the expense of the investment returns enjoyed by plan 

participants and IRA owners. 
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V. Conclusion 

We would like to applaud the Department for its announcement of a public hearing on the 

proposed regulations and for extending the period during which the comments will be accepted 

before the hearing. While we will be providing a formal request to testify at the hearing, we 

would like to take this opportunity to express our interest in participating in the hearing. We 

believe that the Department’s proposed regulations address a wide range of important issues and 

urge you to consider all of the potential implications for consumers and capital markets as this 

important policy dialog continues to move forward. Please feel free to contact me or John Little,

our Senior Vice President for Federal Affairs with any questions regarding our comments.

Sincerely,

Cathy Weatherford

President & CEO