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

Want to highlight some important new research by NBER – Risky Insurance by Joesph Briggs, Ciaran Rogers and Christopher Tonetti of Stanford.  https://www.nber.org/system/files/working_papers/w35122/w35122.pdf

The Risky Insurance paper provides an important independent confirmation of the argument Thomas Lambert and I made in our March 2026 Journal of Economic Issues article, “‘Safe’ Annuity Retirement Products and Possible Future U.S. Retirement Risks, Threats, and Shortfalls.” https://doi.org/10.1080/00213624.2026.2613361

Our paper argues that an annuity’s reported book value is not the same thing as its economic value. An insurer may report a contract at 100 cents on the dollar because the customer is not permitted to demand the underlying assets, sell the contract freely, or force the insurer to mark the obligation to market. But when actual buyers are asked what they would pay for the contract—or when consumers are asked what certain payment they would accept in exchange for the insurer’s uncertain promise—the value can fall toward 70 to 80 cents on the dollar.

The new NBER paper makes that argument much harder to dismiss.

Three Different Roads Lead to Roughly the Same 70-to-80-Cent Valuation

There are now at least three distinct ways to observe the economic discount hidden beneath annuity book-value accounting.

Valuation method	Indicated economic value
Consumers’ expected annuity payout in the NBER survey	81.5 cents per promised dollar
Consumers’ annuity certainty equivalent	73.8 cents per promised dollar
Secondary-market pricing cited in Lambert–Tobe	Often approximately 80 cents per contract dollar
Current stressed private-credit exits and tender prices	Frequently 70–85 cents per reported NAV

These are not identical measurements and should not be mechanically treated as interchangeable. But they point in the same direction: a contractual or accounting value of $1 may conceal an economic value closer to $0.70–$0.80 once liquidity, uncertainty, credit risk, contract restrictions, and the cost of immediate exit are recognized.

Our Paper Already Identified the Annuity’s 20% Liquidity Discount

Lambert and Tobe noted that annuities do not generally price or mark to market each day. An annuity holder who wants liquidity must often accept a substantial secondary-market discount. We specifically cited secondary-market firms that commonly pay approximately 80% of contractual value, meaning a person could purchase an annuity and face an immediate 20% economic loss if forced to sell it.

That was not merely an observation about retail hardship. It exposed the central accounting deception:

The insurance company reports the annuity at book value because the contract prevents the policyholder from discovering its market value.

A mutual fund normally shows the participant the market value of its assets every day. A publicly traded bond is marked to the price at which investors are willing to buy and sell it. An annuity instead reports the insurer’s contractual promise, usually without showing what an independent buyer would pay for that promise.

Illiquidity does not eliminate market risk. It conceals it.

Our paper also explained why this problem becomes more severe after a downgrade. A bond manager can sell a deteriorating security when it falls below the portfolio’s required credit standard. Most annuity holders cannot sell the issuing insurer’s promise without surrender charges, market-value adjustments, contractual restrictions, or a deep secondary-market discount. The holder therefore may be forced to ride the insurer down toward default.

The NBER Paper Independently Values the Risky Annuity at 74 Cents

The NBER authors reach a strikingly similar result through an entirely different method.

Survey respondents expected to receive, on average, only 81.5% of the annuity payments they had been promised. They also indicated that a completely certain payment of only 73.8% of the promised benefit would make them economically indifferent to retaining the risky insurance contract. The difference produces an implied annuity risk premium of about 7.7 percentage points.

The 73.8-cent figure is not a quoted secondary-market price. It is a consumer certainty equivalent. It reflects the amount of certain value respondents were willing to accept instead of bearing:

• insurer default risk;
• partial-payment risk;
• claims and contract disputes;
• delay risk;
• procedural complexity;
• and uncertainty about future performance.

Yet it lands almost precisely in the range suggested by actual illiquid-market discounts.

That convergence matters. Consumers may not know the insurer’s portfolio, spread, capital formula, offshore reinsurance arrangements, or private-credit exposure. But collectively they appear to value the promise as though it were a deeply discounted, illiquid credit instrument—not cash and certainly not a Treasury obligation.

Private Credit Creates a Second Hidden Mark-to-Market Discount

The connection becomes more troubling because life insurers increasingly hold private credit and other illiquid debt.

The precise percentage depends heavily on how “private credit” is defined. Current estimates range from approximately 20% of insurers’ fixed-income holdings under narrower definitions to roughly 35% or more of balance-sheet exposure under broader definitions. One 2026 estimate placed life and annuity insurers’ private-credit exposure at approximately 46% of total debt holdings. Therefore, it is reasonable to say that some insurers—and especially certain private-equity-affiliated insurers—have something approaching half of their debt portfolio exposed to private or illiquid credit, but it would be too broad to say every insurer is 50% private credit.

Our paper anticipated this development. We documented that private-equity-influenced insurers were moving into private asset-backed securities, private placements, leveraged credit, commercial real estate, and other difficult-to-value investments. We also explained that the regulatory system allows many of these assets to be carried using modeled values and favorable NAIC designations rather than observable market prices.

The market is now beginning to test those modeled values.

Recent offers for interests in nontraded private-credit vehicles have reportedly been made at discounts of 15% to 30% from reported NAV—equivalent to approximately 70 to 85 cents on the accounting dollar. Earlier surveys of private-credit secondary transactions showed average pricing around 85 cents on the dollar, while publicly traded private-credit vehicles have also traded at material discounts to stated NAV.

This produces a potential double-opacity structure:

1. The insurer carries private loans near modeled or reported value, even when a prompt secondary sale might produce only 70 to 85 cents.
2. The insurer then issues an annuity contract backed by that portfolio and reports the policyholder’s claim at 100 cents, even though the annuity itself may be saleable only at a substantial discount.
3. The participant sees neither markdown because both sides of the insurer’s balance sheet are insulated from ordinary market pricing.

The Annuity Is a Leveraged Claim on Assets That May Themselves Be Overstated

An annuity is not direct ownership of the insurer’s bonds, mortgages, CLOs, private loans, or affiliated investments. It is a general unsecured claim against the insurance company.

That means the annuity owner is structurally behind the insurer’s entire asset-selection process. The owner bears the consequences of:

• private-credit markdowns;
• defaults and restructurings;
• valuation errors;
• affiliate transactions;
• leverage within borrowers;
• leverage within private-credit funds;
• reinsurance leverage;
• and the insurer’s own capital structure.

The Financial Stability Board warned in 2026 that private credit can contain leverage at multiple levels: the portfolio company, fund, sponsor, investor-financing, and insurance-company levels. It also highlighted opacity, interconnectedness, liquidity mismatch, and the difficulty regulators face in detecting concentrated risk.

Thus, the annuity contract is not simply backed by a diversified portfolio of safe loans. It may be a single-entity promise backed in substantial part by private obligations that cannot be readily sold at their stated values.

A Simple Illustration

Assume an insurer reports $100 of assets supporting an annuity obligation:

Insurer assets	Book value	Possible prompt-sale value
Private and illiquid credit, 50%	$50	$35–$42.50
Public and more liquid assets, 50%	$50	$47.50–$50
Total	$100	$82.50–$92.50

This simple illustration does not establish an individual insurer’s actual liquidation value. Not every private loan would sell for 70 cents, and a forced liquidation may be either better or worse depending on credit quality, duration, transfer restrictions, and market conditions.

But the illustration shows how quickly reported surplus can disappear.

If the insurer has $100 in stated assets and $95 in policyholder and other liabilities, it appears to have $5 of capital. If those assets would produce only $85 in a stressed market sale, the insurer is not merely short of its reported capital. It may be economically insolvent by $10.

The annuity holder’s 100-cent promise would then depend on:

• continued book-value accounting;
• time to maturity;
• borrowers’ ability to refinance;
• regulatory forbearance;
• affiliated support;
• reinsurance recoveries;
• guaranty-association capacity;
• or a public rescue.

This is why a small percentage decline in insurer assets can create a much larger percentage loss in insurer capital.

The 70-to-80-Cent Range Is a Market Signal, Not Yet a Universal Appraisal

The strongest defensible formulation is not that every annuity is presently worth 70 cents. That would require insurer-specific analysis of:

• underlying asset composition;
• actual secondary bids;
• liability duration;
• surrender rights;
• ratings;
• CDS and bond spreads;
• capital and surplus;
• reinsurance;
• guaranty-association treatment;
• and contract provisions.

The stronger and more accurate statement is:

Multiple independent valuation methods suggest that many insurance promises marketed and accounted for at 100 cents on the dollar may have economic values closer to 70–80 cents when marked for liquidity, risk, and certainty.

That is more than a rhetorical claim. It now rests on:

1. actual annuity secondary-market discounts identified in Lambert–Tobe;
2. the NBER paper’s 73.8-cent annuity certainty equivalent;
3. consumers’ expectation of receiving only 81.5% of promised annuity benefits;
4. current private-credit secondary prices and tenders at material discounts to reported NAV;
5. and evidence that insurers have accumulated substantial private and illiquid credit exposure.

This Also Helps Explain the Hidden 300-to-500-Basis-Point Spread

The insurer earns a large spread partly because the customer is not receiving a liquid, market-priced security.

The insurer takes in $1 of participant money, invests it in assets that may offer elevated yields because they are illiquid, opaque, leveraged, affiliated, or risky, and then credits the participant a much lower rate. Lambert and Tobe explain that the spread equals the insurer’s general-account return minus the rate paid to participants—and that most insurers do not disclose either the complete portfolio economics or the resulting spread.

The insurer may therefore be compensated several times:

• a private-credit liquidity premium;
• a credit-risk premium;
• an origination or affiliate fee;
• an asset-management fee;
• the retained difference between asset yield and participant crediting rate;
• and surrender or liquidity restrictions imposed on the customer.

Yet the annuity holder receives the least liquid claim in the structure.

That is the fundamental asymmetry:

The insurer collects the liquidity premium, but the participant bears the illiquidity.

If private credit yields 9% or 10%, the insurer credits the participant 3% or 4%, and an immediate market sale of the contract produces only 70 to 80 cents, the annuity is not functioning like a low-cost safe investment. It is functioning like a high-spread, illiquid loan from the participant to the insurer.

The Book-Value Illusion

The industry’s defense is that the insurer does not need to sell the assets today. It can hold the private loans to maturity, collect principal and interest, and use the proceeds to meet annuity payments over decades.

That defense assumes away the very risks at issue:

• loans may default;
• borrowers may need refinancing;
• recoveries may be delayed;
• private valuations may be stale;
• annuity liabilities may accelerate;
• collateral calls may occur;
• policyholders may seek liquidity;
• reinsurance counterparties may weaken;
• and regulators may discover that reported capital was overstated.

“Hold to maturity” is not a guarantee of par recovery. It is an accounting and liquidity strategy that works only if the underlying credits ultimately perform and the insurer remains able to fund its liabilities in the meantime.

Our paper described annuities as single-entity, illiquid credit exposures rather than genuinely diversified safe investments. The NBER paper now shows that ordinary consumers appear to reach a similar conclusion when asked to value the promise. They discount it to approximately 74 cents of certainty.

The Strongest Conclusion

Lambert and Tobe argued that annuities are reported at artificial book values, shielded from daily market pricing, and backed increasingly by illiquid assets that may themselves be difficult to value. The new NBER findings provide independent household-level evidence of the same economic reality.

Consumers do not value a dollar of promised annuity payment as a dollar of safe wealth. They value it at approximately:

• 81.5 cents after allowing for expected nonpayment; and
• 73.8 cents after also pricing the uncertainty surrounding that payment.

At the same time, the private-credit assets increasingly supporting those promises may trade at 70 to 85 cents when an actual seller requires liquidity.

The central problem is therefore not merely that insurers hold risky assets. It is that the entire structure is designed to avoid the moment when either the assets or the liabilities must reveal a market price.

The private loan is carried at a modeled dollar. The annuity is carried at a contractual dollar. But when either one must be converted to cash, the market may say it is worth only 70 or 80 cents.

That gap is not harmless accounting noise. It is the hidden risk reserve that insurers have transferred to annuitants while retaining the spread, commissions, and profits for themselves.

The ERISA Problem With Buying a $0.70 Annuity for $1.00

An ERISA fiduciary would ordinarily never knowingly use $100 of plan assets to purchase an investment that becomes worth only $70 or $80 the moment the transaction closes. Calling the investment an “annuity,” recording it at book value, or preventing the participant from selling it does not eliminate the economic loss. It merely prevents the loss from appearing on a daily account statement.

That principle applies in two related settings:

1. a defined contribution plan purchasing or retaining a fixed annuity; and
2. a defined benefit plan purchasing a lifetime annuity in a pension risk transfer.

The legal details differ, especially because the decision to terminate or de-risk a pension plan may be a settlor decision. But the actual selection, pricing, and purchase of the annuity remain fiduciary acts. The Department of Labor expressly distinguishes the sponsor’s business decision to conduct a PRT from the fiduciary implementation of that decision.

The Immediate Loss Is Not Hypothetical

Our March 2026 Journal of Economic Issues paper explains that annuity contracts generally are not marked to market and often cannot be redeemed after an insurer downgrade. Where secondary markets exist, an owner needing immediate liquidity may receive only approximately 80 cents on the contractual dollar. The contract’s lack of daily pricing does not make the loss disappear; it conceals the amount that an independent buyer would actually pay.

The NBER Risky Insurance paper approaches the same issue from the purchaser’s perspective. Survey respondents expected an annuity to deliver only approximately 81.5% of its promised benefits, and their average certainty equivalent was approximately 73.8% of the promised amount. In other words, the average respondent regarded about $74 of certain value as equivalent to a nominal $100 insurance promise.

Neither number is necessarily a formal fair-value appraisal of every annuity. A secondary-market discount may include illiquidity, transaction costs, adverse selection, surrender provisions, and the buyer’s required profit. The certainty equivalent includes perceived nonpayment risk and risk aversion. But a fiduciary cannot simply ignore these measurements when they repeatedly indicate that a supposedly $100 asset has a market or certainty value of only $70 to $80.

1. Duty of Prudence: A Fiduciary Must Examine Economic Value, Not Merely Contractual Face Value

ERISA requires fiduciaries to act with the care, skill, prudence, and diligence that a knowledgeable person would use under the circumstances then prevailing. It also requires diversification to minimize the risk of large losses unless nondiversification is clearly prudent.

The key phrase is “under the circumstances then prevailing.” A fiduciary cannot knowingly purchase an annuity at $100 while disregarding evidence available at the time that:

• the contract could be resold for only $70 to $80;
• the participant cannot exit after an insurer downgrade;
• the insurer’s assets include large amounts of illiquid or modeled private credit;
• the insurer retains a substantial undisclosed investment spread;
• materially safer or more liquid alternatives are available;
• and the contract transfers the participant from a diversified ERISA plan into a single-insurer credit exposure.

The Supreme Court has emphasized that fiduciaries must conduct their own independent evaluation of investments. Participant choice does not excuse an imprudent investment option, and a fiduciary has a continuing obligation to monitor investments and remove imprudent ones.

A fixed annuity therefore cannot be defended merely by saying:

“Participants voluntarily selected it.”

Nor can a PRT annuity be defended merely by saying:

“The sponsor had the right to terminate the pension plan.”

The sponsor may have the right to decide whether to terminate or de-risk. The fiduciary must still prudently determine how plan assets are used to carry it out.

2. The Fiduciary Must Determine What the Plan Actually Receives for Its $100

The transaction should be analyzed like any other exchange of plan assets.

The plan gives the insurer:

• $100 in cash or marketable securities;
• immediate possession and investment control;
• the ability to earn returns on the assets;
• the value of participant illiquidity;
• and, frequently, a long-duration source of funding.

In exchange, the plan or participant receives:

• a contractual promise;
• no ownership of the insurer’s underlying portfolio;
• limited or no right to withdraw at fair value;
• no ordinary daily market price;
• no right to sell after a downgrade without a substantial loss;
• and exposure to the claims-paying ability of a single company.

The fiduciary inquiry cannot stop with the insurer’s promise to pay $100 eventually. It must determine the present economic value of that promise.

A prudent valuation would consider at least:

If that analysis produces a value of $75, paying $100 is not merely selecting a somewhat expensive product. It is transferring approximately $25 of participant value to the insurance structure at inception.

3. The Loss May Be a Fiduciary Loss Even Though It Is Hidden by Book-Value Accounting

ERISA does not require a participant to complete a secondary-market sale before a loss can become economically real.

Suppose a plan pays $100 million for annuity contracts that independent market evidence would value at $75 million immediately after closing. The economic loss is potentially $25 million even if:

• the insurer continues carrying the liability at $100 million;
• participants continue receiving scheduled monthly payments;
• no formal default has occurred;
• and the contract cannot be readily sold.

The industry may argue that no loss exists because the insurer intends to perform over many decades. But that confuses contractual performance with fair exchange.

A fiduciary could not prudently buy a 30-year private bond for $100 when its market value is $75 and then claim there was no loss because the issuer had not yet missed an interest payment. The fact that the annuity contract prevents ordinary price discovery makes the need for fiduciary valuation greater, not smaller.

4. The Duty of Loyalty Prohibits Using Participant Value to Benefit the Sponsor, Insurer, or Intermediaries

ERISA requires a fiduciary to act solely in the interest of participants and beneficiaries for the exclusive purposes of providing benefits and defraying reasonable plan expenses.

That creates a serious loyalty problem when the transaction’s economics are:

• the employer removes pension liabilities from its balance sheet;
• the insurer acquires assets and a profitable long-term spread;
• consultants, brokers, or affiliated firms receive compensation;
• while retirees receive a less liquid, less protected, single-entity promise worth materially less than the assets transferred.

A sponsor’s corporate benefit does not automatically make the annuity purchase unlawful. The sponsor may act in its settlor capacity when deciding whether to amend or terminate a plan. But the fiduciaries implementing the decision cannot subordinate participant interests to:

• improving the sponsor’s balance sheet;
• reducing PBGC premiums;
• increasing reported earnings;
• obtaining the cheapest PRT bid;
• preserving a business relationship with a consultant or insurer;
• or facilitating compensation for an affiliated insurance agency.

The Department of Labor’s IB 95-1 guidance states that cost cannot justify choosing an unsafe annuity and that fiduciaries cannot rely solely on insurer ratings. It requires steps calculated to obtain the safest available annuity unless competing interests justify another choice.

If a cheaper PRT annuity has an immediate market value of only 75 cents per dollar transferred, the “cheap” price may simply reflect that the retiree is receiving less valuable protection.

5. Paying $100 for $75 of Value Raises an Excessive-Compensation Question

The missing $25 does not vanish. It may represent some combination of:

• insurer profit;
• acquisition expenses;
• commissions;
• consultant or broker compensation;
• affiliated asset-management fees;
• retained investment spread;
• capital charges;
• liquidity premium retained by the insurer;
• surrender economics;
• and compensation for bearing genuine insurance risk.

Some of those expenses may be legitimate. ERISA does not require every service to be free or every annuity to be the lowest-priced contract. Current law expressly permits consideration of contract benefits and insurer financial strength alongside cost.

But expenses must still be reasonable. A fiduciary cannot assume that the full 20% to 30% difference is a reasonable insurance charge merely because it is embedded in the contract rather than itemized on an invoice.

That is particularly important for fixed annuities, where our paper explains that the insurer’s compensation often takes the form of the difference between what the general account earns and what the participant is credited. Prudential publicly described earning more than 200 basis points from annuity assets, while our analysis indicates that spreads on some products may be 300 to 500 basis points.

A prudent fiduciary should therefore demand a decomposition of the price:

Component	Required fiduciary question
Actuarial value of promised benefits	What is the present value using realistic mortality and discount assumptions?
Insurer credit risk	What return premium compensates participants for single-insurer exposure?
Illiquidity	What is the value lost through surrender and transfer restrictions?
Administrative cost	What does it reasonably cost to administer the contract?
Capital cost	How much capital is genuinely supporting the obligation?
Commissions	Who is paid, how much, and by whom?
Investment spread	What does the insurer expect to earn over the credited or payout rate?
Affiliate compensation	Are related asset managers, reinsurers, or originators being paid?
Residual profit	What remains after reasonable costs and risk compensation?

Without that analysis, the fiduciary does not know whether the plan purchased insurance or simply transferred participant assets to the insurer at an excessive price.

6. It May Also Constitute a Prohibited Transaction

ERISA §406 generally prohibits a fiduciary from causing a plan to engage in a sale, exchange, transfer, or furnishing of services with a party in interest, subject to statutory and administrative exemptions. It also prohibits certain fiduciary self-dealing and transactions involving conflicted interests.

The Supreme Court’s 2025 decision in Cunningham v. Cornell University held that a plaintiff alleging a transaction covered by §406(a)(1)(C) need not negate the §408 exemptions in the complaint. The exemptions operate as affirmative defenses.

An insurer, recordkeeper, consultant, broker, or other service provider may be a party in interest. The fiduciary defendants may then need to establish the applicable exemption, commonly including that:

• the arrangement was reasonable;
• the services were necessary;
• and no more than reasonable compensation was paid.

An immediate 20% to 30% decline in economic value could be powerful evidence against the claim that the compensation or overall arrangement was reasonable.

It would be especially troubling where:

• the annuity provider was already a plan service provider;
• the recordkeeper steered assets into its own or an affiliated fixed account;
• the consultant received direct or indirect insurance compensation;
• an affiliated broker collected commissions;
• or the employer shared economically in the spread through reduced recordkeeping charges or other concessions.

The fiduciary issue is not merely that the annuity was risky. It may be that plan assets were transferred to a party in interest on terms that included unreasonably large hidden compensation.

7. Application to Fixed Annuities in 401(k) and 403(b) Plans

For a fixed annuity retained as a plan investment, the fiduciary breach is relatively direct.

The plan remains subject to ERISA, and the fiduciary has continuing duties to:

• assess the option’s risk;
• evaluate the credited rate;
• compare it with reasonable alternatives;
• understand surrender restrictions;
• investigate the insurer’s financial condition;
• monitor the product;
• and remove it if it becomes imprudent.

A book-value feature cannot substitute for fair valuation. If the account reports $100 but an informed sale or termination would yield $75, the fiduciary should investigate:

1. why the contract is being reported at $100;
2. who receives the economic benefit of the difference;
3. whether participants receive sufficient additional return for the risk;
4. whether a diversified synthetic stable-value fund is available;
5. whether the insurer can change the credited rate unilaterally;
6. whether employer-initiated withdrawal restrictions trap the plan;
7. and whether the contract contains a meaningful downgrade exit right.

The absence of a downgrade provision is especially damaging. A conventional bond fiduciary can ordinarily sell after a downgrade. A fixed-annuity participant may be locked in as the insurer deteriorates. Paying par for an instrument that denies the most basic credit-risk control could itself support an inference of imprudence.

The Supreme Court’s Hughes decision also makes clear that offering other prudent options does not cleanse an imprudent one. A plan cannot defend a defective fixed annuity merely because participants could have selected a money-market fund or bond fund instead.

8. Application to Lifetime-Income Annuities in Defined Contribution Plans

The same analysis applies when a DC plan selects a lifetime-income product.

The SECURE Act and Department of Labor safe harbors do not authorize fiduciaries to overpay. They provide methods for satisfying aspects of the annuity-provider-selection duty when their statutory conditions are met. The Department has identified separate, nonexclusive safe harbors for DC annuity selection.

A safe harbor is not a license to ignore:

• contract price;
• market value;
• commissions;
• insurer spread;
• surrender value;
• loss of liquidity;
• or materially better alternatives.

Where a participant must surrender $100 of liquid retirement assets in return for a contract worth only $75 on an informed transferable basis, the fiduciary should be required to explain what compensating benefit justifies the $25 reduction.

Longevity insurance has value. Mortality pooling can support higher lifetime payments than a simple bond withdrawal. But that value must be calculated rather than invoked as a slogan. The fiduciary must distinguish:

• genuine mortality credits;
• legitimate insurance and administrative costs;
• and insurer extraction.

9. Application to Pension Risk Transfers

The PRT case is even more serious because the retiree generally does not choose the transaction.

Before the transfer, the retiree may have:

• a claim against a diversified pension trust;
• an ongoing employer funding obligation;
• ERISA fiduciary protections;
• PBGC insurance;
• federal disclosure rights;
• and access to federal remedies.

After the transaction, the retiree may have:

• a single insurance-company promise;
• state rather than federal solvency protection;
• limited guaranty-association coverage;
• no ongoing ERISA fiduciary protection over the transferred benefit;
• and no practical ability to sell or diversify the annuity.

The annuity may reproduce the scheduled monthly payment, but it does not reproduce the entire legal and financial package that previously supported the payment.

That means the fiduciary cannot value the PRT annuity solely by comparing monthly benefit amounts. The correct comparison is:

versus:

If $100 of pension assets buys an annuity package economically worth only $70 to $80, the fiduciary has not transferred equivalent value. It has delivered the same nominal payment while stripping away a substantial portion of the protection supporting it.

That is the PRT equivalent of replacing a federally insured diversified pension bond with a deeply illiquid, uninsured single-company obligation and pretending that the two are identical because they have the same coupon.

10. IB 95-1 Should Require More Than Ratings and Book-Value Solvency

The Department’s guidance requires consideration of the insurer’s investment portfolio, size relative to the contract, capital and surplus, liability exposure, availability of additional protection, and insurer ratings. It also cautions against relying solely on rating agencies and states that cost cannot justify an unsafe annuity.

But a meaningful modern application should also require:

• an independent fair-value estimate of the contract;
• a market-value assessment of the insurer’s assets;
• stress pricing of private-credit holdings;
• insurer CDS and bond-spread analysis;
• surrender and secondary-market valuation;
• examination of offshore and affiliated reinsurance;
• disclosure of all compensation and expected spread;
• a downgrade and replacement mechanism;
• comparison with the value of retaining PBGC-backed benefits;
• and documentation of why paying $100 for the contract is prudent.

Without these steps, “safest available annuity” becomes a competition among products all recorded at artificial par values.

11. The Damages Theory

ERISA §409 provides that a breaching fiduciary may be personally liable to restore plan losses and return profits made through the use of plan assets.

For a fixed annuity, possible loss measures could include:

• the difference between the amount invested and the contract’s fair value;
• lost returns compared with a prudent risk-adjusted alternative;
• excessive spread and commissions;
• surrender losses;
• and profits earned by fiduciaries or parties in interest from plan assets.

For a PRT, the theory is more complex because plan assets are exchanged for distributed annuity contracts. But possible measures could include:

• the amount by which the purchase price exceeded fair economic value;
• the cost of purchasing a genuinely safer contract;
• the value of a downgrade or replacement provision omitted from the contract;
• the cost of replicating PBGC and ERISA protections;
• the insurer’s or sponsor’s unjust enrichment;
• and losses resulting from excessive compensation or conflicted selection.

A simple illustration makes the core issue clear:

Transaction	Amount
Plan assets transferred	$1 billion
Independent economic value of annuity contracts	$750 million
Initial economic shortfall	$250 million
Reported accounting loss	$0
Hidden transfer of value	$250 million

The absence of a reported loss does not answer whether the fiduciary prudently exchanged $1 billion of participant assets for $750 million of economic protection.

Conclusion

An annuity contract should not receive a fiduciary exemption from valuation merely because it is one-sided, illiquid, and impossible to trade.

Indeed, those features strengthen the need for scrutiny.

A fiduciary who knowingly pays $100 for an annuity worth only $70 or $80 has not purchased safety. The fiduciary has purchased a contractual illusion of par value while transferring 20% to 30% of participant wealth to the insurer and the distribution system.

For a fixed annuity, the loss is hidden behind book-value account statements and surrender restrictions. For a lifetime-income product, it is hidden behind the appeal of a guaranteed monthly payment. For a PRT, it is hidden by comparing the amount of the pension check while ignoring the loss of PBGC protection, diversification, employer backing, liquidity, and ERISA rights.

ERISA’s duties of prudence and loyalty should require the fiduciary to value what the participant actually receives—not what the insurer prints on the contract. Where the fiduciary knows that the economic value falls immediately to 70 or 80 cents on the dollar, the purchase can support claims for imprudence, disloyalty, failure to diversify, excessive compensation, and prohibited transactions.

DOL lax guidance on Pension Risk Transfers has cost Retirees billions while Enriching Insurance Companies

Annuities Cherry-Pick the Weakest State Regulator

Annuities Break ERISA’s Disclosure Rules

Lifetime Income: The Gateway Drug for Insurance Products in 401(k) Plans

New Phoenix/LPL Litigation Strengthens the Case Against Fixed Annuities in 401(k) Plans

ERISA Fixed Annuity Due Diligence Checklist

The Biggest Private Credit Fund in America Isn’t a Fund—It’s Your Annuity

DOL Gutted ERISA in 95 with PRT annuities without doing an Actuarial Analysis -now they are upping the corruption to benefit Private Equity, especially one specific insurance company Athene owned by Private Equity giant Apollo with deep ties to the Trump Administration.

As outlined in Pulitzer winner Gretchen Morgenson’s These are the Plunderers it shows how Leon Black made $billions off the 1992 Executive Life collapse, in which he created Apollo.  Morgenson warns of an even worse creation to come and gives it a name: Athene.

Athene was created by Apollo’s Leon Black and Marc Rowan with the help of Jeffrey Epstein and is regulated by the State Insurance Commissioner of Iowa.  Leon Black and Marc Rowan have been long-term donors to Donald Trump.  Trump has appointed Rowan to the Gaza Committee; Leon Blacks son was named CEO of the U.S. International Development Finance Corporation.   Trump via his AG, continues to suppress information on Leon Black in the Epstein files.   So it is no surprise that Trump’s DOL has done all they can to enrich Athene and Apollo. 

DOL Interpretive Bulletin 95-1: Built Without the Actuarial Analysis ERISA Deserved An Insurance Credit Checklist Disguised as an ERISA Fiduciary Standard

Interpretive Bulletin 95-1 was issued by the Department of Labor in 1995. It established the fiduciary framework for selecting annuity providers when terminating defined benefit pension plans.

The Bulletin tells fiduciaries to examine factors such as:

• investment portfolio quality
• diversification
• capital and surplus
• size of insurer
• exposure to liabilities
• contract structure
• state guaranty associations
• administrative capability
• cost (only after safety is addressed)

Those are reasonable insurance-company credit factors.

But ERISA prudence requires much more than determining whether an insurance company appears financially healthy.

---

Missing Requirement #1:

Compare Risk Against the Existing Defined Benefit Plan

IB 95-1 never requires the fiduciary to answer the most basic question:

Is the proposed annuity actually safer than remaining in the existing ERISA pension?

That comparison should include:

• PBGC insurance
• diversified trust assets
• employer funding obligations
• minimum funding rules
• fiduciary oversight
• federal enforcement

Without that comparison, fiduciaries never determine whether participants are gaining or losing protection.

Instead, the Bulletin assumes transferring liabilities to an insurer is an acceptable starting point.

That assumption was never subjected to a comprehensive actuarial analysis.

---

Missing Requirement #2:

Prohibited Transaction Analysis

IB 95-1 almost completely ignores ERISA §406.

Instead it treats the transaction as if it were simply selecting an insurance company.

But many PRTs create obvious conflicts.

The employer often receives enormous financial benefits from selecting the lowest-priced insurer.

Those benefits may include:

• surplus asset reversions
• reduced pension expense
• balance-sheet improvements
• higher earnings
• executive compensation improvements

If choosing a lower-priced insurer directly benefits the employer while increasing participant risk, that should trigger serious prohibited transaction analysis.

IB 95-1 largely ignores that question.

---

Missing Requirement #3:

Independent Risk Benchmark

IB 95-1 never requires fiduciaries to benchmark insurer risk against objective market measures.

Today fiduciaries could evaluate:

• CDS spreads
• bond spreads
• equity volatility
• capital market pricing
• peer insurers
• historical downgrade experience

Instead, many committees simply collect credit ratings.

Ratings are opinions.

Markets price risk every day.

---

Missing Requirement #4:

Concentration Risk

A defined benefit plan is diversified.

A PRT concentrates retirement security into one institution.

That concentration itself is a material fiduciary issue.

IB 95-1 never requires any quantitative analysis of concentration risk.

---

Missing Requirement #5:

Liquidity Stress

Today’s insurers rely upon:

• private credit
• structured finance
• direct lending
• offshore reinsurance
• affiliated investment managers

None of these existed in anything like today’s form in 1995.

IB 95-1 never anticipated these business models.

The Bulletin therefore provides almost no framework for evaluating them.

---

Missing Requirement #6:

Related Party Conflicts

Suppose the insurer is owned by a private-equity sponsor.

That sponsor also:

• manages the insurer’s assets
• earns management fees
• originates loans
• manages affiliated private-credit funds
• profits from insurance spreads.

IB 95-1 contains no meaningful framework for analyzing vertically integrated ownership conflicts.

Yet these structures dominate today’s PRT market.

---

Missing Requirement #7:

Cost-Benefit Analysis for Participants

The Bulletin discusses insurer cost.

It never asks:

What additional compensation do participants receive for accepting greater insurer risk?

Usually the answer is:

Nothing.

Benefits remain exactly the same.

Participants receive no higher monthly pension.

No equity.

No profit sharing.

No additional guarantee.

Only more concentrated credit exposure.

---

Missing Requirement #8:

Independent Actuarial Risk Analysis

IB 95-1 never requires an independent actuary to quantify:

• probability of default
• expected benefit impairment
• downside scenarios
• stress testing
• long-term solvency

Instead it relies largely on qualitative judgments.

That would never satisfy institutional due diligence for billions of dollars of private equity, hedge funds, or private credit.

Why should retirees receive less analysis?

---

Missing Requirement #9:

Comparison With Alternative Risk Reduction

A prudent fiduciary should ask:

Could the plan reduce risk without removing retirees from ERISA?

Examples include:

• liability-driven investing
• duration matching
• Treasury overlays
• high-quality bond portfolios
• partial annuitization
• ongoing plan funding

IB 95-1 never requires that comparison.

Instead it largely assumes that purchasing an annuity is itself an acceptable risk-management strategy.

---

Missing Requirement #10:

Independent Fiduciary Verification

IB 95-1 allows reliance upon experts.

It does not require those experts to be independent from:

• insurance companies
• consultants seeking future insurance work
• investment banks
• brokers
• firms with contingent compensation.

That omission has become increasingly important as the PRT market has grown.

---

I believe it was always a prohibited transaction and that a PRT annuity has 10 to 20 times the risk of the diversified DB plan with PBGC insurance. Insurance companies convert risk to profits and split it with the Corporate plan sponsor at the risk expense of retirees. My take is consumer and unions groups did not fully understand 95-1 so did not demand an actuarial analysis. My take is Insurance and Corporate Lobby US Chamber did understand so they blocked an actuarial analysis by the DOL.

“Should participants be transferred out of a diversified ERISA pension with PBGC protection at all?”  Is this a prohibited transaction.

Until courts begin asking the about the original sin of no actuarial analysis, many of the most important conflicts and risk transfers embedded in modern Pension Risk Transfers will remain outside the scope of meaningful judicial review.

This framework also dovetails with the themes in your June 2026 Private Equity Fiduciary Due Diligence Checklist: before exposing participants to a new risk structure, fiduciaries should identify conflicts, evaluate objective risk measures, compare alternatives, and document why the chosen transaction best serves participants—not simply why the insurer appears financially capable.

A traditional defined benefit pension combines several layers of protection:

• a diversified pension trust invested across many asset classes,
• ongoing employer funding obligations,
• ERISA fiduciary oversight,
• federal minimum funding requirements,
• and the Pension Benefit Guaranty Corporation as a final safety net.

After a Pension Risk Transfer, virtually all of those protections disappear. The retiree instead relies primarily on the financial strength of a single insurance company and the applicable state insurance guaranty system.

Where Was the Actuarial Study?

One would expect that before the Department encouraged this transfer of risk, it would have commissioned a rigorous actuarial study comparing the probability of benefit impairment under the two systems.

To my knowledge, no such comprehensive actuarial analysis accompanied Interpretive Bulletin 95-1.

Instead, the Bulletin largely established a fiduciary process for selecting insurers rather than answering the more fundamental question:

Does transferring retirees from a diversified ERISA pension with PBGC protection into a single insurance company actually reduce or increase long-term retirement risk?

My View

In my opinion, the answer is clear.

A Pension Risk Transfer annuity generally carries materially greater long-term risk than remaining in a diversified defined benefit plan backed by ERISA and the PBGC.

Based on my decades of work analyzing stable value products, insurance company general accounts, and retirement-plan risk, I believe that difference can be on the order of 10 to 20 times greater risk, depending on the insurer, its investment strategy, and the protections being compared. That estimate reflects my professional assessment rather than an official actuarial consensus.

Insurance companies are not charities.

Their business model is to assume risk, price that risk, earn an investment spread, and generate profits for shareholders or owners.

Corporate plan sponsors also benefit because a lower-priced annuity often allows them to recover larger pension surpluses after terminating the plan.

The economic gains from transferring pension obligations therefore may be shared between insurers and plan sponsors.

The additional long-term risk, however, is borne primarily by retirees.

Why Wasn’t This Debated?

Another unanswered historical question is why Interpretive Bulletin 95-1 was never subjected to the type of actuarial scrutiny that accompanies many other retirement policy decisions.

My impression is that, in 1995, most consumer organizations and labor unions focused primarily on preserving pensions and did not fully appreciate the actuarial implications of replacing an ERISA-protected pension with an insurance contract.

By contrast, corporate interests and the insurance industry had a direct financial interest in preserving flexibility to complete pension risk transfers. It is reasonable to observe that business organizations, including groups such as the U.S. Chamber of Commerce, have historically supported policies that facilitate pension de-risking.

Thirty Years Later

Today, courts are being asked to decide whether fiduciaries acted prudently when selecting insurers under a framework that was itself never accompanied by a comprehensive actuarial demonstration that transferring retirees from ERISA and PBGC protection into private insurance contracts actually reduces retirement risk.

That unanswered question may be the most important issue in all Pension Risk Transfer litigation. It goes beyond whether fiduciaries followed the right process. It asks whether the underlying regulatory framework adopted in 1995 rested on an adequate actuarial foundation in the first place.

The DOL’s New Athene Amicus Brief: A Green Light for Riskier Pension Transfers?  The Department of Labor’s newest amicus brief in the Bristol-Myers Squibb Athene litigation represents one of the most significant shifts in ERISA policy in decades.

But because it effectively tells courts that they should make it far harder for retirees to challenge whether fiduciaries exercised genuine prudence before handing pensions to insurers.

That is precisely the question Congress intended ERISA fiduciaries to answer.

Perhaps the most repeated theme of the DOL brief is that no insurer selected in a PRT has failed and therefore PRTs have “worked—swimmingly.”   No prudent fiduciary evaluating a bank asks whether the bank has already failed.   No prudent fiduciary buying bonds asks whether default has already occurred.

A new academic paper from the University of Texas and Yale reaches a striking conclusion. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7152239

 Private-equity-owned insurers no longer resemble traditional insurance companies. Instead, they function as integrated asset-management platforms extracting value through insurance spreads, affiliated management fees, private-credit arbitrage, and opaque balance-sheet transactions while relying on a state guaranty system that ultimately socializes much of the downside risk. Those findings are highly relevant to ERISA. When a pension fiduciary purchases a pension risk transfer annuity from an affiliated private-equity insurer, the fiduciary is not merely buying insurance. The fiduciary is entering into a complex transaction with a party whose incentives are fundamentally conflicted. That is exactly the type of transaction ERISA’s prohibited transaction rules were designed to police.

The Department spends much of its brief arguing that retirees generally lack standing unless insurer failure is sufficiently imminent. In other words, until the Titanic sinks – icebergs do not exist.   If fiduciaries ignore obvious warning signs before transferring billions of dollars in pension obligations, retirees may have little opportunity to challenge the decision until years later—after ERISA protections have disappeared and the pension plan has been terminated.   ERISA’s fiduciary duties were designed to prevent imprudent decisions before they occur, not merely to compensate losses after they become irreversible.

The Department of Labor’s newest amicus brief appears to shift the conversation away from fiduciary prudence and toward preserving the efficiency of the pension risk transfer market and increasing the profit of Private Equity insurers specifically high risk Athene.

Appendix: If One Contract Is Ten Times Safer, How Can It Not Be the “Safest Available Annuity”?

One sentence in Interpretive Bulletin 95-1 has largely disappeared from modern Pension Risk Transfer practice. The fiduciary is not merely supposed to choose a financially strong insurance company. The fiduciary is supposed to select the safest available annuity.

That phrase becomes critically important when insurers offer materially different contractual protections.

For years I have argued that one of the most important contractual protections is a ratings downgrade exit provision. Such a provision allows the pension plan to terminate or replace the annuity if the insurer’s financial condition materially deteriorates before or during the transaction. Without such a provision, retirees are effectively locked into whatever risks management later chooses to assume.

The risk difference is enormous.

A PRT annuity with a meaningful downgrade provision allows fiduciaries to respond if an insurer dramatically changes its business model, increases leverage, shifts toward illiquid private credit, or otherwise weakens its financial position.

A PRT annuity without such protection leaves retirees trapped.

The difference is analogous to owning a corporate bond with a put option versus one without. Both may begin life with identical ratings. But once credit quality deteriorates, the holder of the protected instrument has an exit. The holder of the unprotected contract does not.

From a fiduciary standpoint, those are not remotely equivalent products.

In my opinion, a downgrade provision can reduce long-term credit risk by an order of magnitude. I have estimated that a properly drafted downgrade provision may reduce participant credit exposure by approximately 90 percent, meaning the protected contract could present only one-tenth of the risk of an otherwise identical contract lacking such protection. That estimate is based on the ability to exit before a severely impaired insurer reaches insolvency rather than remaining exposed throughout the deterioration.

Whether the precise reduction is ultimately 70%, 90%, or another figure would require actuarial and credit-risk analysis. But the fundamental point is difficult to dispute:

A contractual right to escape a deteriorating insurer is substantially safer than having no right at all.

Yet the Department of Labor’s guidance never requires fiduciaries to analyze this distinction.

Instead, most PRT due diligence focuses on credit ratings, capital ratios, AM Best reports, and consultant scorecards while largely ignoring whether participants possess any meaningful contractual protection if those measures later prove wrong.

That omission is remarkable because IB 95-1 specifically instructs fiduciaries to evaluate “the structure of the annuity contract and guarantees supporting the annuities.” A downgrade provision is precisely the type of contractual guarantee that should receive careful scrutiny.

The 2023 ERISA Advisory Council discussion further emphasized that fiduciaries should continue to focus on selecting the safest available annuity and even suggested greater attention to insurers’ ownership structures, alternative assets, and contractual protections as insurers increasingly rely on private credit.

This raises a simple question for every PRT case:

If two insurers are otherwise comparable, but one offers retirees a meaningful downgrade protection and the other offers none, how can the latter possibly be considered the “safest available annuity”?

That is not merely a pricing question.

It is a fiduciary question.

And it is precisely the kind of question that discovery should explore by obtaining:

• Draft annuity contracts and all negotiated versions.
• Any proposed ratings downgrade or termination provisions.
• Internal discussions regarding downgrade protections.
• Consultant memoranda evaluating contractual safeguards.
• Reasons why stronger participant protections were rejected.
• Comparisons of competing insurers’ contract language.

If no one analyzed these contractual differences, it becomes difficult to understand how fiduciaries satisfied IB 95-1’s requirement to select the safest available annuity, rather than simply the insurer offering the most attractive commercial terms.

https://commonsense401kproject.com/2026/06/22/prt-updated-litigation-risk-pension-risk-transfer-annuities/  https://commonsense401kproject.com/2026/03/26/apollos-garbage-dump-athene-loading-up-on-risk-endangers-retirees-in-prts-and-other-annuity-investors/      

https://commonsense401kproject.com/2026/01/11/dols-prt-annuity-amicus-brief-dismantling-erisa/  https://commonsense401kproject.com/2025/11/06/prts-why-courts-keep-ignoring-the-dangers-of-pension-risk-transfer-annuities-and-why-these-cases-must-be-appealed/

Jim Watkins’ recent article on fiduciary prudence protocols is one of the best practical guides I have seen for investment committees. It is written as a roadmap for plan sponsors who genuinely want to satisfy ERISA’s prudence requirements before selecting an investment. As I read it, however, I kept thinking about the more than forty fixed annuity ERISA cases in which I have worked as an expert. The surprising thing is not how well Jim’s protocols fit those cases. The surprising thing is how many of those protocols appear never to have been followed. https://fiduciaryinvestsense.com/2026/07/21/fiduciary-prudence-protocols-proactive-fiduciary-risk-mitigation-strategies-for-plan-sponsors-and-other-investment-fiduciaries/

More importantly, Jim’s article unintentionally reinforces something I have been writing for several years. The real problem with many general-account fixed annuities is not simply that they are expensive or opaque. The problem is that they begin as transactions with a party in interest. That means the burden should be on the fiduciaries to prove that an exemption applies—not on participants to prove that something went wrong years later. That changes the entire conversation.

For years, the retirement industry has debated whether fixed annuities are prudent investments. I believe that is asking the wrong question. The first question should be: Was the transaction lawful in the first place? That distinction matters because a committee can spend hours discussing interest rates, guarantees, ratings and participant demand while never asking the question ERISA asks first. Has the plan entered into a prohibited transaction with a party in interest? If the answer is yes, the fiduciaries must establish that an exemption applies.

Jim Watkins makes exactly this point in his prohibited transaction protocol. He reminds fiduciaries that transactions with parties in interest should never be treated as routine business. They require documentation, evidence and a clear demonstration that the statutory exemption has actually been satisfied.

That sounds simple. In practice, it becomes extraordinarily difficult for many fixed annuity products. The reason is hidden compensation. Unlike a mutual fund, where every investor can see the expense ratio, a general-account annuity usually pays participants only a declared crediting rate. What participants do not see is the insurer’s investment spread. The insurance company owns the underlying assets. It earns the full portfolio return. It decides how much interest participants receive. It keeps the difference. That spread is compensation. Yet it is usually invisible to participants and, in many cases, largely invisible to the fiduciaries approving the product.

That raises a commonsense question. How can a committee conclude compensation is reasonable if it does not know what the compensation is? That is not merely a disclosure problem. It is a prohibited transaction problem. For years I have argued that hidden spreads make it nearly impossible for fiduciaries to demonstrate that the insurer’s compensation is reasonable, one of the central requirements of the statutory exemptions under ERISA.

Jim’s article reaches the same destination from a different direction. He says fiduciaries should have documentation proving costs are reasonable. I simply ask: Where is that documentation? Show me the insurer’s gross portfolio yield. Show me the actual spread retained by the insurer. Show me the analysis comparing that spread with transparent alternatives. Show me where the investment committee discussed whether the spread itself—not merely the credited rate—was reasonable. In over forty cases, I have never seen those documents. Instead, committees usually receive presentations showing insurer ratings, historical crediting rates and marketing material explaining why participants like guarantees. That is not the same thing.

 Another part of Jim’s article struck me because it perfectly matches one of my longstanding themes. He repeatedly tells fiduciaries to compare investments with reasonable alternatives. That sounds obvious.

But with plans with Fixed Annuities, they and their consultants compare their rates vs the rates of investments with 1/10^th the risk like synthetic stable value and money market funds.  This risk deception is like comparing a junk bond fund vs. a U.S. Treasury fund.  No one would buy that Junk bond would outperform its benchmark long-term at 3.5% when a Treasury return was 3.2%.  But this is done if plans over and over.

General-account annuities with significant Private credit and other privately valued assets. Insurance accounting. Opaque spreads. That should concern every fiduciary. Jim repeatedly emphasizes that fiduciaries need reliable evidence before investing participant money. A glossy insurance presentation is not evidence. A credit rating is not evidence. A declared crediting rate is not evidence. The evidence should include the insurer’s actual economics, the hidden spread, liquidity restrictions, employer-initiated event provisions, downgrade risks, surrender provisions and a meaningful comparison with transparent alternatives.

If those materials are missing, it is hard to argue that the committee completed the investigation Jim describes. Perhaps the most important lesson from Jim’s article is that documentation cannot manufacture an exemption. Good minutes cannot make hidden compensation transparent. A consultant’s recommendation cannot eliminate a prohibited transaction. A high credit rating cannot eliminate conflicts of interest. Calling something “guaranteed” does not make it prudent. Nor does it satisfy ERISA. The committee still has to prove that the insurer’s compensation was reasonable and that the statutory exemption applies. That burden becomes extremely difficult when the insurer controls the assets, controls the accounting, controls the crediting rate and controls the information necessary to calculate its own compensation.

That is why I believe Jim Watkins’ article deserves to be read by every plan sponsor—and every ERISA plaintiff’s attorney. Jim wrote it as a guide for fiduciaries who want to avoid litigation. I read it as something else as well. It is a roadmap for discovery. Every protocol in his article should leave a paper trail. If the committee truly followed those protocols, there should be documents showing exactly how it evaluated insurer compensation, compared transparent alternatives, analyzed conflicts of interest, reviewed liquidity restrictions and established the prohibited transaction exemption. If those documents do not exist, the issue is no longer simply whether the committee skipped a few prudent steps. The issue may be whether it can prove the transaction was exempt from ERISA’s prohibited transaction rules in the first place. That is where I believe the next generation of fixed annuity litigation is headed.

Jim Watkins’ Fiduciary Prudence Protocol	What Should Be Documented	What Often Happens with Fixed Annuities
Identify participant needs	Why is an insurance product necessary instead of a lower-cost alternative?	Often begins with the assumption that participants “need guarantees” without documenting why. Automatic from insurance company recordkeepers to enhance recordkeeping fees
Evaluate all reasonably available alternatives	Compare against synthetic stable value, money market funds, short-term bond funds, Treasury options, and other capital preservation investments.	Frequently limited to recordkeepers own products at best comparisons among similar high risk high fee insurance products.
Conduct a thorough risk analysis	Review credit risk, downgrade provisions, concentration risk, liquidity restrictions, market value adjustments, portability, and termination provisions.	Committees mostly ignore, at most rely on insurer credit ratings and marketing materials.
Analyze all fees and compensation	Document insurer spreads, commissions, revenue sharing, affiliate compensation, and all direct and indirect compensation.	The insurer’s spread—the largest source of compensation—is typically undisclosed and therefore not analyzed.
Investigate conflicts of interest	Review consultant relationships, insurance affiliations, commissions, proprietary products, and other financial incentives.	Insurance company and consultant conflicts are often secret with undisclosed fees facilitated via insurance commissions
Use meaningful benchmarks	Benchmark both risk and return against comparable alternatives using transparent costs.	Committees frequently benchmark fixed annuities with 10 times the risk or more against synthetic SV and money markets. Ignoring hidden spreads and differing risk profiles.
Review contract provisions	Analyze surrender charges, employer-initiated event clauses, market value adjustments, and participant withdrawal restrictions.	Most fiduciaries never receive or carefully review the complete insurance contract before approval or have their fiduciary counsel review.
Evaluate participant disclosures	Ensure participants receive understandable disclosure of all material fees, risks, restrictions, and guarantees.	Participants generally receive only the credited rate, while insurer spreads and many risks remain undisclosed.
Document the decision-making process	Committee minutes should show questions asked, alternatives considered, expert advice obtained, and reasons for selection.	Minutes often simply reflect acceptance of consultant or insurance company recommendations.
Monitor continuously	Regularly review spreads, insurer financial condition, ratings changes, contract competitiveness, and available alternatives.	Monitoring typically focuses on the credited rate rather than whether the contract remains prudent relative to market alternatives.

Annuities Break ERISA’s Disclosure Rules

The SEC Quietly Killed Stable Value Mutual Funds in 2004 — And That Tells You Everything About Private Equity, Fixed Annuities, and Prohibited Transactions in 401(k)s

TIAA Traditional Annuity Is a Prohibited Transaction

Stable Value Industry Admits Synthetic Funds Are Safer — and Why That Makes General Account Annuities a Prohibited Transaction

Appendix: Why the DOL and IRS “Lifetime Income” Guidance Does Not Immunize Fixed Annuities from ERISA’s Prohibited Transaction Rules

One of the most common arguments made by insurance attorneys is that a collection of IRS rulings, DOL guidance, and regulatory preambles somehow settled the legality of fixed annuities in defined contribution plans. They routinely cite Revenue Ruling 2012-3, the Qualified Longevity Annuity Contract (QLAC) regulations, IRS Notice 2014-66, the October 23, 2014 DOL Information Letter, and most recently DOL Advisory Opinion 2025-04. The implication is clear: if the IRS or DOL discussed lifetime income products, then using insurance company general account annuities inside ERISA plans must be legally acceptable. That conclusion simply does not follow. These authorities address entirely different legal questions. None of them performs the prohibited transaction analysis required by ERISA §§406 and 408. None concludes that a fiduciary has satisfied ERISA’s prudence and loyalty requirements merely because a product provides lifetime income. And none undertakes the actuarial or economic analysis necessary to determine whether a participant is paying reasonable compensation for the risks transferred to an insurance company. In other words, they are being cited as if they were “get out of jail free” cards. They are not.

They Assume the Product Is Already Permissible Almost every one of these authorities begins from the assumption that an annuity has already been selected. The discussion then turns to questions such as: * tax treatment; * required minimum distributions; * portability; * participant communications; * Qualified Default Investment Alternative (QDIA) issues; * Qualified Longevity Annuity Contract (QLAC) requirements; or * implementation mechanics. Those are administrative questions. They are not prohibited transaction questions. Whether a fiduciary may legally purchase an insurance company’s balance-sheet obligation in the first place is an entirely separate inquiry.

None Performs an ERISA §406 Analysis ERISA’s prohibited transaction provisions are intentionally broad. Congress recognized that certain transactions are so susceptible to conflicts of interest that they are presumed unlawful unless a statutory or administrative exemption applies. That is why the legal analysis begins with questions such as: * Is the insurance company a party in interest? * Is the insurer receiving compensation from plan assets? * Is the fiduciary causing the plan to engage in a transaction benefiting a party in interest? * Does an exemption apply? * Is the compensation objectively reasonable? * Has the fiduciary independently established that the transaction is prudent? The lifetime-income guidance largely skips these questions. Instead, commentators frequently treat the guidance as though merely mentioning annuities answers all of them. It does not.

Prudence Is Not the Same as Tax Qualification Revenue Ruling 2012-3 is fundamentally a tax ruling. IRS Notice 2014-66 addresses QDIA issues involving lifetime income products. The QLAC regulations address required minimum distribution rules. The DOL Information Letter discusses fiduciary considerations in a limited context. DOL Advisory Opinion 2025-04 addresses specific questions presented by the requesting parties. None of these authorities transforms an otherwise conflicted transaction into a prudent investment. The Internal Revenue Code and ERISA serve different purposes. A product can satisfy tax requirements while still violating ERISA’s fiduciary standards. Likewise, a product may satisfy disclosure requirements while still constituting a prohibited transaction. ### They Never Ask the Central Economic Question The missing analysis is the one that matters most. How much additional compensation is the insurance company extracting by converting a diversified investment portfolio into a general account obligation? Insurance companies do not eliminate risk. They repackage it. Participants exchange ownership of diversified securities for a promise backed by the insurer’s balance sheet. That transformation creates: * credit risk; * liquidity restrictions; * insurer spread profits; * reserve arbitrage; * capital charges; * surrender charges; * market value adjustment provisions; * downgrade risk; and * potentially significant hidden compensation. None of the frequently cited guidance attempts to quantify those costs. Nor does it compare those costs against readily available alternatives such as diversified synthetic stable value, Treasury securities, or low-cost bond funds. Without that analysis, there is no basis for concluding that compensation is reasonable under ERISA.

Interpretive Bulletin 95-1 Shows the Same Blind Spot This is not a new problem. Interpretive Bulletin 95-1 established a framework for selecting annuity providers in defined benefit pension risk transfers. But it never performed an actuarial comparison between: * remaining in a diversified pension trust with PBGC protection, and * moving participants into an insurance company general account. Instead, the framework focused largely on insurer solvency, ratings, and procedural considerations. That is a very different question from whether participants are better off economically after the transaction. The same analytical gap appears in much of today’s lifetime-income guidance.

Lifetime Income Does Not Excuse Excessive Compensation ERISA does not prohibit lifetime income. It prohibits conflicted transactions that improperly enrich parties in interest. If an insurance company earns several times the compensation available through economically comparable alternatives, fiduciaries cannot avoid scrutiny simply by invoking the phrase “lifetime income.” A worthy objective does not eliminate fiduciary duties. The analysis still requires determining whether: * comparable alternatives exist, * the insurer’s compensation is reasonable, * participants bear unnecessary risks, * conflicts of interest influenced the recommendation, and * the fiduciary acted solely in participants’ interests. Those questions remain regardless of how many IRS notices or DOL letters are cited.

Cunningham v. Cornell Changes the Litigation Landscape The Supreme Court’s unanimous decision in Cunningham v. Cornell reinforces this distinction. Plaintiffs need not negate every possible exemption at the pleading stage. Once a prohibited transaction involving a party in interest is plausibly alleged, defendants bear the burden of establishing that an exemption applies. Simply pointing to IRS guidance on lifetime income or DOL commentary about implementation does not satisfy that burden. The defendant must still prove that the specific transaction falls within a valid exemption and that the fiduciary met ERISA’s demanding standards of prudence, loyalty, and reasonable compensation.

The Bottom Line Insurance attorneys increasingly string together a series of IRS notices, DOL letters, advisory opinions, and regulatory preambles as though repetition creates immunity. It does not. These authorities generally explain how lifetime-income products may operate if otherwise permissible. They do not answer the threshold question of whether the underlying insurance transaction satisfies ERISA’s prohibited transaction rules. Until regulators conduct the kind of rigorous actuarial, economic, and conflict-of-interest analysis that has long been missing from this area, these authorities should be viewed for what they are: guidance on implementation—not blanket approval of every insurance product sold to retirement plans.

People sometimes ask me whether we’ve found most of the bad fixed annuity cases. Not even close. Over the past several years I’ve worked as an investment expert with ERISA plaintiff law firms helping investigate and file more than 40 fixed annuity excessive fee and prohibited transaction lawsuits. Those cases have uncovered hidden spread fees, insurance company conflicts, excessive compensation, and fiduciary failures that most participants never knew existed. But every time another case is filed, I come away with the same thought. We’re only scratching the surface.

The biggest problem isn’t developing legal theories anymore. It’s finding participants. Insurance companies have spent decades making sure participants don’t know they own an annuity. Instead, they see names like Stable Value Fund, Guaranteed Fund, Capital Preservation Fund, or Fixed Account. It sounds safe. It sounds simple. It doesn’t sound like an insurance product generating hidden compensation. So I decided to see how big this market really is.

 I started with 9,404 ERISA defined contribution plans with more than $100 million in assets. I eliminated the low-cost providers—primarily Vanguard, Fidelity, State Street, and Schwab—and concentrated on the higher-fee insurance marketplace. That left about 4,000 plans. Then I reviewed the Form 5500 for every one of them. One by one. I wanted to know which plans actually offered fixed annuities and how much money participants had invested.

 The answer surprised even me. I found 3,568 plans holding more than $211 billion in fixed annuity assets. Read that number again. $211 billion. And that’s only in the larger plans. There are another 25,605 ERISA defined contribution plans with between $20 million and $100 million in assets. Then there are the small plans. America has approximately 722,241 ERISA defined contribution plans with less than $20 million in assets. Based on my years inside the insurance business, I would not be surprised if roughly one-third of those plans also contain fixed annuities. In total there are approximately 757,291 ERISA defined contribution plans. Those numbers tell me something. The plaintiff bar hasn’t found all the cases. The plaintiff bar has barely started.

What surprised me even more was what I didn’t find. If you listen to today’s conferences, you’d think lifetime income annuities were taking over the retirement business. They aren’t. My review found that approximately 97% of the insurance products were traditional fixed annuities. Separate account products represented about 2%. Lifetime income annuities represented less than 1%. Variable annuities represented less than 1%. The product generating almost all the headlines is barely visible.

The product sitting quietly inside thousands of retirement plans is the one almost nobody discusses. Why? Because hidden fees are hard to litigate. Mutual funds tell you their expense ratio. Insurance companies generally don’t tell participants how much they make on the spread between what they earn and what they credit participants. That’s where much of the money is. I’ve seen this business from both sides.

Before becoming an expert witness, I spent seven years as an officer of seven Transamerica insurance companies. I know how these products are built. I know how the spreads work. I know why state regulation has been so attractive to insurance companies. And I know why participants rarely ask questions. They don’t know what to ask. That’s why I assembled this litigation list. Not because I think every plan belongs in court. But because every plan deserves to be investigated.

The next 40 cases won’t be hard to litigate. The hard part will be finding the participants who have no idea they own one of these products. When I look at 3,568 plans, $211 billion, and more than 757,000 ERISA defined contribution plans**, I don’t see the end of fixed annuity litigation. I see the beginning. ::

The Accidental Retirement Revolution: How America’s 401(k) Became a $10 Trillion Marketplace

The Four-Tier Structure of the U.S. 401(k) Marketplace

Annuities Cherry-Pick the Weakest State Regulator

404(a)(5) https://commonsense401kproject.com/2026/07/20/dols-biggest-blind-spot-404a5-fee-disclosures-ignore-annuities-the-largest-fees-in-many-401k-plans/

Annuities Break ERISA’s Disclosure Rules

Lifetime Income: The Gateway Drug for Insurance Products in 401(k) Plans

TIAA Traditional Annuity Is a Prohibited Transaction

Stable Value Industry Admits Synthetic Funds Are Safer — and Why That Makes General Account Annuities a Prohibited Transaction

Annuities as Prohibited Transactions in Retirement Plans –

The Great Fee Recapture: Why Wall Street Is Leaving SEC Mutual Funds for State-Regulated Collective Trusts

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

When Congress debates financial regulation, most Americans assume insurance companies are regulated much like banks or mutual funds. They are not.

During my seven years as an officer of seven Transamerica insurance companies, I learned an uncomfortable truth. Insurance companies don’t simply compete for customers—they compete for regulators. When management decided where to domicile a new insurance company, one of the first questions was not, “Which state has the toughest consumer protections?” Instead, it was, “Which state offers the most favorable regulatory environment?” More often than not, the answer was Iowa.

That experience fundamentally changed how I view insurance regulation. It also explains why I believe so many retirement savers remain exposed to risks and fees they never see.   Most plan sponsors and and their consultants much less participants even know which state regulates the annuity contracts they hold.

Most financial products sold to retirement investors are regulated at the federal level. Mutual funds operate under the Securities and Exchange Commission. Public companies answer to federal securities laws. Banks are supervised primarily by federal banking regulators. Insurance, however, remains largely a state-regulated business.

On paper, that sounds like local control. In reality, it has created fifty competing regulatory systems, each with its own political pressures and economic incentives.

The National Association of Insurance Commissioners (NAIC) attempts to create consistency by developing model laws and regulations. But the NAIC is not a federal regulator. It has no independent enforcement authority. States decide whether to adopt its models and often modify them to suit local priorities. As a result, insurance companies have long been able to organize themselves in states viewed as having lower capital requirements, more accommodating regulators, or a more business-friendly approach.

This is not an accidental feature of the system. It is one of its defining characteristics.

States have powerful incentives to attract insurance companies. Large insurers generate premium tax revenue, create well-paying jobs, support local law firms and accounting firms, and enhance a state’s reputation as an insurance center. The result is an uncomfortable but unavoidable reality: states compete for insurance domiciles.

Anyone who has watched Delaware dominate corporate charters will recognize the pattern. Insurance regulation developed its own version of the same competition with prime examples Iowa and Connecticut.

The consequences extend far beyond where an insurance company keeps its headquarters. They shape how much capital companies must hold, how aggressively they can use affiliated transactions, how they account for investment risks, and ultimately how secure policyholders’ retirement savings may be.

Ironically, the financial crisis of 2008 did not fundamentally change this structure.

Most Americans think of the Dodd-Frank Act as legislation that strengthened financial regulation after the collapse of Lehman Brothers and AIG. In many respects it did. Yet buried within Title V was the Non admitted and Reinsurance Reform Act (NRRA), a little-known provision that significantly strengthened the authority of an insurer’s home state over key reinsurance decisions.

Sections 531 and 532 effectively established that, if an insurer was domiciled in an NAIC-accredited state, that state’s treatment of reinsurance would largely govern. Other states could no longer impose their own competing standards in many important areas. What appeared to be a technical legal change dramatically increased the importance of choosing the right domicile.

That federal framework became the foundation for everything that followed.

Beginning in 2011, the NAIC created the “certified reinsurer” framework, allowing qualified foreign reinsurers to post substantially less collateral than had historically been required. Covered Agreements negotiated with the European Union and later the United Kingdom eliminated collateral requirements for many qualifying foreign reinsurers altogether. Subsequent revisions extended similar treatment to other reciprocal jurisdictions, including Bermuda, Switzerland, and Japan.

Individually, each regulatory change appeared technical. Collectively, they transformed the economics of life insurance.

Today, many private-equity-owned insurance companies routinely transfer large blocks of liabilities to affiliated offshore reinsurers. Whether one believes those structures increase efficiency or increase risk, they became possible because the regulatory framework steadily evolved to permit them. Ironically, one of the laws sold as strengthening financial oversight after the financial crisis also became an important legal foundation for today’s offshore affiliated reinsurance model.

The weakness of state regulation becomes even more apparent when consumers ask the most basic question: “Who guarantees my annuity if my insurance company fails?”

Most Americans assume there is an insurance equivalent of the FDIC. There is not.

Instead, every state maintains its own guarantee association with different coverage limits and different rules but overall it is in many peoples opinion a joke. These associations are generally funded passing the hat after an insolvency occurs through assessments on surviving insurers rather than through a large pre-funded national reserve. The protection is far less uniform and far less transparent than most consumers believe.   There are $0 in reserves so if S&P or Moodys would put a rating on these pools it would be junk at best.  https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/

That matters because retirement savers are increasingly encouraged to place larger portions of their retirement assets into insurance products.

It also matters because insurance regulation has tolerated something that would never be accepted in the SEC-regulated mutual fund world.

Hidden fees.

Outside the largest 401(k) plans, annuities still represent a significant share of retirement assets. Yet participants frequently never learn the insurer’s spread income—the difference between what the insurer earns on its investments and what it credits to participants. This spread often represents the insurer’s largest source of compensation, but unlike mutual fund expense ratios, it generally remains invisible to participants. I have argued previously that this represents one of the Department of Labor’s biggest blind spots under ERISA’s participant disclosure rules.   Insurance products also enable secret commissions paid to advisors/consultants to the plan. 404(a)(5) https://commonsense401kproject.com/2026/07/20/dols-biggest-blind-spot-404a5-fee-disclosures-ignore-annuities-the-largest-fees-in-many-401k-plans/

Most advisor/consultants disclose in their ADV2’s an affiliation with an insurance compay which allows them to take secret commissions from recommending insurance products.

Wall Street has discovered that the state-regulated insurance model can be highly profitable. It should therefore surprise no one that similar regulatory approaches are now appearing in state-regulated collective investment trusts and other retirement products that seek to move assets away from the transparency of SEC regulation. I have discussed that trend extensively in prior articles and will not repeat it here.

For decades, insurance companies have been allowed to choose the regulators they prefer. Dodd-Frank unintentionally reinforced important parts of that structure. Subsequent regulatory changes expanded offshore affiliated reinsurance. Hidden spread fees remain largely undisclosed. State guarantee associations provide a deceptive smokescreen that many consumers mistakenly believe is equivalent to federal insurance.

Insurance lobbyists are too powerful, so regulatory relief is a false hope.  However, ERISA litigation is moving in this direction with several cases labeling these one sided contracts as prohibited transactions. 

Annuities Break ERISA’s Disclosure Rules

Lifetime Income: The Gateway Drug for Insurance Products in 401(k) Plans

TIAA Traditional Annuity Is a Prohibited Transaction

Stable Value Industry Admits Synthetic Funds Are Safer — and Why That Makes General Account Annuities a Prohibited Transaction

Annuities as Prohibited Transactions in Retirement Plans –

The Great Fee Recapture: Why Wall Street Is Leaving SEC Mutual Funds for State-Regulated Collective Trusts

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

For more than a decade, the Department of Labor’s participant fee disclosure regulation under ERISA Section 404(a)(5) has been promoted as the cornerstone of transparency in defined contribution plans. Participants receive tables showing mutual fund expense ratios to the nearest one-hundredth of a percent. Plan fiduciaries compare investment expenses in basis points. Plaintiffs’ attorneys routinely sue over a few basis points of excessive mutual fund fees.

Yet the regulation ignores what may be the largest investment fee in more than 200,000 retirement plans: insurance annuity spread fees.

That omission is not an accident of accounting. It is a structural failure that has distorted competition, misled participants, and given insurance products a disclosure advantage over SEC-registered mutual funds.

My recent articles on the Four-Tier Structure of the U.S. 401(k) Marketplace and Annuities Break ERISA’s Disclosure Rules examined how insurance companies built a separate business model around opaque compensation rather than transparent asset-management fees. The DOL’s disclosure rules effectively bless that distinction.

The result is a two-tier disclosure system. Mutual funds disclose virtually every expense ratio. Insurance products disclose almost none of their economic profit. Participants are left believing the annuity has little or no investment fee because none appears on the required disclosure. Nothing could be further from the truth.

Consider how these products actually work. Traditional mutual funds generally charge explicit expense ratios ranging from roughly 0.03% for index funds to perhaps 0.75% or more for actively managed funds. Those fees appear directly on participant disclosures. Insurance general account products, stable value annuities, fixed annuities, indexed annuities, and many lifetime income products operate differently. The insurance company earns money through an interest-rate spread.

Suppose the insurer earns 6.5% on its investment portfolio but credits participants only 4.0%. The 2.5% difference is not merely an investment result. It is the insurer’s gross economic spread, from which profits, reserves, commissions, overhead, and capital costs are funded. Participants never see this number. The 404(a)(5) disclosure usually reports no investment expense ratio at all.

Imagine requiring Vanguard to report zero fees while Fidelity disclosed every basis point of its mutual fund expenses. That is essentially how today’s disclosure rules treat insurance products. The economic consequences are enormous. Across much of today’s marketplace, low-cost index funds cost between 5 and 25 basis points annually. Insurance spreads frequently exceed 200 basis points and can exceed 400 basis points.

That means the hidden economic cost can easily be ten to twenty times larger than the mutual fund fees receiving all of the regulatory attention. The litigation landscape reflects this imbalance. ERISA lawsuits increasingly focus on whether a mutual fund charged 45 basis points instead of 20.

Meanwhile, annuity products generating spreads measured in full percentage points often escape meaningful scrutiny because the fee is never disclosed in the first place. Disclosure drives governance. What is invisible rarely receives attention. This is particularly significant because insurance products remain deeply embedded throughout the defined contribution marketplace. Thankfully, litigation is starting with the largest plans

More than one-third of America’s roughly 700,000 defined contribution retirement plans continue to utilize insurance products in some form, representing well over 200,000 plans and trillions of dollars in retirement assets. Many of these arrangements date back decades and are primarily fixed annuities. The newest fad is “lifetime income.” Insurance products also enable secret commissions paid to advisors/consultants to the plan. Most advisor/consultants disclose in their ADV2’s an affiliation with an insurance compay which allows them to take secret commissions from recommending insurance products.

Congress, regulators, and industry groups increasingly promote lifetime income solutions as the next evolution of defined contribution plans. Yet very few proposals require participants to receive a standardized disclosure of the insurer’s actual economic spread. Without that disclosure, participants cannot compare an insurance product against a mutual fund or collective investment trust on an apples-to-apples basis. Nor can fiduciaries demonstrate that they have satisfied ERISA’s duty to understand and monitor total compensation.

This matters far beyond annuities. Private equity, private credit, and crypto products are now seeking broader access to participant-directed retirement plans. Each promises higher returns through structures that are significantly less transparent than traditional mutual funds. Each contains layers of embedded compensation that often cannot be observed through conventional expense ratios.

If regulators repeat the mistake made with insurance annuities, participants will once again receive disclosures that appear complete while omitting the largest sources of compensation. History suggests that once an opaque fee structure becomes embedded in retirement plans, reversing course becomes extraordinarily difficult. The annuity market demonstrates precisely how that happens. For decades, spread compensation remained largely outside both participant disclosures and fiduciary discussions. Entire generations of plan committees accepted products without ever seeing the insurer’s primary source of revenue.

The same pattern could emerge for private equity carried interest, private credit financing structures, crypto custody arrangements, valuation costs, affiliated transactions, securities lending revenues, and numerous other indirect forms of compensation.

ERISA’s disclosure philosophy should be straightforward. If compensation comes from participant assets, participants should know about it. If fiduciaries are expected to monitor compensation, they must first be able to measure it. The DOL’s current regulations fall well short of that standard.

Real reform would require insurers offering retirement products to disclose standardized annual economic spread information alongside credited interest rates. Participants should see not only what they earned, but what the insurance company earned on the assets supporting their contract. Only then can meaningful comparisons be made with mutual funds, collective investment trusts, and other investment alternatives.

Transparency should not depend on legal structure. Whether compensation is called an expense ratio, an interest spread, carried interest, performance allocation, servicing fee, or something else entirely, the principle should remain identical. Economic compensation is economic compensation.

The next generation of retirement products should not inherit the disclosure failures of the last. If the Department of Labor could overlook annuity spread fees affecting hundreds of thousands of retirement plans, it is reasonable to ask whether private equity, private credit, and crypto products are headed toward the same regulatory blind spot.

Participants deserve better than another generation of invisible fees.

The Four-Tier Structure of the U.S. 401(k) Marketplace

Annuities Break ERISA’s Disclosure Rules

The Great Fee Recapture: Why Wall Street Is Leaving SEC Mutual Funds for State-Regulated Collective Trusts

Lifetime Income: The Gateway Drug for Insurance Products in 401(k) Plans

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A public pension performance report today typically looks like this:

• Public equities: market-priced daily under CFA/GIPS principles.
• Public bonds: market-priced daily.
• Treasury bills: market-priced.
• Then:
  • Private equity using quarterly GP valuations.
  • Private credit using Level 3 models.
  • Real estate using appraisals.
  • Infrastructure using internal valuation models.

Those last categories are not market prices. They are manager estimates.

Yet they are blended together into a single “Total Fund Return.”

That creates the appearance that every asset class was measured under the same standard when they clearly were not.   Public Pension staff are manipulating these numbers to increase their own compensation.   This was found at both CALPERS https://commonsense401kproject.com/2026/05/22/calpers-sets-its-own-excessive-pay-off-the-charts/ and Ohio Teachers    https://commonsense401kproject.com/2026/07/13/new-academic-paper-ohio-strs-had-two-performance-numbers-and-used-the-better-one-to-pay-bonuses/

GIPS was built around observable market values

The CFA Institute’s Global Investment Performance Standards (GIPS) assume fair values based on market evidence whenever possible.

Private equity is different.

It relies upon:

• GP-generated NAVs
• appraisal smoothing
• Level 3 models
• continuation vehicles
• delayed write-downs
• infrequent valuation dates

Your CFA article from earlier this month emphasized that governance depends on meaningful measurement. Mixing subjective quarterly valuations with continuously priced securities undermines that objective.

Ohio STRS illustrates the problem

Your Ohio STRS article demonstrated one version of this.

The staff effectively maintained two performance numbers:

• one appropriate for compensation;
• another appropriate for public reporting.

The higher number determined bonuses.

If private assets themselves are already valued using optimistic appraisal models, and those values are then blended into total fund returns used for executive compensation, the incentives become even more problematic.

The question trustees should ask is simple:

Were executive bonuses based upon cash returns or estimated valuations?

Those are very different things.

Phalippou’s point is bigger than IRR

Many readers focus on his criticism of IRR.

The deeper point is that cash matters.

Suppose two firms report a 20% IRR.

Firm A returns 1.8x net cash.

Firm B returns 1.3x net cash.

The IRRs look similar.

The investor wealth created is dramatically different.

Your chart illustrates this perfectly.

Apollo:

• 1.39x net multiple
• roughly 6.8% implied annual return

KKR:

• 1.79x
• roughly 12.3%

Those numbers tell investors far more than a headline IRR.

The public pension reporting problem

Imagine a pension reports:

• Public equity: 11%
• Fixed income: 5%
• Private equity: 18%
• Private credit: 13%

Total Fund = 10.9%

But suppose:

• private equity is actually worth 15% less than GP NAV,
• private credit 10% lower,
• real estate 20% lower,

and those values are marked to realistic secondary-market prices.

The reported Total Fund Return immediately changes.

The “alpha” disappears.

The CIO bonus changes.

The funded ratio changes.

Taxpayer contributions change.

None of this requires a single investment to be sold.

It simply requires using market evidence instead of manager estimates.

The false impression of GIPS comparability

This may be the strongest criticism.

Public pensions often imply:

“Our total fund earned 9.8%, measured under professional investment standards.”

That is misleading.

A more accurate disclosure would state:

60% of assets were measured using continuously observable market prices.

40% were measured using manager-supplied or appraisal-based Level 3 estimates that are not directly observable in public markets.

Those are fundamentally different measurements.

A better reporting framework

Every annual report should contain three performance numbers.

1. Traditional Total Fund Return

Current practice.

2. Market-Based Return

Private assets adjusted to estimated secondary-market value.

3. Cash Return

Using actual contributions and distributions.

That third number is closest to what Phalippou argues investors should actually care about.

A new disclosure every pension should provide

Instead of simply reporting:

Private Equity Return: 16.2%

they should disclose:

Metric	Report
Gross IRR	XX%
Net IRR	XX%
Net Multiple	1.42x
DPI	0.68x
TVPI	1.42x
PME vs Russell 3000	XX
Secondary Market Value	88% of NAV
Estimated Market Annual Return	7.3%

That immediately tells trustees whether the impressive-looking IRR actually translated into wealth.

The larger fiduciary issue

The issue is no longer simply whether private equity outperforms.

It is whether public pensions are presenting one performance report that mixes:

• market prices,
• appraisal prices,
• GP estimates,
• Level 3 models,
• IRRs,
• money multiples,
• and GIPS-compliant returns

as though they were directly comparable.

They are not.

If approximately one-third to one-half of a pension’s assets are measured using fundamentally different valuation methodologies, then reporting a single “Total Fund Return” without clearly separating market-based and appraisal-based performance gives trustees and taxpayers a false sense of precision. A genuinely transparent system would distinguish market-priced returns from model-priced returns, report net multiples alongside IRRs, and disclose how much of reported performance depends on manager valuations rather than observable market transactions. That would be far more consistent with both the spirit of GIPS and a fiduciary’s duty of full and fair disclosure.

Public Pensions Should Report What Their Alternative Investments Are Actually Worth

Public pension funds routinely claim that their private equity, private credit, real estate, infrastructure, and other alternative investments are worth almost exactly what the private managers say they are worth. Yet when investors try to sell those same investments, the market frequently offers substantially less.

That gap is not merely an academic accounting dispute. It affects reported investment returns, staff bonuses, actuarial funding ratios, required taxpayer contributions, asset-allocation decisions, and the credibility of the entire public-pension system.

Public pensions should therefore disclose two values for every alternative-investment portfolio:

1. The general partner’s reported net asset value.
2. An independently estimated secondary-market value reflecting what the pension could reasonably receive in a current arm’s-length sale.

For many portfolios, that second number could be 10% to 30% below reported NAV. For distressed, older, venture-capital, or real-estate funds, the discount can be even larger.

The Market Already Provides a Price

The traditional defense is that private investments cannot be marked to market because there is no market.

That argument is increasingly untenable. The private-assets secondary market is now a large, institutional marketplace. Lazard estimated that secondary transaction volume reached approximately $233 billion in 2025, up 53% from 2024. The existence of hundreds of billions of dollars of annual transactions means that public pensions can obtain market indications, competitive bids, broker estimates, and portfolio-level pricing ranges even when individual holdings do not trade daily.

Jefferies’ review of 2025 secondary pricing provides particularly useful evidence:

Alternative investment	Average secondary price in 2025	Implied discount from reported NAV
Buyout private equity	92% of NAV	8%
Private credit	91% of NAV	9%
Venture and growth	78% of NAV	22%
Private real estate	70% of NAV	30%

These are broad averages, not prices that apply mechanically to every fund. But they demonstrate why reporting all alternatives at 100 cents on the manager-reported dollar can materially overstate their realizable value.

Academic research reached a similar conclusion long before the recent liquidity crunch. A major study of secondary transactions found an average discount of 13.8% to NAV, with discounts varying by fund type, age, and market conditions.

The attached June 2026 paper by Eric Tymoigne gives the economic explanation. Private assets are commonly valued through Level 3 models rather than observable market prices. Tymoigne notes that private-credit secondary purchasers may buy LP interests at roughly a 15% discount to the reported NAV, while concerns over refinancing, embedded leverage, continuation vehicles, and conflicts of interest make manager valuations especially vulnerable to manipulation or delay.

The 10%–30% Range Is Not Hypothetical

Recent transactions and trading prices make the discount visible.

Private credit: 15% to 30% discounts

In July 2026, Cox Capital Partners offered to purchase shares in non-traded private-credit BDCs managed by Apollo, Ares, and BlackRock’s HPS at discounts of approximately 15% to 30% from stated NAV. These were actual bids for investments whose managers were still publishing substantially higher values.

Earlier in 2026, publicly traded BDCs were selling at a median price of approximately 74% of forward NAV, implying a market discount of roughly 26%. The public market was effectively saying that internally calculated private-loan values were worth only about three-quarters of the stated amount.

A pension fund may argue that a listed BDC is not identical to a closed-end institutional private-credit partnership. That is true. Listed BDC prices can contain additional discounts for management fees, governance, volatility, and retail sentiment. But a 26% market discount cannot responsibly be ignored while an unlisted portfolio of similar loans continues to be reported at close to par.

Private equity: roughly 8% for stronger buyout funds, more than 20% for venture

Jefferies reported that buyout funds traded around 92% of NAV in 2025, while venture and growth funds traded around 78%. That suggests an approximately 8% haircut for comparatively marketable buyout portfolios and a 22% haircut for venture and growth portfolios.

Averages also conceal wide dispersion. Older “zombie” funds, weak managers, concentrated portfolios, unfunded commitments, and assets requiring additional capital may sell well below average.

Real estate: approximately 30%, sometimes much more

Jefferies reported average private-real-estate secondary pricing of around 70% of NAV in 2025—a 30% discount.

Specialized industry reporting has noted that discounts on some private-real-estate assets can exceed 50% of reported NAV. That does not mean every real-estate fund should immediately be cut in half. It does mean that a pension reporting an office, retail, or distressed real-estate portfolio at the manager’s appraisal value should disclose what the portfolio might actually bring in the secondary market.

New York City’s $5 Billion Sale Shows Both the Market and the Secrecy

In May 2025, the New York City pension systems completed a roughly $5 billion private-equity secondary sale involving more than 125 fund interests managed by 74 firms. Blackstone’s Strategic Partners acquired more than 95% of the portfolio, and the sale attracted interest from more than 80 potential bidders.

This transaction proves that even extremely large pension portfolios can be competitively priced.

But New York City declined to disclose the pricing. The public was told the size of the transaction, the buyer, and the strategic rationale—but not the relationship between:

• the funds’ carrying value before the sale;
• the bids received;
• the final sales proceeds;
• transaction and advisory costs;
• and the gain or loss relative to reported NAV.

That missing number may be the most important number in the transaction.

If a public pension reports $5.5 billion of private-equity NAV and sells it for $5 billion, taxpayers should be told that the portfolio was worth approximately 91 cents on the reported dollar. If the carrying value was $5 billion and it sold for $5 billion, the valuation deserves credit. Secrecy prevents either conclusion.

Public Pension Accounting Currently Permits Too Much Deference to Manager NAV

GASB Statement No. 72 generally requires government investments to be measured at fair value. However, where an investment lacks a readily determinable fair value, governments may use the NAV per share—or its equivalent—reported by the investment fund under specified circumstances.

That accounting accommodation has effectively become an escape hatch.

The GP chooses the model, assumptions, comparable companies, discount rates, expected exits, projected earnings, credit-loss expectations, and sometimes the timing of write-downs. The pension then reports the resulting number as “fair value,” even though the investment may sell for significantly less.

The attached Tymoigne paper reports that Level 3 assets represented approximately 42% of pension-fund assets in the IMF sample in 2022, up from 31% in 2016, with private debt accounting for roughly half of the increase. It warns that Level 3 valuation creates conflicts because an inflated value can help a manager attract financing, maintain fee revenue, avoid covenant problems, and sustain refinancing. https://www.levyinstitute.org/publications/the-retailization-of-private-markets-and-the-rise-of-ponzi-finance/

This is particularly troubling because fees are commonly charged on NAV. The manager who determines the value may also be paid more when that value is higher.

“Hold-to-Maturity” Is Not a Defense

Pension officials often respond that they intend to hold the investment until maturity, so a secondary-market discount is irrelevant.

That argument fails for several reasons.

First, the current sale price is still important information. A homeowner may not plan to sell a house, but that does not justify reporting it at an unsupported appraisal while comparable houses sell for 30% less.

Second, public pensions do sell alternative assets. New York City’s $5 billion transaction is an obvious example. Other pensions sell to reduce manager counts, rebalance allocations, obtain liquidity, avoid future capital calls, or exit deteriorating investments. The secondary value therefore represents a real economic alternative, not a theoretical liquidation.

Third, “holding to maturity” does not guarantee recovery of NAV. Private-equity funds must sell portfolio companies. Private-credit borrowers must repay or refinance. Real-estate funds must refinance or sell properties. Continuation vehicles frequently extend the holding period without producing a genuine third-party realization.

Fourth, a delayed write-down can distort interim performance and compensation even if the final loss is eventually recognized. Staff may receive bonuses based on artificial interim gains that disappear several years later.

Secondary Prices Are Imperfect—but More Informative Than Secret Models Alone

A secondary-market bid is not necessarily the single correct fair value. It can incorporate:

• illiquidity;
• buyer-required returns;
• transaction expenses;
• adverse selection;
• future management fees;
• unfunded commitments;
• portfolio concentration;
• stale GP valuations;
• and the seller’s urgency.

But these are not irrelevant distortions. They are economic characteristics of the investment.

Illiquidity is part of the cost of owning an illiquid asset. It should not disappear from public accounting merely because the pension prefers not to sell.

A responsible policy would not automatically replace every GP NAV with the lowest unsolicited bid. Instead, pensions should report a range:

Manager-reported NAV: $10.0 billion
Independent secondary-market estimate: $7.8 billion to $9.0 billion
Estimated liquidity and valuation adjustment: $1.0 billion to $2.2 billion

That tells trustees and taxpayers far more than simply reporting $10 billion.

The Recommended Public-Pension Disclosure Standard

Every public pension should publish quarterly, by asset class and manager:

Required disclosure	Purpose
GP-reported NAV	Shows the manager’s official valuation
Date of underlying valuation	Exposes three- to six-month reporting lags
Cash-adjusted NAV	Corrects for capital calls and distributions after the valuation date
Independent secondary estimate	Shows current realizable market value
Estimated bid range	Acknowledges uncertainty rather than pretending to false precision
Discount or premium to NAV	Makes the valuation gap visible
Valuation methodology	Identifies bids, broker quotes, comparable trades, public-market equivalents, or models
Unfunded commitments	Captures future cash obligations assumed by a buyer
Fund age and remaining term	Identifies zombie and extension risk
PIK income and non-cash earnings	Exposes returns that have not produced cash
Subscription lines and NAV loans	Shows leverage omitted from simple allocation figures
GP-led or affiliate transactions	Highlights conflicted price validation
Actual sale price after disposition	Permits comparison of earlier estimates with realizations
Fees calculated on NAV	Quantifies whether overstated values increased manager compensation

Pensions should also publish three separate performance records:

1. Performance using manager-reported NAV.
2. Performance using independently adjusted market values.
3. Cash-only performance based on contributions and distributions.

This would expose whether reported “alpha” resulted from actual cash gains or from appraisal assumptions.

A Practical Mark-to-Market Policy

Secondary pricing should be gathered through an independent valuation agent or competitive process, not from the pension’s private-market consultant if that consultant also recommends the managers.

At minimum:

• Large portfolios should be independently priced quarterly.
• Each major partnership should receive a marketability assessment annually.
• At least 20% to 25% of the portfolio should be subjected to broker bids or formal indications each year.
• Funds experiencing write-downs, extensions, PIK growth, covenant amendments, NAV borrowing, or weak distributions should be reviewed more frequently.
• Actual sales should be compared retrospectively with the pension’s earlier valuations.
• Material differences should be reported publicly to trustees.

A standard haircut schedule could serve as a preliminary risk disclosure where direct bids are unavailable—not as a substitute for valuation, but as a warning indicator. Based on current broad secondary-market evidence, a starting sensitivity analysis might include:

Asset category	Illustrative secondary-value sensitivity
High-quality recent buyout funds	90%–95% of NAV
Average buyout portfolio	85%–92%
Mature or weak buyout funds	70%–85%
Private credit	80%–92%
Stressed private credit or redemption-constrained BDCs	70%–85%
Venture and growth equity	65%–80%
Core real estate	80%–95%
Value-add or opportunistic real estate	60%–80%
Troubled office or legacy real estate	potentially below 60%

These should be presented as market-value sensitivity ranges, not universal marks. The point is to stop treating 100% of GP-reported NAV as unquestionable fact.

The Biggest Objection Is Political, Not Technical

The industry will say that disclosure would create volatility. But the volatility already exists in the underlying businesses, loans, and properties. Current accounting merely delays its recognition.

They will say that reporting secondary values would make private assets look riskier than public assets. That is because private assets are riskier and less liquid than quarterly statements suggest.

They will say discounts merely reflect a buyer’s desired return. But every market price reflects the return required by buyers.

They will say public disclosure could weaken negotiating leverage. Aggregate disclosure by asset class, vintage, and manager can protect truly confidential portfolio-company information while still exposing the economic gap between NAV and market value.

And they will warn that transparent marks could reduce pension funding ratios. A funding ratio that depends on avoiding current market evidence is not a stronger funding ratio. It is simply a less honest one.

The Core Fiduciary Principle

Public pensions do not have to liquidate their alternative portfolios. They do have to tell workers, retirees, trustees, legislators, and taxpayers what those portfolios are reasonably worth.

The appropriate standard is not:

“What number did the private-equity manager place on the quarterly statement?”

It is:

“What would an informed, independent buyer pay today, and how does that compare with the value being used to calculate returns, fees, bonuses, and pension funding?”

The secondary market is now large enough to provide that evidence. Depending on the asset class, recent prices indicate discounts ranging from roughly 8% for stronger buyout portfolios to 20%–30% for venture, private credit under liquidity pressure, and real estate. In weaker or distressed portfolios, losses can be considerably larger.

Public pension trustees who refuse even to obtain and publish those estimates are not avoiding volatility. They are avoiding information.

The $500 Billion Lie: How State Pension Staff, Private Equity, and Private Credit Collude to Hide Losses

https://commonsense401kproject.com/2026/05/22/calpers-sick-twisted-relationship-with-jeffrey-epstein-linked-apollo-private-equity/

Consultants, Conflicts, and the Collapse of Public Pension Performance

The American 401(k) is often celebrated as one of the greatest financial innovations of the past half century. Millions of workers have accumulated retirement savings through payroll deductions, employer matching contributions, and decades of economic growth. Yet the system that today holds roughly $10 trillion of American retirement wealth was never designed to become the nation’s primary retirement plan. It emerged almost accidentally, and every stage of its evolution has been shaped by competition among financial firms seeking to manage—and profit from—that enormous pool of assets.

The history of the 401(k) is therefore much more than a history of retirement savings. It is the story of shifting financial risk from employers to employees, the continual introduction of new investment products, and an ongoing struggle between transparency and complexity. Every decade produced another “next great solution” to retirement investing. Some genuinely improved the system. Others primarily created new fee streams and conflicts of interest.

Understanding that history matters because the debates dominating today’s retirement marketplace—private equity, private credit, collective investment trusts (CITs), lifetime income products, and insurance-based investments—are not isolated developments. They are simply the latest chapter in a forty-year pattern of product innovation, regulatory change, and fiduciary oversight.

The modern retirement system actually begins before the 401(k). Congress enacted the Employee Retirement Income Security Act (ERISA) in 1974 after a series of pension failures left workers without benefits they had spent entire careers earning. ERISA imposed extraordinary fiduciary duties on employers and plan committees, requiring them to act solely in the interests of participants, to invest prudently, diversify assets, and pay only reasonable expenses. Courts have repeatedly described these obligations as among the highest fiduciary standards recognized under American law.

Before ERISA, Before the SEC, There Was Trust Law

At the time, retirement looked very different than it does today. Most workers participating in employer-sponsored retirement plans were covered by traditional defined benefit pensions, where professional investment managers made the investment decisions and employers promised a lifetime retirement benefit. The Pension Benefit Guaranty Corporation (PBGC) was created to insure many of those pension promises. Few observers imagined that individual workers would soon become responsible for managing their own retirement investments.

That changed almost by accident. Section 401(k) entered the Internal Revenue Code through the Revenue Act of 1978 as a relatively modest tax provision governing deferred compensation. Only after subsequent IRS interpretations in the early 1980s did employers recognize that the provision could fundamentally reshape retirement benefits. Instead of guaranteeing retirement income decades into the future, companies could promise only current contributions, leaving investment performance to determine the eventual outcome.

This seemingly technical tax change produced one of the largest transfers of financial risk in American history. Under traditional pensions, employers largely bore investment risk, interest-rate risk, and longevity risk. Under the emerging 401(k) model, those responsibilities shifted to individual workers, many of whom had little investment knowledge and almost no experience making long-term portfolio decisions.

The first generation of 401(k) plans would hardly be recognizable today. Investment menus were often built around employer stock, bank products, insurance company guaranteed investment contracts (GICs), and actively managed mutual funds. Automatic enrollment did not exist. Target-date funds had not yet been invented. Participants generally selected their own investments from a limited menu, while many administrative costs remained hidden inside investment products rather than appearing as separate invoices.

Insurance companies played an especially important role during those early years. Guaranteed Investment Contracts appeared to offer exactly what nervous retirement savers wanted: preservation of principal combined with a stated interest rate. Participants saw stable account balances that rarely fluctuated, giving the impression of safety. In reality, however, participants were depending on the financial strength of a single insurance company’s general account rather than owning a diversified portfolio of securities.

That distinction became painfully clear with the collapse of Executive Life Insurance Company in 1991. Executive Life had invested heavily in below-investment-grade bonds while issuing billions of dollars of guaranteed investment contracts to retirement plans. When the company failed, institutional investors learned that stable account values did not necessarily mean stable investments. Book-value accounting had masked concentrated credit risk that became visible only after the insurer encountered financial distress.    https://commonsense401kproject.com/2025/12/29/stable-value-why-general-account-and-separate-account-products-are-erisa-prohibited-transactions-and-why-diversified-synthetic-stable-value-is-not/

Executive Life permanently changed the way many large retirement plans approached capital preservation. Institutional investors increasingly moved away from traditional general account GICs and toward synthetic stable value structures, where retirement plans owned diversified bond portfolios while independent wrap providers supplied book-value accounting.

During the 1990s, mutual funds gradually became the dominant investment vehicle inside 401(k) plans. Compared with insurance contracts, mutual funds offered daily pricing, publicly available holdings, standardized expense ratios, SEC regulation, and decades of easily comparable performance histories. While actively managed mutual funds often remained expensive, the industry’s movement toward open architecture represented a meaningful increase in transparency.

No organization influenced this transition more than Vanguard. By demonstrating that diversified index portfolios could be managed at extremely low cost, Vanguard fundamentally altered the economics of retirement investing. Large employers realized that billion-dollar retirement plans should not pay retail investment prices. Vanguard’s success forced competitors, particularly Fidelity, to reduce fees, improve technology, and expand institutional investment offerings.

That competitive pressure transformed much of the large-plan marketplace. Investment expenses that had once been measured in percentages increasingly became measured in basis points. Large employers began demanding institutional pricing rather than accepting retail products. The resulting competition eventually produced the four-tier structure of today’s retirement marketplace that I discussed in my recent article, with Vanguard setting the low-cost standard and other providers competing through different business models. https://commonsense401kproject.com/2026/07/17/the-four-tier-structure-of-the-u-s-401k-marketplace/

Despite those improvements, another problem quietly expanded beneath the surface. For years, many employers believed recordkeeping was essentially free because they never received a separate invoice. In reality, participants were paying those costs through revenue-sharing arrangements embedded within mutual fund expense ratios. Investment managers, recordkeepers, consultants, brokers, and advisors often divided these hidden payments among themselves, leaving participants unaware of the true cost of plan administration. While most of this in SEC registered mutual funds is disclosed, it can still be hidden in insurance products.  https://commonsense401kproject.com/2025/10/23/revenue-sharing-in-401k-and-403b-plans-why-its-a-prohibited-transaction/

Revenue sharing became one of the defining conflicts of the modern retirement industry. Providers receiving larger indirect payments had financial incentives to recommend certain investment products over others, while fiduciaries frequently underestimated the actual cost participants were bearing. Much of today’s ERISA litigation traces its roots back to this compensation structure and the conflicts it created.

The next major transformation arrived with the Pension Protection Act of 2006 and the Department of Labor’s Qualified Default Investment Alternative (QDIA) regulations. Automatic enrollment dramatically increased participation rates, but it also shifted enormous responsibility onto fiduciaries. Instead of participants building their own portfolios, employers increasingly selected default investments that would receive contributions automatically unless employees actively opted out.

Target-date funds became the overwhelming winners of this regulatory change. Rather than asking participants to assemble portfolios from multiple stock and bond funds, target-date funds packaged an entire retirement strategy into a single investment that automatically adjusted its asset allocation over time. For millions of workers, the default investment effectively became their retirement plan.

From my perspective working inside the retirement industry at AEGON Institutional Markets, the QDIA debate was also a competition for future market share. I wrote and signed AEGON’s 2006 comment letter on the proposed regulations and met with Department of Labor officials as those rules were being developed. Fidelity recognized earlier and lobbied for default investing guidelines and invested heavily in target-date funds before the regulations became final. That early positioning gave Fidelity a huge head start an important advantage as automatic enrollment accelerated across corporate America.

As target-date funds gathered assets, fiduciary responsibility became more concentrated rather than less. Participants who never made an affirmative investment decision depended almost entirely upon the committee’s selection of a single default strategy. Asset allocation, fees, manager selection, underlying investments, and long-term performance increasingly rested on decisions participants rarely examined and often did not understand.

As retirement plans grew larger and more sophisticated, for excessive fees litigation was ERISA’s only enforcement mechanism. The Department of Labor simply lacks the resources to examine hundreds of thousands of retirement plans in detail, leaving private lawsuits to enforce but only the top 1% were cost effective what I call the litigation universe of around 8000. Landmark decisions such as Tibble v. Edison International, Hughes v. Northwestern University, and Cunningham v. Cornell University steadily expanded expectations regarding ongoing monitoring, reasonable fees, and prohibited transactions. The pending Intel case may become the next major milestone as courts consider how fiduciaries should evaluate opaque alternative investments such as private equity and hedge funds.   https://commonsense401kproject.com/2025/04/21/scotus-9-0-erisa-decision-in-cunningham-v-cornell-university-case-confirms-my-view-on-annuities-as-prohibited-transactions/

Ironically, litigation has achieved many of ERISA’s original goals, particularly among the largest retirement plans. Institutional share classes, lower-cost index funds, competitive bidding for recordkeeping services, and greater fee transparency are now common among mega plans. Yet more than 99 percent of defined contribution plans remain outside that elite group, and many smaller employers continue to rely upon structures that would likely receive far greater scrutiny if adopted by America’s largest corporations.

Today the industry sees the Trump Administration as a historical opportunity to load up 401(k)s with hidden excessive fees. Insurance companies promote lifetime income products as a gateway to many insurance products with hidden spread of 200-400 basis points.  Private equity firms argue that ordinary workers should gain access to investments previously reserved for large institutions with their secret 300-700 bps in hidden fees.  Poorly state regulated Collective Investment Trusts increasingly serve as the preferred structure for hiding these products into primarily target date funds in retirement plans.

Perhaps the most important lesson from four decades of 401(k) history is that the greatest advances have generally moved in the same direction: lower costs, stronger fiduciary oversight, transparent fees, independent governance, and direct ownership of diversified publicly traded securities. The greatest disappointments have usually involved one sided contracts, hidden fees, opaque valuation, concentrated risks, and product complexity that participants and even fiduciaries struggle to evaluate.

The 401(k) began as a relatively obscure tax provision. It has become one of the most important financial institutions in the United States. With approximately $10 trillion invested and every basis point representing roughly $1 billion annually, the economic incentives to introduce new products will only grow stronger. The central challenge for the next generation of fiduciaries is ensuring that innovation serves participants first—not simply the firms competing to manage America’s retirement savings.

ERISA Advisory Council Testimony released