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May 5, 2010

Office of Regulations and Interpretations

Employee Benefits Security Administration

Room N-5669

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Attn: 2010 Investment Advice Proposed Rule

Ladies and Gentlemen:

On behalf of the U.S. Chamber of Commerce, the Profit Sharing/401k Council of America

(“PSCA”), and The ERISA Industry Committee (“ERIC”), we are writing this letter in response

to the 2010 proposed rule on Investment Advice—Participants and Beneficiaries issued by the

Department of Labor (“DOL” or “Department”) on February 26, 2010, which amends guidance

issued in 2009.

In general, we appreciate that the proposed rule maintains the Congressional intent of the

Pension Protection Act in allowing employers to provide investment advice to workers.

We are also pleased that the proposed rule reiterates that it applies exclusively with respect to

advice provided pursuant to the statutory exemption provided under sections 408(b)(14) and

408(g)(1) of ERISA and sections 4975(d)(17) and 4975(f)(8) of the Internal Revenue Code, and

that no inferences should be drawn with respect to other methods to provide investment advice.

The final rule should retain this finding.

ERIC is a nonprofit association committed to the advancement of the employee retirement,

health, incentive, and welfare benefit plans of America’s largest employers. ERIC’s members

provide comprehensive retirement, health care coverage, incentive, and other economic security

benefits directly to some 25 million active and retired workers and their families. ERIC has a

strong interest in proposals affecting its members’ ability to deliver those benefits, their costs and

effectiveness, and the role of those benefits in the American economy.

PSCA is a 63-year old non-profit association representing companies that sponsor profit sharing,

401(k), and similar plans. PSCA speaks for over 1,200 companies who employ approximately 5

million plan participants throughout the United States. PSCA’s members range in size from very
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small firms to conglomerates with hundreds of thousands of employees. All regard their defined

contribution plans as vital factors in their business success.

The U.S. Chamber of Commerce is the world's largest business federation, representing more

than three million businesses and organizations of every size, sector, and region. The Chamber

represents a wide management spectrum by type of business and location. Each major

classification of American business - manufacturing, retailing, services, construction,

wholesaling, and finance – is represented. Also, the Chamber has substantial membership in all

50 states, as well as 105 American Chambers of Commerce abroad.

Our comments below ask for further clarification of the rules and responds to the DOL’s

questions.

The DOL Should NOT Regulate Generally Accepted Investment Theories. In the preamble

to the proposed rule, the DOL requests comments on whether it should provide regulations on

what constitutes generally accepted investment theories. These questions are limited to the

computer model, but any finding by the Department will have repercussions beyond that. We

emphatically urge the DOL to reject this idea.

The concept that the Department might prescribe specific parameters on what constitute a

generally accepted investment theory is inconsistent with the statute and the Department’s longstanding positions on the operation of a retirement plan in compliance with ERISA’s fiduciary

requirements. Section 408(g)(3)(B)(i) requires the computer model to use generally accepted

investment theories. The statute, wisely, does not define this term.

Section 408(g)(5) requires an annual audit of all the requirements of the subsection, including

generally accepted investment theories, by an “independent auditor, who has appropriate

technical training or experience and proficiency, and so represents in writing.” In the preamble

to the January 2009 final rule, which is applicable to this regulation, the Department declined to

prescribe the auditor’s qualifications. Rather, the Department recommended that a fiduciary

consider any licenses, certifications, or other evidence of technical training, the relevance of that

training to the audit, and the individual or organization’s experience and proficiency in

conducting similar types of audits. The 2009 final rule states, “In this regard, it is the view of the

Department that the selection of an auditor is a fiduciary act and, therefore, must be carried out

in a manner consistent with the prudence requirements of section 404(a)(1), taking into account

the nature and scope of the audit and the expertise and experience necessary to conduct such an

audit.”

We believe that Congress recognized that “generally accepted investment theory” is a fluid

concept with general principles and subject to change. The statute and the Department’s own

guidance recognize that an auditor will apply their expertise and training, not a strict

methodology, in determining whether an investment theory is generally accepted. This

methodology, that favors prudent process over narrowly prescribed rules, permeates the

Department’s discussions of the fiduciary obligations to select and monitor all plan services. For

example the Department’s publication, Selecting and Monitoring Pension Consultants – Tips for

Plan Fiduciaries, provides a set of helpful questions to assist a fiduciary prudently and
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objectively select a plan advisor or consultant. It does not and should not limit the generally

accepted investment theory to be utilized by the adviser.

Furthermore, a need for the Department to set limits on generally accepted investment theory has

not been demonstrated. The term "generally accepted investment theories" was first used in an

ERISA context in 1996, in Interpretive Bulletin 96-1, which described information that, when

provided to plan participants, constitutes "investment education" rather than "investment

advice." The bulletin required that two categories of investment education information, asset

allocation models and interactive investment materials, be based on "generally accepted

investment theories." The use of this terminology was seen as a way to reference industry

standards while also retaining flexibility, so as not to impose any particular investment approach

or philosophy that could become dated over time. (The concept was also utilized in the

regulation adopted in 2007 Qualified Default Investment Arrangement regulation, without

further specification.) This flexible standard, as adopted in Interpretive Bulletin 96-1, was

implicitly adopted by Congress in 2006 when it incorporated almost identical language into the

participant investment advice exemption, again without further definition. In light of this history

and the understanding that has developed around this standard and the advantages of using a

flexible approach, there is no need or reason to set arbitrary limits on an approach that has

worked well.

The Department also asks several questions about the consideration of an individual investment’s

historical return being consistent with generally accepted investment theories. We are confident

that one constant in generally accepted investment theories is that historical returns should be

considered in offering investment advice. Another constant is that historical returns must be

carefully analyzed and they should never be the sole criteria in recommending offering an

investment. With these constants in mind, a competent adviser will not base a recommendation

solely on historical returns.

Active management is premised on the presumption that markets are inefficient and that skilled

managers who have information or insight that is not reflected in an asset’s price can achieve an

above market return net of costs. (That this skill exists is personified by Warren Buffet and his

success in active management.) Passive management argues that the likelihood of active

managers consistently achieving above market results over time will not exceed the additional

costs and that the ability to identify and select the successful manager is remote. Retirement plan

fiduciaries recognize these different philosophies and varying participant preferences as

evidenced by the inclusion of both active and passive investment options in most individual

account plans.

In summary, we believe that all of these decisions are beyond the scope of the agency’s role. We

respectfully note that the Department does not have jurisdiction or expertise in this matter.

Those that do, such as the Securities and Exchange Commission, the Department of the

Treasury, and the Federal Reserve have avoided the course that the Department is considering.

Furthermore, the plan sponsor and plan professionals have fiduciary obligations to ensure that

assets are appropriately invested and managed. If the DOL begins to prescribe investment theory

then it will override the fiduciary obligations of the plan sponsor and professionals. Moreover,

from a practical perspective, any regulation of investment theory will make that theory the de
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facto investment model for every plan. This result would be inappropriate, ineffective and

potentially detrimental to many plan participants because it would result in a static proscription

that would leave no room for new ideas even as they become generally accepted.

The Regulations Require Clarification of the Consideration of Investments Within a Single

Asset Class. The proposed rule states that, with respect to model-driven advice, the model not

"[i]nappropriately distinguish among investment options within a single asset class on the basis

of a factor that cannot confidently be expected to persist in the future."1

In the preamble, the DOL explains this statement as follows:

While some differences between investment options within a single asset class,

such as differences in fees and expenses or management style, are likely to persist

in the future and therefore to constitute appropriate criteria for asset allocation,

other differences, such as differences in historical performance, are less likely to

persist and therefore less likely to constitute appropriate criteria for asset

allocation. Asset classes, in contrast, can more often be distinguished from one

another on the basis of differences in their historical risk and return

characteristics.

There are several concerns with this language and the explanation thereof. One concern is how

to define an asset class. For example, is an actively managed growth fund in the same "class" as

an S&P 500 Index fund? Moreover, it is not clear how to determine within an asset class

whether a particular distinction is "inappropriate." The explanation in the preamble implies that

historical performance within an asset class may be an inappropriate factor. However, such a

reading would create an inappropriate bias toward low-cost index funds because fees and

expenses would be the primary or even exclusive consideration for recommending an

investment. To avoid this confusion, we ask the DOL to clarify this provision. Specifically, we

recommend that the final rule clarify that historical performance is, among others, an appropriate

and relevant consideration when distinguishing among investments in the same asset class.

The Regulations Require Clarification of the Fee Leveling Provision. The proposed rule

states that no fiduciary adviser may receive any fee or other compensation “that is based in

whole or in part on a participant’s or beneficiary’s selection of an investment option.”2This

appears inconsistent with the statutory fee-leveling exemption found in Section 408(g)(2)(A)(i)

of ERISA that requires that fees “received by the fiduciary adviser for investment advice . . . do

not vary depending on the basis of any investment option selected” [emphasis added]. The intent

of the language of the statute does not appear to be that no compensation based upon the

investment selected may be received, but rather that no “variable” compensation based upon the

investment selected may be received. This is a simple distinction that may be important for

fiduciaries that utilize this exemption to provide investment advice. Accordingly, we ask the

DOL to clarify this language to state that that no fiduciary adviser may receive any fee or other

compensation “that varies based in whole or in part on a participant’s or beneficiary’s selection

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75 Fed. Reg. 9366 (proposed March 2, 2010) (to be codified at 29 C.F.R. pt. 2550)

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Id.
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of an investment option.” That should clear up any confusion and provide consistency between

the regulation and the statute.

We thank you for the opportunity to comment on the proposed rule and look forward to

continuing to work with you to ensure that plan participants receive adequate and effective

investment advice.

Sincerely,

Edward Ferrigno

Vice President, Washington Affairs

Profit Sharing / 401k Council of America

Phone: (202) 863-7272

ferrigno@401k.org

Kathryn Ricard

Senior Vice President, Retirement Security

The ERISA Industry Committee

Phone: (202) 789-1400

kricard@eric.org

Aliya Wong

Executive Director of Retirement Policy

U.S. Chamber of Commerce

Phone: (202) 463-5458

awong@uschamber.com