1

September"24,"2015

Office"of"Exemption"Determinations

Employee"Benefits"Security"Administration

Attention:"DA11712

U.S."Department"of"Labor

200"Constitution"Avenue"NW

Washington,"DC"20210

RE: Conflict"of"Interest"Rule—Retirement"Investment"Advice"RIN"1210AAB32

Proposed"Best"Interest"Contract"Exemption"ZRIN:"1210AZA25;"Docket"ID"EBSAA2014A0016

Dear"Secretary"Perez:

This"comment"is"submitted"by"the"Center"for"American"Progress,"or"CAP,"a"progressive,"nonpartisan"

think"tank"dedicated"to"improving"the"lives"of"Americans"through"ideas"and"action."As"part"of"its"efforts"

to"reduce"poverty"and"ensure"a"stable"middle"class,"CAP"promotes"policies"to"improve"the"financial"wellA

being"of"lowA"and"moderateAincome"households"and"to"ensure"a"financial"system"that"works"for"

everyone."

CAP"appreciates"the"opportunity"to"comment"once"again"on"the"Department"of"Labor’s"proposed"

conflict"of"interest"rule."Overall,"CAP"commends"the"Department"of"Labor’s"proposed"rule"and"supports"

the"Department’s"intent"to"close"loopholes,"reduce"ambiguity,"and"improve"investor"confidence"in"the"

oftenAconfusing"process"of"receiving"retirement"advice."Retirement"savers"largely"expect"that"the"advice"

they"receive"from"financial"professionals"is"already"in"their"best"interest,"and"are"often"surprised"to"find"

that"this"is"not"always"the"case.

1

"They"deserve"legal"protections"to"ensure"that"this"expectation"is"met"

under"a"relationship"of"trust,"particularly"given"the"trillions"of"dollars"in"retirement"assets"at"stake.

CAP"has"already"touched"upon"specific"aspects"of"the"rule"in"a"prior"comment"letter"as"well"as"testimony"

to"the"Department"during"the"August"hearings.2"Previous"comments"recommended"extending"the"

proposed"Best"Interest"Contract"Exemption"disclosures"to"all"retirement"savings"products"and"restricting"

the"use"of"mandatory"arbitration"clauses"to"ensure"that"investors’"rights"are"maintained,"among"other"

provisions."In"addition"to"these"earlier"recommendations,"this"comment"letter"will"address"five"particular"

areas"of"interest"based"on"issues"raised"since"the"prior"public"comment"period"closed"in"July.

1.#Proposed#industry#alternatives#fail#to#fully#protect#investors

Throughout"the"public"comment"period"and"during"public"hearings,"financial"industry"opponents"of"the"

rule"have"offered"alternatives"that"they"claim"provide"necessary"protections"for"retirement"investors."

These"alternatives,"and"others,"fail"to"provide"the"same"level"of"protection"to"retirement"investors"as"the"

rule"as"proposed"and"should"not"be"adopted."

For"example,"Fidelity"Investments’"proposed"“new"best"interest"paradigm”"explicitly"aims"to"narrow"the"

definition"of"what"qualifies"as"fiduciary"advice"under"the"rule"by"separating"“the"terms"of"engagement"of"

the"advisor”"from"specific"investment"recommendations,"with"only"the"latter"subject"to"a"best"interest"

standard. 3"Before"establishing"a"fiduciary"relationship,"the"advisor"would"negotiate"a"contract"that"

establishes"a"given"scope"of"advice,"fee"structure,"and"investment"options"under"the"former,"thereby"

enabling"the"advisor"to"limit"investment"options"to"highAfee"proprietary"products"with"revenue"sharing"

structures"that"create"conflicts"of"interest."This"structure"would"also"allow"advisors"to"separate"an"
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individual’s"decision"to"roll"over"an"employerAprovided"retirement"account"from"the"decision"on"where"

those"funds"should"be"invested.4"The"end"result"would"be"that"an"advisor"could"successfully"oversee"a"

rollover"of"lowAfee"assets"from"an"individual’s"Thrift"Savings"Plan"to"an"IRA"with"dramatically"higher"fees"

and"still"fully"comply"with"the"“best"interest"paradigm.”"Such"an"outcome"is"clearly"not"in"workers’"best"

interest"in"the"vast"majority"of"cases,"yet"conflicted"advice"currently"leads"nearly"half"of"all"federal"

employees"to"ultimately"complete"such"rollovers"after"leaving"the"government.5

Similarly,"the"Financial"Services"Roundtable’s"proposed"“Simple"Investment"Management"Principles"and"

Expectations"Prohibited"Transaction"Class"Exemption,”"or"SIMPLE"PTE, 6"would"fall"short"of"a"true"

fiduciary"standard"that"requires"both"prudence"and"loyalty.""The"proposed"SIMPLE"PTE"crucially"excludes"

the"loyalty"requirement"and"only"demands"that"advisors"give"prudent"advice,"contrary"to"both"the"

Department’s"proposal"and"the"authority"intended"for"the"Securities"and"Exchange"Commission"in

Section"913"of"the"DoddAFrank"Act.7"While"a"standard"of"prudence"just"requires"advisors"to"act"with"care,"

skill,"and"diligence,"a"standard"of"loyalty"goes"further"by"requiring"advisors"to"act"in"the"sole"interest"of"

the"investor."Any"alternative"that"fails"to"institute"both"of"these"requirements"should"not"be"adopted."

2.#A#"sophisticated#investor"#exemption#would#be#inappropriate#and#unworkable

The"idea"of"defining"a"“sophisticated"investor”"is"tempting"given"its"precedent"under"the"securities"laws.8

Yet,"this"concept"is"generally"without"merit"as"long"as"“sophistication”"is"merely"defined"by"income"or"

assets."As"was"noted"in"Forbes"during"the"financial"crisis,"“Many"wealthy"people,"pension"trustees"and"

portfolio"managers"turned"out"to"be"just"as"incompetent"as"any"amateur."..."At"its"most"absurd,"our"

regulatory"laws"say"that"Bernard"Madoff’s"victims"were"sophisticated"investors"and"didn’t"need"

protection"simply"because"they"were"rich"enough"to"lose"some"of"their"money.”9"SoAcalled"

“sophisticated”"investors,"if"they"so"choose,"have"ample"opportunity"to"invest"outside"of"the"retirement"

savings"system"and"to"assume"whichever"level"of"risk"they"deem"is"appropriate"for"them.

However,"retirement"assets"should"not"be"exempt"from"the"Department’s"rule"based"on"“sophisticated"

investor”"status."A"worker"near"retirement"age"may"have"accumulated"a"high"net"worth"of"$1"million"or"

more"as"a"result"of"many"years"of"savings"and"investment"earnings,"and"could"potentially"qualify"for"such"

a"status"without"actually"demonstrating"a"high"degree"of"investing"knowledge"or"risk"tolerance."Indeed,"

a"number"of"articles"in"the"popular"press"suggest"the"attainment"of"“401(k)"millionaire”"status"through"

patient"saving"and"investing.10"Retirement"savings"in"taxAadvantaged"plans"are"crucial"to"retirees’"wellA

being:"a"fact"recognized"by"the"federal"government"as"made"evident"by"its"over"$150"billion"in"tax"

expenditures"for"retirement"pensions"and"savings.11"It"is"therefore"in"the"interest"of"both"retirees"and"

taxpayers"to"protect"these"funds"from"the"greater"risks"that"a"“sophisticated"investor”"potentially"faces.

3.#A#strict#definition#of#“education”#is#crucial#to#prevent#loopholes

If"properly"construed,"the"proposed"rule"will"expand,"not"hinder,"the"ability"to"receive"unbiased"

education."The"rule"rightly"defines"education"as"general"in"nature,"without"referral"to"specific"financial"

products."Attempts"to"weaken"this"definition"will"create"a"giant"loophole"for""marketing""services"that"is"

not"to"be"confused"with"actual,"impartial"advice,"as"evidenced"by"the"experience"of"many"retirees"

subject"to""free"lunch""seminars"in"which"product""education""is"largely"indistinguishable"from"sales"

pitches"for"inappropriate"investment"advice.12

Yes,"some"educational"efforts"will"undoubtedly"lead"to"an"adviceAgiving"relationship."Financial"education"

is"generally"more"meaningful"and"effective"when"tied"to"actual"behavior"change,"and"financial"

professionals"have"the"ability"to"help"workers"overcome"the"inertia"that"hinders"decisionAmaking.13""

Workers"and"retirees,"however,"should"be"given"the"distinction"between"when"an"advisor"is"making"
3

specific"recommendations"with"the"potential"for"conflicts"of"interest"and"when"he"or"she"is"merely"

providing"general"information"in"an"educational"setting."And"in"the"former"case,"they"should"have"a"legal"

mechanism"to"seek"redress"where"a"trusted"relationship"is"violated"through"conflicted"advice.

4.#Transparency#and#consumer#protections#will#lead#to#a#more#competitive#market

Providing"greater"transparency"in"conflicts,"fees,"and"risks"will"lead"to"a"more"level"playing"field"for"firms"

and"professionals"already"operating"under"a"fiduciary"standard,"and"will"require"market"adjustments"for"

others."Traditional"adviceAgiving"models"will"need"to"compete"with"growing"technological"platforms"that"

offer"advice"under"a"fiduciary"standard"at"a"fraction"of"the"cost"of"today’s"conflicted"advice.14"FeeAbased"

advisors"acting"under"a"fiduciary"standard"will"no"longer"face"a"disadvantage"with"others"claiming"that"

their"advice"is"“free”"while"receiving"conflicted"compensation."These"competitive"pressures"will"likely"

lead"to"lower"fees"and"greater"opportunities"for"investors,"rather"than"reduced"access"to"advice.

Indeed,"directly"addressing"previously"hidden"conflicts"and"risks"could"expand,"rather"than"hinder,"trust"

in"retirement"advice."Arguments"that"the"proposed"rule"would"harm"small"savers"are"largely"inaccurate"

based"on"previous"regulation"of"other"financial"products,"such"as"credit"cards"and"mortgages."Increased"

regulation"in"these"markets"has"not"generally"reduced"access"for"consumers"of"modest"means,"provided"

that"the"underlying"products"themselves"are"safe"and"appropriate.15"It"has"only"resulted"in"limiting"

access"to"poorAquality"offerings"that"had"the"potential"to"do"more"harm"than"good."

5.#Disclosures#must#play#a#limited,#but#important,#role

Some"commenters"have"argued"that"the"mere"disclosure"of"conflicts"is"sufficient."However,"any"effort"to"

replace"the"department’s"proposed"rule"–"which"implements"major"protections"for"investors"by"

prohibiting"actions"that"go"against"an"investor’s"best"interest"–"with"a"solely"disclosureAbased"rule"is"not"

appropriate."Investors"need"real"protections,"complete"with"legal"remedies,"when"advisors"fail"to"act"in"

the"best"interest"of"their"clients."

At"the"same"time,"clear"and"conspicuous"disclosures"specific"to"an"investor’s"own"situation"are"necessary"

and"important"to"educate"and"inform"investors,"and"the"disclosure"provisions"of"the"rule"should"be"

maintained"and"strengthened."Disclosures"proposed"in"the"Best"Interest"Contract"Exemption"–"a"preA

purchase"transaction"disclosure,"annual"disclosure,"and"publicly"accessible"wage"page"outlining"

compensation"by"investment"type"–"would"dramatically"improve"investors’"knowledge"of"plan"fees"and"

potential"conflicts"of"interest,"and"each"deserves"to"be"included"in"the"final"rule."CAP"has"advocated"for"

similar"improved"disclosures"to"be"used"across"all"definedAcontribution"and"IRA"plans.16

The"transaction"disclosure"is"especially"important"for"those"rolling"over"retirement"plans"given"the"

potential"for"dramatically"higher"fees."Clearly"disclosing"the"estimated"amount"of"fees"an"investor"will"

pay"over"1,"5,"and"10"years"will"help"investors"hold"their"advisors"accountable."As"the"average"rollover"to"

a"traditional"IRA"in"2013"was"$96,660,17"even"small"differences"in"fees"can"make"a"dramatic"difference"in"

investors’"account"balances."To"assist"in"comparability"between"investment"options,"CAP"also"advocates"

adding"a"“20/20”"disclosure"that"would"show"the"effect"of"fees"on"a"$20,000"investment"over"a"20Ayear"

period.18"For"this"disclosure,"adopting"a"standard"hypothetical"rate"of"return"for"investment"options"

when"calculating"the"compounding"effect"of"fees—for"example,"an"annual"return"of"five"percent—would"

align"this"disclosure"with"the"SEC’s"fee"example"required"in"mutual"fund"prospectuses.19"Explicitly"stating"

that"this"fee"estimate"is"not"a"prediction"of"future"performance"would"further"clarify"that"the"disclosure"

is"a"“hypothetical"illustration"of"mathematical"principles”"and"not"a"violation"of"FINRA’s"Rule"2210.20
4

The"annual"disclosure"would"provide"investors"a"simple,"clear"way"to"regularly"examine"their"retirement"

account’s"fees."The"Department"should"look"to"CAP’s"proposed"annual"retirement"receipt"as"a"model.21

Specifically,"general"planArelated"administrative"fees,"even"those"not"tied"to"a"specific"asset,"should"be"

included"in"this"disclosure."To"simplify"the"disclosure,"it"could"also"be"modified"to"only"show"information"

on"assets"currently"held"at"yearAend"and"not"details"on"assets"bought"and"sold"during"the"year."

Additionally,"providing"a"publiclyAavailable,"machineAreadable"online"compendium"of"fees"and"

compensation"structures"will"enable"potential"clients"and"third"parties"to"easily"access"the"data"and"

compare"advisors.

Conclusion

The"Department"of"Labor’s"proposed"rule"would"protect"retirement"savers"and"retirees"from"costly"and"

often"conflicted"retirement"advice."It"would"create"a"legal"mechanism"to"hold"financial"professionals"

accountable"for"violating"perceived"relationships"of"trust,"and"would"ensure"that"the"significant"public"

investment"made"in"retirement"savings"vehicles"through"tax"expenditures"ultimately"leads"to"greater"

financial"security"for"savers,"instead"of"greater"compensation"to"financial"firms."It"would"also"provide"

new"and"enhanced"disclosures"under"the"Best"Interest"Contract"Exemption"to"give"investors"additional"

information"about"the"true"costs"of"the"retirement"products"in"which"they"are"investing."Many"of"the"

proposed"alternatives"and"exemptions""recently"suggested"by"industry"would"only"create"new"loopholes"

in"a"regulation"under"which"major"loopholes"have"persisted"for"the"past"four"decades,"and"should"be"

rejected"by"the"Department.

Thank"you"again"for"the"opportunity"to"comment"on"this"proposed"rule."If"you"would"like"to"discuss"

anything"in"this"letter"in"more"detail,"please"contact"Joe"Valenti,"Director"of"Consumer"Finance,"at"

jvalenti@americanprogress.org,"or"Alex"Rowell,"Research"Assistant,"at"arowell@americanprogress.org.

Sincerely,

Center"for"American"Progress

"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 1

"For"example,"S."Kathi"Brown,"“Fiduciary"Duty"and"Investment"Advice:"Attitudes"of"401(k)"and"403(b)"Participants,”"

AARP"Research,"September"2013,"available"at"http://www.aarp.org/research/topics/economics/infoA

2014/fiduciaryAdutyAandAinvestmentAadviceAAAattitudesAofA401AkAAandA4.html. 2

"Public"comment"submission"by"Center"for"American"Progress"to"the"Department"of"Labor,"“Conflict"of"Interest"

Rule—Retirement"Investment"Advice"RIN"1210AAB32;"Proposed"Best"Interest"Contract"Exemption"ZRIN:"1210A

ZA25;"Docket"ID"EBSAA2014A0016,”"July"21,"2015,"available"at"http://www.dol.gov/ebsa/pdf/1210AAB32A2A

00639.pdf; Joe"Valenti,"“The"Fiduciary"Rule"Would"Put"Savers’"and"Retirees’"Best"Interests"First”"(Washington:"

Center"for"American"Progress,"2015),"available"at"https://cdn.americanprogress.org/wpA

content/uploads/2015/08/12083805/ValentiFiduciaryRuleAtestimony.pdf. 3

"Public"comment"submission"by"Fidelity"Investments"to"the"Department"of"Labor,"“Definition"of"the"Term"

Fiduciary:"Conflict"of"Interest"Rule"(RIN"1210AAB32);"Proposed"Best"Interest"Contract"Exemption"and"Principal"

Transactions"in"Debt"Securities"Exemption"(ZRIN:"1210AZA25),”"July"21,"2015,"available"at"

http://www.dol.gov/ebsa/pdf/1210AAB32A2A00658.pdf. 4

"Consumer"Federation"of"America,"“Fidelity’s"‘New"Best"Interest"Paradigm’"Does"Not"Serve"the"Best"Interests"of"

America’s"Working"Families"and"Retirees,”"August"31,"2015,"available"at"http://www.consumerfed.org/pdfs/8A31A

15%20Fidelity's%20Best%20Interest%20Paradigm%20is%20Unworkable%20for%20Retirement%20Savers_Comme

nts.pdf. 5

"John"Hechinger,"“Brokers"Lure"Soldiers"Out"of"LowAFee"Federal"Retirement"Plan,”"Bloomberg"News,"August"12,"

2014,"available"at"http://www.bloomberg.com/news/articles/2014A08A12/brokersAlureAsoldiersAoutAofAlowAfeeA

federalAretirementAplan.
5

""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 6

"Public"comment"submission"by"Financial"Services"Roundtable"to"the"Department"of"Labor,"“Revised"Definition"of"

Investment"Advice"and"Related"Exemptions,”"July"21,"2015,"available"at"http://www.dol.gov/ebsa/pdf/1210AAB32A

2A00665.pdf. 7

"Section"913"gives"the"Securities"and"Exchange"Commission"authority"to"universally"extend"a"duty"to"act"in"

investors’"best"interests"“without"regard"to"the"financial"or"other"interest"of"the"broker,"dealer,"or"investment"

adviser"providing"the"advice.”"However,"the"SEC"has"not"acted"on"this"authority"to"date. 8

"Jason"Zweig,"“Do"You"See"Yourself"as"a"Sophisticated"Investor?”"Wall*Street*Journal,"July"18,"2014,"available"at"

http://blogs.wsj.com/moneybeat/2014/07/18/doAyouAseeAyourselfAasAaAsophisticatedAinvestor/. 9

"John"E."Girouard,"“The"Sophisticated"Investor"Farce,”"Forbes,"March"24,"2009,"available"at"

http://www.forbes.com/2009/03/24/accreditedAinvestorAsecApersonalAfinanceAfinancialAadvisorAnetworkAnetA

worth.html. 10"Lou"Carlozo,"“Millennials:"How"to"Become"a"401(k)"Millionaire,”"U.S.*News*and*World*Report,"March"18,"2015,"

available"at"http://money.usnews.com/money/personalAfinance/mutualAfunds/articles/2015/03/18/millennialsA

howAtoAbecomeAaA401AkAmillionaire;"Chuck"Saletta,"“Here’s"How"to"be"a"401k"Millionaire,”"The"Motley"Fool,"

September"27,"2014,"available"at"http://www.fool.com/retirement/401k/2014/09/27/heresAhowAtoAbecomeAaA

401kAmillionaire.aspx. 11"U.S."Office"of"Management"and"Budget,"“Analytical"Perspectives,"Budget"of"the"United"States"Government,"Fiscal"

Year"2016,”"available"at"

https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/ap_14_expenditures.pdf. 12"Milt"Freudenheim,"“Bad"Investment"Advice"Can"Turn"a"Free"Meal"Costly,”"New*York*Times,"March"3,"2010,"

available"at"http://www.nytimes.com/2010/03/04/business/retirementspecial/04LUNCH.html. 13"As"an"example"of"inertia"preventing"some"savers"from"executing"financial"decisions"they"had"intended"to"make:"

Robert"L."Clark"and"Madeline"B."D’Ambrosio,"“Ignorance"is"Not"Bliss:"The"Importance"of"Financial"Education,”"TIAAA

CREF"Institute"Research*Dialogue,"Issue"No."78"(December,"2003),"available"at"https://www.tiaaA

cref.org/public/pdf/institute/research/dialogue/78.pdf

14"Rebalance"IRA"is"one"example"of"a"new"platform"offering"lowerAcost"advice"under"a"fiduciary"standard,"reducing"

fees"for"former"brokerage"clients"an"average"of"68"percent."Rebalance"IRA"Managing"Director"Scott"Puritz,"

“Restricting"Advice"and"Education:"DOL’s"Unworkable"Investment"Proposal"for"American"Families"and"Retirees,”"

Testimony"before"the"Senate"Health,"Education,"Labor"and"Pensions"Committee,"Subcommittee"on"Employment"

and"Workplace"Safety,"July"21,"2015,"available"at"http://www.help.senate.gov/imo/media/doc/Puritz.pdf." 15"Joe"Valenti,"Sarah"Edelman,"and"Julia"Gordon,"“Lending"for"Success”"(Washington:"Center"for"American"Progress,"

2015),"available"at"https://www.americanprogress.org/issues/economy/report/2015/07/13/117020/lendingAforA

success/. 16"Jennifer"Erickson"and"David"Madland,"“Fixing"the"Drain"on"Retirement"Savings:"How"Retirement"Fees"Are"

Straining"the"Middle"Class"and"What"We"Can"Do"about"Them,”"(Washington:"Center"for"American"Progress,"2014),"

available"at"https://www.americanprogress.org/issues/economy/report/2014/04/11/87503/fixingAtheAdrainAonA

retirementAsavings/;"Erickson"and"Madland,"“Retirement"Labels"and"Retirement"Receipts"Could"Save"American"

Investors"Billions"Each"Year,”"(Washington:"Center"for"American"Progress,"2015),"available"at"

https://www.americanprogress.org/issues/economy/news/2015/07/01/115509/retirementAlabelsAandretirementA

receiptsAcouldAsaveAamericanAinvestorsAbillionsAeachAyear/. 17"Craig"Copeland,"“Individual"Retirement"Account"Balances,"Contributions,"and"Rollovers,"2013;"With"Longitudinal"

Results"2010A2013:"The""EBRI"IRA"Database”"(Washington:"Employee"Benefit"Research"Institute,"2015),"available"at"

http://www.ebri.org/pdf/briefspdf/EBRI_IB_414.May15.IRAs.pdf. 18"Erickson"and"Madland,"“Fixing"the"Drain"on"Retirement"Savings:"How"Retirement"Fees"Are"Straining"the"Middle"

Class"and"What"We"Can"Do"about"Them.”

19"U.S."Securities"and"Exchange"Commission,"“Form"NA1A:"Instructions,”"available"at"

https://www.sec.gov/about/forms/formnA1a.pdf"(last"accessed"September"2015). 20"Financial"Industry"Regulatory"Authority,"“2210."Communications"with"the"Public,”"available"at"

http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=10648"(last"accessed"

September"2015).

21"Jennifer"Erickson"and"David"Madland,"“Retirement"Labels"and"Retirement"Receipts"Could"Save"American"

Investors"Billions"Each"Year.”