From: Paul Ruedi [mailto:PRuedi@rhafinancial.com] 

Sent: Tuesday, April 20, 2010 11:47 AM 

To: EBSA, E-ORI - EBSA 

Subject: 2010 Investment Advice Proposed Rule

I have been an investment advisor for 25 years. For most of those years (20) I 

have utilized index funds or passively managed funds for both 401k clients and 

Individual clients. 

I am most encouraged by the recent views or ideas of the DOL notion that 

investors in 401k plans would be best served by using index funds / passive 

funds as it is clearly in the best interests of investors. Anecdotally, this must be 

true since Wall Street is so adamantly opposed to the idea. 

However, the Wall Street crowd, who’s only interest is their bottom line knows 

that once plans begin to use index funds, they will never go back to overpriced 

active management. They are not fighting the DOL as much as they are 

fighting reality and math. 

For example, all the research shows that 80 to 90 percent of active managers 

underperform the indices. Out of the 10 to 20 percent who outperform, only 1 

in 200 outperforms the indices consistently by more than 3% a year. Chances 

that an individual investor will find such a winning manager are less than 1% 

and this game is not worth playing. They know this, yet a fair deal for investors 

threatens their ability to fleece the public. 

Consider the questions the DOL have come up with. 

• “What investment theories are generally accepted ... and what investment 

practices are consistent ... with such theories?”

The real answer is that active management consistently shows that they 

outperform markets no more often than you would expect from random 

chance. 

• “On what bases can a fund’s superior past performance be demonstrated to derive 

not from chance but from factors that are likely to persist?”

See the answer to the first question. It takes 35 years to distinguish skill 

from luck. There has not been one study to show that there is 
persistence in returns (alpha) or that active managers outperform 

markets by more than one would expect from random chance. 

• “Under what if any conditions would it be consistent with generally accepted 

investment theories ... to recommend a fund with superior past performance over 

an alternative fund in the same asset class with average performance but lower 

fees?”

Based on all the studies, how could anyone suggest a more expensive alternative 

based on the notion that past performance is indicative of future performance? In 

fact, most investment people will talk about the Brinson study showing that most 

variation of returns between one portfolio and another are due to asset allocation 

(well over 90%). Yet, they then throw the very notion out when implementing 

their strategies with active management. That is, even though approximately 95% 

of the success of the investor will be directly related to asset allocation, they 

spend 100% of their time (at a very high cost to investors) trying to outperform 

the easily achievable benchmark return—which as all studies have shown do not 

increase returns, but rather DETRACT FROM RETURNS. 

• “Should a model ascribe different levels of risk to passively and actively managed 

investment options?” 

By their very nature, actively managed funds involve more uncertainty 

(risk). They have to since there is always the possibility of falling short 

(underperformance) of the easily achieved benchmark. Active 

management by its very nature increases risk. Anyone who argues 

otherwise has an agenda. Investors never need to outperform anything 

to achieve their goals. However, underperformance can hurt the best 

laid allocation. 

Finally, the definition of insanity is when you keep doing what you have always 

done and expect a different outcome. 401k plans today will change providers 

every four years. That trend has not changed. The reason is as follows. The 

401k plan market is heavily dominated by active management. That increases 

the risk of the “heartbreak of active management” which of course is 

disappointing returns due to the risk of stock picking, timing and the heavy 

burden of cost associated with active management. 

So the next 401k slick salesperson comes in and tell HR that the reason is the 

other firms investments are terrible and that theirs are a whole lot better (which 

is only after the fact). My experience is that all the major firms run around 

telling HR departments that the others sell cancer. The HR person is 

convinced (the proposals are rather convincing—fictitious and misleading—
but convincing) and makes the change. The new platform now contains all 

five-star funds that of course were all included recently due to the past 

performance that can now be determined after the fact. Those funds of 

course, will not likely live up to the hype (since there is no persistence in active 

management alpha) and further disappoint the 401k participant. 

The broker or salesperson however is happy...he or she made a lot of money 

along the way. AND THE CYCLE OF BAD PERFORMANCE AND 

DISSAPPOINTMENT CONTINUES... 

DOL...I say stick to your guns. What you are doing is finally going to make 

the difference. Combined with quality education, index based investments are 

the only rational investment. 

I would ask the folks screaming bloody murder the following questions: 

1. What percentage of active managers outperform a reasonable index fund 

comparison net of all costs? 

2. What percentage of those can be expected to consistently do so? 

3. How does that square with historical evidence? 

4. How does that compare with random chance? 

5. What percentage of variation or outcome between various asset 

allocations is explained by asset allocation between stocks and bonds and 

cash? 

6. How much is explained by active management (timing and selection)? 

7. Is there a risk of underperformance built into active management? 

8. What is that risk to investors? 

9. Is a financial plan using actively managed investments inherently made 

riskier due to the likelihood of underperformance of active 

management? 
10.Do the prudent investor rules and restatement of trusts say that while 

active management is allowed, fiduciaries will have to essentially show 

that attempts of active management will have to be justified by higher 

returns? 

11.Can active management be expected reliably to compensate for the 

higher expenses? 

Sincerely, 

Paul Ruedi 

Paul Ruedi

Work: 217‐356‐1400

Cell:    217‐493‐3030

Ruedi Holder & Associates, Inc.

2004 Fox Drive Suite G

Champaign, Il 61820

E-mail Disclosure: This message is intended only for the use of the person(s) (intended recipient) to whom it is addressed. It may 

contain information that is privileged and confidential. If you are not the intended recipient, please reply to the sender as soon as 

possible and delete the message from your computer. Any dissemination, distribution, copying or other use of this message or any 

of its content by a person other than the intended recipient is strictly prohibited.