Filed Electronically 

 Via e-ORI@dol.gov 

May 5, 2010 

Robert J. Doyle, Director 

Fred J. Wong, Senior Pension Law Specialist 

Office of Regulation and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, D.C. 20210 

Attn: 2010 Investment Advice Proposed Regulation 

 

 Investment Advice – Participants and Beneficiaries 

 75 Fed. Reg. 9360 (March 2, 2010) 

Dear Messrs. Doyle and Wong: 

AARP appreciates the opportunity to comment on the Department of 

Labor’s (DOL or Department) proposed regulation concerning investment 

advice provided by fiduciaries to participants1

 in participant-directed 

individual accounts. 

AARP submits that this proposed regulation concerning the core issues 

surrounding investment advice better reflects the intent of Congress and 

the carefully crafted compromise between the House and the Senate in the 

Pension Protection Act. E.g., Recorded Vote 328, 109th Congress, 

 

1 AARP will use the term participants throughout our comments, but this term includes 

beneficiaries. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 2 of 15 

November 16, 2005.2 We strongly support the Department’s withdrawal of 

the Class Exemption as it did not provide the necessary substantive 

protections for, and was not in the best interests of, participants. In 

contrast, the proposed regulation does a much better job of balancing 

participant protections with the narrow Congressional exemptions from the 

fiduciary duty rules. 

The proposed regulation still raises some difficult (and new) issues, and 

AARP believes that the Department’s proposed resolution of these matters 

could be significantly improved. 

• Fee Leveling. Although AARP supports the rule that an investment 

adviser or its firm cannot be compensated directly or indirectly based 

on the investment choices made by the participant, the prohibition 

does not go far enough. We submit that this prohibition should be 

extended to a fiduciary adviser’s affiliates. 

• Computer modeling. AARP submits that ignoring historical returns 

will actually have a negative effect on participants’ returns inasmuch 

as historical returns appear to be valid predictors of poor 

performance. Moreover, the Department seems to be expressing a 

preference for a particular type of investment strategy which is 

unprecedented and inconsistent with past DOL positions. There are 

also potential problems with index funds if the underlying 

investments are not properly chosen. 

• Generally Accepted Investment Theories. The proposed regulation 

should confirm that a generally accepted investment theory includes 

diversification of investments in terms of both asset classes and 

single stocks. 

• Exclusion of Investment Options from Computer Models. The 

proposed regulation permits computer models to exclude advice on 

employer stock, annuities, and target date and lifestyle funds. First, 

 

2 Congressional representatives, who struck the compromise, had informed the 

Department that provisions in the withdrawn regulation and Class Exemption did not 

reflect this agreement. See October 6, 2008, Letter to Assistant Secretary Brad 

Campbell from Sen. Jeff Bingaman, Sen. Edward M. Kennedy and Sen. Charles E. 

Grassley, and October 8, 2008, Letter to Assistant Secretary Brad Campbell from Rep. 

George Miller and Rep. Rob Andrews. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 3 of 15 

in one of the few areas in which economists and investment advisers 

actually agree – that excessive investment in a single stock is 

extremely risky because of lack of diversification – the proposed 

regulation refuses to permit investment advice concerning employer 

stock and diversification. This is inconsistent with most if not all 

generally accepted investment theories, and turns a blind eye to 

vastly increased risk levels for individuals. Second, the fact that 

annuities, if offered under the plan, are excluded from investment 

advice seems counter to the Department’s recently expressed 

concern that individuals may not have sufficient monies to last 

through their retirement. Third, these exemptions are not consistent 

with the statutory language that computer models “take into account 

all investment options under the plan.” Fourth, a competent 

recommendation on investments cannot be made without the 

recommendation taking into account all investment options, 

including assets the participant may already have invested in one or 

more of the excluded options. 

It is unclear from the regulation whether fiduciary advisers who do 

not use a computer model may discuss these options with 

participants. The regulation should be clarified that this is not only 

permissible, but required. 

AARP’s Interest 

AARP is the largest nonprofit, nonpartisan organization representing the 

interests of Americans age 50 and older and their families. Nearly half of 

our members are employed, full or part-time, with many of those 

employers providing retirement plans. A major priority for AARP is to assist 

Americans in accumulating and effectively managing adequate retirement 

assets to supplement Social Security. The shift away from defined 

pension plans to defined contribution plans has placed significant 

responsibility on individuals to make appropriate investment choices so 

that they have adequate income to fund their retirement years. 

In order to help individuals make appropriate investment decisions, AARP 

shares the goal of increasing access to investment advice for individual 

account plan participants. To that end, we have consistently asserted that 

such advice must be subject to the Employee Retirement Income Security 

Act’s (ERISA) fiduciary rules, based on sound investment principles and 
May 5, 2010 

AARP Comments: Investment Advice 

Page 4 of 15 

protected from conflicts of interest. The recent financial turmoil and 

scandals underscore the imperative that such advice is independent and 

non-conflicted, and the standards governing industry practices involved in 

rendering investment advice are fair, clear and easy to understand. 

AARP Survey on Investment Decisions 

In a 2008 AARP survey, respondents answered questions concerning what 

factors they thought were important when making decisions about 

investments in their 401(k) plans. Collette Thayer, Comparison of 401(k) 

Participants’ Understanding of Model Fee Disclosure Forms Developed by 

the Department of Labor and AARP (Sept. 2008), available at

http://www.aarp.org/research/surveys/stats/surveys/public/articles/fee_disc

losure.html. Respondents cited the risk of the investments (94%); the 

reputation of the financial services that managed the investments (93%); 

the past performance of investments (92%); diversification of investments 

(92%) and the amount of fees (85%) as important considerations when 

making investment decisions in their 401(k) plans. Id. at 6-7. Significantly, 

the types of information that respondents thought would be very helpful in 

making decisions concerned the amount of fees deducted, information 

about past performance and performance and fee benchmarks. Id. at 7-8. 

Individuals may be unwilling to use and/or trust investment advice that 

does not take into account the information they believe is important to 

make decisions concerning investment options. 

The Pension Protection Act 

The financial industry’s protracted campaign to legitimize the furnishing of 

direct investment advice to 401(k) participants resulted in hearings and 

extensive debate in Congress and public policy circles, spanning three 

separate Congresses. See Doug Halonen, Delay on Advice Rule May 

Lead to Revamp, PENSIONS & INVESTMENT (January 26, 2009). Against 

this background, the Pension Protection Act (PPA) created a narrow 

exemption from ERISA’s prohibited transaction rules to permit plan 

fiduciaries to structure investment advice arrangements where the advice 

provider is affiliated with the provider of the underlying investment options. 

Accordingly, Congress mandated certain restrictions and participant 

protections as a condition to permitting providers to give conflicted advice 

to participants. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 5 of 15 

The statutory exemption to ERISA’s prohibited transaction rules permits 

one of two models. First, a compensation model may meet the exemption 

if the compensation received by the provider of advice does not vary based 

on the investment option selected. Second, a computer model may meet 

the exemption if the model uses generally accepted investment theories 

and is certified by an independent expert. The PPA offers plan sponsors 

protection from fiduciary liability only for the advice given under these 

specific models. The PPA confirms that the plan sponsor has a fiduciary 

duty to prudently select and monitor the entity providing the advice. 

Although the PPA tracked most of the language set forth in the Housepassed bill, H.R. 2830, see H.R. 2830, 109th Cong., 1st Sess. (June 9, 

2005), 2005 CONG US HR 2830, the Act contains three significant 

modifications relevant here. One modification was the change in the 

provisions regarding compensation of fiduciary advisers. Both H.R. 2830 

and the PPA state that “compensation received by the fiduciary adviser 

and affiliates thereof in connection with the sale, acquisition, or holding of 

the security or other property [must be] reasonable.” However, the PPA 

further limits compensation received specifically by the fiduciary adviser. 

Discussing criteria for meeting requirements of an “eligible investment 

advice arrangement,” section 408(g)(2) of ERISA states that “fees 

(including any commission or other compensation) received by the 

fiduciary adviser for investment advice or with respect to the sale, holding, 

or acquisition of any security or other property for purposes of investment 

of plan assets do not vary depending on the basis of any investment option 

selected.” 29 U.S.C. § 1108(g)(2) (emphasis added). A second critical 

distinction between H.R. 2830 and the PPA concerns the timing of the 

required disclosures. H.R. 2830 called for disclosure, via written 

notification, to be made to the recipient of the investment advice, “at a time 

reasonably contemporaneous with the initial provision of the advice.” The 

PPA, however, requires that disclosure by a fiduciary adviser, also via 

written notification, be provided to a participant or a beneficiary “before the 

initial provision of the investment advice.” 29 U.S.C. § 1108(g)(6) 

(emphasis added). Finally, although H.R. 2830 did not address the issue 

of investment advice procured using a computer model, the PPA permits 

the use of computer models to meet the definition of an “eligible 

investment advice arrangement” as long as the specific requirements are 

met. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 6 of 15 

Withdrawal of Class Exemption

AARP fully supports the withdrawal of the published Class Exemption. As 

we have previously stated in our comments, AARP believed that the Class 

Exemption did not provide the necessary substantive protections for, and 

were not in the interests of, participants. See ERISA §§ 408(a)(2) & (3), 29 

U.S.C. §§ 1108(a)(2) & (3). 

Level Fee Arrangements 

The PPA limits compensation received by the fiduciary adviser, which also 

includes affiliates. Section 408(g)(2) of ERISA, discussing criteria for 

meeting requirements of an “eligible investment advice arrangement,” 

provides that “fees (including any commission or other compensation) 

received by the fiduciary adviser for investment advice or with respect to 

the sale, holding, or acquisition of any security or other property for 

purposes of investment of plan assets do not vary depending on the basis 

of any investment option selected.” 29 U.S.C. § 1108(g)(2) (emphasis 

added). 

AARP supports the regulation’s prohibition that an investment adviser or its 

firm cannot be compensated directly or indirectly based on the investment 

choices made by the participant. We submit that this prohibition should be 

extended to a fiduciary adviser’s affiliates. Although we appreciate that the 

proposed regulation attempts to put some boundaries around this 

relationship by prohibiting the affiliate from providing any financial or 

economic incentive to that fiduciary adviser, AARP submits that the 

potential for conflicts of interest still exists and this could be harmful to 

participants. 

We also support this provision’s application to target date and lifestyle 

funds which might be constructed with proprietary funds benefitting their 

firms. This is a continuing problem. See generally Figas v. Wells Fargo & 

Co., D. Minn., No. 08-4546 (alleging breaches of fiduciary duty when Wells 

Fargo invested 401(k) plan retirement savings in mutual funds managed by 

Wells Fargo). 

We support the intent that advisers would be prevented from steering 

participants toward higher-fee investments or financial products from which 

they or their companies may receive commission income. We do question, 
May 5, 2010 

AARP Comments: Investment Advice 

Page 7 of 15 

however, how enforcement will be performed, and submit that auditing 

may not be sufficient. Effective enforcement is particularly important so 

that participant losses are kept to a minimum, given limited access to the 

courts, Conkright v. Frommert, 2010 U.S. Lexis 3479, as well as limited 

remedies. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 

(2002). 

Computer Model 

 General 

Congress saw the computer model as an objective source verified by 

independent analysis that could be easily evaluated by regulators. 

Generally accepted investment theories include modern portfolio theory, 

which strongly supports diversification of investments to minimize risk. 

The proposed regulation should confirm and strongly support the premise 

that generally accepted investment theories include diversification of 

investments in terms of both asset classes and single stocks. An 

individual’s age, time horizons (e.g., life expectancy, retirement age), risk 

tolerance, current investments in designated investment options, and 

investment preferences of the participant or beneficiary including other 

assets or sources of income should be taken into consideration. 

During the hearing on target date funds, participants’ confusion over the 

timing and amount of liquidity in their accounts became apparent. In 

particular, issues surrounding the use of “glide paths” were discussed. 

There was an apparent disconnect between the understanding of 

participants (who assumed that the target date of the fund was the date 

that a majority of the account would be liquid) and the managers (who 

assumed that they would be managing the money until participants were 

significantly older than their actual ages of retirement) as to the meaning of 

“glide paths.” This issue of the liquidity of the account also occurs when 

participants use in-plan annuity options as investments. Participants may 

choose in-plan annuity options and then cash out the option at retirement 

age, thereby defeating the purpose of purchasing the in-plan annuity 

option. Liquidity and glide path issues greatly affect asset allocation and 

time horizons. The regulation does not clearly address this subject either 

in the computer models or the disclosures provided to participants. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 8 of 15 

Use of Historical Data 

ERISA provides a framework for fiduciaries to act prudently, including 

choosing investment options for the individuals in their participant directed 

accounts. ERISA does not specify the types of investments in which 

fiduciaries must invest. There are few limitations on the percentage of plan 

assets in a particular investment. Section 407(a)(2), 29 U.S.C. § 

1107(a)(2). And, most courts refuse to specify a bright line test on which 

investments are prudent and what percentage of an investment compared 

to a plan’s total portfolio meet the diversification requirement. E.g., Metzler 

v. Graham, 112 F.3d 207 (5th Cir. 1997) (63% of plan assets in 

undeveloped property did not violate diversification or prudence 

requirements); Donovan v. Mazzola, 1981 U.S. Dist. LEXIS 17411 

(N.D.Cal. 1981), aff’d, 716 F.2d 1226 (9th Cir. 1983) (a single loan 

comprising 12% of total fund portfolio violated diversification rules); Reich 

v. King, 867 F. Supp. 341 (D. Md. 1994) (53% of plan assets in real estate 

mortgages did not violate diversification or prudence requirements); 

Marshall v. Glass/Metal Ass'n & Glaziers & Glassworkers Pension Plan,

507 F. Supp. 378 (D.Haw.1980) (single loan comprising 23% of plan 

assets violated diversification rule). 

DOL clearly recognizes that the premises of the computer model will 

determine the recommendations the model generates – as with magicians, 

the “bunnies in the hat” will predict the result. Unfortunately, economists 

are not in uniform agreement about what those premises should be. 

Significant for this discussion is that the research is mixed on whether 

active fund performance is due to skill or mere luck. Compare R. 

Kosowski, R.A. Timmerman, R. Wermers, and H. White, “Can Mutual Fund 

‘Stars' Really Pick Stocks? New Evidence from a Bootstrap Analysis”, 61 J. 

of Finance 2551, 2594 (2006) (“Our findings indicate that the performance 

of the best and worst managers is not solely due to luck, that is, it cannot 

be explained solely by sampling variability.”) with L. Barras, O. Scaillet and 

R. Wermers, False Discoveries in Mutual Fund Performance: Measuring 

Luck in Estimated Alphas, at 27 (April 2009), available at http://papers. 

ssrn.com/so13/papers.cfm?abstract_id=869748 (“Among the 2,076 funds, 

we estimate that the majority—75.4%—are zero-alpha funds. Managers of 

these funds exhibit stock picking skills just sufficient to cover their trading 

costs and other expenses (including fees)” “Further, it is quite surprising 

that the estimated proportion of skilled funds is statistically 

indistinguishable from zero (see “Skilled” column).) 

 
May 5, 2010 

AARP Comments: Investment Advice 

Page 9 of 15 

There is no question that fees are important to the overall investment 

return on account balances. There is strong evidence to suggest that 

passively managed index mutual funds outperform actively managed 

mutual funds when considering expenses and fees charged by actively 

managed funds. See Are Hidden Fees Undermining Employee Retirement 

Income Security?: Hearing Before the Committee on Education and Labor 

110th Cong. 5 (2007), available at http://edlabor.house.gov/testimony/ 

030607matthewhutchesontestimony.pdf (statement of Matthew Hutcheson, 

independent pension fiduciary) (citing INDEX FUNDS ADVISORS, INC.,

OVERVIEW OF THE 12-STEP PROGRAM FOR ACTIVE INVESTORS at 1 (2006), 

http://www.ifa.com/Book/Book_pdf/overview.pdf) (S&P 500 Index 

“consistently outperformed 90% of fund managers over the past three 

years, 97% over the past 10 years ending October 2004, and 94% over the 

past 30 years”). 

Even though some actively managed funds outperform the index after 

considering costs, past superior performance is not necessarily an 

accurate predictor of future superior performance. However, reliance on 

past performance may cause investors to select actively managed funds. 

INDEX FUNDS ADVISORS, INC, supra (“only about 12% of the top 100 of 

managers repeat their performance in the following years. . . . Therefore, it 

is not possible to consistently pick next year’s hot mutual fund manager”).

Although historical performance is not necessarily an accurate predicator 

of future superior performance of actively managed funds, research 

suggests that it is a positive predicator of future poor performance. A 

subset of actively managed funds consistently underperforms the market, 

suggesting that repeated poor past performance should be a factor used to 

disfavor certain funds. L. Barras, O. Scaillet and R. Wermers, False 

Discoveries in Mutual Fund Performance: Measuring Luck in Estimated 

Alphas, at 27 (April 2009), available at http://papers. ssrn.com/so13/ 

papers.cfm?abstract_id=869748 (“It is interesting (Panel A) that 24% of the 

population (499 funds) are truly unskilled fund managers—unable to pick 

stocks well enough to recover their trading costs and other expenses. In 

untabulated results, we find that left-tail funds, which are overwhelmingly 

comprised of unskilled (and not merely unlucky) funds, have a relatively 

long fund life— 12.7 years, on average. And, these funds generally 

perform poorly over their entire lives, making their survival puzzling. 

Perhaps, as discussed by Elton, Gruber, and Busse (2004), such funds 

exist if they are able to attract a sufficient number of unsophisticated 

investors, who are also charged higher fees (Christoffersen and Musto 
May 5, 2010 

AARP Comments: Investment Advice 

Page 10 of 15 

(2002)).”). Of course, fiduciaries in performing their due diligence should 

not choose these funds as investment options for their plans.3

Unfortunately, index funds may not be the total answer. Index funds may 

also underperform relative to the market as a whole and even as to their 

particular asset class, depending on their asset mix and most importantly 

the stocks actually held in the index fund. So-called index funds do not 

necessarily mirror the market. “As particular stocks rise in price and 

constitute a larger portion of an index, there is another problem for 

investors who add to their fund holdings. They are essentially buying 

greater proportions of companies that have already risen significantly and 

reducing their exposure to stocks that have declined. In other words, they 

are buying high and selling low.” Gretchen Morgenson, “Why an Index Isn't 

a Mirror of the Market,” The New York Times, April 9, 2000, § 3 (Part 2), at 

17, 32. AARP does not believe that current regulations address what can 

be called an index fund, how the underlying investments are chosen for a 

particular index fund or what is considered appropriate for a certain asset 

class. Indeed, a comparison of two mutual funds that claim to be large cap 

index funds could demonstrate significantly different holdings. 

In addition, passive investing can distort the market and continue to 

subject the investor to market levels of volatility. For example, since the 

announcement that Berkshire Hathaway would be added to the S&P 500, 

its stock price rose almost 10% -- part of this price increase was fueled by 

the automatic flow of investment dollars from index funds. Dan Burrows, 

Retail Investors, Rejoice: Berkshire Hathaway Joins S&P 500, 

DAILYFINANCE (Feb. 12, 2010), available at http://www.dailyfinance 

.com/story/investing/retail-investors-rejoice-berkshire-hathaway-joinssandp-500/19356394/. 

 

3 At least three circuit courts have held that in a section 404(c) plan a fiduciary’s duty does not 

include the selection and monitoring of investment options. See, e.g., Hecker v. Deere & Co., 

556 F.3d 575 (7th Cir. 2009); Langbecker v. Electronic Data Sys., 476 F.3d 299, 307 (5th Cir. 

2007); Jenkins v. Yaeger, 444 F.3d 916 (7th Cir. 2006); accord, In re Unisys Sav. Plan Litig., 74 

F.3d 420, 455 (3d Cir. 1996) (in dicta); contra, DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 418 n. 

3 (4th Cir. 2007). These decisions indicate that courts would permit fiduciaries to choose all 

underperforming funds as investments option without finding a violation of ERISA’s prudence 

standards. AARP has previously suggested in our comments to the Department of Labor’s 

408(b)(2) proposed regulations that the 404(c) regulation be amended to specifically state that 

the selection and monitoring of investment options are a fiduciary function. We reiterate that 

suggestion here because the implications are obvious. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 11 of 15 

To complicate this issue, the regulation permits the computer model to 

offer advice only about the investment options in the plan, with one major 

exception discussed below. If the computer model is skewed towards 

passively managed funds, but the plan does not have such funds as 

investment options, will the model be helpful to the participant? Or what if 

the plan offers only one index fund? Or is the assumption that plans 

offering investment advice will choose a variety of passively managed 

funds? 

Because the research in this area falls short of definitive, AARP suggests 

that the computer model should include overall performance over the long 

run (10+years) factoring in costs and fees. This would enable the 

computer model to ensure that those funds that have shown long term bad 

performance would be excluded while shorter term superior performance 

would not be included since it is not an accurate indicator of future 

performance. Although there are seemingly very few funds that have long 

term superior performance, to the extent they exist, the computer model 

should take these into account. If an index fund does have a history of 

outperforming such active funds in the long run due to lower fees, then the 

index fund should be favored in the computer model. If, however, an index 

fund underperforms (e.g., because the index is not an accurate reflector of 

the actual market because of the way the underlying stocks are selected) 

relative to active funds (even those that merely cover their fees and little 

else), then the computer model should favor the active funds. In addition, 

AARP submits that significant research should be conducted before 

committing to the total absence of information on historical returns in the 

computer model. 

Exclusion of Investment Options from Computer Models. 

The proposed regulation permits computer models to exclude advice on 

employer stock, annuities, and target date and lifestyle funds. The 

proposed regulation’s exclusion of these investment options is not 

consistent with the statutory language that computer models “take into 

account all investment options under the plan.” Moreover, from a 

pragmatic viewpoint, neither a fiduciary adviser nor a computer model can 

make a competent recommendation on investments without the 

recommendation taking into account all investment options, including 

assets the participant may already have invested in one or more of the 

excluded options. Most important, participants may discount investment 

advice that does not consider all of the investment options in the plan. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 12 of 15 

Unlike disputes over the importance of historical returns and the benefits, 

or not, of actively managed funds, no one disputes the effect of 

overinvestment in employer stock in an individual’s account. Most, if not 

all, economists would agree that an excess of employer stock is too risky 

and potentially devastating to a participant’s retirement security due to the 

lack of diversification. And, most investment advisers would agree that a 

properly diversified individual should not hold more than even ten percent 

of their assets in a single stock. Most significantly, Congress thought that 

ten percent was the maximum exposure appropriate for defined benefit 

plans and thus statutorily limited such holdings to ten percent (10%) of a 

plan’s assets. Section 407(a)(2), 29 U.S.C. § 1107(a)(2). Even after 

Enron and Worldcom and the enactment of the Pension Protection Act, 

employees still tend to own too much employer stock.4

 E.g., Wall Street 

employee owners shudder as Bear Stearns implodes, MARKET WATCH (March 17, 

2008), available at http://www.marketwatch.com/story/wall-streetemployee-owners-shudder-as-bear-stearns-implodes?pagenumber=2. In 

these instances, where the employer stock crashes and participants have 

not properly diversified their accounts, participants may not only lose their 

jobs, but their retirement security. 

Accordingly, AARP disagrees with the Department’s position on employer 

stock in the computer models. Computer models should not ignore this 

investment option. Instead, it should be treated as any other single stock 

would be treated in determining proper diversification of an individual’s 

account.5

The fact that annuities, if offered under the plan, are excluded from 

investment advice seems counter to the Department’s recently expressed 

concern that individuals may not have sufficient monies to last through 

their retirement. See Request for Information Regarding Lifetime Income 

Options for Participants and Beneficiaries in Retirement Plans, 75 Fed. 

 

4

 A new research paper of persons over 55 shows that many respondents expressed a 

preference for having come company stocks. And depending on the manner of the question, 

most rejected the idea of holding little or no money in company stock. A. Lusardi, O. Mitchell & V. 

Curto, Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 

2008 HRS 6-7 (Sept. 2009), available at http://www.mrrc.isr.umich.edu/publications 

/index_abstract.cfm?ptid=1&pid=653. 

5

 The regulation should also require fiduciary advisers who do not use a computer model to 

discuss the positive aspects of diversification and the danger of holding too high a percentage in 

a single stock, including employer stock. We have heard anecdotes where the employer has 

informed the adviser not to talk about employer stock. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 13 of 15 

Reg. 5253 (Feb. 2, 2010). If the Department wants participants to 

understand the benefits of annuities as an option to ensure lifetime income 

streams, then advisers and computer models should include this option in 

their advice, if the plan offers it. The proposed regulation should not 

exclude this investment option.. 

Finally, with the growing number of plans that include target date and 

lifestyle funds as investment options, it makes no sense that these options 

are excluded from investment advice. That is particularly true because 

research has shown that participants often split their contributions among 

numerous target date or lifestyle funds and other investment options, 

thereby taking on too much or too little risk. Ashlea Ebeling, Investors 

Misfire With Target-Date Funds, FORBES (Dec. 17, 2009), available at

http://www.forbes.com/2009/12/17/401k-retirement-vanguard-januspersonal-finance-target-date-funds.html. Investment advice that includes 

these funds could help those participants.6 

Certification

AARP suggests that the regulation should explicitly require the plan 

fiduciary to obtain the certification from the fiduciary adviser, backed up by 

the resume of the person or firm providing the certification. Although the 

plan fiduciary would normally put that request in its contract with the 

fiduciary adviser, by making it a specific regulatory requirement, it would 

hopefully avoid fiduciary advisers from refusing to provide this information. 

Audit 

Although an audit may be a tool for a fiduciary to assess and monitor how 

well an investment advice program is working, the audits must be 

meaningful and effective. Consequently, the regulation should establish 

minimum criteria concerning the scope of the audit, the audit process itself, 

and the minimum criteria for the auditor’s qualifications. 

 

6 It is unclear from the regulation whether fiduciary advisers who do not use a computer model to 

give investment advice may discuss excluded options with participants. The regulation should be 

clarified that fiduciary advisers must do so. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 14 of 15 

Currently, if an audit finds that the investment advice arrangements are 

deficient under the criteria established by the regulation, the auditor must 

merely notify the Department and the plan fiduciary. AARP suggests that 

the Department specifically reserve the right to require additional audits or 

other actions by the plan, including the removal of the investment advisers 

and/or the review of the computer model. 

Timing and Type of Disclosure 

AARP strongly supports a rule that any and all disclosures must be 

provided to participants prior to the offering of investment advice. The 

regulations do not state a time period for when the disclosures must be 

provided before the offering of investment advice. AARP submits that 

“prior” means some period of time before the advice is provided. AARP 

suggests that fourteen calendar days prior to the provision of investment 

advice would be a reasonable period of time. Any shorter period would not 

give participants sufficient time to read, digest and give meaningful 

consideration to the information in the disclosures. 

Finally, AARP submits that there should be some disclosure upon every 

occasion that the adviser and a participant have contact. After the initial 

disclosure, the information provided in the following subsections should be 

disclosed in a one page document at every meeting: subsections 7(i)(A): 

the total of the amounts set forth in 7(i)(C); 7(i)(D); 7(i)(F); & 7(i)(G). 

As demonstrated in AARP’s last survey concerning fee disclosure, 

Comparison of 401(k) Participants’ Understanding of Model Fee Disclosure 

Forms Developed by Department of Labor and AARP (September 2008),7

the manner in which investment information is presented is of paramount 

importance in determining whether participants are able to use and 

understand the information. For example, both the DOL and suggested 

AARP fee disclosure form included information directing the reader how to 

find additional information; however, a significant percentage of people 

surveyed who reviewed the Department’s form did not believe that this 

information was on the form. If confusion can arise based merely on the 

design of the form, then it should be apparent that information can be 

easily obfuscated and of little significance to participants. The proposed 

regulation does not indicate whether the non-mandatory model form was 

 

7

 Available at http://www.aarp.org/research/financial/ira/fee_disclosure.html. 
May 5, 2010 

AARP Comments: Investment Advice 

Page 15 of 15 

ever tested through focus groups. If it has not been, AARP submits that in 

order to assess comprehension and determine adequacy, the model 

disclosure form should be tested with a random sample of 401(k) plan 

participants weighted to be nationally representative of all 401(k) 

participants. 

Conclusion

AARP appreciates the opportunity to present its views on the Department’s 

proposed regulation concerning investment advice. Please do not hesitate 

to contact me at 202/434-3750 or Mary Ellen Signorille at 202/434-2072. 

Sincerely, 

David Certner 

Legislative Counsel and Legislative Policy Director 

Government Relations and Advocacy 

cc: Joseph Piacentini, Chief Economist and Director of the Office of 

Policy and Research 

Timothy D. Hauser, Associate Solicitor 

William Taylor, Regulation Counsel, Plan Benefits Security Division