Office of Regulations and Interpretations
Employee Benefits Security Administration
January 14, 2011

Page 5 of 5

descriptions allow for overlap among QDIA definitions. For example, it could be argued
that some managed account services fall not only within the description of a managed-
account type QDIA in 29 CFR § 2550.404c-5(e)(4)(iii), but also within the terms of 29
CFR § 2550.404c-5(e)(4)(i), as described above. Accordingly, we ask that the
Department make clear that investment products, funds, or services described in 29 CFR
§ 2550.404c-5(e)(4)(ii) or (iii) are excluded from the Proposal’s specific disclosure
requirements for Target Date Funds.

* * *
Financial Engines appreciates the opportunity to comment on the proposed

regulation. We welcome the opportunity to work with the Department and to provide any
further assistance that may be required. Please contact us should you have any questions.

Sincerely,
/s/ J ) CO
Anne S. Tuttle

Executive Vice President and General Counsel
Financial Engines, Inc.

1804 Embarcadero Road Palo Alto, CA 94303 Telephone: (650) 565-4900
Fax: (650) 565-4905


Office of Regulations and Interpretations
Employee Benefits Security Administration
January 14, 2011

Page 4 of 5

funds or portfolios would not only impose costs and operational burdens on managed
account service providers, but would make the disclosures essentially meaningless and
confusing to Plan participants.

Clarification Regarding Scope of Target Date Fund Disclosures

We ask that the Department make clear that the Proposal’s specific disclosure
requirements for Target Date Funds are not intended to apply to any investment product,
fund, or service described in sections (e)(4)(ii) or (iii) of the QDIA Regulation.

The Proposal specifies additional disclosures Target Date Funds would be
required to make under the Participant Disclosure Regulation”? and the QDIA Regulation.
Under the proposed amendments to the Participant Disclosure Regulation, a covered
Target Date Fund is a “designated investment alternative that is described in 29 CFR
2550.404c-5(e)(4)(1) [sic].” 4 Under the proposed amendments to the QDIA Regulation,
a covered Target Date Fund is an investment fund product or model portfolio intended to
satisfy section (e)(4)(i) of the QDIA Regulation.’° In either case, a covered Target Date
Fund would be defined as:

An investment fund product or model portfolio that applies generally
accepted investment theories, is diversified so as to minimize the risk of
large losses and that is designed to provide varying degrees of long-term
appreciation and capital preservation through a mix of equity and fixed
income exposures based on the participant’s age, target retirement date
(such as normal retirement age under the plan) or life expectancy. Such
products and portfolios change their asset allocations and associated risk
levels over time with the objective of becoming more conservative (i.e.,
decreasing risk of losses) with increasing age."

We are concerned that the above definition is broad enough to encompass
investment alternatives that the Department does not intend to include in this portion of
the Proposal. In the QDIA Regulation, the descriptions of potential QDIAs are
purposefully broad in order to allow “sufficient[] flexibl[ity] to accommodate future
innovations and developments in retirement products.”!” However, these broad

'. 29 CER § 2550.404a-5.

14 See proposed 29 CFR § 2550.404a-5(i)(4). We believe, and the following discussion assumes, the
correct citation is 29 CFR § 2550.404c-5(e)(4)(i).

'S See proposed 29 CFR § 2550.404c-5(d)(vi).
"629 CFR §2550.404c-5(e)(4)(i).
1” Preamble to QDIA Regulation, 72 Fed. Reg. at 60460.

1804 Embarcadero Road Palo Alto, CA 94303 Telephone: (650) 565-4900
Fax: (650) 565-4905


financial
engines:

January 14, 2011

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

Attn: Target Date Amendments

Ladies and Gentlemen:

Financial Engines, Inc. (“Financial Engines”) appreciates the opportunity to
provide comments on the U.S. Department of Labor’s (“Department”) Proposed
Regulation on “Target Date Disclosure,” 75 Fed. Reg. 73987 (Nov. 30, 2010)
(“Proposal”).

Financial Engines is a leading independent investment advisor committed to
making high-quality independent investment advice available to everyone, regardless of
wealth or investment experience. We work with many of the nation’s largest employers
and retirement plan providers. As a result, over one million people have used Financial
Engines’ “Online Advice” service or have their retirement accounts professionally
managed by Financial Engines. Financial Engines offers a managed account program
(designed to qualify as a “qualified default investment alternative” or “QDIA”) under
which Financial Engines allocates individual participant accounts among the investment
alternatives otherwise available under a plan to provide an asset mix that, among other
factors, takes into account an individual’s age or target retirement date.

Financial Engines supports the Department’s initiatives on fee transparency and
applauds the Department’s efforts in ensuring every participant in participant-directed
retirement plans (“Plans”) receives important information regarding his or her investment
options.

However, we have two concerns regarding the Proposal, which we discuss in
more detail below. First, we are concerned that the proposed amendments applicable to
all QDIAs, as defined in the Department’s regulation on QDIAs (“QDIA Regulation”),’
were developed with a view to mutual funds and other commingled investment vehicles
and do not take into account the characteristics of investment management services such

"29 CER § 2550.404c-5.


Office of Regulations and Interpretations
Employee Benefits Security Administration
January 14, 2011

Page 2 of 5

as managed accounts. Second, we ask that the Department clarify the scope of the
Proposal in connection with the proposed disclosure requirements for target date or
similar funds (“Target Date Funds”).

Changes to QDIA Regulation are not Tailored to Managed Account Services

Although the Proposal relates principally to “Target Date Disclosure,” the
Proposal also adds a number of disclosure requirements to the QDIA Regulation that
would be applicable to all QDIAs, not just Target Date Funds.” These proposed
amendments focus on the types of disclosures and information that mutual funds
registered under the Investment Company Act of 1940 (“1940 Act”) typically provide to
investors and are not generally appropriate for investment management services such as
managed accounts.

The QDIA Regulation lists three types of potential long-term QDIAs—Target
Date Funds,’ balanced funds,* and managed accounts.° While the first two types of
QDIAs are described as “investment fund product[s] or model portfolio[s],” the managed
account-type QDIAs is described as an “investment management service,” not a fund or
portfolio. As described above, investment management services such as those we offer
allocate individual participant accounts among existing Plan investment alternatives to
provide an asset mix that, among other factors, takes into account an individual’s age or
target retirement date. In the preamble to the QDIA Regulation, the Department
acknowledges the distinction between investment management services and other types
of QDIAs, stating that it “included investment management services within the scope of
fiduciary relief in order to avoid any ambiguity concerning the scope of relief available to
plan fiduciaries in the context of participant directed individual account plans.”” The
disclosure requirements that the Proposal would add to the QDIA Regulation for all
QDIAs may be reasonable and appropriate for investment fund products or model
portfolios, particularly 1940 Act-registered mutual funds. However, many of these
disclosure requirements are not appropriate for QDIAs that are investment management
services such as managed accounts.

2 See proposed 29 CFR § 2550.404c-5(d)(3)(i)-(v) and the requirement in proposed 29 CFR § 2550.404c-
5(c)(4) to provide the material set forth in 29 CFR § 2550.404a-5(d)(3) and (4).

3 Similar issues to those discussed below may also arise in connection with the Department’s regulation on
disclosure in participant-directed individual account plans, see 29 CFR § 2550.404a-5.

429 CER § 2550.404c-5(e)(4)(i).

5 29 CFR § 2550.404c-5(e)(4)(ii).

6 29 CFR § 2550.404c-5(e)(4)(iii).

7 Preamble to the QDIA Regulation, 72 Fed. Reg. 60452, 60462 n.8 (Oct. 24, 2007)

1804 Embarcadero Road Palo Alto, CA 94303 Telephone: (650) 565-4900
Fax: (650) 565-4905


Office of Regulations and Interpretations
Employee Benefits Security Administration
January 14, 2011

Page 3 of 5

For example, the Proposal would require disclosure of, among other items, a
description and amount of sales loads or charges, redemption fees, surrender charges,
exchange fees, and the annual operating expenses (e.g., the expense ratio) of the QDIA.*
Because a managed account is not a fund or portfolio, but instead a service provided to
Plan participants, these shareholder-type fees are not pertinent in the context of a
managed account.

In addition, the Proposal would require disclosure of (i) copies of the QDIA’s
prospectus (or any short-form or summary prospectus whose form has been approved by
the SEC or any similar documents); (ii) copies of financial statements or reports, such as
statements of additional information or shareholder reports, and any other similar
materials related to the QDIA, if such materials are provided to the Plan; (iii) a statement
of the value of a share or unit of an investment in the QDIA, and the date of such
valuation; (iv) a list of the assets comprising the portfolio of the QDIA and the value of
each such asset (or the proportion of the QDIA which it comprises). Again, these are
disclosures which are appropriate for QDIAs that are funds or portfolios, but are not
appropriate for managed account services as QDIA because they are either not pertinent
or not appropriate to provide at the Plan level (e.g., for managed account services, a list
of account assets may be appropriate to provide at the participant level but has less
relevance and meaning at the Plan level).

Because a managed account service allocates assets among investment
alternatives already existing under the Plan, Plan participants would already receive fee
disclosures on underlying investment alternatives as required by the Department’s
regulation on disclosure in participant-directed individual account plans (“Participant
Disclosure Regulation”).'° Furthermore, the existing QDIA Regulation already requires
disclosure of fees and expenses attendant to a QDIA."! These disclosures should be
sufficient to fully inform a Plan participant regarding the fees associated with a managed
account service.

Financial Engines strongly encourages the Department to exclude QDIAs that are
“investment management service[s],” within the meaning of the QDIA Regulation,’ such
as managed accounts, from coverage under this portion of the Proposal. Forcing
disclosures for investment management services to fit within a structure intended for

8 See proposed 29 CFR § 2550.404c-5(d)(3)(v).

° See proposed 29 CFR § 2550.404c-5(c)(4), requiring a QDIA to provide the material set forth in 29 CFR
§ 2550.404a-5(d)(4).

129 CER § 2550.404a-5.
"29 CER § 2550.404c-5(4)(3).
2 29 CER § 2550.404c-5(e)(4)(iii).

1804 Embarcadero Road Palo Alto, CA 94303 Telephone: (650) 565-4900
Fax: (650) 565-4905