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February 3, 2011

Submitted Electronically – Re: Definition of the Term “Fiduciary” (RIN 1210‐AB32)

Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor

200 Constitution Ave, NW

Washington, DC 20210

e‐ORI@dol.gov

Ladies and Gentlemen:

On behalf of the Competitive Enterprise Institute, we are writing to submit comments regarding

the proposed regulation published by the Department of Labor’s Employee Benefits Security

Administration (the Department) defining the term “fiduciary” in connection with the provision

of investment advice under ERISA (the Proposal).1  The Proposal would replace the current

regulation at 29 CFR §2510.3‐21(c) promulgated by the Department in 1975.  The Department

has argued that the new rules are necessary because of changes in the market in the past 35

years.  However, we believe that these changes – notably the proliferation of defined

contribution plans – make such a broad definition of “fiduciary” even less appropriate now then

it would have been when the majority of workers were in defined benefit plans.

We thank you for the opportunity to comment on this regulation.  CEI supports the

Department’s decision to review and update aging regulations.  However, we are strongly

concerned about the costs this proposal imposes on the investing community and the

curtailment of options for individual workers planning their retirement. We also have concerns

regarding the regulatory impact analysis accompanying the Proposal, and we appreciate the

opportunity to share our thoughts with you.   

The Competitive Enterprise Institute (CEI) is a non‐profit public policy organization dedicated to

advancing the principles of limited government, free enterprise, and individual liberty.  

Founded in 1984, our mission is to promote both freedom and opportunity.  We make the

uncompromising case for economic freedom because we believe it is essential for

entrepreneurship, innovation, and prosperity to flourish.  

                                                           

1 75 Fed. Reg. 65263 (Oct. 22, 2010)
One of CEI’s ongoing initiatives is to evaluate whether the regulations promulgated by the

Federal government properly take into account the burden they place on private enterprise.  

We seek to eliminate unnecessary regulation, and to promote thorough and accurate cost‐

benefit analysis.  As the federal regulatory structure imposes significant costs on our economy,

it is imperative that federal agencies conduct their regulatory impact analyses in accordance

with Executive Orders and Office of Management and Budget guidance designed to ensure

thorough estimation of costs and benefits, as well as full consideration of the regulatory

alternatives that minimize burdens and maximize regulatory efficiency.

Summary:

At the outset, we have basic concerns about the thrust of this proposal.  Expanding “fiduciary

duty” as the Department proposes will make it harder, not easier, for workers to exercise their

rights and responsibilities in their retirement plans.  Individual choice is the hallmark of defined

contribution plans such as 401(k)s, and we believe this proposal will make it more difficult for

workers to get the information or advice they seek to make informed decisions.  Plan sponsors

and workers should be free to select service providers on a non‐fiduciary basis to assist them in

making their own decisions—we believe the likely effect of the Proposal would be to limit the

ability of plans and workers to make that choice.

We are also concerned that the regulatory impact analysis accompanying the Proposal

overstates the Proposal’s benefits and understates its costs, and does not comply with the

intent of Executive Order 12866 and OMB Circular A‐4.  Accordingly, our comments will identify

for the Department the areas we believe should be reviewed and revised.      

First, the Department did not conduct a threshold analysis of the cost of the Proposal, as

required in OMB Circular A‐4 when an agency determines costs cannot be quantified.  The

Department did, however, conduct a threshold analysis of the benefits of the Proposal.  We are

concerned that the lack of a threshold cost analysis could significantly understate the Proposal’s

costs relative to its benefits.  Given the vast size of the regulated universe, with approximately

$10 trillion held by ERISA plans and Individual Retirement Accounts (IRAs),2 even a very small

proportion of providers experiencing transition and other costs could result in very high costs to

plans and participants.  We are also concerned that the Department did not appear to consider

the cost impact on the $4.5 trillion IRA marketplace at all.  Given the significant differences

between ERISA plans and IRAs, including the fact that the IRA holder affirmatively selects the

IRA provider he or she prefers, it is not at all clear that the same cost considerations obtain.  

Second, we are concerned that the analysis may significantly overstate the Proposal’s benefits

because it does not appear to take into account the effect of the Department’s previously

                                                           

2 See “The U.S. Retirement Market: Third Quarter 2010,” Investment Company Institute, January 2011, pg. 6.  
promulgated Interim Final ERISA §408(b)(2)3 regulation regarding undisclosed compensation.  

That regulation, which will take effect on July 16, 2011, already prohibits, deters and punishes

the same conflicts of interest that the Proposal claims to prevent.  We believe the Department

appears to be, in effect, “double‐counting” the benefit of the prior regulation.   

Third, we are concerned that the regulatory impact analysis did not sufficiently consider the

impact the Proposal would have on small businesses, including financial advisors and

appraisers.  We urge the Department to examine data regarding the average size of a financial

advisor and of an appraiser to reassess this issue.

Fourth, the Proposal did not consider alternative regulatory options that might have

significantly reduced costs by narrowing the scope of the Proposal—instead the Department

considered only two alternative options that would have expanded the scope of the Proposal.  

This seems inconsistent with the intent of Executive Order 12866 and OMB Circular A‐4.

Fifth, the Proposal does not appear to consider what impact increasing the number of fiduciary

service providers may have on existing prohibited transaction exemptions that plans and

service providers use to conduct ordinary plan business.  A number of commonly‐used

prohibited transaction exemptions may not be available to service providers if their services

become fiduciary in nature.  The regulatory impact analysis is silent on this point.

Finally, given the reliance the Preamble and the regulatory impact analysis place on the

Department’s experience with its national enforcement project on employee stock ownership

plan (ESOP) issues and the Consultant/Adviser project (CAP), we believe the Department should

have analyzed the impact the Proposal would have had in these cases and make that

information available for public comment as part of this rulemaking.  For example, the

Department has provided no data showing how many CAP cases the Department successfully

closed with results under the current rule.  Of those that did not close with results, how many

likely would have closed with results under the Proposal and why?

In our nation’s voluntary system of employee benefits, the Department has a responsibility to

regulate efficiently; ensuring workers are protected without unnecessarily increasing costs and

reducing the availability of plans.  Given these concerns about the regulatory impact analysis,

and given the potential impact of the Proposal on the cost and availability of retirement plans

for America’s workers, we believe the Department should reevaluate the Proposal in light of

the comments received, conduct a new regulatory impact analysis that properly accounts for

expected costs and benefits, and repropose the entire rule so that the public has a meaningful

opportunity to comment upon all relevant data that the Department has relied upon in

preparing the Proposal.   

                                                           

3 75 Fed. Reg. 41599 (July 16, 2010).
Threshold Analysis Requirement:

OMB Circular A‐4 provides clear direction regarding the need to conduct a threshold analysis

when the agency believes it cannot quantify the cost or benefit impacts.  The guidance

provides:

“If the non‐quantified benefits and costs are likely to be important, you should carry out a

‘threshold’ analysis to evaluate their significance.  Threshold or ‘break‐even’ analysis

answers the question, ‘How small could the value of the non‐quantified benefits be (or how

large would the value of the non‐quantified costs need to be) before the rule would yield

zero net benefits?’  In addition to threshold analysis you should indicate, where possible,

which non‐quantified effects are most important and why.”4

  

While the Department may not have all the cost information it believes it needs to quantify the

specific impact of the Proposal (such as the proportion of assets managed or held pursuant to

variable compensation arrangements the Proposal may prohibit), there is sufficient information

available to conduct at least a threshold cost analysis that would provide a more accurate

understanding of the range of potential impacts than the Department has provided in the

Proposal.  Private sector defined contribution and defined benefit plans subject to the Proposal

hold nearly $6 trillion; IRAs hold roughly an additional $4.5 trillion.5  Given the scale of this

roughly $10 trillion marketplace, the Proposal need only result in a very small percentage of

service providers being required to change their business models and compensation

arrangements to make the transition costs of the Proposal extremely significant.  At the very

least, the Proposal likely will result in a significant impact on a substantial number of small

entities.6   

Furthermore, the Department’s analysis does not appear to make any attempt to quantify or

otherwise estimate the impact of the Proposal on the $4.5 trillion IRA marketplace.  This is

troubling, as the IRA marketplace is inherently different from the ERISA plan marketplace.  The

IRA holder acts as his or her own fiduciary in selecting the IRA provider of his or her choice, and

generally does so in the retail rather than in the institutional market.  It is not at all clear that

the same assumptions the Department made about the impact of the Proposal on the ERISA

space will apply in the IRA space—in fact, many factors, including the number and type of

service providers operating in the IRA space, are likely quite different.   

Overstating the Proposal’s Benefits and §408(b)(2):

We are also concerned that the economic impact analysis may be overstating the benefits of

the Proposal by “double‐counting” the enforcement benefits already achieved in a prior

regulation.  In assessing the benefits of the regulation with respect to preventing conflicts of

                                                           

4 OMB Circular A‐4, pg 2. 5 “The U.S. Retirement Market: Third Quarter 2010,” at 6. 6 See Regulatory Flexibility Act, 5 U.S.C. § 601 et seq.
interest caused by undisclosed service provider compensation, the analysis does not appear to

take into account that the Department has already promulgated regulations prohibiting this

conduct through the Interim Final ERISA §408(b)(2) disclosure requirements.  

Beginning on July 16th, most service providers receiving indirect compensation (payments from

a party other than the plan in connection with the plan’s business), including pension

consultants and other entities identified in the Preamble to the Proposal, will be required to

disclose to plan fiduciaries direct and indirect compensation totaling $1,000 or more.  Failure to

provide the disclosure will result in a prohibited transaction, as the transaction will no longer be

eligible for the statutory exemption for reasonable services.   

The Department’s regulatory impact analysis for the §408(b)(2) Interim Final regulation

concluded that:

“Harmful arrangements generally are those that are tainted by unmitigated conflicts. A

plan's service providers may strike deals that profit one another at the plan's expense.

Such arrangements may thrive in the shadows, but tend to wither in sunlight. These

arrangements exist today in the market for plan services precisely because information

asymmetries obscure them. Mandatory proactive disclosure will reduce the asymmetry,

creating a sunnier climate that is less friendly to harmful arrangements.”7

   

The regulatory impact analysis for the Proposal makes essentially the same claim, finding:

“Harmful arrangements generally are those that are tainted by unmitigated conflicts.

These arrangements occur when a plan’s service providers strike deals that profit one

another at the plan’s expense or subordinate the plan’s interest to someone

else’s...According fiduciary status to certain service providers that provide investment

advice...and subjecting them to the full extent of remedies under ERISA, would

discourage harmful conflicts and create more beneficial arrangements in the pension

plan service provider market.”8

While the mechanism used by the two regulations is different—the §408(b)(2) regulation

imposes an excise tax on the non‐disclosing service provider for committing a prohibited

transaction while the Proposal would impose fiduciary liability on the service provider—the

effect in deterring and preventing conflicted advice is likely the same.  Thus, absent a discussion

in the Proposal’s regulatory impact analysis about the Proposal’s incremental improvement

upon the Interim Final regulation’s enforcement effect, it appears as though the Department is

claiming the same benefit twice in two different regulations.

                                                           

7 75 Fed. Reg. 41599, 41622 (July 16, 2010).   

8 75 Fed. Reg. 65263, 65272‐65273 (Oct. 22, 2010).
Impact on Small Entities:

We urge the Department to engage in discussions with trade associations representing financial

advisers, insurance agents, broker‐dealers, and appraisers to obtain real data about the size of

these providers.  It is our understanding that most financial advisers are not employees of large

financial institutions, but rather are either wholly independent business people or independent

contractors.  Thus, these entities are likely to have a large proportion of small businesses, many

of whom could be forced to make substantial changes in their business models in response to

the Proposal.  For example, one survey of 450 financial advisors serving qualified plans, ranging

in size from advisors with only a small number of plans to advisors whose plan clients

represented as much as $2 billion in plan assets, suggested that even many larger advisors had

fewer than 25 employees and revenues below the Small Business Administration guidelines.9

Regulatory Alternatives:

In explaining its reasons for publishing the Proposal, the Department identified a number of

specific concerns with the existing regulation.  These included: undisclosed conflicts of interest

by service providers who did not meet the five‐part test of the regulation; the accuracy of

appraisals of employer stock in connection with ESOPs; and the lack of fiduciary status for one‐

time advice, regardless of its significance to the plan.  The Department also expressed concern

with the requirement of the current regulation that advice provided would be the “primary”

basis for a plan’s decision‐making.   

However, the Proposal is much broader than is necessary to address these issues.  It adds a new

category of fiduciary advice regarding “management” in paragraph (c)(i)(A)(3), and would

potentially make a fiduciary of any entity giving individualized advice for a fee that “may be

considered” by the plan in paragraph (c)(1)(ii)(D).  While the proposal also provides certain

exceptions to this broad scope of fiduciary conduct and status, it is likely that many providers

who have not previously been fiduciaries would become fiduciaries under the Proposal as

written.    

Despite this very broad scope, when considering regulatory alternatives for the purposes of the

regulatory impact analysis, the Department chose to consider only two alternatives, both of

which expanded rather than limited the scope of the proposal.  This seems inconsistent with

the intent of Executive Order 12866 and its interpretive guidance, OMB Circular A‐4.  For

example, Circular A‐4 advises agencies of a variety of different ways to evaluate potential

alternatives, including the “degree of stringency,” writing:

“In general, both the benefits and costs associated with a regulation will increase with the

level of stringency (although marginal costs generally increase with stringency, whereas

marginal benefits may decrease).  You should study alternative levels of stringency to

                                                           

9 “Benchmarking Your Practice: Practice Profiles” pg. 29, Monarch, 2010.
understand more fully the relationship between stringency and the size and distribution of

benefits and costs among different groups.

10

In our opinion, the Department’s two alternatives demonstrated that the marginal benefits of

more stringent alternatives decreased while costs increased.  However, we believe the

Department also should have examined alternatives of lesser stringency to determine if these

would allow the Department to achieve its primary objectives with less cost and greater

efficiency within the regulated community.

Effect on Prohibited Transaction Exemptions:

By expanding the number of service providers who likely would be fiduciaries under the

Proposal, the Department may indirectly impact the ability of these providers to engage in

many common plan transactions that rely on certain prohibited transaction statutory and

administrative exemptions.  As both the Preamble and the regulatory impact analysis are silent

on this point, it is not clear whether the Department considered this issue and determined

there was no concern, or whether the matter was not considered.  We urge the Department to

review these issues, as there could be unintended consequences for individual or class

exemptions, with resulting costs to plans and participants.

Enforcement Experience Data:

The Preamble suggests the Department relied on its experience in its national enforcement

projects on Consultants/Advisers and ESOPs in developing and justifying the Proposal.  While

the Department makes some very cursory information about these programs publicly available,

it is not sufficiently detailed to evaluate the interconnection between this experience and the

Proposal.  

The Department should provide detailed information about these cases in connection with its

policy decision.  Specifically, the Department should disclose how many CAP cases were closed

with results and the ratio of cases closed with results to those closed without results.  The

Department should further disclose whether the Proposal likely would have changed the

outcome in cases closed without results, and if so, why.  This information is necessary for the

public to evaluate the efficacy of the Department’s policy decision in achieving its stated

objectives.   

Conclusion:

ERISA establishes a voluntary system—employers are not obligated to offer employee benefits

to their workers.  As a result, it is vitally important that ERISA regulations efficiently balance the

need to protect workers from inappropriate conduct regarding their retirement savings with

                                                           

10 OMB Circular A‐4, pg 8.
the need to ensure the cost‐effectiveness of offering plans.  Ultimately, the Department is

charged with the responsibility to ensure that its rules offer investor protection that includes

the protection of investor choice. The rules also should not overly burden investment providers,

because the added costs are inevitably passed on to retirees.   To fulfill this important

responsibility, the Department must engage in thorough and comprehensive analysis of its

regulatory decisions.

Thank you for the opportunity to comment on these important issues, and we would be happy

to answer any questions you may have.

Sincerely,

__________________________

F. Vincent Vernuccio, JD

Labor Policy Counsel

Competitive Enterprise Institute

John Berlau

Director, Center for Investors and Entrepreneurs

Competitive Enterprise Institute

Bradford P. Campbell

Outside ERISA Counsel to CEI

Schiff Hardin, LLP