Employee Benefits Security Administration
May 5, 2010
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disadvantage relative to other investors by limiting their access to innovative investment
strategies and products. New and more sophisticated investment strategies will continue
to emerge and it is very likely that some will incorporate data on historical performance
among investments within a single asset class. Discouraging plans from providing
participants with advice that incorporates new strategies and products could leave
participants behind without access to the best available and most timely advice. The
proposed regulations acknowledge as much by excluding lifecycle (target-date) and
lifestyle (target-risk) investments from the computer model requirements, It is reasonable
to assume that other investment products will emerge with similarly innovative
approaches. The regulations should not inhibit the availability of these products to plan
participants.

If the Department’s proposed restrictions on historical performance are included in the
final regulation, or if the final regulation includes a list of criteria that a computer model
must consider to the exclusion of others, the direct effect will be that all participant
advice under the PPA computer model approach will favor investments with the lowest
fees regardless of the investment’s historical performance. This will amount to a strong
and unprecedented regulatory bias in favor of passively managed investments regardless
of market conditions, individual participant preferences and characteristics, and
investment product design. Such a bias would also ignore the fact that actively managed
investments out-perform passively managed investments in various market conditions
and over certain periods, as described in detail below, in favor of a one-size-fits-all
approach. The consequences could be significant. If enacted in its present form, the rule
would most likely result in millions of participant accounts being redirected into index
funds and other passive investments. In a broadly rising market that strategy could
benefit participants overall; however, if markets experience a sustained period of slower,
less consistent performance, participants invested in index funds would likely miss out on
gains produced by active management.

The evidence does not support the Department’s conclusions and implications
regarding historical performance.

The hoary debate about the relative merits of actively and passively managed mutual
funds typically weighs performance statistics covering different categories of funds over
different time periods. From a regulatory perspective, the question should not be whether
varying circumstances tend to favor one kind of fund over the other but should be
whether one approach so overwhelmingly dominates the other in practice that regulation
should favor one over the other. While the broadest statistical findings tend to favor
passively managed funds, the degree of difference in favor of the passive management
style is insufficient to justify such a drastic regulatory determination. Moreover, actual
investor behavior indicates that fund purchasers not only prefer active funds, but they
systematically favor out-performing actively managed funds over weaker competitors.

Frequently cited studies report that a majority of funds underperform their respective
benchmarks. For example, according to S&P, an average of 52% of domestic equity


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accepted investment theories are not appropriate in formulating participant investment
advice, provisions to that effect would have been set forth in the statute.

The Department should not require that investment advice computer models omit
historical performance as a factor in distinguishing among investment options
within an asset class.

The proposed rule provides that computer model advice must “avoid investment
recommendations that. ..inappropriately distinguish among investment options within a
single asset class on the basis of a factor that cannot confidently be expected to persist in
the future...” (Paragraph (b)(4)(i)(E)(3)). In the preamble to the proposed regulations,
the Department explains the intent of this provision as follows:

While some differences between investment options within a single asset class,
such as differences in fees and expenses or management style, are likely to persist
in the future and therefore to constitute appropriate criteria for asset allocation,
other differences, such as differences in historical performance, are less likely to
persist and therefore less likely to constitute appropriate criteria for asset
allocation. (emphasis added)

To the extent the Department’s purpose in proposing a restriction on the use of historical
performance is to ensure that participants receive unbiased advice, the restriction is
unnecessary. Other provisions of the PPA and the proposed regulations provide ample
safeguards. Safeguards include a prohibition on advice biased in favor of investments
offered by the fiduciary advisor; the requirement that computer models use only objective
criteria, and expert certification and audit requirements.

Further, the restriction on the use of historical performance included in the proposed.
regulations is ambiguous and would have repercussions beyond the development of
computer advice models. Plan fiduciaries would rightly be concerned, and we believe
very confused, about the implications of the restriction for investment decisions they
make in contexts other than computer models. For example, if participant advice
computer models do not consider the historical performance of investments, should a
fiduciary also ignore historical under-performance in deciding whether to retain an
investment in a plan menu?

If the Department continues to believe that investment advice to plan participants should
be based on factors different than those used by investors in general, then a more
detailed, separate analysis and proposal should be undertaken so as not to further delay
the implementation of participant advice regulations which have already been finalized,
delayed several times, withdrawn and now reproposed. As the Department points out
early in the analysis of the proposal, quality investment advice can help participants
reduce investment errors and “reap substantial benefit”.

We are concerned that discouraging the use of investment performance as a factor in
investment advice computer modeling will ultimately put plan participants at a


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funds underperformed the S&P Composite 1500 index” (gross of any fees) each year
between 2000 and 2009. Similarly, for periods ending December 31, 2009:

* Over five years, just over 60% of actively managed U.S. equity funds
underperformed this benchmark;

¢ Over three years 54% underperformed;

« For one year 42% underperformed.

Actively managed funds’ critics interpret data like these to impugn the performance and
question the utility of active funds. They oversimplify.

First, comparisons between funds and indices, the latter of which are not directly
investable, neglect to consider the fees that index-tracking investment vehicles charge
their customers. More importantly, these ratios in fact demonstrate that significant
proportions of active funds do outperform this benchmark. If 60% of funds
underperformed, 40% outperformed. Limiting retirement investors’ advice to index or
other passive funds would deny meaningful guidance about the full range of investments,
including these outperforming funds.

Such a limitation would be less important if investors were proven incapable of selecting
outperforming funds; the evidence suggests that they actually choose successfully. The
statistics set forth above weight all funds equally. To better understand the choices
investors make in practice, funds in each category should be weighted by their respective
assets, so that larger funds — the ones that investors favor — will affect the statistical
results more than smaller funds, which less successfully attract investors’ assets. When
managed funds are compared with indices on an asset-weighted basis, the results differ
considerably:

« Averaged over five years and equally weighted, domestic equity funds
outperformed the S&P Composite 1500 by 10 basis points, but when funds are
asset weighted, they outperformed by 76 basis points (1.46% versus 0.69%);

e When asset weighted, actively managed large, small, and multicap (though not
midcap) funds five-year outperformance also exceeded their respective
benchmark returns;

e Asset weighted returns exceed equal weighted returns for

o International/global equity funds and
o 10 of 13 fixed income categories (two others are essentially equal)

Investors appear to discriminate among funds’ performance and vote with their dollars,
preferring the better performing funds over less successful competitors. Limiting
computer model investment advice to a menu of passive funds would deny participants
the opportunity to make these selections. The Department should not impose such a
draconian restriction on investment advice without overwhelming evidence that certain

? Data from Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard, Year-End 2009.
http://www.standardandpoors.comyindices/spiva/en/us.


OppenheimerFunds’

OppenheimerFunds, Inc,
Two World Financial Center
225 Liberty Street, 11th Floor
New York, NY 10281

Tel 212.323.0200

May 5, 2010
Submitted Electronically

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: 2010 Investment Advice Proposed Rule
Room N-5655

U.S, Department of Labor

200 Constitution Avenue, N.W.

Washington, DC 20210

Re: 2010 Investment Advice Proposed Rule

Ladies and Gentlemen:

OppenheimerFunds, Inc. (“OppenheimerFunds”)' appreciates the opportunity to
comment on the Department of Labor’s proposed rules regarding investment advice for
participant-directed individual account plans, implementing section 601 of the Pension
Protection Act of 2006 (“PPA”). OppenheimerFunds is a leading provider of retirement
plan products and services, including qualified retirement plans, individual retirement
accounts and retirement income planning tools and education, and offers a broad range of
Oppenheimer mutual funds and other investment vehicles as retirement plan investments
to help investors as they seek retirement security.

Among our many retirement-related initiatives, OppenheimerFunds partners with
intermediaries and plan sponsors to provide retirement savings information, including
investment-related education, to plan participants. We support Congress’s and the
Department’s recent initiatives to enhance Americans’ retirement security and
specifically to increase the availability of sound investment advice to plan participants.
We believe the proposed rule’s fee-leveling provisions are a step in the right direction to

' OppenheimerFunds is the investment adviser to approximately 100 investment companies that comprise
the Oppenheimer family of mutual funds. As of March 31, 2010, OppenheimerFunds, Inc., including
subsidiaries, managed more than $160 billion in assets, including mutual funds having nearly 6 million
shareholder accounts. Together with its affiliates, OppenheimerFunds also provides retirement plan
services to plan sponsors and individuals. Massachusetts Mutual Life Insurance Company
(“MassMutual”), an affiliate of OppenheimerFunds, intends to submit similar comments separately.


Employee Benefits Security Administration
May 5, 2010
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categories of investments are simply not in investors’ best interests. The available
evidence does not support such a conclusion.

Denying plans and participants access to advice about actively managed funds creates an
additional problem for asset allocation funds of funds. There is added complexity in
these vehicles in that they not only include stock selection but also include asset
allocation that changes over time. Asset allocation, itself, requires active management as
there is not an allocation benchmark for an investor at any specific point in time.
Consequently, there is not a single solution for how that allocation should change over
time. In short, there is no broadly accepted index benchmark for life-cycle, asset
allocation funds, Requiring advice to include only index or other passive products would
reduce investors’ access to alternative asset allocations, which by definition are actively
managed. Asset allocation is a significant driver of future results, along with individual
fund selection. Therefore, choice in asset allocation and roll down are key elements for a
lifecycle fund to fit various risk/return appetites.

The academic literature covers the active/passive debate with arguments about market
conditions, asset classes, and other variables that favor one approach or the other. The
issue is in fact much simpler. Active managers can and do outperform indices, and
investors appear to choose funds that do outperform. Those conclusions leave no basis
for regulatory preference to the use of either actively or passively managed funds.

For the reasons discussed above, the final rule on participant investment advice should
not prohibit or discourage the use of historical performance in computer model or other
investment advice programs.

Again, OppenheimerFunds appreciates the opportunity to comment on this proposal, and
appreciates the Department’s efforts to expand the availability of quality advice for
retirement plan participants.

Respectfully submitted,

st. Aahone

Léri E. Bostrom
Senior Vice President
and Deputy General Counsel

> Although the proposed rule does not require a plan’s asset allocation funds to be included in the
recommendations generated by a computer model, as discussed in more detail below, the broader
implications of the rule would nevertheless discourage plans from offering asset allocation funds at all.


Employee Benefits Security Administration
May 5, 2010
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expand the availability of advice and we strongly support the rule’s preservation of the
Department’s pre-PPA guidance on this topic.

Our comments are focused on the provisions of the proposed rule that deal with computer
model advice. Specifically, we believe that the Department should not establish or
endorse a particular investment theory in the context of computer model advice, and that
discouraging the use of historical investment performance in computer model advice
programs would impede, rather than enhance, the availability of sound advice to
participants,

The Department should not define what constitutes a generally accepted investment
theory or limit which generally accepted investment theories are available to plan
participants, except as necessary to ensure unbiased advice.

The preamble to the proposed rule seeks comment on a series of questions related to the
establishment of one or more investment theories that should be applied to computer
model advice, including whether the Department should establish “a list of criteria that
[computer] models must consider to the exclusion of all others”.

The proposed rule, invitations for comment and the preamble together indicate that it may
be the Department’s intent to establish an investment theory unique to investment advice
delivered by computer modeling to ERISA plans, or to dictate which generally accepted
investment theories may be used to generate investment advice for participants and which
may not. Neither approach is called for by the PPA, and either alternative would
represent a significant departure from ERISA’s longstanding approach to fiduciary
considerations and the responsibility for investments.

Congress and the Department have not previously defined what constitutes a generally
accepted investment theory for ERISA purposes or otherwise attempted to limit the
criteria that may be taken into account as part of a generally accepted investment theory
for purposes of providing advice to plan participants. Congress and the Department have
likewise declined to mandate specific investments for plans. We believe Congress and
the Department have avoided those steps for important practical and public policy
reasons and that it would be a mistake for the Department now to embark on that path.

First, the term “generally accepted investment theories” is self-defining. We believe it
refers, in general, to investment theories that are widely used and accepted by investors
and investment experts. Historical performance is clearly a factor that many investors
and investment experts incorporate into investment analysis. Therefore, historical
performance is a component supporting generally accepted investment theories.
Hundreds of mutual fund tracking services, investment web sites and periodicals
regularly publish performance information that millions of investors and investment
advisors use to evaluate options and formulate investment advice. By excluding
historical performance from consideration under computer model advice programs and
thereby dictating which investment theories may be used, the Department would be
changing the standard for computer models specified in the PPA.


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Moreover, defining “generally accepted investment theories” as proposed, or favoring
certain theories over others, would fail to accommodate the healthy evolution of
investment theory and investment products. Any rule that favors or excludes certain
generally accepted theories is likely to become outdated quickly.

ERISA has proven to be a highly successful and adaptable framework for retirement plan
regulation and innovation precisely because of its reliance on guiding principles and its
emphasis on thoughtful and informed oversight by fiduciaries rather than rigid rules and
the promulgation of “legal lists” of approved investments.

The significant unanticipated market losses suffered by millions of plan participants as a
result of the recent global financial crisis were a harsh reminder that investment strategies
that produce favorable results for investors under certain market conditions are
disadvantageous under different conditions, with a disastrous impact on some investors.
As discussed in more detail below, “buy and hold”, passive investment strategies that
may work well for a hypothetical investor over decades will not always produce the best
possible results for actual investors over shorter periods.

In addition, the exclusionary approach taken by the proposed regulations directly
contradicts the Department’s historical position with respect to the selection of plan
investments generally. At the time the Department issued its ‘prudence’ regulation, it
stated:

{T]he Department does not consider it appropriate to include in the regulation any
list of investments, classes of investment, or investment techniques that might be
permissible under the ‘prudence’ rule. No such list would be complete; moreover,
the Department does not intend to create or suggest a ‘legal list’ of investments
for plan fiduciaries. 44 Fed. Reg. 37255 (June 26, 1979)

ERISA does not now call for the Department to place limits on a plan’s use of commonly
accepted investment techniques that satisfy ERISA’s fiduciary standards any more that it
did in 1979 when the prudence regulation was issued.

Even if the Department is inclined to reconsider the application of generally
accepted investment theories in the context of ERISA plans, the computer model
requirements of the participant investment advice regulations are not the
appropriate place to do so.

Using the participant investment advice regulations to limit the generally accepted
investment theories that may be incorporated into computer model advice is not
contemplated by the PPA. The PPA does not include a definition of “generally accepted
investment theories” or limit which theories may form the basis for computer model
advice (other than requiring that a model take into account historic returns of different
asset classes over defined periods of time). If Congress believed that certain generally