background of our shared desire to encourage savings and prevent loss of assets
from the retirement system.

The rule should be amended so that “advice” to a fiduciary party who isn’t the
decision maker for the plan, such as a plan’s broker-dealer, doesn’t trigger fiduciary

status. Under the current wording, advice to any “fiduciary” - which could now
include a large number of advisors - may be fiduciary advice. Asset managers need
to be able to educate intermediaries about our products without tripping into the
highly technical area of ERISA prohibited transactions.

The DOL should also look more broadly at any other collateral consequences in
situations where an assct manager works with an intermediary, and not directly with a
plan, to ensure that the rule focuses appropriately on the intermediary as the party
which has a direct relationship with the retirement investor. Otherwise, general
investment information, investment models, and fund information provided to
educate financial advisors - often without knowledge of the advisor’s underlying
client base or their specific needs - could potentially create fiduciary status for a fund
provider.

The rule should make it clear that valuation of fund assets and routine reporting is
not a fiduciary activity. This is basic information which retirement investors need to
monitor their investments and make good decisions, and which isn’t ticd to a specific
proposed transaction, but to ongoing, basic account maintenance. The exemption
should also apply even when reporting isn’t required by law, but by good,
transparent commercial practice.

Fund providers routinely provide a net asset value for their funds. Although this
activity may, from time to time, include valuing hard-to-assess assets, that activity
takes place in the context of a fund’s opcrations, not a specific plan investor’s
circumstances, and should not be subject to fiduciary status, particularly where the
fund vehicle itself is not a plan assets vehicle.

wee

Additional details on many of these points, as well as on the risks the proposed rules
pose to the workplace savings system - and ideas on ways to improve the rules - can
be found in the comment letters being submitted by our affiliated firms, Empower
Retirement and Great-West Financial. And even though these rules have limited
direct impact on Pumam Investments as an asset manager, we wholly concur with
Empower and Great-West’s respective points.


The impact may be most dramatic in the IRA market - a critical lynchpin in keeping
assets productively at work toward retirement saving needs and preventing system
leakage. The rule, combined with the absence of a practical, helpful exemption, will
indirectly push savers toward a single model — fee-based advice from an ERISA
fiduciary. Some retirement investors already obtain advice in exactly this way - but,
in a diverse market including investors with differing needs, investment approaches,
and account sizes, the model is not for everyone. We [ear that many smaller TRA
investors and plans will simply no longer be able to obtain the help they need.

Likewise, we are concerned that the BIC exemption would not, in practice, be
product-ncutral across investment choices. Faced with the complexity of the
exemption, especially its requirement for internal policies, firms that do seck to rely
on the BIC may find themselves be pushed toward low-fee products to minimize
litigation risk - even in situations where a different fund might be the better choice
for a particular retirement investor.

wee

We do strongly support EBSA’s poli als: ensuri t investment providers
retirement investors act in the best interests of their clients. But we believe that the
tule, as currently proposed, would likely have the unintended consequence of
damaging the America retirement system as a whole.

We are encouraged by the DOL’s reported openness to engage with commentators
on possible revisions. We urge the DOL to consider carefully the comments it
receives and move forward with a rule that recognizes that advice can be valuable,
secks to remain neutral across legitimate advisor business models and investment
product choices, and focuses on the core issues at hand, while avoiding unnecessary
complexity and cost.

Sincerely,

bit —

Robert L. Reynolds
President and CEO, Putnam Investments

10


years, advised household held 2.7 times as much in assets as comparable families
without advice. These are net results, after taxes and accounting [or the costs of the
advice given, and they reflect the real value investment advisors can provide.

Similarly, the annual Lifetime Income Surveys done by Putnam Investments and the
Putnam Institute from 2010 to 2014 (and since carried on by the Empower
Institute)’ have consistently shown that investors who have access to professional
financial advice are much further along toward the goal of replacing their work-life
incomes in retirement than comparable savers who lack professional advice.

These surveys assess a comprehensive range of assets, including Social Security,
workplace and personal savings, home equity, and even the value of businesses that
people own. Analyzing this data allows us to estimate what level of income
replacement - or Lifetime Income Score (LISTM) - various savers are achieving - and
what variables account for greater success,

The single most powerful variable is access to any form of workplace savings plan.
Those who lack such access are on track - at the median - to replace just 42% of
working income. Simply having any form of payroll deduction plan raises the
median LIS score to 74%. This vastly better outcome is worth noting, since we
believe the added costs, complexity and Icgal risks posed by the DOL’s proposed
rule could inhibit the formation of new work-based savings plans.

Another very powerlul variable the survey discloses is the impact of access to
professional financial advice. At the median, houscholds that do not receive advice
are on track to replace 56% of their working income. Those who do draw on
professional financial advice, by contrast, arc headed at the median towards
replacing 82% of their working incomes. This is a massive step closer to what most
of us would consider to be retirement success.

A recent study by Oliver Wyman’ also indicates that individuals with access to
professional guidance exhibit the behaviors commonly associated with long-term
investment success. Specifically, the report found, among other things, that when
compared to individuals without access to professional guidance, those with access:

Own more diversified investment portfolios;
+ Stay invested in the market by holding less cash and cash equivalents;

+ Take fewer premature cash distributions; and

? Empower Institute is the research and education arm of Empower Retirement’s parent company, Great-West
Lifeco U.S., Inc.
3 Oliver Wyman, “The role of financial advisors in the US retirement market,” July 10, 2015.


The Value of Advice

Our prime concern is not with the rule’s impacts on Putnam and its asset manager
peers. After all, mutual fund sponsors are, by definition, SEC-registered investment
advisers that are already subject to a robust, well-developed fiduciary standard with
decades of law to back it. We are not the direct focus of this proposed rulemaking.
But we are deeply concerned with the indirect impacts of the proposed rule which
would fall not only on us and our financial intermediary partners, but on the market
for retirement services, and on American savers and retirees.

As a company that distributes investment funds through intermediaries, we are
disturbed by the underlying assumptions and data cited by the DOL as rationale for
proposing these rules. As the Invesunent Company Institute, the U.S. Chamber of
Commerce and many others have noted, the baseline study done by the Council of
Economic Advisors - and cited by EBSA to justify this rule-making - was deeply
flawed. Its estimates of the alleged “costs” of “conflicted advice” were not well-
validated by the studies it cited, and the report totally failed to assess any benefits that
investors may have received from the advice and guidance they paid for. It was, in
short, a highly debatable all-cost/no bencfit “analysis”.

While some advisors do, indeed, abuse clients’ trust and put their own interests first,
we believe that behavior can — and should be — dealt with by stricter enforcement of
existing law. To curb these abuses, we would strongly support increased funding for
the enforcement units of relevant financial regulators. But policy should not be
based on the misdeeds of the few. It should, instead, be guided by evidence and data
on the behavior of the advisor community as a whole.

Our decades of experience suggest that the overwhelming majority of financial
advisors are honest servants of their clients. They carn their livings by delivering real
value. Their personal success and that of their clients are well-aligned. Advisors who
overcharge or abuse their clients generally do not succeed over time. Those who
deliver value do. This common sense view is not merely “anecdotal” - it is amply
supported by objective data from studies of how access to professional advice, on the
whole, favorably impacts actual investors’ outcomes.

A study done by the Investment Funds Institute of Canada (IFIC) in 2012, for
example, analyzed a full spectrum of households across ages, wealth and income
levels - then compared those who enjoyed professional advice with those who
didn’t! The results were dramatic. After as little as six years, it found that advised
households had built up 58% more assets than those without advice. After fifteen

1 The Investment Funds Institute of Canada and CIRANO (Center for Interuniversity Research and Analysis on
Organizations), New Evidence on the Value of Financial Advice, Dr. Jon Cockerline, 2012.

6


e The liability and warranty provisions may lead many providers to
decide that providing advice to customers with smaller accounts is
simply not economically viable. Advisors should be liable for violating
the best interest standard — beyond that, blanket warranties covering all
existing state and federal law are not required in other U.S. legal
contexts and, given the outsized impact of even minor non-compliance
in the context of ERISA’s strict regime for prohibited transactions,
should be stripped from the final rule.

e The BIC exemption is overloaded with new disclosure requirements
that diverge widely from EBSA’s own, more carcfully-crafted rules
under Sections 404(a) and 408(b)(2) of ERISA. While we vigorously
support clear, understandable disclosure, the proposed website, point
of sale, and ongoing annual disclosures are impractical both in iming
and content. They would be of limited value, and deviate, without
explanation, [rom the blueprint that already exists in the DOL’s own
tules. Any disclosure requirements in the IRA space should track those
existing provisions closely -and where the existing provisions already
apply for plan investors and participants, there should be no
duplication.

@ We fully agree that financial firms should maintain robust procedures
to mitigate potential conflicts of intcrest. But the proposed policies,
particularly around compensation (with their unclear “would tend”
standard), are too broad. The requirements would appear to foreclose
existing compensation practices - contrary to the DOL’s stated
intention to craft the BIC as a path to preserve those structures. We
believe the DOL should be careful to remain principles-based in its
imposition of this new requirement, and should be appropriately
deferential to existing SEC and FINRA guidance around firms’ internal
policies and approaches to conflicts of interest.

As a result of these and other issues, while the BIC exemption is intended to permit
continued receipt of 12b-1 fees and other common forms of compensation for
intermediaries’ services, in practice, the exemption is not business-model neutral,
because its requirements are simply not workable. Traditional broker-dealer models,
in which the advisor is paid for advice through means other than an advisory [ec
charged directly to the client, may simply become untenabic in the retirement
market.

9


Robert L. Reynolds 617-760-8800
617-760-7154 fax
robert_reynolds@ putnam.com

President and

Chief Executive Officer
One Post Office Square
Boston, MA 02109

VIA E-MAIL: e-ORI@dol.gov and e-OED@dol.gov

Office of Regulations and Interpretations and

Office of Exemption Determinations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule and related exemption package
Room N-5655 and Suite 400

U.S. Department of Labor

200 Constitution Avenue NW

Washington, DC 20210

Re: RIN 1210-AB32, Conflict of Interest Rule
ZRIN 1210-ZA25, Best Interest Contract Exemption (D-11712)

Dear Sir or Madam:

As someone who has spent more than three decades working to build America’s
workplace savings system, I welcome this chance to share Putnam Investments’
comments and concerns about the recent rule proposals from the Employee
Benefits Security Administration (EBSA) of the Department of Labor (DOL).
These rules, to be issued under the Employee Retirement Income Sccurity Act of
1974 (ERISA), touch on fiduciary responsibility and potential conllicts of interest in
the provision of retirement investment advice.

Putnam Investments is one of the pioncers of America’s mutual fund industry, with
approximately $160 billion under management today on behalf of over 100
institutional and 5 million individual customers. We proudly strive to embrace our
own fiduciary responsibilities. Indeed, Putnam’s highest value is to “always put the
client first.” And that ethical heritage traces its roots back to the Prudent Man rule
articulated in 1830 by Judge Samuel Putnam, whose great-grandson founded our
company.

1


Re-balance their portfolios with greater frequency to stay in line with their
investment objectives and risk tolerances.

These studies underscore how seriously the Council of Economic Advisors report -
which the DOL cites as its rationale for these rules - ignored the economic value
that financial advisors deliver. What is worse - and again this would be due to cost,
complexity and litigation risk - the real-world impact of the proposed DOL rules
would likely be to curtail the availability of financial advice to lower-income and
lower balance savers. Since the best available data shows that advice delivers
measurable value, and since wealthy savers will likely continue to pay for that value,
the probable cut-back of investment advice to less-well-olf savers would, perversely,
further exacerbate wealth and income inequality. Surely that is a consequence that
no one intends.

The BIC Exemption

Because we believe in the value of advice, we think the rule and its related
prohibited transaction exemptions should allow for continued market compctition
and evolution. DOL should, indeed, uphold the principle of a best interest standard
~ but without an overlay of burdensome requirements that would make the
provision of advice potentially unworkable. Unfortunately, in our view, the proposed
Best Interest Contract (BIC) exemption, which would apply to a wide swath of the
financial advisor community, misses the mark.

The BIC’s individual contract requirements and other provisions are unprecedented
and impractical in a number of respects. Among other things:

e Inclusion of individual advisors as parties is unprecedented -
and unnecessary, given financial firms’ existing legal responsibility for
their employees’ actions.

e The required timing of the contract essentially creates a “Catch 22” that
could stymie even basic information-gathering or comparison-shopping
by investors, as financial firms become reluctant or unable to assist in
any meaningful way without a formal relationship being in place. Any
contract requirement should apply at the point of a transaction’s
completion or the actual commencement of services, not before.

e The prospect of amending and repapering millions of contracts is
daunting and must be avoided. It is critical that, for existing customers,
a fully informed, negative consent process be available to bridge the gap
between today’s practices and the new requirement.


investment offerings - and to promote our investing acumen without being trapped
in red tape - in situations where it’s clear we are selling only our own services and
products, not acting as a trusted plan advisor that recommends investments from the
market as a whole.

The rule should be revised to make it clear that sales talk won’t be considered
“advice” in situations where a reasonable retirement investor would understand the
non-fiduciary, promotional nature of the information being provided.

The counterparty or seller’s exemption should also be clarified, both to apply to
ervices as we ucts (including direct promotion of a ’

funds) and to apply to smaller participant-directed plans. If a small plan sponsor can
be asked to comply with ERISA and the tax code, with all their complexities, that

same sponsor should be treated like other employers for purposes of the rule.

Basic information and education should not be subject to ERISA’s prohibited
transaction rules. Retirement investors necd information in order to make decisions.
Under the proposed rule, many types of baseline investment information that we

and other firms make available to the public and to prospective clients, including
gencral educational pieces and markct discussions, could potentially be

characterized as “fiduciary” advice. Likewise, some of the most basic of interactions
between our call center employees and our fund investors could trigger a web of
technical ERISA rules.

Finally, in other contexts, such as consultant questionnaires and RFP responses,
asset managers could arguably be considered fiduciaries undcr this draft rule even
when they do not know they are providing information to a retirement plan! The
tule should be amended, through careful reworking or elimination of the
“specifically directed to” clause of the definition, to make it clear that these situations
are not fiduciary interactions.

The rule’s applicability to IRA rollovers should be carefully reconsidered. Financial
firms must be allowed to continue to provide participants with information about the

important decision to roll assets to a new plan or IRA or withdraw them. Without a
workable path for financial firms to assist customers at this critical juncture, we may
see an increase in assets leaving the retirement system - to the detriment, most
importantly, of working families.

Instead of subjecting most rollover conversations to fiduciary status, the DOL should
seck to define more clearly (and broadly) the boundaries of what may be said and
donc by a financial firm in this context without triggering fiduciary status. The
analysis should come down to the facts and circumstances - against the policy


As discussed in more detail below, what retirement savers necd is a simpler, more
tailored rule that focuses on the critical issues at hand, without raising the specter of
dramatic unintended consequences.

Comments and Concerns

First, we offer a few points about the rule and Putnam. Like other asset managers,
we want to make sure that the rule’s technicalities properly apply to investment
product manufacturers like ourselves - the firms that build the investment offerings
that financial intermediaries use to work with clients toward their retirement goals.
We highlight a few of these issues below.

A level playing field for different investment products is critical to a balanced and
effective rule. The investment funds and other products that succeed today are
different from those of just a few years ago. Market change stops for no one. So it is
vitally important to keep this in mind as the rules are revised. The DOL should not
take any steps that would reduce choice or prevent the free flow of ideas and
innovations which, in a fiercely competitive marketplace like the U.S. retirement
system, will ultimately work to consumers’ benefit.

In particular, focusing solely on [ees - directly, through a proposed low cost fund
exemption, or indirectly, through an overly complicated, fee-focused BIC exemption,
as discussed below - risks reducing savers’ choices by artificially pushing financial
advisors in the direction of passive products. We will not recite here the age-old
debate between active and passive management. That debate - which is really as
simple as the reality of net-of-fee returns — plays out in the long term performance
that retirement savers experience over time.

Likewise, the rule shouldn’t limit the possibility of an advisor working with affiliated
products. Provided that there is clear, full, plain-English disclosure around potential
conflicts of interest, those products may be the right choice for a particular plan or
TRA holder.

In the end, a variety of strategies and investment approaches — and a wealth of
considerations beyond just fees, including volatility, risk, liability-matching,
diversification, ctc. — play into appropriate savings and investment decisions. In our
market-based economy, the DOL should not inadvertently stymie ongoing debate
and competition with a regulatory fiat.

We believe retirement plan sponsors and intermediaries understand that sales

discussions aren’t fiduciary advice, and the rule should exempt these discussions
accordingly. We need to be able to educate intermediarics and plans about our


Putnam’s investment products for the Defined Contribution (DC) market are almost
wholly distributed through financial intermediaries. We work with firms that employ
a variety of business models, from traditional broker-dealers, to independents, to
bank channels and registered investment advisers. Some partners are fiduciaries
today under ERISA or Securities and Exchange Commission (SEC) rules, and some
are not. Butall are already subject to regulation based on their business models:
regulation that does - or where it doesn’t yet, should - focus on ensuring that
financial firms put the customer first.

So we wholeheartedly agree with the expressed intention of the DOL’s proposed
rules. The best interests of retirement savers should always come first. Any potential
conflicts between the interests of those savers and the intermediaries who advise
them or offer them guidance should be fully disclosed and guarded against carefully.

The question, in our view, is not whether a customer’s best interest should be the
standard for advice-giving. Of course, it should. The real question is how best to
achieve that goal through a set of clear, certain, well-coordinated and effective rules
that can be implemented cost-effectively. In our view, the DOL ’s draft rule would
not achieve that.

To the contrary, if implemented as drafted, these rules would raise costs and
confusion across the entire workplace savings system - ultimately at the expense of
retirement savers. Access to meaningful investment information, guidance and
education that retirement savers need to make decisions would, at best, be scriously
inhibited and, in many cases, eliminated. Litigation risk could explode. So could the
perverse result of increased inequality - as lower-income clients lose access to advice
that highly-aMuent customers will surely continue to pay for and benefit from.

At least two other key public policy goals would be set back by the proposed rule.

e First, the expansion of workplace savings coverage to the tens of millions of
Americans who lack such plans on the job today would likely be stymied by
rising costs, compliance and litigation risk. This would aggravate the “access
gap”, the single most serious failing in U.S. workplace retirement policy today.

e Secondly, the provision of more lifetime income options, whether annuities or
insured draw-down options within workplace plans or at the point where
participants “roll-over” assets to Individual Retirement Accounts (IRAs),
would face similar cost and fitigation-risk headwinds. Innovation in that arena
could slow or stall. Tens of millions of retirement savers would have to sign
Best Interest Contracts before providers could offer any meaningful
information about these - or any other — investment options.