MassMutual

FINANCIAL GROUW’

May 5, 2010

Submitted Electronically

Employee Benefits Security Administration

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

Attn: 2010 Investment Advice Proposed Rule

Ladies and Gentlemen

Massachusetts Mutual Life Insurance Company ("MassMutual") appreciates

the opportunity to comment on the Department’s proposed investment

advice rule implementing section 601 of the Pension Protection Act of 2006

("PPA").

Founded in 1851, MassMutual is a mutually owned financial protection,

accumulation and income management company headquartered in

Springfield, Massachusetts. We are a premier provider of retirement plan

products and services, life insurance, annuities, disability income insurance,

long-term care insurance, income management and other products and

services for individuals, business owners, and corporate and institutional

markets. MassMutual currently provides investment and administrative

services to over 6,500 defined contribution retirement plans, which hold

approximately $36.6 billion of assets and cover over 1 million participants.

MassMutual’s affiliate, OppenheimerFunds, Inc., is also a leading provider

of defined contribution plan investments and services, i

~ OppenheimerFunds, Inc. will submit similar comments separately.

Massachusetts Mutuai Life Insurance Company and affiliates Springfield, MA 01111-0001 (413)788-8411
As an institution deeply committed to serving plan sponsors and their

participants with best in class products and services, MassMutual supports

Congress’ and the Department’s recent initiatives to enhance Americans’

retirement security and specifically to increase the availability of sound

investment advice to plan participants.

We believe the proposed rule’s fee-leveling provisions are a step in the right

direction to expand the availability of advice and we strongly support the

rule’s preservation of the Department’s pre-PPA guidance on this topic.

Our comments below are focused on the provisions of the proposed rule that

deal with computer model advice, specifically our concern that discouraging

the use of historical investment performance in computer model advice

programs is inconsistent with generally accepted investment theories and

would impede, rather than enhance, the availability of sound advice to

participants.

The Department should not define what constitutes a generally accepted

investment theory or limit which generally accepted investment theories

are available to plan participants except as necessary to ensure unbiased

advice.

The preamble to the proposed role seeks comment on a series of questions

related to the establishment of one or more investment theories that should

be applied to computer model advice, including whether the Department

should establish "a list of criteria that [computer] models must consider to

the exclusion of all others".

The proposed rule, invitations for comment and the preamble together

indicate that it may be the Department’s intent to establish an investment

theory unique to investment advice delivered by computer modeling to

ERISA plans, or to dictate which generally accepted investment theories

may be used to generate investment advice for participants and which may

not. Neither approach is called for by the Pension Protection Act, and either

alternative would represent a significant departure from ERISA’s

longstanding approach to fiduciary considerations and the responsibility for

investments.

Congress and the Department have not previousIy defined what constitutes a

generally accepted investment theory for ERISA purposes or otherwise
attempted to limit the criteria that may be taken into account as part of a

generally accepted investment theory for purposes of providing advice to

plan participants. Congress and the Department have likewise declined to

mandate specific investments for plans. We believe Congress and the

Department have avoided those steps for important practical and public

policy reasons and that it would be a mistake for the Department go down

that path now.

First, the term "generally accepted investment theories" is self-defining. We

believe it refers, in general, to investment theories that are widely used and

accepted by investors and investment experts. Historical performance is

clearly a factor that many investors and investment experts incorporate into

investment analysis. Therefore, historical performance is a component of

generally accepted investment theories. Hundreds of mutual fund tracking

services, investment ~veb sites and periodicals regularly publish performance

information that millions of investors and investment advisors use to

formulate investment advice. By excluding historical performance from

consideration under computer model advice programs and thereby dictating

which investment theories may be used, the Department would be changing

the standard for computer models specified in the PPA.

Moreover, defining "generaliy accepted investment theories" as proposed, or

favoring certain theories over others, would fail to accommodate the healthy

evolution of investment theory and investment products. Any rule that

favors or excludes certain generally accepted theories is likely to become

outdated quickly.

ERISA has proven to be a highly successful and adaptable frame~vork for

retirement plan regulation and innovation precisely because of its reliance on

guiding principals and its emphasis on thoughtful and informed oversight by

fiduciaries rather than rigid rules and the promulgation of "legal lists" of

approved investments.

The significant unanticipated market losses suffered by millions of plan

participants as a result of the recent global financial crisis were a harsh

reminder that investment strategies that produce favorable results for

investors under certain market conditions are disadvantageous under

different conditions, with a disastrous impact on some investors. As

discussed in more detail below, °°buy and hold", passive investment

strategies that may work well for a hypothetical investor over decades will
not always produce the best possible results for actual investors over shorter

periods.

In addition, the exclusionary approach taken by the proposed regulations

directly contradicts the Department’s historical position with respect to the

selection of plan investments generally. At the time the Department issued

its ’prudence’ regulation, it stated:

IT]he Department does not consider it appropriate to include in the

regulation any list of investments, classes of investment, or investment

techniques that might be permissible under the ’prudence" rule. No

such list would be complete; moreover, the Department does not

intend to create or suggest a ’legal list’ of investments for plan

fiduciaries. "’ 44 Fed. Reg. 37255 (June 26, 1979)

ERISA does not now call for the Department to place limits on a plan’s use

of commonly accepted investment techniques that satisfy ERISA’s fiduciary

standards any more that it did in 1979 when the prudence regulation was

issued.

Even if the Department is inclined to reconsider the application of

generally accepted investment theories in the context of ERISA plans,

the computer model requirements of the participant investment advice

regulations are not the appropriate place to do so.

Using the participant investment advice regulations to limit the generally

accepted investment theories that may be incorporated into computer model

advice is not contemplated by the Pension Protection Act. The Act does not

include a definition of "generally accepted investment theories" or limit

which theories may form the basis for computer model advice (other than

requiring that a model take into account historic returns of different asset

classes over defined periods of time). If Congress believed that certain

generally accepted investment theories are not an appropriate fiduciary basis

for formulating participant investment advice, they would have included

provisions to that effect in the Act.

The Department should not require that investment advice computer

models omit historical performance as a factor in distinguishing among

investment options within an asset class.
The proposed rule provides that computer model advice must "avoid

investment recommendations that...inappropriately 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..." (Paragraph

(b)(4)(i)(E)(3)). In the preamble to the proposed rule, the Department

explains the intent of this provision 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. (emphasis added)

To the extent the Department’s purpose in proposing a restriction on the use

of historical performance is to ensure that participants receive unbiased

advice, the restriction is unnecessary. Other provisions of the Pension

Protection Act and the proposed regulations provide ample safeguards.

Safeguards include a prohibition on advice biased in favor of investments

offered by the fiduciary advisor; the requirement that computer models use

only objective criteria; and expert certification and audit requirements.

Further, the restriction on the use of historical performance included in the

proposed rule is ambiguous and would have repercussions beyond the

development of computer advice models. Plan fiduciaries would rightly be

concerned, and we believe very confused, about the implications of the

restriction for investment decisions they make in contexts other than

computer models. For example, if participant advice computer models do

not consider the historical performance of investments, should a fiduciary

also ignore historical under-performance in deciding whether to retain an

investment in a plan menu?

If the Department continues to believe that investment advice to plan

participants should be based on factors different than those used by investors

in general, then a more detailed, separate analysis and proposal should be

undertaken so as not to further delay the implementation of participant

advice regulations which have already been finalized, delayed several times,

withdrawn and now reproposed. As the Department points out early in the
analysis of the proposal, quality investment advice can help participants

reduce investment errors and "reap substantial benefit".

We are concerned that discouraging the use of investment performance as a

factor in investment advice computer modeling will ultimately put plan

participants at a disadvantage relative to other investors by limiting their

access to innovative investment strategies and products. New and more

sophisticated investment strategies will continue to emerge and it is very

likely that some will incorporate data on historical performance among

investments within a single asset class. Discouraging plans from providing

participants with advice that incorporates new strategies and products could

leave participants behind without access the best available and most timely

advice. The proposed regulations acknowledge as much by excluding

lifecycle (target-date) and lifestyle (target-risk) investments from the

computer model requirements. It is reasonable to assume that other

investment products will emerge with similarly innovative approaches. The

regulations should not inhibit the availability of these products to plan

participants.

If the Department’s proposed restrictions on historical performance are

included in the final regulation, or if the final regulation includes a list of

criteria that a computer model must consider to the exclusion of others, the

direct effect will be that all participant advice under the PPA computer

model approach will favor investments with the lowest fees regardless of the

investment’s historical performance. This will amount to a strong and

unprecedented regulatory bias in favor of passively managed investments

regardless of market conditions, individual participant preferences and

characteristics, and investment product design. Such a bias would also

ignore the fact that actively managed investments out-perform passively

managed investments in various market conditions and over certain periods,

as described in detail below, in favor of a one-size-fits-all approach. The

consequences could be significant. If enacted in its present form, the rule

would most likely result in millions of participant accounts being redirected

into index funds and other passive investments. In a broadly rising market

that strategy could benefit participants overall, however, if markets

experience a sustained period of slower, less consistent performance,

participants invested in index funds would likely miss out on gains produced

by active management.
The evidence does not support the Department’s conclusions and

implications regarding historical performance.

The hoary debate about the relative merits of actively and passively

managed mutual funds typically weighs performance statistics covering

different categories of funds over different time periods. From a regulatory

perspective, the question should not be whether varying circumstances tend

to favor one kind of fund over the other but should be whether one approach

so overwhelmingly dominates the other in practice that regulation should

favor one over the other. While the broadest statistical findings tend to favor

passively managed funds, the degree of difference in favor of the passive

management style is insufficient to justify such a drastic regulatory

determination. Moreover, actual investor behavior indicates that fund

purchasers not only prefer active funds but they systematically favor outperforming actively managed funds over weaker competitors.

Frequently cited studies report that a majority of funds underperform their

respective benchmarks. For example, according to S&P, an average of 52%

of domestic equity funds underperformed the S&P Composite 1500 index2

(gross of any fees) each year between 2000 and 2009. Similarly, for periods

ending December 31, 2009:

Over five years, just over 60% of actively managed U.S. equity funds

underperformed this benchmark;

 ̄ Over three years 54% underperformed;

 ̄ For one year 42% underperformed.

Actively managed funds’ critics interpret data like these to impugn the

performance and question the utility of active funds. They oversimplify.

First, comparisons between funds and indices, the latter of which are not

directly investable, neglect to consider the fees that index-tracking

investment vehicles charge their customers. More importantly, these ratios

in fact demonstrate that significant proportions of active funds do

outperform this benchmark. If60% of funds underperformed, 40%

outperformed. Limiting retirement investors’ advice to index or other

passive funds would deny meaningful guidance about the full range of

investments, including these outperforming funds.

Data from Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard, Year-End 2009.

http://www.standardandpoors.com!indices/spiva/en/us.
Such a limitation would be less important if investors were proven incapable

of selecting outperforming funds; the evidence suggests that they actually

choose successfully. The statistics above weight all funds equally. To better

understand the choices investors make in practice, funds in each category

should be weighted by their respective assets so that larger funds - the ones

that investors favor - will affect the statistical results more than smaller

funds, which less successfully attract investor’s assets. When managed

funds are compared with indicies on an asset-weighted basis, the results

change materially. The results differ considerably:

Averaged over five years and equally weighted, domestic equity funds

outperformed the S&P Composite 1500 by 10 basis points, but when

funds are asset weighted, they outperformed by 76 basis points

(1.46% versus 0.69%);

 ̄ When asset weighted, actively managed large, small, and multicap

(though not midcap) funds five-year outperformance also exceeded

their respective benchmark returns;

Asset weighted returns exceed equal weighted returns for

® International/global equity funds and

o 10 of 13 fixed income categories (two others are essentially

equal)

Investors appear to discriminate among funds’ performance and vote with

their dollars, preferring the better performing funds over less successful

competitors. Limiting computer model investment advice to a menu of

passive funds would deny participants the opportunity to make these

selections. The Department should not impose such a draconian restriction

on investment advice without overwhelming evidence that certain categories

of investments are simply not in investors’ best interests. The available

evidence does not support such a conclusion.

Denying plans and participants access to advice about actively managed

funds creates an additional problem for asset allocation funds of funds.3

There is added complexity in these vehicles in that they not only include

stock selection but also include asset allocation that changes over time.

3 Although the proposed rule does not require a pimp’s asset allocation f~n ds to be kmluded in the recommendations generated by a

computer model, as discussed in more detail below, the broader implications of the rule would nevertheless discourage plans fi’om

offering asset allocation ~nds at all.
Asset allocation, itself, requires active management as there is not an

allocation benchmark for an investor at any specific point in time.

Consequently, there is not a single solution for how that allocation should

change over time. In short, there is no broadly accepted index benchmark

for life-cycle, asset allocation funds. Requiring advice to include only index

or other passive products would reduce investors’ access to alternative asset

allocations, which by definition are actively managed. Asset allocation is a

significant driver of future results, along with individual fund selection.

Therefore, choice in asset allocation and roll down are key elements for a

lifecycle fund to fit various risk/return appetites.

The academic literature covers the active/passive debate with arguments

about market conditions, asset classes, and other variables that favor one

approach or the other. The issue is in fact much simpler. Active managers

can and do outperform indices, and investors appear to choose funds that do

outperform. Those conclusions leave no basis for regulatory preference to

the use of either actively or passively managed funds.

For the reasons discussed above, the final rule on participant investment

advice should not prohibit or discourage the use of historical performance in

computer model or other investment advice programs.

Respectfully submitted

Eric Wietsma

Senior Vice President

Massachusetts Mutual Life Insurance Company

S. Viola

"-.,~VP and Counsel

Massachusetts Mutual Life Insurance Company