May 5, 2010 

FILED ELECTRONICALLY 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Re: Comments on Proposed Rule on Investment Advice, as published in 75 Fed. Reg. 9360 

(March 2, 2010) 

Dear Madam Assistant Secretary: 

The Pension Rights Center submits the following comments on the Department’s proposed rule 

on the exemption under ERISA § 408(g) of certain categories of investment advice from the 

prohibited transaction rules. 

The Pension Rights Center is a nonprofit consumer organization that has been working since 

1976 to promote and protect the retirement security of American workers and their families. The 

Center understands that participants and beneficiaries need professional, competent advice on 

how to allocate assets among various investment options in self-directed individual account 

plans. But the Center believes that that advice must be unbiased and free of conflicts of interest. 

When Congress passed the Pension Protection Act of 2006, it tried to expand the availability of 

investment advice through regulation rather than through prohibition of conflicted investment 

advisers. To do this, it provided that a conflicted investment adviser must either use an 

objective, independently verified computer model or be subject to fee leveling. 

While the Center has remained skeptical of the value of investment advice provided by 

conflicted advisers, it commends the Department for regulations that attempt to implement 

Congressional intent, which intended a strong bulwark against potential conflicts infecting 

investment advice by requiring either fee leveling or the use of an objective computer model. 

The Center also commends the Department for withdrawing the 2009 class exemption, which 

undermined the legislative judgments of Congress on the type of safeguards needed to minimize 

bias on the part of conflicted investment advisers. 

Although we applaud the Department’s proposed regulations as a significant improvement over 

the 2009 rules, we believe that the regulations can be improved. We provide a number of 

observations and suggestions for improvement below. 
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Moreover, we continue to believe that the addition of Section 408(g) to ERISA was an error and 

urge the Department to advocate for stronger legislative protections for participants. 

Finally, we suggest that the Department also consider collecting into a single regulation its 

generally thoughtful prior guidance on investment advice by non-conflicted advisers and on the 

difference between investment education and investment advice. 

Observations and Suggestions on Proposed Regulations

1. Fee-leveling should apply to affiliates of investment advisors. In a positive departure from 

the 2009 regulations, the proposed regulations expressly provide that an affiliate of a 

fiduciary adviser providing advice under a “fee-leveling” arrangement may not offer the 

adviser direct or indirect payments that is based on investments selected by participants or 

beneficiaries. 

We are concerned that the forms in which benefits might be provided to an investment 

advisor will not always be transparent and that it will sometimes be difficult to indentify 

forms of improper payment. 

Moreover, bonuses paid by an affiliate to investment advisers that depend on overall affiliate 

performance may influence investment adviser’s recommendations. For these and other 

reasons, we recommend that the regulation apply fee-leveling requirements not only to 

individual fiduciary advisers, but also to their affiliates. 

2. Independent investment experts should be subject to limited-purpose fiduciary status. 

Section 408(g) requires that an independent investment expert must certify that a computer 

model investment arrangement satisfies the statutory criteria for such model. The statute 

vests in the Secretary of Labor the authority to establish requirements for an independent 

expert. 

We believe it essential to the integrity of the certification process that the independent 

investment expert be a fiduciary for the limited purpose of determining a computer model’s 

compliance with the statute. Thus, we would urge that the regulations require that an 

independent investment expert accept limited fiduciary status before certifying a computer 

model. 

3. A computer model should consider all investment options under a plan. Section 408(g) 

provides that a computer model is valid only if it takes into account all investment options 

offered under the plan. The proposed regulations, however, permit a computer model to omit 

from consideration employer stock, deferred annuity products, and target date and similar 

funds. 

We understand that incorporating the omitted items into a suggested computer-generated 

asset allocation raises a number of practical and theoretical issues, but we do not think it 

appropriate to ignore investment options open to participants. (It may be that a narrative 

description of how a participant should evaluate the appropriateness of target date funds or 
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annuities as an investment is the most sensible way for a computer model to consider such 

options.) In any event, this is an issue to which the Department should devote further 

thought. 

4. Historic returns on asset classes should be determined net of investment fees. The proposed 

regulations, for both fee-leveling and computer-model investment advice arrangements, 

require that advice be based at least in significant part on historic risk and returns of various 

asset classes. The regulation should clarify that “return” refers to returns net of investment 

fees associated with investments in particular classes of assets. 

5. Electronic Communication. The proposed regulations permit that the disclosures to 

participants required by Section 408(g) can be provided in electronic form, in accordance 

with Department rules. The Department’s rules for electronic communication—and 

particularly the Department’s guidance that Title I requirements are met by electronic 

communication that conforms to the IRS’s generally less protective electronic 

communication standards—are particularly inapt to communications involving fiduciary and 

investment considerations applicable to all employees, regardless of the employee’s level of 

sophistication. 

We strongly urge the Department to permit electronic communication of notice of conflicted 

investment advice only to those employees who provide advance written consent to 

electronic communication. 

6. Model Notice. We also have concerns about the regulations’ model notice, which we believe 

could be improved through the use of focus groups of participants of different background 

and educational levels. In particular, we believe that some information included in the model 

form is more pertinent than other information and that such information should be given 

greater prominence. 

7. Use of historical data in determining future expectations for investment options. We applaud 

the Department for inviting comments on computer models using past performance as a basis 

for evaluating competing investment options within an asset class. Clearly, one way to 

increase a conflicted advisor’s fees is to weight the model toward actively managed funds by 

placing undue emphasis on past performance and by manipulating the time period over 

which such performance is measured. The department should address appropriate limitations 

on these potential abuses. 

Problems with Statute 

The Pension Rights Center continues to believe that the 2006 legislation authorizing conflicted 

investment advice was an error. The legislation was based, in part, on the dubious assumption 

that conflicted investment advice (provided by the vendors of investment products to plan 

participants) is either free or at least far less expensive than independent investment advice. 

Under this view, it was more likely that participants would have access to investment advice than 

if it had to come from independent parties. 
May 5, 2010 

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The idea that conflicted investment advice is free, or at least inexpensive compared to 

independent investment advice, is questionable. Investment companies that provide conflicted 

investment advice are hardly eleemosynary institutions and are not providing the advice on a 

charitable basis. 

Although the charges for the advice may not be transparent, participants will nevertheless pay 

them, either through higher administrative fees or through the selection of higher-cost investment 

products. Moreover, plan experience with independent investment advisors under Departmental 

guidance, such as the Sun America opinion, provides strong evidence that plans and participants 

will use independent investment advisors. 

It can, however, be expected that some plan participants will be reluctant to pay independent 

investment advisers fees for services that conflicted parties provide nominally—but not in fact—

for free. The statute thus may have the perverse effect of making it harder for independent 

advisors to compete. If this is the effect, participants will be the losers. 

If you have any questions, please contact Norman Stein, Senior Policy Advisor, at 202-296-

3776. 

Respectfully submitted, 

Pension Rights Center