From: 4714026 [mailto:4714026@optonline.net] 

Sent: Wednesday, May 05, 2010 11:52 PM 

To: EBSA, E-ORI - EBSA 

Subject: COMMENTS ON PROPOSED LEGISLATION RE INVESTMENT ADVICE

5/5/2010       We believe that the proposed regulation  >>> should not <<<< be enacted, because

it is likely to undermine a number of the “best practices” that currently benefit the 401(k) and

related retirement plan markets, to a significant degree.     Also, the proposed regulation unduly

favors “computer models” that, while they may represent the potential for innovation in the

industry, are far from proven.     We also are concerned that this proposed legislation is merely

another spear thrown by the Obama Administration at the thousands of decent and well‐trained

people who work in America’s financial services industry, essentially cloaked in administrative

jargon and bureaucratese, but pointedly intended to terminate the employment of experienced

retirement plan personnel on “Wall Street” – and therefore we would, to the extent we can, say

“No” to the proposal – and note that this particular section of America’s financial marketplace,

is really not calling for additional regulation at this time.

A few words on the “computer models” which under this legislation will be escorted in to

America’s retirement plan industry as some kind of all‐knowing oracles of financial advice.    Let

the record show, there are no “computer models” which have risen to industry‐standard levels,

much less risen to a point where they supplant the need for experienced and qualified

retirement plan personnel to be on the scene, on hand to take questions and talk with plan

participants.   Moreover, we can only assume that the goal is to escort in the types of “computer

models” which are gaining in popularity – such as “Financial Engines” and the like.    While these

models are interesting – they pass off their conclusions as fact and that is not right.   They

(mis)portray asset allocation as a programmatic process that can be matched to a date in time,

and produce conclusive answers regarding investment choices.   This misportrayal is clearly

misleading – and dangerous.   It is dangerous to the plan participants because it will be passed

off as “industry standard”, which it is not today, and may not ever be.   It is also dangerous to

the markets as a whole because it will slant the entire apparatus of America’s retirement plan

industry toward passive index investing, which has good validity as an adjunct or satellite for

plan investment strategy in mega‐market catetgories such as the S & P 500, but unproven

validity in basically all the other categories.   The promoters of passive index investing have in

some respects done a service to America, in the sense of educating people about their product

and about benchmarking; but in other respects they have done a disservice to America by their

constant and self‐serving disparagement of active investing, which prices the market.     It is a

quantitative fact that the more people who utilize passive strategies, the less likely they are to

work.     It is also a quantitative fact that if enough people do it, it won’t work.   So before the

Federal Government of the United States of America passes laws pressuring hundreds of

millions of people into passive strategies, what happens if the law is “successful” and pushes the

markets to the point where everyone is being passive, so the markets no longer price correctly.   

And, this will be on the nickel of the retirement plan investors.   And for what ?    To let the SEIU

cartel punch “Wall Street” in the nose ?    Note, as we use the term “Wall Street” it spans the

entire country.

Also, the proposed legislation is very dangerous and improper in its suggestion that a retirement

plan rep is wrong to use the menu of his or her firm’s products for recommendations to the plan
participants.   If his or her firm does not have a proper investment menu – that is a problem, but

that is not what the proposed legislation is talking about.    The proposed legislation would

create a scenario wherein a plan vendor / professional, who perhaps allowed in some ultra‐low

cost investment choices to satisfy some very financially articulate and financially well‐educated

plan participants – wherein the professional could then not recommend the proper menu (albeit

ever so slightly more costly) to the mass of plan participants, because in theory there is

something cheaper they could buy.    That does not help the plan participants.    There are

investment products out there that are costed down to almost zero, in some cases down to zero

– yet they are very dangerous to people who do not understand them.    This is not to excuse

overpriced investment selections, by no means.   Yet the proposed legislation effectively

prohibits a basic plan professional from presenting a basic asset allocation suggestion using

using basic products from leading firms – and that’s not good.     The gist of it is, under the

proposal, everything has to be costed down to zero, or near‐zero, and then turned over to a

computer.   Not a good idea.

Bear in mind – where America is today regarding its housing finance markets, and the role

computers played in that.     It was after the implementation of “automated underwriting” that

FNMA and FHLMC really went sour.    And, this proposed legislation essentially mimics that.    

Why ?    Just so that a few thousand “Wall Street” reps who specialize in retirement plans lose

their livelihoods ?    (At the expense of plan quality across the nation.)     Automated

underwriting turned out to be an unmitigated disaster for FNMA, for FHLMC, and for the United

States of America.   Let’s not have the same thing happen to the 401(k) industry.     If the

esteemed “computer models” have errors, who will correct them ?   And will they be corrected

in time ?    In situations where quantitative finance is being implemented, our experience is that

the people associated with it are extremely resistant to responding to reports of errors.   

Oftentimes, just looking the other way.    For example, when I was engaged to review a text for

the GARP FRM license program, the text contained an error.   In presenting the formula for

collateral coverage, they presented loan‐to‐value instead, which is essentially a

numerator/denominator transposition error.   We presented this to the publisher, and they did

not even answer.   (I’ll attach the page as a PDF file so you can see.)  This is a representative risk

of quantitative finance.  And, people don’t like correcting them.   There are numerous other

similar situations that could be named as militating against quantitative finance applications.    

Quantitative finance is a fascinating area, but is it properly a very small subsection of the world

of investments, and should not be passed off to America’s retirement plan participants as a

standard for mainstream investment advice, because it isn’t.   It’s not even close.   It is an area

of finance where errors are very prone to be missed, and that is not good.   There are also very

serious dangers in regard to the United States government pressuring the nation’s plan

participants to all head toward passive investing – at some point, and it may not be far off, with

enough investors going passive, the markets won’t price right.

The real answer is encouraging more professional involvement with retirement plans, not less;

and encouraging more financial education and literacy, and providing good solid services to

America’s retirement plan participants.    This proposed legislation should be discarded.

Matt Lechner – CFP, CRPS, FRM

Chairman – WSSIG, the Wall Street Special Interest Group
Certified Financial Planner, Chartered Retirement Plans Specialist, (certified) Financial Risk

Manager

Individually named “one of America’s top financial planners 2005, 2006, 2007, 2008, 2009”

“supporting and growing America’s interests in the global capital markets”

4714026@optonline.net
WSSIG

THE

WnII STREET

SpEcInL I N T E R E S T

Gnou p

MATT LECHNER - CFR CRPS, FRM; CHAIRMAN

(203) 979-6146

az I aoza@oPToN Lr N E. NET

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