Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 5

among annuity providers, and accepted kickbacks from insurance carriers while
taking fees to advise plans regarding the selection of annuity contracts, DoL
concludes it could not hold the brokers accountable as fiduciaries because the
advice would not have been offered on a regular basis and would not be enough to
confer fiduciary status.

's 35-year ulatio writ atime i tment ice was
very dift - that, too, is part o need fo. update that is inated wi
r regulat ontexts in which th: eof co ice is ke

While AFSCME advocates the DB plan as the most cost-effective way for
employers to provide a retirement benefit, we are also concerned about the
retirement security of those workers in defined contribution (DC) plans. These
workers often must decide how much to contribute from their paychecks and how
to allocate those contributions among the investment options available to them in
the employer plan. Workers in a DC plan bear the investment risks and usually the
costs of the plan and its investments.

As of 2007, 60 million active workers held roughly $ 3 trillion in assets in
defined contribution plans that allowed for participant direction. To improve their
access to this market, the financial industry has for years urged EBSA to issue
guidance broadening the list of activities that would be considered “educational”
and without fiduciary risk to the provider versus “advice” and therefore a trigger to
fiduciary responsibility. Though regulatory guidance has been issued in various
forms over the years, the distinction between education and advice - and between
fiduciary and non-fiduciary - remains unclear and debated. Employers are under no
obligation to provide either.

The ways in which “advice” is delivered have become more varied and
complex, and that, too, adds to the challenge. For example, early DoL positions
suggested that asset allocation services could constitute investment advice. If
vendors become fiduciaries by virtue of the advice they provide, they not only face
potential liability - they also face strict restrictions, known as prohibited :
transactions, which prohibit fiduciaries from self-dealing, and from acting on behalf
ofa party whose interests are adverse to the interests of the plan or its participants.
Guidance from DoL in 1996 concluded that.asset allocation services would not
constitute advice, to the relief of financial services providers.

It is important to examine more carefully what asset allocation services could
be. Asset allocation is often used as a broad description meant to sweep in generic
tips on diversification among equities and bonds, or among Morningstar style boxes.
However, asset allocation also refers to products that bundle together investment
choices (maybe stock and bond funds), rebalancing services changing your overall



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 10

will be attractive for repeat business. That practice, known as “solving for X,”
deserves careful attention in unraveling the kinds of decisions or recommendations
that go into assembling an investment menu and might trigger fiduciary status.

A ur, ion regardi “sellers” tion” Lha r
comment.

It appears that Dol has tried to carve out a category of communications that
would clearly fail outside the definition of advice and fiduciary activity because it
would include an explicit label of a sales message not intended to be independent or
unbiased investment advice. AFSCME can appreciate the effort to not only broaden
fiduciary activity but help define what would not be fiduciary activity. However, we
suspect that the sellers’ exemption is not likely to work as intended.

Major providers with household names will easily continue a marketing pitch
that says, in essence, “We are experts at helping you plan for the future. Naturally
we also offer products built from the best of our in-house expertise and of course we
are proud to bring you those, too - what else would we offer you but the products
we built ourselves and know best and believe in?” It seems that would satisfy the
notice DoL has suggested, and yet it could come across more as a proud
endorsement, rather than a clear statement that “this does not constitute
investment advice, neither the company nor the individual broker or agent or
advisor is a fiduciary with an obligation to act in your best interest; therefore I have
no obligation to forego added compensation from the products I sell you and no
obligation to limit or disclose it, either.” AFSCME strongly suggests that this

exception go back to the drawing board and we would be happy to join you in trying

again to craft something more effective.
T line is this - DoL is ri tno

DoL’s proposal is a well-timed and necessary complement to the investor
protections in Dodd-Frank; they must be updated in coordinated fashion if they are
to deliver the'added protection consumers, workers and investors expect.

Clearly, in the last 35 years, much has changed -- plans have changed,
individuals’ responsibilities for making decisions about how to participate in plans
have changed, and the financial industry that serves plans and participants has ‘
changed ~ including the products, services and combinations that are made
available to employers and employees. EBSA is right to take on this issue now. The

2 Testimony Before the ERISA Advisory Council Working Group on Fiduciary
Responsibilities Update and Revenue sharing, September 20, 2007, by Michael J.
Malone of MJM401k.



Comments on Definition of the Term “Fiduciary”
April 12,2011
Page 7

keepers. DoL and SEC have said they are continuing to develop guidance that will
address target date funds - that work must continue.

If a strong case can be made for re-examining prohibited transactions, it
should be made. Legislative modifications are not unprecedented. Regulatory
modifications are well within DoL’s existing authority. In fact, DoL has pending now
a proposal to update its current procedure for granting prohibited transaction
exemptions. But avoiding fiduciary status by denying that advice is being rendered
is not acceptable.

does n fine “advice” ~ so the SEC i: ical place to -and
rdinari is wi inanci. ices industr

Typically, financial industry players commenting to DoL urge deference to
the SEC on matters of investment regulation and disclosure, limiting its own rules so
as not to require anything incompatible with SEC guidance, and conformity even
though DoL is administering a different statute with different policy goals. But in
this proceeding, industry comments are different and urge DoL to avoid using the
‘40 Act definition of advice as sufficient to define advice for ERISA purposes. Is
advice really different in the ERISA world than it is in individual investing outside a
pension plan?

SEC efforts are underway to update the definition of investment advice for
purposes of addressing the duties owed to retail investors, the obligations of
municipal advisors and the duties of swap dealers toward special entities including
ERISA and other retirement plans. ERISA’s definition should be developed in
coordination with specifics in these other contexts. DoL has taken a constructive
step in proposing that what the SEC determines to be advice for.’40 Act purposes
will constitute advice for ERISA purposes such that if other required factors are
present, the advice provider will be an ERISA fiduciary. DoL recently dedicated two
days of agency hearings to this issue and heard from a long line of Wall Street
witnesses, assuring them the consultation is taking place. That is the way regulatory
consultation should work.

EBSA’s proposed update eliminates several of the unexpected limitations and opens
the di r ical und i f what ki i consti dvice:

EBSA reports that this update is needed to more fully implement ERISA’s
ability to address abuses by those who recommend investments in exchange for
undisclosed kickbacks from investment providers, engage in bid rigging, mislead
plan trustees about the nature and risks associated with investments, fail to disclose
fees, misrepresent compensation arrangements, or give biased or incompetent
valuation opinions.



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 6

allocations from time to time, and the investor’s payment for that asset allocation
into the dollars invested. This could include a target date fund much more complex
than an illustrative pie chart on diversification, perhaps one that maps investments
from one lineup to another if participants are given the chance to make a selection
and do not respond.

It seems increasingly likely that advice is being provided - and paid for by
workers - at the same moment in time as automatic enrollment, automatic increases
of pay deferrals, and automatic changes in the investment lineup. Encouraging
retirement savings is good, and automatic payroll-based savings is the most efficient
way of gathering assets for investment managers. Workers need to share in that
efficiency and need to be sure that Wall Street’s access to automatic enrollment
practices does not lower pension safeguards regarding fees, fiduciaries, and
conflicts of interest.

Dol has granted a number of exemptions from the prohibited transaction
rules beginning almost immediately after ERISA’s passage, and mutual funds and
certain other investment vehicles are accorded special status under ERISA.
However, the following types of questions have nevertheless been raised:

* Can plan fiduciaries and service providers invest plan assets in mutual
funds to which they provide services, without violating the prohibited
transaction rules?

e Can investment advisers, banks, or other managers offer asset
allocation programs to plan clients that involve investments in the
advisers’ own funds without violating the prohibited transaction
rules?

e Can mutual funds pay 12b-1 fees, or other revenue sharing or
administrative service fees to plan fiduciaries and service providers
whose clients invest in the funds, without a violation?

The prohibited transaction exemptions are important to Wall Street -- unlike
SEC rules, disclosure wil] not cure a conflict of interest under ERISA. Certain kinds
of fee leveling or offsetting of compensation received against other fees may suffice.
But most vendors would prefer to avoid fiduciary status and to avoid triggering
these restrictions altogether.

One component in particular that should get close attention from Dol is
compensation for “embedded advice,” paid for by 12b-1 or “trail fees,” often
described as part of a target date or other asset allocation option. What should plan
sponsors know in order to prudently evaluate these investment options on which an
exceptional degree of reliance is placed? Sellers insist to the SEC that these fees
compensate for the time brokers must allot to advising clients, while at the same
time insisting to DoL that this money is not for advice but for compensating record



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 9

with retirement benefits at their eligibility to retire. It is creative to suggest that
plan protections should end at the point of figuring out what to do with the plans’
“benefit.” Coordinated definitions by Dol and SEC should put an end to this effort to
avoid fiduciary duty just when it is needed most.

Retirement Platforms require a closer Jook - one that goes beyond their role in
rowing i nt options i heir conce’ i f market power

Another offshoot of the asset allocation issue is the use of retirement
“platforms” to narrow available investment options that might be used to set up
individual employers’ plans. This may consist of an insurer’s wrap product or an
“architecture” set up by a fund company, wirehouse or brokerage. Serious questions

, have been documented publicly regarding the use of these platforms as gatekeepers

to plan purchasers who may have outsize economic ability to control the price of
access, to shape the “shelf space” for investment products, and to squeeze the
margins of competing investment products and distributors who need access to
broader distribution networks. EBSA invited comment on how platforms should be
treated under its proposed fiduciary definition; several analyses made public by
Edward Seidle, former SEC official, now with Benchmark Financial Services, Inc., are
illuminating on this issue and we urge EBSA’s attention to the interplay they reveal.

Several industry groups have suggested that no serious conflict of interest is
presented by investment options that provide different levels of revenue sharing to
the brokers who provide “education and guidance” to plan participants. They
suggest that variations in broker compensation generated by allocations to
investment options with different embedded revenue sharing are not a real
incentive to distort advice offered. But that approach is not the right way to see how
conflicts can be embedded and how participants’ investment choices and risks and
costs are shaped by those incentives.

A better illustration is provided in a 2007 submission to DoL’s ERISA
Advisory Council by a registered investment adviser and consultant. This
submission shows that it is not the person-by-person difference in broker
compensation that reveals the troubling conflict of interest. Instead, it is the way in
which investment menus are assembled in order to ensure that the investment
expenses paid by participants generate sufficient revenue sharing payments from
the investment providers to the financial advisor and the plan sponsor. As a result,
no billable fees will be assessed, the “plan” will appear to be “free,” and the seller

1 “Secrets of the 401k Industry: How Employers and Mutual Fund Advisers
prospered as Workers’ Dreams of Retirement Security Evaporated”, “Capping’ 401k
Revenue Sharing: Recordkeepers Block Rebates to Participants” and “The Siedle
Guide to the Securities Industry”, both by Edward Siedle.



AFSCME.

We Make America Happen

Gerald W. McEntoe
President

Lee A. Saunders
Secretary Treasurer
Vice Presidents

* Ken Allen
Portland, OR

Henry L Bayer
Chicogo, th.

George Boncoraglio
‘New York, NY

‘Anthony Caso
Boston, MA

Greg Devereux
‘Olympia, WA

Danny Donohue
Albany, NY

David R.Fillman
Horrisburg, PA

Michael Fox
Hrrisburg, PA

Albert Garrett
Detroit,

Raglan George Jr.
New York,

Sherryl Gordon
Trenton, NI

Lakesha Harrison
okland, CA

Danny |-Homan
‘Des Moines, 1A

Salvatore Luciano
‘New Briton, CT

John A. Lyall
Worthington, OH

Roberta Lynch
- Chicago, IL

Glenard S. Middleton Sr.
Baltimore, MD

Gary Mitchell
‘Madison, WI

Doug Moore
Son Diego, CA

Henry Nicholas
Philadelphia, PA

Eddie L.Parks
Westervile, OH

Randy Perreira
Honolui, Hi

George E.Popyack
‘Oakland, CA

Greg Powell
‘Austin,TX

Laura Reyes,
Son Diego, CA

Eddie Rodriguez
NewYork, NY

Lawrence A. Rohrig
tnsing, Ml

Joseph P Rugola
‘Columbus, OH

Kathy J Sackman
Pomona, CA

Eliot Seide
South St Paul, MN

Mary Sullivan
‘Albany, NY

Braulio Torres
‘Son Juan, PR

David Warrick
Indianapolis, IN

Jeanette D. Wynn
Tallahassee, Fl.

i I
oe

April 12, 2011

Office of Regulations and Interpretations
Employee Benefits Security Administration
Room N-5655

U.S. Department of Labor

200 Constitution Avenue, N.W.
Washington, D.C. 20210

Re: Public Hearing on Definition of Fiduciary
Dear Sir or Madam:

The American Federation of State, County and Municipal Employees
(“AFSCME”) is the largest union in the AFL-CIO representing 1.6 million state
and local government, health care and child care workers. AFSCME members
participate in over 150 public pension systems whose assets total over $1
trillion. In addition, the AFSCME Employees Pension Plan is a long-term
shareholder governed by the Employee Retirement Income Security Act
(“ERISA”) that manages $850 million in assets for its participants, who are staff
members of AFSCME and its affiliates.

AFSCME is pleased to have this opportunity to comment on the
proposed definition of “fiduciary” by the Employee Benefits Security
Administration (“EBSA”) of the Department of Labor (“DoL”). We applaud the
effort to update this 35-year old rule. We urge the Dol to adopt a definition
that reflects the evolution of investment products, sales and fee structures, and
retirement plans since the enactment of ERISA.

AFSCME advocates retirement security for all Americans, and there are
conditions which need to be specifically addressed in this rulemaking to
ensure that plan participants are protected. We encourage EBSA to coordinate
with the SEC and ensure that fiduciary duty includes the moment when
retirees receive distributions. The investment platforms used to narrow
selections for plans and participants also need special treatment. Special
caution and skepticism are warranted regarding any “sellers’ exception” that
attempts to differentiate the sales process from the provision of investment
advice.

American Federation of State, County and Municipal Employees, AFL-CIO
TEL (202) 429-1000 FAX (202) 429-1293 TDD (202) 659-0446 ‘WEB wwwafscme.org 1625 L Street, NW, Washington, DC 20036-5687



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 11

financial sector is facing a wide variety of proposals to improve outdated regulatory
tools. None-will substitute for this - none should be allowed to delay or dilute this
protection.

We appreciate the opportunity to express our views on this matter. Should
you have questions regarding our comments, please contact Lisa Lindsley at (202)
429-1275.

Sincerely,

fT A WAC.

GERALD W. McENTEE
International President



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 8 .

The proposed rule will better address these risks to pension plans by, among

other things: .

* specifically including the provision of appraisals and fairness opinions
in the investment-related advice and recommendations that trigger
fiduciary duty;

e specifically including advice and recommendations as to the
management of securities or other property, including for example
advice and recommendations regarding the exercise of rights attached
to stock ownership, such as voting proxies;

¢ deleting the requirement that only advice provided on a regular basis
triggers fiduciary duty; and

e deleting the condition that fiduciary status is only triggered with a
mutual understanding that advice will form the primary basis of
decisions, since the relative importance of the individual advisor’s
input does not control whether it is in fact advice or subject to a
fiduciary obligation.

EBSA notes that trustees often seek out the assistance of other kinds of
particular expertise. Pension consultants and advisors are able to shape their roles
to escape falling under the fiduciary obligations that do cover those seeking their
assistance, and so avoid triggering a duty to disclose their compensation or conflicts
of interest. Reversing the unnecessary limits on the scope of ERISA’s fiduciary duty
for advice-givers will help to address what right now is a “buyer beware” situation
not in keeping with the high fiduciary standard ERISA otherwise provides.

EBSA also modified the test to make more explicit its long-standing position
that fiduciary status may result from the provision of advice, not only to a plan
fiduciary, but also to a plan participant or beneficiary.

etin ol. Distributi hould do ections -
t in repr alifeti “retireme! ings at a ve rable poi

EBSA also invited comment as to whether it should reconsider its 2005
conclusion that advice rules would not include recommendations related to taking a
distribution from the plan at retirement.

EBSA is right to seize this moment - while it is considering ERISA advice and
while the SEC is considering retail investor advice - to revisit its 2005 guidance
suggesting that advice about taking a plan distribution was not advice under ERISA.
Advice about plan accumulations should not change legal status when it becomes
advice at the point of converting an account balance to a “benefit” or to another
investment vehicle. The biggest investment most people will make is what to do



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 4

Public and private sector plans, employers and employees, are now faced
with deciphering new and constantly evolving investment options, risks and costs,
and in need of the protection of rules that recognize the growing complexity behind
the products and arrangements presented to them. Allowing misimpressions
around ERISA’s reach - or a dated and inappropriately limited assertion of ERISA’s
reach ~ to cast undue influence on the shape of investor protections outside ERISA
would be a shameful distortion of the purposes of Dodd-Frank.

L’s current definiti f advice tl ives rise to fiduci is outdated and far
too narrow - written at a time wl ensions w: ifferent than they are
today. _

As currently and narrowly interpreted, ERISA fiduciary responsibility for
rendering investment advice does not arise unless each element in a five-part test is

satisfied:

1. Advice is rendered as to the value of securities or other property, or
recommendations are made as to the advisability of investing
in, purchasing or selling securities or other property,

2. On a regular basis :

3. Pursuant to a mutual agreement, arrangement or understanding, with
the plan or a plan fiduciary, that

4. The advice will serve as a primary basis for investment decisions with
respect to plan assets, and that

5. The advice will be individualized based on the particular needs of the
plan.

Sponsors and trustees of DB plans often desire expert assistance in
evaluating the investment scenarios that will enable them to meet the plans’ long-
term promises. This narrow definition means that much of the guidance they seek
will be structured to fall outside a fiduciary’s duty in ways that plans large and small
may find hard to discern.

In its proposed rule updating this definition, EBSA appropriately concluded
that plan officials and participants are poorly served by several of these conditions |
that limit the scope of ERISA’s protections. Many plan officials and participants |
would be surprised by the way the current interpretation artfully limits the scope of
ERISA’s fiduciary definition. For example, the EBSA proposal notes that a plan’s
purchase of annuity contracts to meet benefit obligations when the plan is being
terminated is a major transaction involving a recommendation that participants will
be counting on for years. Yet even if the insurance brokerage made
recommendations that were undoubtedly the primary basis for the plan’s choice



Comments on Definition of the Term “Fiduciary”
April 12, 2011
Page 3

This year, in approaching the numerous new rules that real financial reform
requires, many representatives of the financial services industry make the following
suggestions: .

“DoL, withdraw your proposal to define fiduciary duty toward pension plans
and participants, start over, and refrain from finalizing action until at least two
years after SEC action is completed.” SEC action has been authorized but stymied
for years.

“SEC; do not do anything to implement a fiduciary duty toward individual
investors until you develop more proof that investors need help and more proof that
small business will not be hurt.”

“SEC and CFTC, do not require disclosure of pricing or risks or other
information from swaps dealers who are advising investors, because it may conflict
with the Dol’s interpretation of the kind of guidance that triggers a fiduciary duty to
pension plans and participants; it may, in fact, trigger enhanced disclosure
obligations regarding costs and conflicts of interest and inhibit our ability to cross-
sell products and services.”

“SEC, do not move forward on your latest effort to protect investors by
reforming the use of sales and marketing fees investors pay under Rule 12b-1.
Instead, since there are so many new Dodd-Frank rules to talk about, put that 12b-1
issue on the back burner one more time.”

The combined messages sound less like “coordination” and more like the
same old regulatory arbitrage that has a lot to do with where the economy is today.
There is a big difference between genuine consultation and coordination - the kind
that avoids gaps in regulation and dangerous risk ~ and a call for coordination that
simply pushes the goalposts further down the field, and further from each other,
leaving a regulatory overlay that looks like Swiss cheese. Real coordination must
take place. But just dodging and delaying - that is an old tactic that regulators and
Congress must see through.

DoL’s interpretation of “investment advice” is an important guide — not only for the
ensi irectl IS foro not ri

Rendering investment advice is not the only way in which one becomes a
fiduciary to an ERISA plan - but it is certainly one of the most important. When
ERISA was enacted in 1974, most private sector workers who were offered a
retirement plan on the job were offered a defined benefit (DB) plan in which the
employer promised workers a certain benefit at retirement and the employer made
investment decisions in order to accumulate assets with which to satisfy those
promises. Since that time, the DB landscape has changed dramatically. Much has
been made of the challenges involved in “guaranteeing” a defined benefit - less
attention has been paid to the Wall Street practices that make growing plan assets
so difficult. DB plans have struggled with the effects of hard-to-penetrate conflicts
of interest, hidden fees; opaque derivatives recommendations, and more. And
pension guidance that fits what we have seen through 2011 is needed:



Comments on Definition of the Term “Biduciary”
April 12, 2011
Page 2

The adoption of an updated definition should not be delayed. However,
consultation with other regulators will ensure that financial products, processes and
fees do not fall outside the scope of investor protections. Financial services firms
may seek to shield cross-selling practices, revenue sharing arrangements, and fee
comparisons from the obligations of transparency that could accompany fiduciary
duty. Business lines such as target date funds, default investment guidance, lifetime
income products, sales and marketing 12b-1 fees, revenue sharing, and even
derivatives involve complex relationships and regulatory structures. It is essential
that EBSA coordinate with other regulators so that investors are protected.

During consideration of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”), AFSCME strongly supported the inclusion of
provisions establishing the strongest possible market reforms, oversight and
transparency for the “shadow markets” and other major provisions addressing
corporate governance and investor protection. Investor protections important to
AFSCME members include new market reforms addressing the sale of derivatives
products and strategies, duties owed by those offering investment advice to
investors, greater transparency for the advisors to hedge funds and private equity
investments, and improved safeguards for municipal markets.

In each of these rulemaking contexts, vendors of various investment
products and services have raised concerns that new obligations of disclosure or
other investor protection remedies are not workable. Perhaps unsurprisingly, many
Wall Street firms and their different lobbying entities argue that new investor
protections under Dodd Frank may also trigger obligations under federal pension
law. Banks, broker-dealers, insurers and mutual funds particularly point to the
proposal by EBSA which would modernize its interpretation of the facts and
circumstances that give rise to a fiduciary duty toward pension plans, the employers
who sponsor plans, and the workers who contribute to plans. Financial firms call
for a delay in the process of updating the definition of fiduciary duty and for
“coordination” with other regulators who are implementing important investor
protections pursuant to Dodd-Frank. Coordination is needed — but it must be the
kind of coordination that closes gaps, not the kind that creates them.

’S SU, i it DoL c i with ncies is ndatio
im e! i to lin

Upon review of regulatory comment letters, a pattern emerges. Firms with
revenue at risk will often say, for example, “Don’t do A until you do B”; then “Don’t
do B until you do C”; and finally, “C can’t be done.”