Regarding Department of Labor, Employee Benefits Security Administration, RIN 1210-AC38, Proposed Rule, “Fiduciary Duties in Selecting Designated Investment Alternatives”
To Whom It May Concern:
The overall purpose of this proposed rule is worthwhile: to boost returns and increase the diversification of retirement assets being invested by millions of workers and retirees, and to reduce class-action lawsuits against plan sponsors. This would be accomplished by allowing the responsible inclusion of the growing and varied class of alternative investments in participant-directed individual account plans sponsored by employers, without fear of expensive and frivolous litigation for claims of inappropriate plan investments. The rule, moreover, lays out a reasonable process of evaluation factors including investment performance, fees, liquidity, valuation, benchmarks, and complexity, and gives several safe harbor examples. Also, unlike some of the proposed rules issued during the Biden Administration, for example on disability adjudication by the Social Security Administration[1], the documentary evidence and organization here are complete, logical, and meet the federal legal requirements. There are, nonetheless, some significant policy and technical errors in the rule as written which should be corrected before being finalized.
The largest policy error is the lack of appropriate focus for comparisons when judging whether certain investments should be included. For example, the rule illustrates consideration of fees in a case when the plan sponsor is judging whether to add a variable annuity contract that provides lifetime income. It notes that the annuity will have higher fees even with underlying investments that cost the same as the current plan lineup, owing to the extra cost of the lifetime income guarantee, and that this can be appropriate. That focus, however, is too narrow because it ignores the relevant fuller comparison to retirement income strategies that use immediate life annuities, investments, and withdrawal strategies, as explained and shown in Warshawsky and Pang (2009).[2] Depending on the level of fees and the desire for certain risk features, it is possible that the variable annuity is still the right choice, but the comparative analysis needs to be broad.
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