Follow the Abbott Money

Texas is becoming the perfect private-capital ecosystem.

Hundreds of billions of dollars sit in Texas public pensions and university investment funds. Private equity and private credit are expanding rapidly. AI data centers are consuming extraordinary amounts of electricity, water, land and infrastructure. Energy companies stand to make fortunes supplying them.

And now Apollo Global Management is moving a major strategic hub to Austin.

Governor Greg Abbott welcomed Apollo with open arms despite their clear links to the Jeffrey Epstein scandal. 

That would be interesting enough.

But follow the money.

Some of Abbott’s largest political donors are simultaneously major players in energy, real estate, infrastructure, technology and the Texas data-center boom.

Some have received Abbott appointments.

Some have direct relationships with Texas public investment funds.

Some have both.

It shows why Texas desperately needs transparency about the intersection of campaign contributions, gubernatorial appointments, pension investments and the data-center gold rush.

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Abbott’s Million-Dollar Club

Abbott doesn’t raise political money in ordinary amounts.

Transparency USA reports approximately $71.4 million in contributions during the 2026 election cycle and $67.5 million cash on hand.

Among the biggest contributors:

S. Javaid Anwar — $3.37 million

The Permian Basin oil executive was previously identified by the Texas Tribune as Abbott’s largest overall donor. Abbott appointed Anwar to the Texas Higher Education Coordinating Board.

Edward Roski Jr. — $2 million

Roski is chairman of Majestic Realty.

Majestic senior executive Jim Fonteno has an interesting résumé: former trustee of the Teacher Retirement System of Texas and former chairman of the TRS Investment Committee.

Kelcy Warren — $1.50 million this cycle

Warren controls Energy Transfer, one of America’s largest pipeline companies.

The Texas Tribune previously calculated Warren had already given Abbott approximately $2.9 million by 2022.

Abbott also appointed Warren to the University of Texas System Board of Regents.

And Texas public investment funds have invested in Energy Transfer securities.

Joe Gebbia — $1.5 million

The Airbnb co-founder is another Abbott megadonor. Texas TRS reported owning 93,405 Airbnb shares in February 2026.

Kenneth Fisher — more than $1 million

Fisher Investments previously managed approximately $350 million for the Employees Retirement System of Texas before ERS terminated the mandate in 2019.

Elon Musk — $500,000

Texas TRS reported owning 783,916 Tesla shares in February 2026.

But the private-market and governance connections deserve considerably more scrutiny.

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Kelcy Warren: Exhibit A

If you want to understand the Texas ecosystem, start with Kelcy Warren.

Warren is a huge Abbott donor.

Abbott appointed him to the UT Board of Regents.

Warren controls Energy Transfer.

Texas public investment funds have invested in Energy Transfer.

And now the AI data-center boom promises potentially enormous additional demand for natural gas and energy infrastructure.

This is not some hypothetical future industry.

Texas’ proposed electric-grid connections reached an astonishing 474 gigawatts this summer.

Approximately 90% was associated with data centers.

That is more than five times Texas’ record peak electricity demand.

Only after the boom reached those proportions did Abbott order regulators to pause most new approvals while conducting an audit.

Energy Transfer and other pipeline companies could be enormous beneficiaries if Texas attempts to satisfy even a fraction of that demand with new gas-fired generation.

Again, that doesn’t establish that Warren bought Abbott.

It establishes something more useful:

The financial interests of some enormous Abbott donors overlap directly with policies controlled or influenced by Texas government.

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Ray Hunt: Follow the Pension Money

The Hunt connection may be even more interesting from a pension perspective.

The Hunt family has been a significant Abbott donor.

Hunt Energy is positioned in the energy and power-infrastructure economy.

But Hunt also had a direct commercial relationship with Texas TRS.

Hunt Realty and TRS created the Akard Street real-estate investment platform.

TRS ultimately took control of the platform.

That isn’t a passive S&P 500 investment.

It is the kind of direct institutional relationship pension trustees should disclose alongside political relationships.

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Private Equity Moves Onto the Pension Board

Then Abbott made a particularly revealing appointment.

In June 2026, Abbott appointed Dan West to the Teacher Retirement System of Texas Board of Trustees.

West’s occupation?

Private equity.

He is an investor at SCF Partners, which specializes in energy services, equipment and technology.

So while Texas TRS pours billions into private markets, Abbott has placed a professional private-equity investor on the board overseeing teachers’ retirement assets.

Again, private-equity experience can be useful.

But who represents the skeptical side of the table?

Who asks whether private equity actually beat public markets after fees?

Who challenges GP valuations?

Who questions carried interest?

Who demands the LPAs and side letters?

Who asks whether the consultant recommending another private-equity allocation has conflicts?

Texas appears much better at bringing Wall Street into the pension boardroom than bringing Wall Street skeptics into it.

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And Then Apollo Arrives

Now add Apollo.

Texas TRS has already been a major Apollo investor, including a reported $400 million commitment to Apollo Investment Fund X.

Then, on August 3, Governor Abbott announced that Apollo was establishing a major strategic hub in Austin.

Abbott proclaimed:

“Texas is the new financial capital of America.”

He may be right.

But Austin is also becoming America’s public-pension/private-equity capital.

Apollo will be surrounded by enormous pools of public institutional capital:

Teacher Retirement System of Texas

Employees Retirement System of Texas

Texas Municipal Retirement System

Texas County & District Retirement System

UTIMCO

Collectively, these institutions oversee hundreds of billions of dollars.

For Apollo, Blackstone, KKR, Ares and the rest of the private-market industry, Austin is increasingly where the money is.

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The Data-Center Money Trail

Now connect Wall Street to the data-center boom.

Abbott’s current donor records include:

Edward Roski / Majestic Realty — $2 million

Kelcy Warren / Energy Transfer — $1.5 million

Black Mountain Power — $500,000

Black Mountain founder John Bennett — $500,000

Elon Musk — $500,000

And that is before adding major Abbott donors associated with natural gas, electric transmission, oil, real estate and infrastructure.

Texas created enormous incentives for data centers.

Private capital rushed in.

Data centers demanded enormous amounts of electricity.

Energy and infrastructure companies stood to benefit.

Then proposed electricity demand exploded to 474 GW.

Suddenly Abbott discovered that Texas might have a problem.

In August he ordered a comprehensive audit and effectively paused many new grid connections.

Good.

But where was the audit before the gold rush?

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Abbott’s Appointment Machine

There is a larger governance problem here.

The Texas Tribune conducted an extraordinary analysis of Abbott’s university appointments.

It found that more than 70% of Abbott’s appointees to the state’s university-system boards had contributed to Abbott.

Approximately 30% had contributed more than $100,000.

Among them was Kelcy Warren.

This doesn’t prove that Abbott sells appointments.

Abbott denies contributions determine appointments.

But when governors can accept unlimited six- and seven-figure political contributions from wealthy business executives and then appoint some of those same executives to powerful public boards, the appearance problem is obvious.

Add public pension money and private equity and the stakes become much larger.

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What is missing is the cross-match.

Texas retirees should be able to type “Kelcy Warren,” “Apollo,” “Black Mountain,” “Majestic,” “Hunt,” “Blackstone” or “KKR” into one database and see:

How much did they give Texas politicians?

Who appointed whom?

How much pension money do they manage?

What fees are they collecting?

What Texas projects do they own?

What tax breaks did they receive?

And what infrastructure are Texas ratepayers being asked to finance?

That is not accusing anyone of a crime.

That is basic public accountability.

Texas has assembled almost every ingredient necessary for a private-capital feeding frenzy:

Political money.

Pension money.

Private equity.

Private credit.

Cheap land.

Natural gas.

Tax incentives.

Data centers.

And politicians eager to proclaim Texas open for business.

Apollo’s move to Austin isn’t the story.

Apollo’s move is the symbol of the story.

Texas is rapidly becoming America’s private-capital capital.

Before Wall Street gets any more Texas pension money, electricity, water or tax subsidies, somebody needs to follow the money.

Appendix — Follow the Abbott Money

The current-cycle contribution figures below come from Transparency USA’s 2026 Abbott records, which report roughly $71.4 million in total contributions.

Abbott contributor	2026-cycle giving identified	Business	Key connection
S. Javaid Anwar	$3.37M	Midland Energy	Oil & gas; Abbott appointee; Tribune previously identified him as Abbott’s top overall donor
Edward Roski Jr.	$2.00M	Majestic Realty	Data-center/industrial real estate; Majestic executive Jim Fonteno formerly TRS trustee & Investment Committee chair
William Doggett	$1.59M	Doggett Equipment	Heavy equipment/infrastructure
Kelcy Warren	$1.50M	Energy Transfer	Gas/pipelines; former Abbott-appointed UT Regent; Texas public-investment exposure to Energy Transfer
Joe Gebbia	$1.50M	Airbnb co-founder	TRS held 93,405 Airbnb shares
Bobby Cox	$1.19M	Bobby Cox Companies	Texas business/real estate
Kenneth Fisher	$1M+	Fisher Investments	Former ~$350M Texas ERS investment-management mandate
Elon Musk	$500K	Tesla/SpaceX	AI/compute; TRS held 783,916 Tesla shares
Black Mountain Power LLC	$500K	Black Mountain	Direct Texas data-center/power-development connection
John Bennett	$500K	Black Mountain	Founder/CEO; direct data-center connection

The Abbott appointment pattern is independently significant. The Texas Tribune found that more than 70% of Abbott’s university-system appointees were donors, with roughly 30% giving more than $100,000. It specifically identified Warren at $2.9 million historically and Anwar at more than $6.2 million at the time of its 2022 analysis.

Appendix B — The Strongest Pension Cross-Matches

Name / firm	Political connection	Public-capital connection	Significance
Kelcy Warren / Energy Transfer	Major Abbott donor; Abbott-appointed UT Regent	Texas public funds have held Energy Transfer securities	A — donor + appointment + public capital + data-center energy
Ray Hunt / Hunt Realty	Abbott donor family	Direct Akard Street real-estate relationship with TRS	A — direct pension commercial relationship
Edward Roski / Majestic	$2M current-cycle Abbott donor	Majestic executive formerly TRS trustee and Investment Committee chair	A — revolving-door/governance connection
Kenneth Fisher	$1M+ Abbott donor	Fisher Investments formerly managed ~$350M for ERS	A — direct asset-manager relationship
Dan West / SCF Partners	Abbott appointee	Abbott appointed PE professional to TRS board in June 2026	A — PE directly inside pension governance
Apollo	Abbott publicly welcomed Austin expansion	TRS has committed substantial capital to Apollo, including reported $400M Fund X commitment	A — major PE/pension relationship
Elon Musk / Tesla	$500K Abbott donor	TRS owns 783,916 Tesla shares	B — direct but ordinary public-market investment
Joe Gebbia / Airbnb	$1.5M Abbott donor	TRS owns 93,405 Airbnb shares	B — direct but ordinary public-market investment

Appendix C — The Data-Center/Power Network

Texas’ situation has become extreme enough that Abbott ordered a new audit last week. ERCOT had approximately 474 GW of proposed new demand, about 90% associated with data centers and more than five times Texas’ peak load.

Abbott donor / interest	$ identified	Potential Texas boom exposure
Roski / Majestic	$2.0M	Data-center/industrial real estate
Warren / Energy Transfer	$1.5M current cycle	Natural-gas pipelines and power-generation fuel
Black Mountain Power	$500K	Power/data-center development
John Bennett / Black Mountain	$500K	Data-center development
Musk	$500K	AI, computing, electricity-intensive infrastructure
Hunt interests	Significant Abbott donor	Power, energy, real estate
Kinder interests	Abbott donor	Natural-gas pipeline infrastructure
Oncor-linked interests	Abbott donor	Electric transmission/distribution
Hilcorp-linked interests	Abbott donor	Oil and natural gas

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“Why Did the Bonus Number Win 19 Out of 20 Times?

Ohio STRS has apparently decided that the best response to allegations that it used favorable performance numbers to help determine investment-staff bonuses is to bury Ohio teachers under enough investment jargon that hopefully everyone gives up.  https://www.strsoh.org/news/investments.html

GIPS.  Performance examinations.  Time-weighted returns. Net fiduciary position. Valuation conventions. Different methodologies. Independent verification.

Anything, apparently, except answering the obvious question:

Why did the performance number that helped determine investment-staff compensation come out higher in 19 of 20 years?

That is the remarkable finding of the Heritage Foundation’s Allen Mendenhall and Dan Sutter in Retirement at Risk: The Political Economy of Public Pension Governance. https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/

The authors compared STRS’s reported investment returns with returns they reconstructed from audited financial information for 2003–2022.

STRS’s reported number was higher 19 times out of 20.

The average difference was about 0.33% per year.

The authors estimate the compounded difference at approximately $9.3 billion over the period.

And — here’s the part STRS would probably prefer Ohio teachers not dwell upon — the more favorable performance measure was used in evaluating investment performance and determining incentive compensation.

This is the central finding of a peer-reviewed academic paper.

Funny How the Errors Keep Going in the Same Direction

Different legitimate performance methodologies can absolutely produce different numbers.

That isn’t the scandal.

The scandal is the direction.

If this were merely innocent statistical noise, sometimes STRS’s number should be higher and sometimes it should be lower.

That is essentially what the researchers found at Ohio’s other giant pension system, OPERS.

OPERS’s discrepancies were much smaller — about 0.08% — and went both directions.

STRS?

19 out of 20 in the favorable direction.

What extraordinary luck.

It is almost as if an employee were allowed to calculate his own batting average for purposes of determining his bonus — and somehow discovered 19 years out of 20 that he was batting better than the accountant thought.

STRS can produce another 40-page explanation of investment-performance methodology if it wants.

It still has to explain 19 out of 20.

The Compensation Makes This Much Worse

This might be an interesting accounting dispute if STRS investment employees were ordinary Ohio public employees earning ordinary public-sector salaries.

They aren’t.

As CommonSense previously documented, STRS has created what amounts to a little Wall Street compensation island in Columbus.

Based on the compensation data we reviewed:

• 4 STRS employees earned more than $600,000.
• 20 earned more than $400,000.
• 49 earned more than $300,000.
• 85 earned more than $200,000.

And the disparity inside STRS itself is extraordinary.

The average investment employee was paid approximately $180,693, versus about $89,686 for accounting employees.

The Chief Investment Officer received approximately $913,909, versus approximately $193,933 for the Chief Financial Officer.

So the people helping produce and defend the investment-performance numbers can make multiples of the people responsible for financial controls.

That is not a trivial governance detail.

That is the governance problem.

Meanwhile, Ohio’s governor — who runs the entire State of Ohio — makes a fraction of what STRS’s top investment personnel can receive.

Apparently managing an Ohio teachers’ pension portfolio is several times more valuable than managing Ohio.

And teachers and retirees are supposed to regard this compensation structure as perfectly normal.   https://commonsense401kproject.com/2026/05/02/ohio-strs-investment-staff-paid-excessively-to-look-the-other-way/

STRS’s Favorite Magic Word: GIPS

When challenged about performance, STRS repeatedly retreats behind GIPS compliance and independent verification.

That sounds impressive.

But it doesn’t answer the question.

GIPS is a performance-presentation framework. It tells an organization how performance should be calculated and presented under specified conventions.   https://commonsense401kproject.com/2026/08/05/gips-compliance-the-new-gaap-why-pension-trustees-should-stop-confusing-reporting-standards-with-market-reality-with-private-equity/  

It does not magically transform every underlying valuation into an observable market price.

That becomes particularly important with private equity, private credit, real estate and other alternatives.

A private-equity GP can mark a partnership at $100.

The accountant can determine that the valuation process complies with accepted accounting rules.

The performance people can correctly calculate a return using $100.

The GIPS verifier can determine that the calculation and presentation comply with GIPS.

And an actual buyer might still only pay $75.

Everybody can therefore be “compliant” while the economic value available in an actual transaction is substantially different.

As CommonSense has argued before:

The math can be perfectly correct while the number being fed into the math remains questionable.

And when those resulting performance numbers help determine bonuses, valuation isn’t some obscure accounting debate anymore.

It becomes a compensation issue.   https://commonsense401kproject.com/2025/08/25/misleading-claims-of-gips-compliance-at-ohio-strs/

The World’s Most Convenient Measuring Stick

The deeper problem at STRS is the same problem we have identified at other public pension systems.

Staff participates in an extraordinarily convenient closed loop:

Choose complicated investments.

Accept private-market valuations that aren’t continuously tested by markets.

Measure performance using specialized methodologies and custom benchmarks.

Have consultants and verifiers certify that the methodology was followed.

Declare value-added.

Pay bonuses.

Then, when somebody asks whether a simple transparent portfolio might have produced a better result at dramatically lower cost, explain that the comparison isn’t sophisticated enough.

Apparently the only unacceptable benchmark is one ordinary teachers can understand.

For compensation purposes, STRS should publish one reconciliation every year:

Audited financial return

versus

GIPS-reported investment return

versus

return used to calculate staff incentive compensation.

Put all three numbers on one page.

Then disclose the exact dollar amount of compensation produced by each calculation.

And for private assets, add one more column:

Estimated realizable secondary-market value.

If a private-equity partnership is carried at $100 million, tell Ohio teachers what independent buyers would actually pay for it.

Then recalculate performance and bonuses using that number.

If STRS’s performance is as terrific as STRS says it is, this should be an easy exercise.

Don’t demand Wall Street compensation for performance measured using pension-accounting conventions, GP-estimated private-market values, customized benchmarks and internally generated performance calculations.

You don’t get to claim you are a public servant when discussing accountability and a Wall Street rainmaker when discussing compensation.

Pick one.

Bottom Line: 19 Out of 20

STRS can torture this issue with as much investment terminology as it wants.

The number that matters remains remarkably simple:

19 out of 20.

The academic researchers found STRS’s reported performance exceeded the result they reconstructed from audited financial information in 19 of 20 years.

The more favorable performance numbers were connected to investment-staff incentive compensation.

At OPERS, the differences were smaller and went both ways.

At STRS, they overwhelmingly went one way.

Toward higher reported performance.

Toward higher apparent value-added.

And toward the compensation system.

Ohio teachers don’t need another lecture about GIPS.

They need a straight answer to a very simple question:

Why did the number connected to paying the investment staff keep winning?

Until STRS answers that without hiding behind methodological jargon, its tortured explanations may simply reinforce the problem they are supposed to explain.

Because when employees are allowed to help define the measuring stick used to determine their own bonuses, the issue isn’t whether the measuring stick technically complies with industry standards.

The issue is who gets to hold the ruler.

ERISA is supposed to be simple.

The retirement plan exists for the exclusive benefit of participants.

Not for the employer’s investment bankers.   Not for the CFO’s lenders.   Not for the consultant’s business partners.   Not for private-equity firms that finance the corporation.

And certainly not for Wall Street firms looking for another distribution channel for expensive products that would have a much harder time getting into an SEC-regulated mutual fund.

Yet I believe this basic principle explains one of the biggest remaining problems in America’s retirement system: too many retirement-plan investment decisions may still be influenced by corporate and Wall Street relationships that have little or nothing to do with what is best for participants.

Thole Exposed the Strange Economics of Defined-Benefit Plans

The Supreme Court’s 2020 decision in Thole v. U.S. Bank illustrates an important distinction.

In a traditional defined-benefit pension, participants generally receive the pension benefit they were promised regardless of whether the plan invests cheaply in index funds or pays enormous fees to hedge funds and alternative managers—assuming, of course, the employer ultimately remains capable of funding the benefit.

That means excessive investment costs can economically fall primarily on the corporate sponsor, rather than immediately reducing an individual participant’s account.

The Supreme Court consequently held that the Thole plaintiffs lacked Article III standing because they had received all of their monthly pension benefits and would receive the same benefits regardless of the lawsuit’s outcome.

Whatever one thinks of the standing decision, it highlights something important:

A DB pension and a 401(k) are fundamentally different economic animals.

In a 401(k), participants own the consequences.

If the investment earns less because of excessive fees, participants lose.

If an alternative investment is overvalued, participants lose.

If a private-equity fund charges layers of management fees, carried interest and portfolio-company expenses, participants lose.

If an annuity provider retains an excessive insurance spread, participants lose.

There is no corporate balance sheet automatically making the participant whole.

Intel: Running a DC Plan Like a DB Plan

That is why the Intel litigation is so important.

As I have previously argued, Intel appears to have imported the institutional-pension model into a defined-contribution plan, using private equity and other alternatives through structures whose underlying economics can be extraordinarily difficult for ordinary participants—and sometimes even sophisticated fiduciaries—to evaluate.

That might make conceptual sense in a $50 billion pension plan staffed with investment professionals.

It is much harder to justify when the ultimate investor is an employee whose retirement account bears the investment results.

The central question should therefore be:

Why expose a 401(k) participant to opacity, valuation discretion, illiquidity, leverage and multiple layers of fees unless the fiduciary can demonstrate that participants are actually being compensated for taking those risks?

“Institutions invest this way” isn’t an answer.

A 401(k) isn’t a corporate pension.    https://commonsense401kproject.com/2026/01/17/the-supreme-courts-intel-case-is-about-secrecy-fake-benchmarks-and-fiduciary-illusions/

The 401(k) System Has Actually Improved—Because of Litigation

There are roughly 8,000 large 401(k) and ERISA-covered 403(b) plans with more than $100 million in assets.

My rough estimate from years of examining plans is that perhaps half—around 4,000—are now reasonably well run.

That is dramatically better than a decade ago.

I would estimate that the number of well-run large plans has increased roughly fourfold.

And I don’t credit Washington for most of it.

I credit ERISA litigation.

Fee lawsuits forced fiduciaries to examine recordkeeping costs.

Litigation pushed plans toward institutional share classes.

It exposed revenue sharing.

It challenged proprietary funds.

It forced committees to document their processes.

It made consultants explain themselves.

It made corporate boards recognize that the 401(k) plan wasn’t simply an employee-benefits department backwater.

Democratic administrations have talked about protecting retirement investors, but in my view the Department of Labor has done far too little to confront these structural conflicts. Republican policymakers have increasingly pushed in the opposite direction—toward expanding access to private equity, private credit, annuities and other complicated Wall Street products.

The plaintiffs’ bar may have done more to improve America’s large 401(k) plans than either political party.

But the Easy Problems Were Fixed First

The first generation of ERISA litigation went after problems that could be seen relatively easily.

A mutual fund charged 100 basis points when an otherwise identical institutional share class charged 40.

A recordkeeper received $150 per participant when comparable services cost $40.

A plan stuffed its lineup with the sponsor’s proprietary funds.

Those cases mattered.

But today’s conflicts can be much harder to see.

They increasingly occur outside the transparent world of SEC-registered mutual funds.

Private equity.

Private credit.

Collective investment trusts.

Insurance-company general and separate accounts.

Lifetime-income products.

Custom target-date funds.

Alternative-investment vehicles.

This is precisely where ERISA standards should become higher, not lower.

Instead, we seem determined to move retirement assets into structures with less transparency.

Follow the Corporate Relationships

Suppose a corporation’s 401(k) committee selects a large Wall Street firm.

The traditional fiduciary analysis asks:

Was the investment prudent?

Were the fees reasonable?

Was performance properly benchmarked?

Those are necessary questions.

But they may no longer be sufficient.

We should also ask:

What other business does this Wall Street firm do with the corporation and its executives?

Consider the possibilities.

The company’s CFO may have banking relationships with the same institution providing retirement-plan products.

The corporation may borrow money from that bank.

It may use the bank for investment banking, treasury management, derivatives, acquisitions or bond offerings.

The corporation may borrow from a private-credit fund affiliated with Apollo, Blackstone, JPMorgan or another enormous financial organization.

Executives may have personal wealth-management relationships.

A consultant may have relationships with investment managers that extend well beyond the consulting contract.

These relationships don’t prove an ERISA violation.

But pretending they don’t matter is equally unreasonable.

I Saw This Problem Thirty Years Ago

This isn’t theoretical to me.

In the 1990s, I worked on defined-contribution plans for a bank.

We lost one piece of retirement-plan business to another bank.

Why?

As I understood it, the competing bank offered the corporate client a better deal on its commercial lending relationship.

Think about what that means.

The decision supposedly concerned the employees’ retirement plan.

But another corporate banking relationship could influence who received the retirement business.

That experience permanently changed how I look at retirement-plan conflicts.

Whenever someone tells me that a sophisticated corporate retirement committee selected a financial company solely because it was best for participants, my next question is:

What other business was going on between the two companies?

Now Add Private Equity and Private Credit

The potential conflict becomes even more significant as Apollo, Blackstone and other alternative-asset managers expand across corporate finance.

These aren’t simply “investment managers” anymore.

They can be lenders.

Private-credit providers.

Insurers.

Asset managers.

Real-estate financiers.

Buyout sponsors.

Retirement-product manufacturers.

Owners of companies doing business with plan sponsors.

And increasingly, they want access to defined-contribution retirement assets.

Imagine a corporation borrowing hundreds of millions of dollars from a private-credit platform while its retirement committee is simultaneously considering products affiliated with that same financial organization.

Does that automatically mean the retirement investment is imprudent?

Of course not.

But ERISA’s exclusive-benefit rule should require fiduciaries to ask whether the relationship affected the decision.   https://commonsense401kproject.com/2026/08/03/more-academics-oppose-private-equity-in-401k-clayton-and-de-fontenay/

Participants shouldn’t become bargaining chips in a larger corporate relationship.

Consultants Can Be the Missing Link

The consultant is supposed to protect the committee from precisely these conflicts.

But what happens when the consultant has conflicts of its own?

I have previously written about the relationships between major pension consultants and private-equity firms, and why consultants should receive much greater scrutiny in ERISA litigation.

Consultants can occupy an extraordinarily powerful position.

They decide which managers get presented.

They construct peer groups.

They recommend benchmarks.

They evaluate fees.

They prepare committee materials.

And when something goes wrong, corporate fiduciaries frequently point to the consultant and say:

“We relied on our expert.”

That defense becomes considerably less reassuring if the supposedly independent expert has undisclosed financial, ownership, marketing, conference, insurance, referral or other relationships with the financial firms being recommended.

The consultant should be the firewall.

A conflicted consultant can instead become the distribution system.

How America’s Largest Pension Consultants Became the Distribution Arm for Private Equity & Private Debt

Why 401(k) Consultants Should Be Included as Defendants in ERISA Litigation

And Don’t Ignore Personal Relationships

Discovery should go further.

Who introduced the consultant?

Who introduced the investment manager?

Was the consultant already working with the CEO, CFO or board members?

Were there family relationships?

Friendships?

Prior employers?

Banking relationships?

Insurance relationships?

Executive-benefit arrangements?

Private-wealth relationships?

Commercial loans?

Investment-banking mandates?

Private-credit loans?

These aren’t accusations that every relationship is corrupt.

They are questions that sophisticated fiduciary oversight should already be asking.

ERISA demands loyalty.

You cannot intelligently evaluate loyalty while deliberately ignoring relationships capable of creating divided loyalties.

Mutual Funds Put Some Guardrails Around This Problem

This is another reason I continue to argue that ERISA investment standards should be higher than SEC mutual-fund standards—not lower.    https://commonsense401kproject.com/2026/07/27/erisa-investment-standards-should-be-higher-than-mutual-fund-standards-not-lower/

Public mutual funds aren’t perfect.

But they operate inside a highly developed federal securities framework involving standardized disclosures, audited financial statements, pricing requirements, liquidity rules, custody requirements and extensive public reporting.

Most importantly, investors can usually determine what they own and what it costs.

Now compare that with the direction Wall Street wants retirement plans to travel:

Private equity inside a CIT.

Private credit inside another pooled vehicle.

An annuity embedded inside a target-date fund.

Alternative assets buried several layers beneath a participant’s investment election.

Each additional layer can make conflicts, compensation and valuation harder to see.

Opacity isn’t an unfortunate side effect. It can have enormous economic value to Wall Street.

The Next Generation of ERISA Litigation Should Follow the Money Outside the Plan

For years, ERISA cases have examined the money flowing out of the retirement plan.

That remains important.

But perhaps the next generation of cases needs to examine money flowing around the retirement plan.

Who lends money to the employer?

Who handles its investment banking?

Who manages executive wealth?

Who sells its insurance?

Who finances its acquisitions?

Who owns its consultant?

Who pays the consultant?

Who finances the consultant?

Who owns the recommended manager?

What business does the employer conduct with the manager’s affiliates?

And what relationships exist among the executives, consultants, recordkeepers, insurers and investment managers?

The most important conflict may never appear on the Form 5500.

The Common Sense Test

Strip away the acronyms and fiduciary jargon.

A worker puts $100 into a 401(k).

Every person involved in deciding what happens to that $100 should be trying to make that worker’s retirement better.

Period.

If an investment is selected because it helps the employer’s banking relationship, something is wrong.

If it helps obtain corporate financing, something is wrong.

If it helps the consultant’s business relationships, something is wrong.

If it puts a CEO’s friend in the door, something is wrong.

If it gives a private-equity manager another captive pool of assets while providing no demonstrable benefit to participants, something is wrong.

And if nobody can determine whether any of those things happened because the investment has been buried inside opaque private funds, CITs, annuity contracts and custom target-date structures, that opacity is itself a fiduciary warning sign.

ERISA doesn’t say:

Put Wall Street first unless participants can prove exactly how the deal was made.

It says fiduciaries must act for the exclusive purpose of providing benefits to participants and beneficiaries.    We will see soon if the Supreme Court will uphold this in Intel.

After fifty years of ERISA, that shouldn’t be a revolutionary concept.

Yet in far too many retirement plans, it apparently still is.

For decades, Americans have been told the same story:

“Social Security may not be there for you.” The warning has become Wall Street’s greatest marketing tool. Convince workers that Social Security is on the verge of collapse, and suddenly expensive annuities become the “safe” alternative.

There is just one problem. The financial markets themselves don’t believe it, based on Credit Default Swap rates.  https://commonsense401kproject.com/2025/10/29/annuity-risk-measured-by-credit-default-swaps-cds/

“The market prices the credit risk of a typical annuity insurer at roughly 10-30 times, and sometimes 50-100 times during periods of stress, the credit risk of obligations backed by the U.S. Treasury.”

CDS spreads represent what sophisticated investors are willing to pay to insure against default. When you compare U.S. Treasury obligations to large life insurers, the difference is striking. That means the market itself prices the single-company credit risk of many annuity providers dramatically 10 to 100 times above that of obligations backed by the U.S. government.

Social Security Is Not Just Another Pension

Critics constantly describe Social Security as “going broke.” That is simply not how the system operates.

Social Security is a hybrid:

• an earned retirement benefit;
• a payroll-tax financed insurance system;
• a disability insurance program;
• survivor insurance;
• and an income redistribution program enacted by Congress.

Unlike a private insurer, Congress can:

• adjust payroll taxes;
• modify benefits;
• raise or eliminate taxable wage caps;
• change retirement ages;
• transfer general revenues if it chooses.
• Can change demographics ie let in select immigrants like a few million young engineers

Whether one agrees with those policy choices or not, they make Social Security fundamentally different from a private insurance company whose only source of payment is its own balance sheet.

The Political Solution Already Exists

Senator Bernie Sanders and others have long argued that Social Security’s projected funding gap could largely be addressed by applying payroll taxes to earnings above the current taxable wage cap.

For 2026, the Social Security taxable wage base is $184,500. Wages above that amount are not subject to the 6.2% Social Security payroll tax (or the employer’s matching 6.2%).

Whether Congress adopts that proposal is a political question. But it demonstrates an important point: Social Security’s challenge is primarily political—not one of corporate insolvency.

Those making over $184,500 who would pay the Sanders Tax probably make up 95% of the political donations to both parties and are helping push the media narrative through their connections.

Yet We Are Told the Opposite

At the same time politicians warn workers about Social Security, retirement plans increasingly steer participants toward:

• fixed annuities;
• private-credit backed insurers;
• private-equity owned insurance companies;
• pension risk transfers;
• lifetime income products.

These products depend on a single insurer remaining solvent for decades. If that insurer fails, retirees cannot simply vote for a new funding mechanism. Consumers are often reassured that state guaranty associations protect annuity owners. https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/

If someone tells you Social Security is “too risky,” ask one simple question:

Would they rather trust the taxing authority of the United States—or the balance sheet of a single insurance company?

The credit markets have already answered.   Insurance Companies are 10 to 100 times riskier

And they are not buying the fear.

---

Why Offshore Structures and Weak State Regulation Make Most Annuities ERISA “Prohibited Transactions”

For years, I have argued that private equity performance rests on a simple premise: the manager gets to decide what the investment is worth. Increasingly, I see the same problem developing with the industry’s use of GIPS compliance.

GIPS—the Global Investment Performance Standards—has become a powerful marketing tool. Pension trustees hear the words “GIPS compliant” and assume that means the reported performance has been independently validated. It has not.

The comparison reminds me of another accounting convention that investors have learned to question: GAAP accounting.

GAAP often permits firms to carry assets at management’s estimate of fair value. Likewise, GIPS generally accepts the valuation methodology used by the private equity manager. Neither asks the harder question:

What would someone actually pay for this partnership today?

That distinction matters enormously.

The 100-Cent Myth

A private equity general partner may report that a limited partnership is worth 100 cents on the dollar. The valuation follows accepted accounting policies. Auditors review the process. Performance statistics are calculated from those values. The investment manager may even claim GIPS compliance at the firm level.

Yet when investors attempt to sell the very same limited partnership interest on the secondary market, buyers frequently demand substantial discounts.

In many periods, secondary-market transactions have occurred at 70 to 80 cents on the reported NAV for certain private equity or private credit interests. Discounts vary widely by market conditions, asset quality, strategy, and liquidity, but the secondary market often provides the closest observable evidence of what sophisticated buyers are actually willing to pay.

That should raise an uncomfortable question.

If sophisticated institutional buyers consistently pay substantially less than reported NAV, which number better reflects economic reality?

The GP’s valuation?

Or the market’s?

GIPS Is About Presentation, Not Price Discovery

This is not a criticism of GIPS itself.

GIPS was designed to standardize how investment firms present performance, not to determine whether every underlying private asset has been perfectly valued.

Likewise, auditors generally evaluate whether managers have followed accepted valuation procedures—not whether the reported value equals the price that would clear in an arm’s-length market transaction.

Those are fundamentally different questions.

A valuation process can satisfy accounting standards and still materially differ from what an actual buyer would pay.

Pension Fiduciaries Should Care

This distinction becomes critical for ERISA plans and public pension systems.

Trustees often receive quarterly reports showing smooth, steadily rising returns supported by audited financial statements and references to GIPS-compliant reporting.

That combination creates an aura of certainty.

But if the underlying assets could only be sold at a significant discount, then reported returns may overstate the economic value available to beneficiaries.

Unlike publicly traded securities, private partnerships rarely face continuous market pricing. Instead, they rely heavily on manager judgment, valuation models, comparable-company multiples, projected cash flows, and periodic appraisals.

None of those substitutes for an active market.

The Missing Benchmark

Public securities face an unforgiving daily test.

Every trading day, thousands of independent buyers and sellers establish a market price.

Private equity generally does not.

Instead, the industry largely benchmarks itself against its own reported valuations.

That is a remarkably circular process.

Imagine if publicly traded stocks could report performance based primarily on management’s opinion of what the shares should be worth rather than where they actually traded.

No regulator would tolerate it.

Yet pension systems increasingly accept exactly that framework for trillions of dollars of private assets.

What Trustees Should Ask

Every pension board investing in private markets should ask straightforward questions:

• What percentage of reported NAV has similar partnerships sold for in recent secondary-market transactions?
• How often have our reported valuations exceeded realizable market prices?
• How sensitive are our reported returns to changes in valuation assumptions?
• Why are we relying primarily on GP marks instead of observable market evidence when it exists?

Those questions go to the heart of fiduciary oversight.

The Bottom Line

GIPS compliance should not become the private-market equivalent of a “seal of approval.”

It is a reporting framework—not an independent market valuation.

Nor should audited financial statements lull fiduciaries into believing that reported NAV necessarily equals realizable value.

Markets ultimately determine prices.

Accounting standards and performance reporting standards merely describe them.

When a partnership is carried at 100 but consistently changes hands in the secondary market at 70 or 80, fiduciaries should not simply celebrate the reported return.

They should ask why the market disagrees.

For retirement plans entrusted with workers’ lifetime savings, that may be the single most important valuation question of all.

Appendix: The New STRS Performance Video Asks the Right Question — But the Problem Goes Deeper

A new video circulating among Ohio teachers questions the investment-performance story being presented by the State Teachers Retirement System of Ohio. https://www.youtube.com/watch?v=3ItC4lkDSqQ

That is exactly the question trustees and beneficiaries should be asking.

But there is an even more fundamental problem than whether STRS beat or trailed a particular benchmark:

Before comparing performance, we need to know whether the performance number itself represents economic reality.

That distinction becomes especially important at STRS because billions of dollars are invested in private equity, private credit and other alternative investments for which there is no continuously observable market price.

STRS Can Report Excellent Private-Market Returns — On Paper

STRS itself has presented extraordinarily strong historical results for its alternative-investment portfolio.

For example, an STRS investment presentation reported a 10-year annualized alternatives return of 11.45% through September 30, 2023, compared with an 8.04% return for the total STRS fund. STRS also reported substantially lower measured volatility for alternatives.

Those numbers look terrific.

But there is a huge difference between a publicly traded stock returning 11% and a private-equity partnership reporting an 11% return.

A stock has to face the market every day.

Private equity generally does not.

The private-equity GP estimates what its portfolio companies are worth. Those valuations flow into the partnership’s NAV. The NAV flows into the pension’s performance calculation. The resulting performance then gets compared with benchmarks and may ultimately help justify investment-staff bonuses.

That creates a circular system:

The private manager helps determine the valuation → the valuation determines the return → the return demonstrates apparent investment skill → the apparent investment skill helps justify fees and bonuses.

GIPS Does Not Solve This Problem

STRS and its defenders frequently point to sophisticated performance measurement, consultants and GIPS compliance as evidence that the reported numbers can be trusted.

That misses the point.

As I explained in my August 5 CommonSense piece, GIPS is fundamentally a performance-reporting framework, not an independent price-discovery mechanism.

A calculation can be perfectly performed under an accepted methodology while the underlying asset value remains questionable.

That is the private-market equivalent of saying:

“The math is correct. We haven’t established that the starting number is.”

If a private-equity partnership is reported at $100 million and the return calculation correctly uses $100 million, compliance with a performance standard does not independently establish that an unrelated buyer would actually pay $100 million for the partnership.

The $100 NAV Versus the $70–$80 Market Question

This is why trustees should stop beginning their analysis with:

“Did STRS beat its benchmark?”

The first question should be:

“What could STRS actually sell these investments for?”

Suppose a private-equity partnership is carried at $100.

The GP’s valuation methodology supports $100.

The accountant accepts the valuation process.

STRS reports performance using $100.

The consultant calculates the return using $100.

The performance presentation follows accepted standards.

But suppose sophisticated secondary-market buyers will only pay $75.

Economically, that $25 difference matters far more to an Ohio teacher than whether the performance calculation complied with GIPS.

As my earlier piece argued, discounts on some private-equity and private-credit interests can be substantial, although they vary greatly by strategy, vintage, quality and market conditions.

That does not mean every STRS private investment is worth 70 or 80 cents on its reported dollar.

It means trustees should demand evidence showing how reported NAV compares with observable transaction values whenever such evidence exists.

Ohio STRS Has Another Performance Problem: Two Numbers

There is an additional reason to scrutinize STRS performance carefully.

Allen Mendenhall and Dan Sutter independently reconstructed STRS investment returns from audited financial information and found that STRS’s reported investment return exceeded their independently calculated figure in 19 of 20 years from 2003 through 2022.

They calculated an average annual difference of approximately 0.33 percentage points.

Even more troubling, STRS reportedly used the higher internally reported performance measure in determining investment-staff incentive compensation.

That doesn’t prove fraud.

Different legitimate performance methodologies can produce different numbers.

But 19 favorable differences out of 20 years deserves an explanation, particularly when compensation is connected to the more favorable measure.

It also makes the current debate over GIPS much more important.

“Independent” Verification Can Verify the Wrong Thing

The pension industry repeatedly answers criticism with words that sound reassuring:

Audited.
GIPS compliant.
Independently verified.
Consultant reviewed.
Institutional quality.

Trustees need to ask what each term actually means.

An accountant can verify that an accepted valuation process was followed without independently establishing the price at which an asset could actually be sold.

A GIPS verifier can examine compliance with performance-presentation requirements without independently auctioning STRS’s private-equity partnerships.

An investment consultant can report that STRS beat its policy benchmark without establishing that the benchmark represents the opportunity cost available to teachers.

Indeed, STRS’s consultant Meketa reported that for the five years ending March 31, 2025, STRS returned 10.98% annually versus its total-fund benchmark of 10.54%.

That may be an entirely accurate calculation.

The question is what lies underneath the calculation.

Mark the Private Portfolio to Something Resembling a Market

There is a simple stress test STRS could perform.

Take every material private-equity and private-credit partnership and estimate its current secondary-market liquidation value using actual bids, comparable secondary transactions or independent market indications.

Then recalculate:

STRS total-fund NAV.

Private-market performance.

Five- and ten-year total-fund returns.

Performance versus investable public-market alternatives.

Investment-staff incentive compensation.

Then show Ohio teachers both numbers side by side:

Pension Accounting View	Economic/Market Stress Test
Reported private-market NAV	Estimated secondary-market value
Reported PE/private-credit return	Return using market-adjusted NAV
STRS policy benchmark	Transparent investable benchmark
Reported staff value-added	Value-added after market adjustment
Bonus calculation	Bonus calculation using adjusted returns

That would be real transparency.

The Video Is Asking the Question Trustees Should Have Asked Years Ago

The importance of the new STRS performance video is not whether every number or conclusion in it ultimately proves correct.

Its importance is that Ohio teachers are beginning to challenge the performance architecture itself.

That is healthy.

STRS has recently publicly promoted the claim that independent benchmarking shows “strong investment performance at a lower cost,” while pointing to long-term peer rankings and internal-management savings.

Fine.

Then STRS should welcome an even tougher test.

Don’t merely show teachers the return.

Show them the price.

Show the original cost of every major private investment.

Show the GP-reported NAV.

Show subsequent cash distributions.

Show secondary-market indications.

Show actual secondary sales.

Show every write-down following a realization.

And reconcile those numbers with the performance figures used to compensate investment staff.

Bottom Line

The debate over Ohio STRS performance should no longer be reduced to competing charts showing whether STRS ranked in the top quartile, second quartile or bottom quartile against some consultant universe.

The deeper issue is whether pension performance based partly on manager-estimated private-market values should be treated as equivalent to performance produced by securities continuously priced by independent buyers and sellers.

GIPS compliance does not answer that question.

An audit does not necessarily answer that question.

Beating a consultant-designed benchmark does not answer that question.

There is one test that cuts through all of them:

What would an independent buyer pay today?

If STRS reports a private partnership at 100 and the market says 75, Ohio teachers deserve to see both numbers.

And if marking private assets closer to observable market values materially changes STRS’s reported performance, benchmark comparisons or staff bonuses, then the controversy is much larger than whether somebody used the wrong performance chart.

The real question becomes whether Ohio teachers have been shown investment performance—or merely professionally standardized estimates of investment performance.

Misleading Claims of GIPS Compliance at Ohio STRS

Senator Ron Wyden’s new report on Jeffrey Epstein’s financial network should end the excuses from pension boards, endowments, and unions that continue investing with JPMorgan and Apollo. https://www.finance.senate.gov/imo/media/doc/wyden_wall_street_epstein_report.pdf

This is no longer just a scandal about bad judgment or embarrassing associations. It is a financial-governance scandal involving suspicious transactions, senior executives, misleading disclosures, regulatory failures, and billions of dollars in institutional assets.

Wyden’s report concludes that Leon Black, Apollo’s co-founder and longtime chief executive, was Epstein’s largest source of funding. Black paid Epstein roughly $170 million, providing as much as 90% of Epstein’s income during key years. The report also states that Epstein used money paid by Black to finance his operations.

Apollo has spent years portraying Epstein as Black’s private problem. That defense is collapsing.

New litigation alleges that Epstein communicated with Apollo leaders about Apollo tax strategies, corporate structure, Athene, and other company matters. The Mississippi Public Employees’ Retirement System is already involved in litigation accusing Apollo and its executives of misleading investors about the extent of the relationship.  https://www.levernews.com/pension-fund-sues-financial-giant-over-epstein/

Other pension funds should ask why they are still writing Apollo new checks.

The case against JPMorgan is just as serious.

According to Wyden’s report, JPMorgan knew for years that Epstein presented extraordinary criminal, compliance, and reputational risks. Yet the bank continued serving him, processing suspicious transactions, and treating him as a gateway to wealthy clients.

After supposedly terminating Epstein in 2013, JPMorgan executives allegedly continued working through him to pursue business from Leon Black and others. Internal communications described Epstein as Black’s primary adviser and as someone who would be “calling the shots.”

That is not a minor compliance failure. It is evidence that revenue may have repeatedly defeated risk controls at one of the world’s largest banks.

JPMorgan later reported thousands of suspicious transactions totaling more than $1 billion—but only after Epstein’s 2019 arrest. Wyden also says JPMorgan refused to answer his detailed questions or produce the internal documents he requested.

Pension trustees should not wait for another settlement, indictment, leaked email, or stock drop.

They should act now.

At a minimum, pensions should freeze new investments and mandates involving JPMorgan, Apollo, and Athene; disclose all direct and indirect exposure; demand the full internal investigations; and review potential securities and contractual claims.

Divestment should not be framed as political punishment. It should be framed as ordinary fiduciary risk management.

JPMorgan faces unresolved compliance, regulatory, litigation, and governance risks. Apollo faces serious questions about disclosure, board oversight, leadership credibility, and whether its institutional investors were told the full truth.

Comparable banks, asset managers, custodians, private-credit firms, and public securities are readily available. No pension needs to accept uncompensated governance risk merely because JPMorgan and Apollo are powerful.

Pension funds control trillions of dollars. They are not powerless victims of Wall Street. They are Wall Street’s clients, shareholders, lenders, and source of permanent capital.

Wyden’s report gives them more than enough reason to use that power.

Freeze the money. Demand the records. Preserve the claims. And begin divesting from JPMorgan and Apollo.

Apollo Divestment Case for Jeffrey Epstein ties stronger after Wyden Letter

CalPERS sick twisted relationship with Jeffrey Epstein linked Apollo & Private Equity

The campaign to push private equity into America’s 401(k) plans has largely been driven by Wall Street lobbyists, consultants, and asset managers. What has been missing has been an independent academic critique.  That gap is starting to disappear.

First the outstanding analysis recently published by the NYU Stern Center for Business and Human Rights,  https://bhr.stern.nyu.edu/quick-take/part-1-the-labor-departments-proposed-401k-rule-protects-private-equity-not-retirees/    review at https://commonsense401kproject.com/2026/08/02/nyu-stern-gets-it-right-the-dols-new-401k-rule-protects-private-equity-not-retirees/

Next,  BYU Law Professor William Clayton and Duke Law Professor Elisabeth de Fontenay have submitted what may be the most comprehensive academic comment letter yet opposing the Department of Labor’s proposed 401(k) private-equity rule. Their accompanying Duke Law Journal article, Private Equity for All: The Paradoxical Push to Democratize Private Markets, expands the analysis even further.   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6899998

For years, The CommonSense 401(k) Project has argued that the push into private equity was never primarily about helping retirees.  The BYU/Duke paper reaches remarkably similar conclusions—but from mainstream legal scholarship rather than litigation or policy advocacy. That matters.

They Reject the Entire “Democratization” Narrative

Perhaps the paper’s greatest contribution is its willingness to challenge the central marketing slogan of the private-equity industry.  For years Americans have been told:

“Retail investors deserve access to investments only rich institutions have enjoyed.”

Clayton and de Fontenay ask a much harder question.  What if democratization actually benefits private-equity firms more than ordinary workers?

They conclude that retail investors receive:

• higher fees,
• greater complexity,
• more opaque investments,
• uncertain valuations,
• weaker liquidity,

while private-equity firms receive billions of dollars of new permanent capital precisely when institutional fundraising has slowed.

That observation perfectly complements our article The Great Fee Recapture. https://commonsense401kproject.com/2026/07/14/the-great-fee-recapture-why-wall-street-is-leaving-sec-mutual-funds-for-state-regulated-collective-trusts/

Wall Street isn’t fleeing SEC mutual funds because they are inefficient.  They’re fleeing because transparency limits profits.  https://commonsense401kproject.com/2026/07/27/erisa-investment-standards-should-be-higher-than-mutual-fund-standards-not-lower/

Timing Matters

One of the strongest sections explains why private equity suddenly wants retirement money.

The industry is facing:

• weak fundraising,
• fewer exits,
• excess portfolio companies,
• higher interest rates,
• reduced institutional allocations.

That is exactly when the industry begins talking about “democratization.”

Clayton and de Fontenay correctly observe the irony.

Retail investors are being invited into private equity at what may be one of the most difficult periods the industry has experienced in years.

That reinforces our earlier observation that Wall Street is seeking a new captive source of assets—not necessarily because those assets will earn superior returns, but because the industry needs fresh capital.

The Performance Debate Has Finally Gone Mainstream

One of the most encouraging developments is that respected legal scholars are now openly questioning what once seemed untouchable:

Does private equity actually outperform?

The authors review the academic literature and conclude that the evidence is far from settled. After adjusting for leverage, risk, fees, and methodology, many studies show little or no persistent outperformance, while any historical advantage appears to be shrinking as more capital floods the asset class.

Readers of The Great Performance Fraud will recognize this argument immediately. https://commonsense401kproject.com/2026/07/26/the-great-performance-fraud/     Our concern has never been merely whether returns are high.   Our concern has been whether the reported returns are comparable to public-market investments at all.

They Confirm the Diversification Illusion

One of our longest-running themes has been that private equity appears less volatile largely because it is not continuously marked to market.

Clayton and de Fontenay make essentially the same point.

The apparent low correlation with public markets may simply reflect valuation smoothing rather than lower underlying economic risk. Comparing private-equity volatility with publicly traded securities can therefore create a misleading picture of diversification.

That dovetails directly with The Diversification Lie, where we argued that accounting conventions—not necessarily economics—can make private assets appear more attractive than they really are. https://commonsense401kproject.com/2026/05/04/the-diversification-lie-how-private-equity-and-private-credit-use-corrupt-accounting-to-hijack-pension-and-401k-allocations/

Target-Date Funds Become the Trojan Horse

Perhaps the paper’s most important practical insight concerns target-date funds.

The authors recognize that Wall Street’s goal is not for millions of workers to voluntarily choose private equity.

Instead, the goal is to embed relatively small allocations inside target-date funds—the default investment for tens of millions of Americans.

Once inside a target-date fund:

• fee increases become difficult to detect,
• performance attribution becomes harder,
• participants may not even realize they own private assets.

This perfectly reinforces our repeated warnings about state-regulated collective investment trusts.    https://commonsense401kproject.com/2026/05/30/target-date-fund-fiduciary-due-diligence-guardrail-checklist/    https://commonsense401kproject.com/2025/12/07/wall-street-journal-exposes-target-date-cit-corruption-but-theyve-only-scratched-the-surface/

Complexity becomes a competitive advantage.

Litigation Is Not the Problem—It Has Been the Solution

One section deserves particular attention.

The Department of Labor argues that excessive ERISA litigation discourages innovation.

Clayton and de Fontenay reach almost the opposite conclusion.

They review decades of retirement-plan history and argue that fiduciary litigation played an important role in pushing plans toward:

• lower-cost investments,
• index funds,
• better monitoring,
• reduced fees.

Rather than viewing litigation as a problem, they see it as an important discipline on fiduciaries.

That conclusion should resonate with anyone who has followed excessive-fee litigation over the past two decades.    The Supreme Court will soon rule if plans can block Private Equity transparency  https://commonsense401kproject.com/2026/01/17/the-supreme-courts-intel-case-is-about-secrecy-fake-benchmarks-and-fiduciary-illusions/

Consultants Are Not Neutral

One section particularly caught my attention.

The professors observe that consultants specializing in private markets have structural incentives to recommend private-market investments because their businesses depend upon those markets continuing to grow. They also warn that performance data and benchmarks in private markets are susceptible to manipulation, making consultant recommendations especially difficult to evaluate independently.

That mirrors years of our reporting on consultant conflicts involving alternative investments.

How America’s Largest Pension Consultants Became the Distribution Arm for Private Equity & Private Debt

Public Pensions Are Not a Valid Comparison

The private-equity industry frequently argues:

“Public pensions invest in private equity successfully. Why not 401(k)s?”

Clayton and de Fontenay dismantle that comparison.

Defined-benefit plans differ fundamentally from defined-contribution plans because they have:

• longer investment horizons,
• different liquidity needs,
• specialized investment staffs,
• greater bargaining power,
• pooled risk,
• stronger governance structures.

The authors conclude that public-pension experience cannot simply be imported into ordinary 401(k) plans.

At Commonsense we have argued Private Equity has cost public pensions billions but corruption and lack of ERISA Fiduciary standards and litigation, has let it remain hidden. https://commonsense401kproject.com/2026/07/20/public-pensions-are-manipulating-performance-screams-for-real-standards/   https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/  https://commonsense401kproject.com/2026/05/22/calpers-sick-twisted-relationship-with-jeffrey-epstein-linked-apollo-private-equity/

An Emerging Academic Consensus

Taken together, three independent critiques now point in the same direction:

• NYU Stern questions whether the DOL proposal protects participants or primarily shields the private-equity industry.
• BYU and Duke challenge the economic assumptions underlying the entire “democratization” narrative and explain why the proposal could increase costs and risks while weakening fiduciary accountability.
• The CommonSense 401(k) Project has argued for years that opaque valuations, hidden fees, conflicted advice, and weakened disclosure standards are fundamentally inconsistent with ERISA’s participant-first principles.

These perspectives are not identical, and they differ in emphasis and legal theory.

But they converge on one central message:

The burden of proof belongs to those seeking to transform the American retirement system—not to those asking that ERISA continue to demand transparency, independent valuation, meaningful fee disclosure, prudent fiduciary oversight, and accountability before exposing millions of workers’ retirement savings to increasingly opaque private-market products.

That is a debate worth having. And thanks to the work of Professors Clayton and de Fontenay, it is now being advanced with rigorous scholarship rather than marketing slogans.

The most important critique yet of the Department of Labor’s proposed rule opening 401(k) plans to private equity and other alternative investments did not come from a plaintiff’s law firm, a union, or a consumer advocate. It came from  Michael Goldhaber at the NYU Stern Center for Business and Human Rights.  https://bhr.stern.nyu.edu/quick-take/part-1-the-labor-departments-proposed-401k-rule-protects-private-equity-not-retirees/   

Their article, “The Labor Department’s Proposed 401(k) Rule Protects Private Equity, Not Retirees,” deserves to become required reading for every ERISA fiduciary, consultant, plaintiff attorney, trustee, and member of Congress evaluating the proposal.

For years, I have argued in CommonSense 401(k) Project that the movement to place private equity, private credit, insurance products, and other opaque investments into America’s retirement system has nothing to do with helping retirees, but to enrich Wall Street.

The NYU paper reaches many of the same concerns from an independent academic perspective.

They Ask the Right Question

The debate has often been framed incorrectly.  Private-equity advocates ask:

“Should participants have access to private markets?”  NYU instead asks:

“Who is this rule really protecting?”  That distinction changes everything.

The Department of Labor describes the proposal as creating a neutral framework for fiduciaries evaluating alternative investments. Yet one of its central features is reducing litigation exposure for plan fiduciaries who follow prescribed procedures when selecting investments. Private Equity industry supporters argue this encourages innovation; consumer advocates contend it shifts legal protection toward fiduciaries and asset managers rather than participants by blocking transparency.

That concern has been at the center of nearly every article we have written on this issue.

Safe Harbors Are Not Investment Standards

One of the biggest problems with the proposed rule is philosophical.

ERISA was enacted to protect workers.

The proposed regulation instead spends enormous effort explaining how fiduciaries can protect themselves from litigation.  It’s hidden objective seems to be hiding high fee high risk products to enrich Wall Street.

That is why we argued in ERISA Investment Standards Should Be Higher Than Mutual Fund Standards—Not Lower that ERISA plans should demand more transparency than SEC-regulated mutual funds—not less.  https://commonsense401kproject.com/2026/07/27/erisa-investment-standards-should-be-higher-than-mutual-fund-standards-not-lower/

Instead, this DOL proposal appears willing to accept investments with:

• subjective valuations,
• limited liquidity,
• non-standard performance reporting,
• complex fee structures, and
• benchmark methodologies unavailable in public markets.

That represents a lowering—not a raising—of investment standards.

The Missing Piece: Performance Integrity

The NYU article focuses heavily on fiduciary protection.

But there is an even deeper issue.

Private equity is unlike virtually every traditional investment offered inside 401(k) plans because performance itself often depends upon manager-generated valuations rather than continuously observable market prices.

That was the central point of The Great Performance Fraud. https://commonsense401kproject.com/2026/07/26/the-great-performance-fraud/

If reported performance depends upon internal valuation assumptions, then every downstream fiduciary analysis becomes suspect:

• benchmark comparisons,
• diversification studies,
• Sharpe ratios,
• consultant reports,
• target-date fund allocations,
• manager rankings.

The entire analytical framework becomes dependent upon accounting assumptions, self-serving valuations rather than market prices.

ERISA should demand the strongest performance standards in American finance—not weaker ones.

The Fee Story Is Even Worse

Our article The Great Fee Recapture explained why Wall Street increasingly prefers state-regulated collective investment trusts (CITs) over SEC mutual funds.  https://commonsense401kproject.com/2026/07/14/the-great-fee-recapture-why-wall-street-is-leaving-sec-mutual-funds-for-state-regulated-collective-trusts/

The answer is simple.  Greater opacity creates greater opportunities to capture fees that would be difficult to sustain in highly transparent mutual funds.

Private equity adds another layer:

• management fees,
• carried interest,
• transaction fees,
• monitoring fees,
• portfolio-company expenses,
• financing costs,
• valuation discretion.

Participants frequently see only a fraction of the total economic cost.

The Department’s proposal asks fiduciaries to consider fees.

But unless those fees are fully observable, measuring them becomes extraordinarily difficult.

Transparency cannot be optional.    Private Equity contracts will be buried in poor state regulated CIT’s, which will then be buried in another layer of poor state regulated CITs in a Target Date Fund.

PwC Accidentally Said the Quiet Part Out Loud

One of our earlier articles analyzed how even industry publications increasingly describe retirement plans as enormous new distribution channels for alternative investments. https://commonsense401kproject.com/2026/06/10/pwc-accidentally-says-the-quiet-part-out-loud-about-private-equity-in-401ks/

The conversation rarely begins with participant needs.  Instead it begins with:

“How can private markets gain access to trillions in defined contribution assets?”

That inversion of priorities should concern every fiduciary.

Capital formation is not ERISA’s mission.    Participant protection is.

Due Diligence Cannot Be a Checklist

Our Private Equity Due Diligence Checklist attempted to demonstrate how difficult true due diligence actually is. https://commonsense401kproject.com/2026/06/07/erisa-private-equity-fiduciary-due-diligence-checklist/

Questions include:

• How are valuations independently verified?
• What secondary-market discounts exist?
• How are benchmark indices constructed?
• How much leverage exists?
• What conflicts exist between affiliated entities?
• How are portfolio-company expenses allocated?
• How are liquidity risks managed?
• How are performance numbers audited?

Many of these questions remain difficult—even for sophisticated institutional investors.

Expecting ordinary 401(k) fiduciaries to answer them consistently is unrealistic.   Current structures of non-transparent state CITs will make it impossible for fiduciaries to do this level of due diligence

The Business Model Depends Upon Information Gaps

One of our most controversial articles argued that much of private equity’s competitive advantage comes not from superior investment skill but from information asymmetry.

The combination includes:

• limited transparency,
• proprietary benchmarks,
• subjective pricing,
• confidential agreements,
• limited disclosure,
• complicated organizational structures.

Whether one agrees with that conclusion or not, it highlights why transparency matters.

Markets work best when participants can compare investments using common standards.

Private markets frequently rely on customized standards instead. https://commonsense401kproject.com/2026/06/07/the-private-equity-business-model-depends-on-secrecy-fake-benchmarks-and-fiduciary-illusions/

Why Public Pension Experience Matters

As a Trustee of a $20 billion plan I was not allowed to look at the Private Equity contracts. Staff knew if I did I would point out the hidden fees and clauses which violated state fiduciary laws.

Our work examining CalPERS, Ohio STRS, and other public pension systems has shown how private equity can corrupt every system it touches. https://commonsense401kproject.com/2026/05/22/calpers-sick-twisted-relationship-with-jeffrey-epstein-linked-apollo-private-equity/

Both CalPERS and Ohio STRS staff have been able to manipulate Private Equity returns to enhance their own bonuses in the $millions. https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/

The Real Standard Should Be the SEC

Perhaps the simplest principle is also the strongest.

The SEC requires extraordinary transparency from mutual funds because millions of ordinary investors depend upon them.

ERISA participants deserve protections that are at least as strong.

Instead, many of the investments now being promoted for retirement plans exist outside that disclosure framework.

That should concern every fiduciary.

If an investment cannot satisfy the transparency expectations imposed on mainstream retail investment products, fiduciaries should carefully consider whether it belongs in the default retirement savings vehicle for millions of American workers.    https://commonsense401kproject.com/2026/07/27/erisa-investment-standards-should-be-higher-than-mutual-fund-standards-not-lower/

NYU Has Advanced the Conversation

Michael Goldhaber  at NYU Stern deserves credit for reframing the debate.

Rather than asking whether private equity can enter 401(k) plans, they ask whether the Department of Labor’s proposal adequately protects the people ERISA was enacted to serve.

That is exactly the right question.

Our answer remains that participant protection requires more than procedural safe harbors. It requires investment standards built on transparent valuation, comparable performance measurement, complete fee disclosure, independent benchmarking, meaningful liquidity, and enforceable fiduciary accountability.

Until those standards exist, opening America’s retirement system to increasingly opaque private-market products risks protecting the industry’s expansion more effectively than the retirement security of the workers whose savings finance it.

Appendix: Underlying Private Equity Contracts, Violate ERISA

The Department of Labor’s proposed rule assumes that fiduciaries can prudently evaluate private equity before placing it inside America’s retirement plans.  

That assumption falls apart the moment one asks a simple question:

How many ERISA fiduciaries—or their attorneys—will actually be allowed to read the underlying private equity contracts?

As a Trustee of a $20billion Retirement fund, I was not allowed to see the underlying Private Equity Contracts.

In many modern target-date structures, the answer may effectively be none.

The private equity fund sits inside another investment vehicle.

That vehicle sits inside a state-regulated Collective Investment Trust (CIT).

That CIT is then buried inside another state-regulated target-date CIT.

The plan sponsor never contracts directly with Apollo, KKR, Carlyle, or Blackstone.

Instead, it owns units of a CIT that owns another CIT that owns a limited partnership.

By the time an ERISA fiduciary reaches the actual governing contract, the legal rights may already have disappeared.

The Missing Documents

The attached review of Apollo, Carlyle, and KKR partnership agreements demonstrates why these contracts matter.

They commonly give the General Partner:

• unilateral valuation authority,
• broad indemnification,
• confidentiality protections,
• authority to conduct parallel investment activities,
• extensive conflict protections,
• limited fiduciary liability.

The architecture is remarkably consistent.

Authority.

Valuation.

Indemnification.

Confidentiality.

Oversight comes later—if at all.

That alone should concern every ERISA attorney.

---

The 25 Percent Test

Many private equity funds contain provisions allowing substantial portions of the partnership to consist of non-ERISA investors.

Practitioners commonly refer to this as the “25 percent test” under the Department of Labor’s plan asset regulation, where benefit plan investor participation below certain thresholds can mean the underlying assets are not treated as ERISA plan assets.

If 80%, 90%, or 95% of investors are non-ERISA capital, the governing agreement may legitimately be written primarily for non-ERISA investors.   Or to shield Private Equity from ERISA liability

The contract may permit provisions that would never appear inside an ERISA trust.

What Would a Good ERISA Lawyer Say?

Imagine handing an experienced ERISA attorney—not a securities lawyer—the actual limited partnership agreement.

The attorney reads provisions providing:

• manager-controlled valuations;
• broad exculpation clauses;
• confidentiality restrictions;
• affiliated transactions;
• parallel funds;
• limited fiduciary remedies.

Many attorneys would likely advise their client that these provisions deserve careful scrutiny under ERISA’s duties of prudence and loyalty before committing plan assets. Whether particular provisions violate ERISA would depend on the facts and legal analysis, but the contractual allocation of authority itself raises obvious fiduciary questions.

Unfortunately, most attorneys may never receive the documents.

---

The Intel Problem

That is why the Supreme Court’s decision in the Intel litigation matters so much.

As discussed in my earlier article,

The Supreme Court’s Intel Case Is About Secrecy, Fake Benchmarks, and Fiduciary Illusions   https://commonsense401kproject.com/2026/01/17/the-supreme-courts-intel-case-is-about-secrecy-fake-benchmarks-and-fiduciary-illusions/

the central issue extends beyond pleading standards.

It is about whether plaintiff attorneys can obtain the information necessary to determine whether fiduciaries actually acted prudently.

Without discovery:

• the contracts remain hidden;
• the side letters remain hidden;
• the valuation procedures remain hidden;
• the conflicts remain hidden.

If the governing documents cannot be examined, meaningful fiduciary review becomes extraordinarily difficult.

---

The Perfect Shield

The Department of Labor proposes allowing private equity inside target-date funds.

State banking regulators oversee the CIT.

The private equity manager invokes contractual confidentiality.

The plan sponsor receives only summary information.

Participants receive even less.

The plaintiff’s attorney cannot obtain the governing documents until after years of litigation—if ever.

Every layer adds another barrier to transparency.

Every layer makes fiduciary review more difficult.

Every layer weakens ERISA’s promise of accountability.

---

ERISA Was Never Intended to Operate Blindfolded

ERISA is built on informed fiduciary judgment.

That judgment becomes impossible when the governing documents cannot be examined.

If fiduciaries cannot read the contracts…

If participants cannot read the contracts…

If regulators rarely review the contracts…

If plaintiff attorneys cannot obtain the contracts…

…then the Department of Labor is asking fiduciaries to certify prudence based largely on trust.

That is not the ERISA Congress enacted.

It is an invitation to substitute opacity for diligence.

Before private equity is allowed inside America’s retirement plans, the Department of Labor should answer one basic question:

Will every ERISA fiduciary, every participant, and every plaintiff’s attorney have meaningful access to the governing contracts before retirement assets are committed?

If the answer is no, then the rule risks protecting secrecy as much as it protects investment flexibility.

Private Equity in 401(k)s Is Illegal – How They’re Getting Away With It

The Diversification Lie: How Private Equity and Private Credit Use Corrupt Accounting to Hijack Pension and 401(k) Allocations

Target-Date Funds CIT’s Should Not Become Dumping Grounds for Private Equity, Private Credit, Crypto, Annuities, and Leverage  

ERISA fiduciaries control the retirement savings of workers who may depend on those assets for the rest of their lives.   In my last piece I show why SEC mutual fund performance standards are the only ones you can trust.  https://commonsense401kproject.com/2026/07/26/the-great-performance-fraud/

That should mean ERISA investments are held to standards at least as strong as those governing SEC-registered mutual funds. In reality, Wall Street, private-equity firms, insurers, consultants, and asset managers are pushing for the opposite. They want retirement plans to admit investments that could not meet the accounting, valuation, liquidity, fee, and performance standards ordinarily expected of a mutual fund.

They especially want to place those investments inside target-date funds, where millions of participants will receive them automatically through a qualified default investment alternative without understanding what they own. The emerging target-date fund could contain: – private equity valued by the private-equity manager; – private credit valued by the lender that originated the loan; – cryptocurrency subject to extreme price volatility and custody risks; – fixed annuities valued according to insurer contract terms; – lifetime-income products whose true economic cost is obscured by actuarial assumptions; – collective investment trusts with less public disclosure than mutual funds; and – publicly traded stocks and bonds valued at observable market prices. All these assets would then be combined into one fund, assigned one net asset value, compared with one benchmark, and advertised using one performance number. That is not a higher fiduciary standard. It is an invitation to accounting chaos. https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/

The Mutual-Fund Standard Begins With Market Value An SEC-registered mutual fund normally values publicly traded securities using current market quotations. When reliable quotations are not readily available, the fund must use a formal fair-value process. The valuation must be conducted in good faith, subject to documented procedures, risk assessment, methodology testing, pricing-service oversight, recordkeeping, and board supervision. The objective is to estimate what an asset could reasonably be sold for in an orderly transaction between market participants.

That does not mean mutual-fund valuation is perfect. Thinly traded bonds, complex derivatives, and unusual securities can still involve judgment. But the process begins with the correct economic question:  What is this investment worth today? The proposed ERISA approach increasingly begins with a different question:  What number can the manager or insurer report without recognizing the current loss? That distinction is fundamental. A market-based system recognizes that values rise and fall. A manager-controlled system often allows losses to be delayed, smoothed, modeled away, hidden in assumptions, or shifted into future crediting rates and withdrawal restrictions.

SEC Exceptions Are Narrow, Not General Permission to Ignore Markets The investment industry may point to limited SEC accounting exceptions, such as the treatment of certain money-market funds, to argue that market pricing is not always required. But those exceptions prove the rule rather than undermine it. Money-market accounting accommodations were designed for narrowly constrained portfolios of short-term, highly liquid instruments. They are accompanied by detailed requirements governing maturity, liquidity, diversification, credit quality, stress testing, oversight, and disclosure. The theory is that amortized cost can remain close to current market value when the assets are short term and relatively stable. Even then, the SEC has repeatedly tightened money-market rules when experience showed that stable accounting could conceal real risks.

 A narrow rule for short-term liquid instruments cannot reasonably justify carrying a ten-year private loan at par. It cannot justify allowing a private-equity sponsor to determine the reported value of a company it owns. It cannot justify treating an insurer’s contractual promise as though it were equivalent to cash. It cannot justify hiding complex lifetime-income guarantees inside a target-date fund. And it cannot justify using stale or manager-created valuations to report lower volatility and higher apparent risk-adjusted returns. ## Private Equity Marks Its Own Homework Private-equity funds generally do not have daily market prices.

The private-equity manager controls the investment, receives management fees, may receive carried interest tied to performance, and plays a central role in determining the reported value of the portfolio company. That creates an unavoidable conflict. The manager benefits when reported values are higher. Higher values can produce better performance rankings, additional fundraising, larger bonuses, more carried interest, and favorable comparisons with public markets. Valuation committees, outside consultants, and auditors may review the process, but they ordinarily do not create an actual market transaction. An audited estimate remains an estimate. The fact that an accounting firm reviewed a manager’s assumptions does not mean the asset could be sold for the reported price. Private-equity funds frequently rely on: – comparable-company multiples; – projected earnings; – adjusted earnings before interest, taxes, depreciation, and amortization; – discounted cash-flow models; – prior financing rounds; – manager-selected peers; – acquisition-cost anchors; and – assumptions about future exits. Each assumption creates discretion. A small change in the selected earnings figure, valuation multiple, discount rate, or projected exit date can materially change the reported value. Public stocks receive prices from actual buyers and sellers. Private equity receives a model from the firm being paid to manage it. Those numbers should not be treated as equivalent.

Private Credit Has the Same Conflict Private credit is often marketed as safer and less volatile than public bonds. Much of that apparent stability comes from accounting manipulation. A publicly traded bond can fall immediately when interest rates rise, credit spreads widen, the borrower deteriorates, or investors demand more compensation for risk. A private loan may remain near par because the lender or affiliated manager continues to value it near par. The economic risk may have increased dramatically even though the reported price barely moves. A private-credit manager may originate the loan, collect origination and management fees, negotiate amendments, waive covenants, extend maturities, capitalize unpaid interest, and determine whether the borrower should be treated as impaired. The same manager can then report the loan’s value. That is not market discipline. It is lender-controlled accounting. The lack of visible volatility does not prove the lack of risk. It may merely prove the lack of trading. Private credit can appear to diversify a target-date fund because its values move slowly compared with public markets. But slowly reported values are not the same as stable economic values. Mixing private credit with public bonds can manufacture the appearance of lower correlation, lower volatility, and superior downside protection. That is a fraudulent accounting diversification, not investment diversification.

Fixed Annuities Are Accounting Promises, Not Transparent Portfolios A fixed annuity is frequently described as safe because the participant’s account balance does not fluctuate like a mutual fund. But the visible account value is a contractual figure, not necessarily the current economic value of the contract. The participant usually does not own the insurer’s underlying bonds, mortgages, structured securities, private loans, real estate debt, or affiliated investments. The insurer owns those assets. The participant owns a promise from the insurer. The insurer controls: – the asset allocation; – the amount of private credit; – the use of affiliated investments; – the crediting rate; – the retained spread; – the reserve assumptions; – the surrender rules; – the transfer restrictions; – the market-value adjustment; – the payment schedule; and – much of the information available to the plan fiduciary. A contract may show a value of $100 even though an economically equivalent market sale, surrender, or replacement would produce substantially less. The loss has not disappeared. It may be embedded in: – a below-market crediting rate; – surrender charges; – installment-payment provisions; – withdrawal restrictions; – employer-initiated-event clauses; – a market-value adjustment; – illiquidity; – or the insurer’s retained spread. Reporting the contract at $100 does not establish that it is worth $100.

Lifetime Annuities Are Even Harder to Measure Lifetime-income products create additional valuation problems. The apparent value of a lifetime annuity depends on assumptions involving: – interest rates; – mortality; – longevity; – insurer expenses; – insurer profit margins; – adverse selection; – lapse behavior; – optional benefits; – inflation; – guarantee periods; – beneficiary provisions; and – insurer credit risk. Two annuities can promise similar monthly payments while having materially different economic values because of differences in insurer strength, contract terms, liquidity, downgrade protections, state guaranty-association exposure, mortality assumptions, and embedded fees. The participant often cannot transfer or resell the annuity. Once purchased, the transaction may be irreversible. That makes the initial valuation and fiduciary review more important, not less. Yet insurers rarely disclose the full economic spread between: – the assets supporting the annuity; – the expected cost of benefit payments; – the value of participant guarantees; – the insurer’s expenses; – the insurer’s capital charge; and – the insurer’s expected profit. The monthly payment is presented as the product. The undisclosed spread is the price.  

Target-Date Funds Turn Incompatible Valuation Systems Into One Number A target-date fund containing public securities, private equity, private credit, crypto, fixed annuities, and lifetime-income contracts could combine several incompatible accounting systems. Public stocks may be valued at closing market prices. Public bonds may be valued through observable market transactions or pricing services. Private equity may be valued quarterly using manager models. Private credit may be held near par despite deteriorating secondary-market conditions. Crypto may trade continuously across fragmented exchanges. Fixed annuities may be reported using contract values. Lifetime-income guarantees may be valued through actuarial models that are largely invisible to participants. The target-date fund then blends all of these into one reported return. The result looks mathematically precise. It may be economically meaningless. A participant could be shown a return of 7.42%, but that number may combine: – actual market gains; – unrecognized private-asset losses; – stale quarterly values; – insurer-declared crediting rates; – modeled annuity values; – delayed impairments; – accrued but unpaid interest; – and benchmark assumptions selected by the manager. No ordinary investor could reconstruct the calculation. Many plan fiduciaries could not reconstruct it either.

Smoothing Can Manufacture Superior Performance Private assets and insurance contracts tend to report smoother returns than publicly traded securities. That smoothness is often presented as evidence of lower risk. But an investment can appear less volatile simply because it is valued less frequently or because losses are recognized more slowly. Suppose public markets decline by 20%. The public holdings inside a target-date fund recognize the decline immediately. The private-equity sleeve may use a valuation from months earlier or a model that reflects only part of the decline. The private-credit sleeve may remain near par despite widening credit spreads. The fixed-annuity sleeve may continue reporting contract value. The lifetime-income sleeve may be valued under assumptions that change only periodically. The target-date fund will appear to fall less than a fully market-valued portfolio. That does not prove that it suffered less economic damage. It may merely mean that less of the damage was reported. This accounting lag can improve apparent: – downside capture; – volatility; – Sharpe ratios; – maximum drawdowns; – correlations; – diversification; – and benchmark-relative performance. The fund may therefore look safer precisely because its least transparent assets are not being measured on the same basis as its public assets. ## Benchmarks Become Misleading A benchmark is meaningful only when the investment and benchmark are measured on comparable terms. A public-stock index is marked to market. A public-bond index is marked to market. A target-date fund containing private assets and insurance contracts may not be. If the benchmark recognizes losses immediately while the fund delays them, the fund can report artificial outperformance. Private-equity managers also frequently use internal rates of return, while public-market benchmarks generally use time-weighted returns. Private credit may be compared with public bonds even though the private loans are not marked with the same frequency or market sensitivity. Annuity crediting rates may be compared with bond-fund returns even though the annuity return omits the current market value of the underlying insurance promise. These comparisons mix different accounting rules, different liquidity, different timing, and different risk. The resulting excess return may be nothing more than excess discretion.

Target-Date Funds Eliminate Participant Consent Participants already have difficulty understanding target-date funds composed of conventional stocks and bonds. Once private equity, private credit, crypto, and annuities are added, meaningful understanding becomes nearly impossible. Participants may not know: – which private-equity funds are included; – which companies those funds own; – how those companies are valued; – what private loans are held; – whether the loans are impaired; – how much crypto exposure exists; – which exchange or custodian is used; – which insurer issued the annuity; – what assets support the insurance promise; – what surrender restrictions apply; – how much the insurer retains as a spread; – or what happens if the target-date manager removes or replaces the investment. The participant sees one fund name. The participant receives one fact sheet. The participant is shown one performance number. The complexity is hidden inside the package. That is especially troubling because target-date funds are commonly used as default investments. Participants may be placed into them because they made no investment election. Silence is being treated as consent to private equity, private credit, crypto, and insurance products. That is not informed choice. ## Complexity Makes Fiduciary Monitoring Weaker ERISA fiduciaries are required to act prudently and solely in the interest of participants. But complexity often weakens fiduciary oversight. A plan committee may rely on: – the target-date manager; – the recordkeeper; – the investment consultant; – the insurer; – the private-equity sponsor; – the private-credit manager; – the valuation firm; – and the auditor. Each adviser reviews only part of the structure. No one may accept responsibility for the combined economic result. The consultant may say the valuations came from the manager. The manager may say they followed industry standards. The auditor may say it tested compliance with accounting procedures rather than determining actual market value. The insurer may say the crediting rate complied with the contract. The fiduciary committee may then claim it relied on experts. That is how responsibility disappears. The more opaque the target-date fund becomes, the easier it is for every adviser to point to someone else.

Fees Become Almost Impossible to Identify Mutual funds disclose expense ratios. That disclosure may be incomplete in some respects, but it provides a common starting point. A target-date fund containing private assets and annuities can have multiple layers of compensation that do not appear clearly in the headline fee. Private equity may charge: – management fees; – carried interest; – transaction fees; – monitoring fees; – portfolio-company fees; – financing fees; – and expenses charged through underlying entities. Private credit may charge: – management fees; – origination fees; – amendment fees; – structuring fees; – prepayment fees; – servicing fees; – and performance compensation. Crypto may involve: – custody fees; – trading spreads; – fund expenses; – staking arrangements; – and exchange costs. Annuities may impose: – insurer spreads; – mortality and expense charges; – administrative expenses; – surrender charges; – market-value adjustments; – distribution compensation; – and embedded profits that are not described as fees. The target-date fund may then charge another management fee on top of all the underlying costs. A participant may see a reported expense ratio that captures only a fraction of the true economic cost. ## ERISA Standards Should Be Stronger ERISA should not permit an investment to receive weaker accounting, valuation, liquidity, or disclosure treatment merely because it is placed inside a retirement plan. At a minimum, any target-date fund containing private equity, private credit, crypto, fixed annuities, or lifetime-income products should be required to provide the following. ### Current Economic Value Every investment should disclose a reasonable estimate of current realizable value. Historical cost, contract value, manager net asset value, actuarial value, and declared account value should not substitute for an estimate of what the investment is economically worth today.

Separate Reporting by Valuation Method Performance should be broken out according to whether assets are: – exchange traded; – priced through observable market data; – valued by an independent third party; – valued by the investment manager; – carried at contract value; – valued through actuarial assumptions; – or valued using stale information. A single blended return should not conceal fundamentally different valuation systems. ### Comparable Benchmarks Private assets should not be permitted to claim outperformance against public indexes unless the comparison adjusts for valuation lag, leverage, liquidity, fees, and methodology. Annuity crediting rates should not be compared with market-valued bond returns without recognizing the economic value of the contract and the insurer spread.

  Full Look-Through Fee Disclosure Plans should disclose every material layer of fees, spreads, carried interest, insurance profits, transaction costs, affiliate payments, and underlying fund expenses. Calling compensation a spread does not make it free. ### Liquidity and Exit Disclosure Participants and fiduciaries should know: – whether an asset can be sold; – who can buy it; – how long a sale could take; – what discount may be required; – whether withdrawals can be suspended; – whether the insurer can pay in installments; – whether the manager can restrict redemptions; – and whether the reported value differs materially from likely exit value.

Independent Valuation A manager should not have primary authority to value the same assets on which its fees and performance compensation depend. Material private assets should be valued using truly independent processes, with disclosure of disagreements between the manager, independent valuer, auditor, and secondary-market evidence. ### No Accounting Blending Target-date funds should not be allowed to combine market-priced assets, manager-priced assets, contract-valued insurance products, and actuarially valued guarantees into one performance number without detailed reconciliation. The participant should be able to see how much of the reported return came from actual market prices and how much came from models, assumptions, smoothing, and manager judgment.

Mutual-Fund Eligibility Should Be the Floor The retirement industry has often treated ERISA plans as a laboratory for products that could not gain acceptance in ordinary mutual funds. That principle should be reversed. A useful starting rule would be: > If an investment cannot meet the valuation, liquidity, fee, accounting, and disclosure standards expected of an SEC-registered mutual fund, it should face a presumption against inclusion in an ERISA target-date fund. That does not mean every retirement investment must literally be organized as a mutual fund. It means the mutual-fund standard should be the regulatory floor, not the ceiling. A product should not qualify for weaker oversight merely because it is held through: – a collective investment trust; – an insurance company separate account; – an insurance company general account; – a private partnership; – a limited liability company; – a pooled employer plan; – or a target-date fund. Changing the legal wrapper does not change the economic risk.

Target-Date Funds Should Be Simpler Than Individual Choice Menus A target-date fund is supposed to simplify retirement investing. Adding private equity, private credit, crypto, and annuities does the opposite. The participant is no longer buying a diversified portfolio of transparent stocks and bonds. The participant is buying a chain of trusts, partnerships, contracts, guarantees, valuation models, fee arrangements, and withdrawal restrictions. A participant could never independently reproduce or evaluate the portfolio. That should be viewed as a fiduciary defect, not an innovation. Complex products may generate higher fees for Wall Street, but they do not necessarily generate better retirement outcomes. ## The Real Purpose Is Distribution Private-equity firms want access to the enormous defined-contribution market. Private-credit managers need new buyers as the market expands. Crypto firms want retirement-plan legitimacy and a stable source of inflows. Insurers want annuities embedded into defaults because most participants will never actively choose them. Target-date funds provide the ideal distribution mechanism. Once an asset is embedded in a default fund, the provider no longer needs to persuade each participant. The provider needs only to persuade: – the target-date manager; – the recordkeeper; – the consultant; – the insurer; – the plan sponsor; – or a regulator. One institutional decision can direct billions of dollars into products that participants may not understand and never affirmatively selected. The complexity benefits the seller. The opacity protects the fees. The accounting smooths the performance. The target-date wrapper delivers the customers. ## The Fiduciary Rule Should Be Simple Workers should not receive lower investment protections because their money is held inside an ERISA plan. They should receive higher protections. ERISA target-date funds should therefore be required to meet standards stronger than those governing ordinary mutual funds, including: – current and independently supportable valuations; – complete fee and spread disclosure; – market-based performance reporting; – comparable benchmarks; – daily or clearly disclosed liquidity; – transparent ownership; – visible counterparty exposure; – and understandable participant communications. Private equity, private credit, crypto, fixed annuities, and lifetime-income products should not receive a regulatory shortcut simply because Wall Street places them inside a target-date fund. The governing principle should be: > **If the investment cannot withstand mutual-fund-level scrutiny, it should not be hidden inside the default retirement investment of an American worker.

Target-date funds should protect participants from complexity. They should not be used to conceal it. :::

Addendum: Collective Investment Trusts Should Not Become the Regulatory Escape Hatch

The movement away from SEC-registered mutual funds and toward Collective Investment Trusts (“CITs”) is often marketed as a way to reduce expenses.   It has for some Vanguard and Fidelity funds.

Increasingly, however, CITs are becoming something far different—a regulatory escape hatch through which Wall Street can introduce products that would face far greater scrutiny inside an SEC mutual fund.

Originally, CITs were simple institutional pooled trusts investing primarily in publicly traded stocks and bonds. They generally mirrored mutual funds while avoiding certain retail regulatory costs.

That model is changing rapidly.

Today’s target-date CITs increasingly provide a convenient structure for investments that are difficult to value, difficult to benchmark, difficult to monitor, and difficult for participants to understand.

Unlike SEC mutual funds, CITs generally:

• are not registered under the Investment Company Act of 1940;
• do not issue SEC prospectuses;
• are not subject to the same shareholder reporting requirements;
• often disclose far less portfolio information;
• frequently provide less detailed fee disclosure;
• may rely upon confidential trust documents unavailable to participants; and
• often disclose holdings only quarterly or even less frequently.

None of those characteristics necessarily make a CIT imprudent.

But they become dangerous when combined with opaque investments.

Lower Disclosure Encourages Higher Risk

The SEC mutual-fund framework developed over decades around one central principle:

Investors should know what they own.

The current movement toward state-regulated CITs increasingly produces the opposite result.

Participants frequently cannot determine:

• the underlying private-equity partnerships;
• the private-credit funds;
• leverage employed by underlying managers;
• insurance contracts;
• affiliated transactions;
• valuation methodologies;
• secondary-market pricing;
• carried interest;
• performance fees;
• insurer spreads; or
• other embedded compensation.

Instead, participants receive a target-date fund fact sheet showing only a single allocation and a single performance number.

The complexity disappears from view.

The risk does not.

Hidden Leverage Creates Hidden Risk

Leverage magnifies both gains and losses.

Public mutual funds generally disclose leverage in financial statements and regulatory filings.

Private markets frequently embed leverage at multiple levels simultaneously.

A target-date CIT can unknowingly expose participants to:

• leverage at the portfolio company;
• leverage inside private-equity funds;
• subscription credit facilities;
• leverage inside private-credit vehicles;
• leverage employed by real estate funds;
• leverage inside infrastructure investments;
• derivative exposure;
• securities financing transactions; and
• leverage employed by insurance companies supporting annuity guarantees.

A participant reviewing a target-date fact sheet rarely sees this aggregate exposure.

The participant may believe the fund owns a diversified portfolio.

In reality, portions of that portfolio may already be highly leveraged before the target-date manager even purchases them.

The result is leverage stacked upon leverage.

Hidden Fees Are Just as Dangerous

The migration from mutual funds to CITs has also weakened fee transparency.

Mutual funds generally report a readily identifiable expense ratio.

CITs increasingly layer compensation throughout the investment structure.

Participants may indirectly pay:

• target-date management fees;
• underlying CIT management fees;
• private-equity management fees;
• carried interest;
• monitoring fees;
• transaction fees;
• consulting fees;
• placement-agent compensation;
• insurance spreads;
• affiliate profits;
• servicing fees;
• administration fees;
• financing costs; and
• portfolio-company expenses.

Many of these costs never appear in the participant’s stated expense ratio.

Instead, they reduce investment returns invisibly.

From an economic standpoint, a hidden spread deducted before returns are credited is no different than an explicit fee deducted afterward.

ERISA should recognize both as plan expenses requiring full fiduciary review.

Lower Standards Should Never Follow a Different Legal Structure

Changing an investment’s legal wrapper should not reduce fiduciary protections.

Yet that is precisely the direction the industry is moving.

Assets that may not fit comfortably inside an SEC mutual fund increasingly migrate into:

• Collective Investment Trusts;
• insurance separate accounts;
• insurance general accounts;
• private partnerships;
• private funds;
• limited liability companies; and
• other exempt investment vehicles.

Each step away from SEC regulation generally reduces public transparency.

Participants know less.

Fiduciaries often know less.

Regulators receive less standardized information.

Meanwhile, investment complexity increases.

That is the opposite of what ERISA should encourage.

The Burden Should Increase—Not Decrease

The more opaque an investment becomes, the greater the fiduciary obligation should be.

Instead, today’s regulatory structure often produces the opposite result.

The least transparent investments frequently receive:

• the weakest disclosure;
• the weakest valuation standards;
• the weakest performance comparisons;
• the weakest fee transparency;
• the weakest liquidity disclosure; and
• the weakest participant understanding.

That inversion of regulatory priorities makes no sense.

The burden of proof should rest with the product sponsor.

If a private-market investment, insurance product, or highly leveraged strategy cannot satisfy disclosure and valuation standards comparable to those governing SEC mutual funds, it should not be admitted into an ERISA target-date fund simply because it has been placed inside a Collective Investment Trust.

.  

The Supreme Court’s Intel Case is About Secrecy, Fake Benchmarks, and Fiduciary Illusions

The Diversification Lie: How Private Equity and Private Credit Use Corrupt Accounting to Hijack Pension and 401(k) Allocations

Why Wall Street Wants to Escape the SEC’s Performance Standards

By Christopher B. Tobe, CFA, CAIA

One of the most important conversations I have had in years was my recent interview with Jeffrey Snyder on the Broadcast Retirement Network.  Watch the full interview at  https://www.msn.com/en-us/money/investment/sec-mutual-funds-the-performance-standard-you-can-actually-trust/vi-AA28AAji 

https://broadcastretirementnetwork.com/

https://youtu.be/5Z-6eHZUnLw

We did not discuss stock picking, interest rates, or the latest hot investment strategy. Instead, we discussed something far more fundamental:

Can investors even trust the performance numbers they are being shown?

That question should be at the center of every fiduciary discussion in America.

For decades, the investment industry has quietly relied on one enormous advantage that most investors never think about.

SEC-registered mutual funds operate under real performance standards.

Most alternative investments do not.

As I explained during the interview, performance measurement is not simply calculating a percentage return. Performance depends upon accounting standards, valuation standards, fee disclosure standards, and regulatory enforcement. Those are exactly the areas where private equity, private credit, insurance products, and many state regulated Collective Investment Trusts (CITs) begin to diverge sharply from SEC-regulated mutual funds.

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Mutual Funds Have Something Wall Street Hates

The SEC spent decades building an ecosystem where investment performance is tied to verifiable market values and sound accounting principles.

Mutual funds generally own securities that trade every day.  Stocks trade. Treasuries trade. Corporate bonds trade. Market prices exist.

Independent custodians verify assets.  Auditors verify financial statements.

Returns are calculated under established rules.

The system is not perfect. But investors know the numbers come from actual market prices—not from managers deciding what they think their investments are worth.

That is why SEC mutual funds have become the gold standard for investment performance.

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Private Equity Begins With a Different Assumption

Private equity starts with an entirely different premise.

Most portfolio companies do not trade.

No daily market exists.

Managers determine valuations using internal models.

Consultants and plans blindly accept those valuations.

Auditors verify only whether the methodology was followed—not whether the valuation reflects what an outside buyer would actually pay.

Those internally generated values then become the foundation for:

• reported returns
• IRRs
• manager rankings
• consultant recommendations
• executive bonuses
• performance fees

The entire chain depends on valuations that often cannot be independently observed.

That does not mean every valuation is fraudulent. But it does mean the reported performance is much more dependent on judgment than the performance of publicly traded securities.

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Oxford Is Asking the Same Questions

Oxford Professor Ludovic Phalippou has spent years examining private equity performance reporting.

His recent work argues that many headline returns substantially overstate the economic returns ultimately received by investors. Using different but economically grounded measures, he concludes that some of the industry’s largest firms produced returns roughly half of widely promoted figures.   https://ludovicphalippou.substack.com/p/big-boys-returns

When changing the measurement system can cut reported returns in half, fiduciaries should ask whether they fully understand what those numbers represent.   

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SEC Mutual Funds Prevent Many of These Problems

There is a reason the SEC generally does not permit traditional private equity funds inside ordinary registered mutual funds.

The regulatory framework for registered funds emphasizes liquidity, valuation, disclosure, diversification, and pricing requirements that are difficult for many traditional private-market investments to satisfy.

The practical effect is simple.

Most retirement investors holding mutual funds receive performance based largely on observable market prices.

Once fiduciaries move into private markets, valuations increasingly depend upon manager estimates.

That difference matters.

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Why the Industry Is Moving Toward State CITs

Federal regulation, like the SEC and the OCC regulated CITs tend to have solid rules and staff with some knowledge of the rules.  Private Equity has gone the route of Annuities pick the weakest state regulator of 50.  These then become state banking commissioners instead of state insurance commissioners.    https://commonsense401kproject.com/2026/07/21/annuities-cherry-pick-the-weakest-state-regulator/    But the same principles apply little or no rules and a small unknowledgeable staff who do not know or care what type of assets go into their CITs much less understand performance or valuation issues.

Collective Investment Trusts (CITs) have become the preferred delivery mechanism for investments that would be difficult—or impossible—to package inside a traditional mutual fund.

Less public disclosure. Less standardized reporting. Greater flexibility. Reduced transparency. https://commonsense401kproject.com/2026/05/04/the-cit-black-box-bloomberg-gets-it-right-but-the-real-risk-is-even-bigger/

When combined with private equity, private credit, insurance contracts, and other difficult-to-value assets, the result is a retirement marketplace where participants receive far less information than they would receive in a comparable SEC mutual fund.

In my view, this migration deserves much greater scrutiny because it reduces transparency precisely where independent verification is most difficult.

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Ohio STRS Shows Why Standards Matter

The Ohio STRS controversy demonstrates why performance methodology matters.

As I discussed previously, the system reportedly maintained multiple performance calculations and used the more favorable measure when determining staff incentive compensation.   https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/

State Pensions are not covered by Federal Pension Standards ERISA, so the state essentially makes it up its own rules so very difficult to prove any violations of law.

Performance standards influence real money.

Bonuses.

Manager selection.

Consultant evaluations.

Public confidence.

If performance calculations can materially change outcomes, fiduciaries should understand precisely how those calculations are produced.

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GIPS Is Helpful—but Not Enough

Many plans and consultants point to CFA Institute’s Global Investment Performance Standards (GIPS).

GIPS has unquestionably improved consistency in performance reporting.

But GIPS is fundamentally a reporting framework.

It does not itself verify private valuations or enforce compliance in the way a regulator does.

As I noted in my interview, GIPS works best where underlying assets already have reliable pricing. It becomes much more challenging when applied to illiquid assets whose values depend heavily on assumptions and internal models.    Plans like Ohio STRS have manipulated GIPS https://commonsense401kproject.com/2025/08/25/misleading-claims-of-gips-compliance-at-ohio-strs/

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Performance Fraud Begins With Accounting

Wall Street often talks about alpha.

Diversification.

Illiquidity premiums.

Alternative investments.

Almost nobody talks about accounting.

Yet accounting determines performance.   https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/

Performance determines bonuses.

Bonuses determine incentives.

If valuation assumptions become increasingly subjective, performance itself becomes increasingly difficult to verify.

That is why fiduciaries cannot stop at reported returns.

They must ask:

• Who determined these values?
• Were they independently observable?
• Could another evaluator reasonably reach a different answer?
• How sensitive are returns to valuation assumptions?
• What would these assets sell for today in an actual market?

Those questions matter every bit as much as superficial reported IRRs and other numbers.

Wall Streets answer is to litigation is to block transparency in court.  https://commonsense401kproject.com/2026/01/17/the-supreme-courts-intel-case-is-about-secrecy-fake-benchmarks-and-fiduciary-illusions/

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The Bottom Line

The investment industry increasingly portrays SEC mutual funds as outdated while marketing private equity, private credit, insurance products, and opaque Collective Investment Trusts as the future of retirement investing.

I see it differently. The greatest strength of SEC mutual funds is not simply low cost. It is trust.

Their performance is built on transparent accounting, market pricing, standardized disclosure, and decades of regulatory oversight.

When retirement assets migrate into vehicles where valuations become increasingly subjective, fiduciaries should recognize that they are also leaving behind the strongest performance framework investors have ever had.

Performance is only meaningful if investors can trust how it was measured.

And that may be the biggest investment issue almost nobody is discussing today.

This article expands on themes discussed in my recent interview with Jeffrey Snyder of the Broadcast Retirement Network regarding SEC mutual fund standards, private-market performance measurement, and fiduciary responsibility. The interview emphasized the importance of looking “under the hood” of reported investment returns rather than relying solely on headline performance figures.   Full transcript of interview at https://www.thestreet.com/retirement/sec-mutual-funds-the-performance-standard-you-can-actually-trust

Links to video at

https://www.msn.com/en-us/money/investment/sec-mutual-funds-the-performance-standard-you-can-actually-trust/vi-AA28AAji    https://finance.yahoo.com/video/sec-mutual-funds-performance-standard-093334852.html

Appendix: Why Traditional Private Equity Performance Measures Overstate Skill

A CFA Framework for Understanding the Performance Illusion

One of the recurring defenses offered by the private equity industry is that its performance has been “proven” by decades of academic research using Public Market Equivalent (PME), IRR, TVPI, and similar metrics.

Unfortunately, those measures are far less objective than they appear.

Many of the industry’s favorite performance statistics systematically overstate manager skill because they fail to properly adjust for risk.

The issue is remarkably similar to evaluating a hedge fund using Treasury bills as the benchmark. If the benchmark understates the risk being taken, ordinary leverage begins to masquerade as investment genius.

The Hidden Assumption Inside PME

Most institutional investors have heard of Kaplan-Schoar PME.

It has become one of the industry’s standard methods for comparing private equity against public markets.

What relatively few trustees understand is that the methodology effectively assumes a market beta of approximately 1.0.

Buyout funds, however, generally operate with substantially more leverage than ordinary public companies.

Story demonstrates that once buyout leverage is properly recognized, the effective beta is closer to 1.2–1.4 rather than 1.0.

That seemingly small difference has enormous consequences.

If the benchmark assumes too little risk, then leverage itself is incorrectly recorded as manager skill.

Leverage Is Not Alpha

Imagine two investors.

One buys a diversified public equity portfolio.

The other borrows heavily and buys essentially the same companies.

If both produce higher returns because one employed leverage, few would call that investment genius.

Yet that is effectively what happens in many traditional private equity performance comparisons.

The leverage premium becomes “alpha.”

Once benchmarks are adjusted for comparable leverage and style exposure, most of the apparent excess return disappears.

The Benchmark Matters

Another weakness is benchmark selection.

Many studies compare buyout funds against broad indices such as the S&P 500.

But buyout targets tend to resemble smaller, value-oriented companies.

A more appropriate benchmark is therefore a leveraged small-cap value portfolio rather than a large-cap index.

Once that comparison is made, the excess performance largely vanishes.

This finding is consistent with work by Ludovic Phalippou, Erik Stafford, L’Her and others, who conclude that much of buyout performance can be replicated using inexpensive public securities combined with leverage.

Direct Alpha Tells a Different Story

Traditional presentations often emphasize IRRs and multiples because they look impressive.

Data shows that Direct Alpha—a metric designed to compare private equity against a properly risk-matched benchmark—often produces dramatically different conclusions.

His worked example is revealing:

• Compared with the S&P 500:
  • Direct Alpha = +0.96%
• Compared with a style-matched benchmark:
  • Direct Alpha ≈ 0.10%
• Compared with a properly risk-adjusted leveraged benchmark:
  • Direct Alpha = –0.34%

Nothing about the fund changed.

Only the benchmark changed.

The apparent “alpha” disappeared.

Why This Matters for Public Pension Bonuses

This has enormous implications for public pension systems.

Many pension staffs receive bonuses for outperforming benchmark portfolios.

But if the benchmark fails to recognize the additional leverage and systematic risk embedded in private equity, then employees may be rewarded simply for taking more risk—not for producing genuine investment skill.

That is exactly the concern raised repeatedly in this article.

The accounting methodology itself can manufacture alpha where none actually exists.

ERISA Should Demand Better

For ERISA fiduciaries, the implications are even more significant.

ERISA has never rewarded managers merely for increasing risk.

The prudent fiduciary standard has always required evaluating returns relative to the risks undertaken.

If private equity benchmarks ignore leverage, ignore style effects, or otherwise understate risk, then fiduciaries may be relying on performance measures that systematically exaggerate investment success.

A prudent fiduciary should insist on:

• Risk-adjusted benchmarks.
• Transparent leverage assumptions.
• Comparable public-market alternatives.
• Direct Alpha or equivalent risk-adjusted measures.
• Independent verification rather than marketing presentations.

The Bigger Picture

This article has argued that much of private equity’s reported superiority rests on accounting conventions rather than economic reality.

This technical framework reaches much the same conclusion through an entirely different route.

His work does not argue that every private equity investment underperforms.

Rather, it demonstrates that once leverage, size, value, and systematic risk are properly priced, the industry’s long-claimed “persistent alpha” becomes difficult to find.

That is precisely why pension trustees, ERISA fiduciaries, auditors, and regulators should stop asking whether private equity beat the S&P 500.

They should instead ask the much harder—and much more important—question:

Did it beat a public portfolio carrying the same risks?

If the answer is no, then billions of dollars of performance fees, carried interest, staff bonuses, and public narratives about private equity “outperformance” deserve to be reconsidered.