A new Columbia Business School paper, Rating Without Market Discipline, may become one of the most important academic papers in the debate over private credit, insurance company solvency, fixed annuities, and pension risk transfer annuities.
The paper’s core finding is devastatingly simple: private ratings appear to understate credit risk. That matters because life insurers increasingly hold opaque private credit, structured credit, CLOs, bank loans, and privately placed securities on their balance sheets. These assets are often treated as high-quality investment-grade assets for regulatory capital purposes. But Columbia finds that privately rated insurer bonds with the same rating as publicly rated bonds are roughly twice as likely to suffer impairments — and are downgraded less often, not more.
That is the worst possible combination.
It means the rating is not merely optimistic. It is sticky. It fails to move when the credit is deteriorating. In plain English, the insurer gets the benefit of a high rating for capital purposes while the real economic risk is higher than the rating suggests.
This finding goes directly to the heart of the private credit debate. The private credit industry has repeatedly claimed that its loans and structured assets are safe, senior, secured, carefully underwritten, and conservatively valued. But the Columbia paper shows that when private credit-type instruments move into insurance company balance sheets and are rated through private-letter channels, the ratings may not carry the same information as public ratings. The “AA” or “A” label may not mean what ordinary investors, fiduciaries, or retirees think it means.
That is a market-shaking finding.
It is especially important because the paper focuses on life insurers — the same institutions now selling fixed annuities, general account stable value products, registered index-linked annuities, group annuity contracts, and pension risk transfer annuities. These products are often marketed as safe because they are backed by insurance company balance sheets. But if the assets inside those balance sheets are increasingly private, opaque, self-priced, privately rated, and potentially overrated, then the safety claim becomes much weaker.
This also strengthens the argument made in the Phoenix/LPL litigation context. The risk in annuity products is not only whether the underlying investments “go to zero.” The risk is that policyholders and retirement plan participants become trapped inside an insurer balance sheet when the insurer weakens, enters rehabilitation, or loses liquidity. Participants may lose the ability to surrender, transfer, exchange, or reposition assets even before a traditional “principal loss” appears.
The Columbia paper makes that risk easier to prove.
For years, insurers have pointed to ratings and regulatory capital as proof that general account annuities and PRT annuities are safe. But Columbia shows that the ratings themselves may be part of the problem. If a large portion of the insurer’s supposedly high-grade portfolio depends on private ratings without market discipline, then fiduciaries cannot simply rely on the insurer’s headline rating, statutory capital ratio, or NAIC treatment.
The most important fiduciary takeaway is this:
A fixed annuity is not just a conservative bond fund. A PRT annuity is not just a pension check with an insurance wrapper. Both are concentrated credit exposures to an insurance company whose balance sheet may contain hard-to-value private credit assets that are rated through channels lacking public market discipline.
This is particularly dangerous for 401(k) and pension fiduciaries because participants do not negotiate the insurer’s investment policy, cannot inspect private ratings, cannot value opaque private credit holdings, and usually do not receive meaningful downgrade escape rights. They are told the product is safe because it is issued by an insurance company. Columbia shows why that assumption is no longer good enough.
The paper also helps explain why private equity-owned insurers deserve special scrutiny. Columbia finds private ratings are concentrated among large insurers, high-yield tilted insurers, and private equity-owned insurers. That fits the broader concern that private equity has turned insurance balance sheets into financing engines for private credit. The insurer collects retirement money. The affiliated or related asset manager originates or packages private credit. Private ratings help lower capital charges. The policyholder or retiree bears the hidden credit and liquidity risk.
That is not ordinary insurance regulation. That is regulatory arbitrage.
The paper is also important for pension risk transfers. In a PRT transaction, a plan sponsor moves pension obligations from an ERISA-protected pension plan to an insurer. The transaction is sold as “de-risking.” But if the insurer’s balance sheet is increasingly supported by privately rated credit that is less safe than its rating indicates, the transaction may simply replace transparent pension risk with opaque insurer credit risk.
This should change the fiduciary due diligence standard. Fiduciaries evaluating fixed annuities, general account stable value contracts, or PRT annuities should ask:
Are the insurer’s “AA” assets really AA?
How much of the insurer’s bond portfolio relies on private-letter ratings?
How much is private credit, CLOs, structured credit, bank loans, or affiliate-originated assets?
Who rated those assets?
Were they publicly rated or privately rated?
Are the assets priced by observable market inputs or by models, brokers, affiliates, or the insurer itself?
What happens if the insurer is downgraded?
Do participants have real liquidity rights, or are they trapped?
The Columbia paper provides academic support for a commonsense conclusion: private credit cannot be treated as safe simply because an insurer, private rating agency, or regulator assigns it a high-grade label. Ratings without market discipline are not the same as ratings tested by public markets.
That finding is enormously important for ERISA litigation, annuity fiduciary reviews, PRT due diligence, and the broader debate over private credit in retirement plans.
The insurance industry has long argued that fixed annuities and PRT annuities are safe because insurers are highly regulated and conservatively capitalized. Columbia’s paper shows the flaw in that defense. Regulation may require a rating, but it cannot create the market discipline that makes the rating reliable.
That is the bridge between private credit and annuity risk.
If the assets backing annuities are overrated, opaque, illiquid, and slow to be downgraded, then the annuity itself is riskier than advertised. The danger is not just volatility. The danger is hidden credit deterioration that remains invisible until policyholders discover they cannot get their money out.
Phoenix showed what happens when annuity owners lose control.
Columbia shows why the balance sheets backing modern annuities may be far riskier than the ratings suggest.
Li, Xuelin and Oh, Sangmin and Ricciardi, Giacomo, Rating Without Market Discipline (May 31, 2026). Columbia Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=6859158
Today, the retirement industry insists that if a product is somehow legal under lax state insurance rules or state banking laws and has a vague, weak ERISA exemption, then it somehow belongs inside a 401(k) plan. That logic is backwards.
A much better test is this: Could the product survive inside a fully transparent, federally regulated, SEC-registered mutual fund subject to daily fair-value accounting? If the answer is no, fiduciaries should immediately ask why.
That question is becoming increasingly important as Wall Street attempts to push private equity, private credit, insurance annuities, and other opaque contract-based products into retirement plans through CITs, insurance wrappers, and other structures exempt from the accounting standards applied to SEC mutual funds.
Ironically, the best historical example may be stable value itself.
The Forgotten Stable Value Mutual Funds
Most younger fiduciaries do not realize that from roughly 1997 to 2004, several firms attempted to operate synthetic stable value products inside SEC-registered mutual funds. They never even tried with fixed annuities. Deutsche/Scudder, Morley, PBHG, Pilgrim Baxter, Dwight and others experimented with structures that used wrap contracts and book-value accounting techniques inside registered investment companies. It was basically 95% SEC short bond fund and 5% insurance wrapper. I remember because I was the wrapper.
The experiment quietly failed. Not because participants lost money. Not because the underlying bond portfolios collapsed.
But because the SEC accounting framework could not comfortably accommodate book-value insurance accounting inside a daily NAV mutual fund structure.
One of the most important historical documents is a 2004 SEC filing from Scudder/Deutsche involving the Scudder PreservationPlus Income Fund.
The filing states:
“The staff of the Securities and Exchange Commission has inquired as to the valuation methodology for Wrapper Agreements utilized by ‘stable value’ mutual funds, including this Fund.”
That sentence is extraordinary.
The SEC staff was directly questioning the accounting treatment of wrapper agreements used by stable value mutual funds. The filing further explained that if the SEC required the wrappers to be valued differently, the fund would no longer be able to maintain a stable NAV.
Then came the real admission. Effective November 17, 2004:
“the fund no longer seeks to maintain a stable net asset value per share”
And “terminated all of its wrapper agreements … and effectively became a short-term bond fund.” The stable value mutual fund structure effectively disappeared shortly thereafter.
The Real Problem Was Accounting
This is one of the most misunderstood episodes in retirement-plan history.
The issue was not necessarily that the underlying bonds were impaired. In many cases, market-to-book values were manageable or even positive. Providers could quietly unwind the wraps and transition the products into short-duration bond funds without creating participant panic.
The problem was structural.
Stable value depended on:
book-value accounting,
contract-value reporting,
insurance-style smoothing,
and wrapper agreements whose economics did not fit naturally inside a mutual fund built around daily fair-value NAV accounting.
That distinction matters enormously.
The Investment Company Act of 1940 is fundamentally a transparency regime. Mutual funds generally operate under:
daily liquidity,
observable valuation,
mark-to-market discipline,
independent custody,
and fair-value accounting.
Stable value strained those rules.
And if a synthetic stable value had trouble surviving inside a registered mutual fund structure, then general account fixed annuities are dramatically worse.
Synthetic Stable Value Was the Furthest the SEC Would Go
The industry now portrays synthetic stable value as conservative and traditional.
Historically, however, synthetic stable value represented the outer boundary of what regulators were willing to tolerate inside transparent investment structures.
Synthetic stable value at least had:
externally plan owned bond portfolios,
independent trusts,
observable fixed-income assets,
and some degree of market transparency.
General account annuities eliminate even those protections.
Under a traditional general account GIC:
the insurer owns the assets,
the insurer controls valuation,
the insurer controls liquidity,
participants become exposed to insurer solvency,
spreads are opaque,
private assets may be self-rated,
and fiduciaries cannot independently observe underlying economics.
From an accounting perspective, general account annuities are far further removed from SEC mutual fund standards than synthetic stable value ever was.
The Same Accounting Arbitrage Is Happening Again
The stable value mutual fund story is not ancient history.
It is the blueprint for what is happening today with:
private equity,
private credit,
insurance annuities,
interval funds,
target-date CITs,
and insurance-based retirement products.
Products that struggle under SEC accounting standards increasingly migrate into structures like State Regulated Insurance and State Banking-regulated CITs where:
fair-value discipline weakens,
disclosures decline,
liquidity assumptions soften,
Benchmarking becomes manipulable,
and fiduciary oversight becomes more difficult.
The common denominator is not diversification.
It is accounting arbitrage.
Wall Street increasingly seeks products that cannot survive under ordinary mutual fund transparency rules because opaque accounting produces:
higher fees,
smoother reported returns,
hidden leverage,
spread extraction,
and greater control over valuation.
That is not modernization.
It is a regression.
A Useful Fiduciary Test
The retirement industry spends enormous energy debating whether products technically qualify for ERISA exemptions.
Fiduciaries should ask a more important question:
Would this product survive inside a fully transparent SEC mutual fund subject to daily fair-value accounting and independent valuation standards?
If the answer is no, that is not automatically proof of a prohibited transaction.
But it is a major warning sign.
The stable value mutual fund collapse of 2004 suggests regulators themselves became uncomfortable with stretching SEC accounting rules even for synthetic stable value products that were far more transparent than modern general account annuities, private credit vehicles, and private equity structures now being pushed into 401(k) plans.
The further a product must migrate away from SEC accounting standards and toward opaque contractual accounting systems, the more likely it is that the product’s economics depend on conflicts of interest, hidden spreads, valuation discretion, or fiduciary opacity.
That is exactly the environment ERISA’s prohibited transaction rules were designed to prevent.
The collapse of PHL Variable Insurance Company and the new litigation against LPL Financial provide one of the clearest modern examples of why insurer-issued annuity products represent a growing and poorly understood danger inside retirement plans.
According to the newly filed complaint, the alleged harm was not that the underlying separate account investments suddenly disappeared. Rather, policyholders allegedly lost the ability to access, surrender, exchange, or reposition their retirement assets once Phoenix entered rehabilitation.
As attorney Adam Gana explained:
“The issue is not whether the underlying separate account investments disappeared. According to the complaint, the harm stems from policyholders losing the ability to access, surrender, exchange, or otherwise reposition their assets once PHL entered rehabilitation.”
That distinction is critically important for ERISA litigation involving fixed annuities and insurer general account and separate account products in 401(k) and 403(b) plans. It also covers lifetime income annuities and Pension Risk Transfer (PRT) annuities in ERISA Defined Benefit Plans.
For years, insurers and some plan consultants have marketed general account fixed annuities as “stable value” or “capital preservation” investments. But the Phoenix collapse again demonstrates that policyholders are not simply investing in a conservative bond portfolio. They are becoming unsecured creditors of a leveraged insurance company whose liabilities can become frozen during periods of financial distress.
This is precisely the type of liquidity and counterparty risk that synthetic stable value structures were designed to reduce.
Unlike insurer general account annuities, diversified synthetic stable value structures generally separate the fixed income portfolio from the wrap provider’s balance sheet. If one wrap provider weakens or fails, plans can often replace the wrap provider while maintaining participant ownership of the underlying assets.
In contrast, insurer general account annuities typically trap participants inside the insurer’s balance sheet itself. Once the insurer enters rehabilitation or experiences severe financial stress, participants can lose practical access to their money even if the underlying investments continue to exist.
The Phoenix litigation also highlights a major structural problem with insurer-issued fixed annuities in 401(k) plans: most contain no meaningful downgrade protection clauses.
In institutional synthetic stable value contracts, downgrades are accommodated with step-up clauses. A typical synthetic stable value CIT like the Vanguard RST may have 6 diversified wrappers. If the credit quality of one wrap provider deteriorates below specified levels, there are contractural provisions that the other 5 wrappers step up and take the coverage allocation of the downgraded wrapper. Vanguard RST successfully did this with AIG in 2007 before the bailout was certain, and would have had little effect even if the government had let AIG collapse.
But many insurer-issued fixed annuities in 401(k) plans contain no comparable participant protections. Plans remain trapped even after significant credit deterioration in what I have called a death spiral.
The complaint against LPL alleges that Phoenix annuities were no longer recommended after ratings downgrades and other warning signs emerged following the 2008 financial crisis, yet existing policyholders allegedly were not warned about the insurer’s deteriorating financial condition.
That allegation directly parallels one of the central fiduciary concerns now emerging in ERISA prohibited transaction litigation involving fixed annuities:
If insurers, consultants, or recordkeepers understood the growing credit risks associated with insurer balance sheets, why were retirement plan participants not given meaningful liquidity protections or downgrade escape rights?
The issue becomes even more troubling in employer retirement plans because participants often have no practical ability to negotiate terms, review insurer solvency risk, or monitor complex insurance company balance sheets.
In many 401(k) plans, the insurer is simultaneously:
the product manufacturer,
the credit counterparty,
the spread-profit recipient,
and frequently a party in interest to the plan.
That structure creates precisely the kind of conflicted transaction ERISA’s prohibited transaction rules were designed to scrutinize.
The Department of Labor’s historical exemptions for insurance company general account products were largely built around assumptions that insurers were highly regulated, conservatively capitalized, and operationally stable. But the modern insurance industry increasingly relies on:
private credit,
structured finance,
derivatives,
affiliated asset managers,
offshore reinsurance,
and opaque valuation practices.
The Phoenix collapse demonstrates that these are not hypothetical concerns.
Even when “market losses” do not immediately appear in participant statements, policyholders can still suffer catastrophic harm through the loss of liquidity, surrender rights, transfer rights, and control over retirement assets.
That reality fundamentally weakens the common defense argument that insurer-issued annuities are “safe because participants never lost principal.”
Loss of liquidity itself can constitute enormous economic harm.
For ERISA fiduciaries, the key question is no longer simply whether an insurer can maintain book-value accounting during normal conditions. The question is whether participants are being exposed to uncompensated insurer-credit and liquidity risks without adequate contractual protections.
The Phoenix litigation may become one of the strongest modern real-world examples supporting the argument that insurer general account annuities are fundamentally different from diversified stable value structures — and that many plans failed to adequately evaluate those differences.
It also strengthens the broader argument that insurer-issued fixed annuities in 401(k) plans deserve heightened scrutiny under ERISA’s prohibited transaction framework, particularly where:
no downgrade clauses exist,
no independent market valuation exists,
participants cannot freely exit,
insurers profit from spread capture,
and affiliated parties control multiple sides of the transaction.
For years, the insurance industry has argued that these products are safer because they avoid mark-to-market volatility.
Phoenix demonstrates the opposite reality:
Sometimes the greatest risk is not volatility. It is discovering that your retirement assets are locked inside a failing insurer when you need them most.
A Common Sense Framework for 401(k), 403(b), CIT, and Target-Date Fund Fiduciaries
Introduction
Private equity and other private-market investments are increasingly being pushed into participant-directed retirement plans through target-date funds, CITs, interval funds, evergreen vehicles, and semi-liquid wrappers. Fiduciaries are often told these products provide “diversification,” “institutional access,” and “enhanced returns.”
However, private equity products differ fundamentally from traditional mutual funds and public securities. They involve limited transparency, subjective valuation, conditional liquidity, complex fee structures, leverage, and performance reporting methodologies that are often not comparable to public-market investments.
Oxford Professor Ludovic Phalippou recently warned the Department of Labor that “asset neutrality should not mean metric neutrality, disclosure neutrality, or governance neutrality.”https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6847259
This checklist is designed to help ERISA fiduciaries identify hidden risks, conflicts, prohibited transaction concerns, and misleading performance claims before adding private-market exposure to participant-directed retirement plans.
I. Performance Measurement & Benchmarking
□ 1. Avoid reliance on IRR as the primary performance metric
Internal Rate of Return (“IRR”) is not equivalent to mutual fund or index returns and does not measure investor wealth compounding. IRR is heavily influenced by cash-flow timing, subscription lines, early exits, dividend recapitalizations, and leverage.
Professor Phalippou notes that private equity firms such as KKR and Apollo have reported remarkably stable since-inception IRRs for decades, despite radically different market conditions, demonstrating how IRR can become mathematically “sticky” rather than economically meaningful.
Fiduciary Questions
Is IRR being compared directly to public market annualized returns?
Is IRR being used to justify superiority over index funds?
Are subscription credit lines artificially inflating IRR?
Is the fiduciary receiving actual cash-flow-based investor outcome analysis?
□ 2. Require Public Market Equivalent (PME) analysis
Fiduciaries should require cash-flow-based PME benchmarking rather than marketing-based IRR comparisons.
PME analysis should:
Be specified ex ante
Match geography, leverage, sector, currency, and risk
Be net of all fees and expenses
Compare against realistic investable alternatives
Fiduciary Questions
Was the benchmark selected before evaluating performance?
Is the benchmark investable and liquid?
Does the benchmark reflect similar leverage and sector exposure?
Is the comparison apples-to-apples?
□ 3. Compare the entire target-date product—not merely the private sleeve
Private equity allocations are frequently embedded inside target-date funds, collective investment trusts, or multi-layered structures.
The relevant fiduciary question is not:
“Did the private sleeve outperform?”
The relevant question is:
“Did the total participant product improve expected participant outcomes after all fees, liquidity limits, valuation risk, leverage, and complexity?”
Fiduciary Questions
Would a simple public-market implementation likely achieve similar outcomes?
Is the private sleeve adding measurable participant value after all costs?
Is volatility being artificially suppressed through stale or subjective valuations?
II. Fee Transparency & Hidden Compensation
□ 4. Require consolidated all-in fee disclosure
Private equity fees frequently extend far beyond “2 and 20.”
Potential hidden costs include:
Portfolio-company monitoring fees
Transaction fees
Financing fees
Broken-deal expenses
Advisory fees
Platform fees
Subscription-line costs
Distribution compensation
Affiliate payments
Feeder fund expenses
Consulting and placement fees
Professor Phalippou emphasizes that “knowing fees are 2%-20%-8% does not convey the actual economic burden.”
Fiduciary Questions
What percentage of gross investment gain is ultimately retained by participants?
Are affiliate payments fully disclosed?
Are portfolio-company fees rebated or retained?
Is compensation flowing to parties in interest?
□ 5. Examine revenue-sharing and platform conflicts
Private-market products often generate indirect compensation to:
Recordkeepers
Consultants
OCIO providers
Target-date managers
Placement agents
Wealth platforms
CIT trustees
Fiduciary Questions
Does any service provider receive compensation tied to private-market allocations?
Are fiduciaries receiving fully transparent compensation reports?
Are private-market products steering participants toward higher-fee structures?
III. Valuation, NAV, and Fair Pricing
□ 6. Scrutinize NAV-based pricing mechanisms
Many semi-liquid and evergreen structures use Net Asset Value (“NAV”) as:
Subscription pricing
Redemption pricing
Fee calculation basis
Performance reporting basis
This creates substantial conflicts when valuations are subjective.
Professor Phalippou notes that investors may subscribe or redeem at prices materially disconnected from actual market-clearing values.
Fiduciary Questions
Are secondary market discounts materially below stated NAV?
Who determines the NAV?
Can the manager influence valuation inputs?
Are stale marks suppressing volatility?
□ 7. Evaluate continuation funds and affiliated transactions
Continuation vehicles, GP-led secondaries, and cross-fund sales create inherent conflicts where the manager may influence both price and process.
Fiduciary Questions
Are fairness opinions truly independent?
Does the manager control both sides of the transaction?
Are participants effectively buying marked-up assets from affiliated entities?
IV. Liquidity & Stress Testing
□ 8. Conduct stress-based liquidity analysis
Quarterly liquidity windows, gates, redemption caps, and side pockets may function normally during stable markets but fail during stressed conditions.
Fiduciary Questions
What occurs during mass participant withdrawals?
What happens if public markets decline sharply?
How would the product behave during a plan termination or sponsor bankruptcy?
Could remaining participants become trapped in illiquid assets?
□ 9. Analyze first-mover advantage risk
Semi-liquid structures may reward early redeemers while leaving remaining participants with concentrated illiquid exposure.
Fiduciary Questions
Are liquid assets sold first during redemption stress?
Does the portfolio become progressively riskier after withdrawals?
Could later participants bear disproportionate valuation losses?
V. Complexity & Governance Risk
□ 10. Treat complexity itself as a fiduciary risk factor
Complexity is not merely operational—it can conceal:
Hidden fees
Affiliate conflicts
Leverage
Valuation manipulation
Benchmark gaming
Illiquidity
Risk concentration
Fiduciary Questions
Can participants reasonably understand the structure?
Can fiduciaries independently evaluate the underlying holdings?
Does complexity benefit participants—or intermediaries?
□ 11. Investigate consultant and adviser conflicts
Professor Phalippou specifically warns that adviser reliance should not substitute for fiduciary judgment.
□ 13. Evaluate whether “availability” is being sold rather than prudence
Higher-fee products are often justified based on “access” or “institutional availability,” even where comparable public-market exposure exists at dramatically lower cost and greater transparency.
Fiduciary Questions
Is private-market exposure truly necessary?
Would public-market alternatives likely provide similar participant outcomes?
Is illiquidity being confused with sophistication?
VII. Common Sense Participant Protection Questions
Before adding private equity exposure, fiduciaries should ask:
Would I fully explain this structure to participants in plain English?
Could participants independently verify valuation and performance claims?
Could participants easily understand total fees?
Would the product remain attractive if fully transparent?
Is the structure designed primarily for participant benefit—or intermediary profit extraction?
Conclusion
Private equity is not automatically prudent or imprudent under ERISA. But private-market products require significantly greater scrutiny because they involve:
subjective valuation,
conditional liquidity,
opaque fee structures,
benchmark manipulation risk,
leverage,
and substantial conflicts of interest.
As Professor Ludovic Phalippou recently warned the Department of Labor, fiduciaries must distinguish “asset neutrality” from “metric neutrality, disclosure neutrality, and governance neutrality.”
ERISA fiduciaries should not treat private-market products as ordinary mutual funds merely because they are packaged inside a target-date fund, CIT, or retirement wrapper.
Retirement savers deserve transparent pricing, meaningful benchmarking, stress-tested liquidity, fair valuation practices, and fully disclosed conflicts before their retirement savings are exposed to private-market risk.
The private equity industry does not merely prefer secrecy. It requires secrecy.
Without opaque valuations, manipulated benchmarks, hidden fees, and misleading performance metrics, the industry’s excessive fee structure could not survive in a competitive marketplace.
That is the uncomfortable truth at the center of the Department of Labor’s proposal to open 401(k) plans to private equity products. And after reviewing more than 40,000 public comments submitted to the DOL, none stands out more than the analysis submitted by Professor Ludovic Phalippou of Oxford University — arguably the world’s leading academic expert on private equity performance and valuation.
The industry’s defenders talk endlessly about “innovation,” “access,” and “democratization.” Ludo talks about math.
As Phalippou explains in his formal DOL submission, the private equity industry’s favorite performance metric — Internal Rate of Return (IRR) — is not actually a measure of investor wealth compounding at all. It is a discount-rate formula that can be heavily manipulated through timing, subscription lines, dividend recaps, and cash-flow engineering.
In plain English: private equity markets returns in a way that would never be tolerated in public mutual funds.
Phalippou demolishes the fantasy using the industry’s own numbers.
KKR has reported roughly 26% since-inception IRRs for almost twenty years straight. Apollo has reported approximately 39% since-inception private equity IRRs for decades. If those numbers reflected actual investor wealth compounding, Apollo’s original funds would theoretically be worth sums approaching the GDP of the United States.
That is not investing. That is marketing arithmetic.
Phalippou’s central point is simple but devastating:
“Asset neutrality should not mean metric neutrality, disclosure neutrality, or governance neutrality.”
The private equity industry survives because it is allowed to compare apples to oranges while charging exponentially higher fees than transparent public markets.
And that deception is spreading.
The Entire Business Model Depends on Preventing Transparency
If private equity managers were forced to:
disclose all fees like SEC mutual funds,
use public-market-equivalent benchmarks,
fully report portfolio-company fees,
mark assets honestly,
disclose secondary-sale discounts,
reveal side letters,
and compare performance against low-cost index funds,
the economics of the industry would collapse.
That is why transparency itself has become the industry’s existential threat.
The recently released independent forensic CalPERS investigation highlights exactly how this system operates inside the nation’s largest public pension.
The report documents:
chronic underperformance,
hidden and understated investment costs,
fake “custom” benchmarks,
consultant conflicts,
opaque valuations,
zombie private-equity funds,
and aggressive resistance to transparency.
The report’s findings are extraordinary because CalPERS is not some small fringe pension.
against low-cost public alternatives, the illusion breaks down.
The Industry Knows Transparency Is the Real Threat
The most revealing quote in the entire CalPERS investigation may be this statement from CalPERS CEO Marcie Frost on CNBC:
“CalPERS is not sharing the limited partnership agreements. CalPERS is not sharing any side letters… We are extremely transparent… But frankly, private markets are private for a reason…”
That single sentence captures the entire private-equity model.
Private markets are “private” because transparency threatens fees.
The secrecy protects:
side-letter arrangements,
valuation games,
portfolio-company fees,
subscription-line engineering,
fee layering,
secondary-sale discounts,
political relationships,
and benchmark manipulation.
The industry cannot tolerate sunlight because sunlight would expose how much of private equity’s reported “alpha” comes from:
stale marks,
leverage,
fee extraction,
and benchmark engineering.
“Pension Fight Club” Exposes the Fear
The movie Pension Fight Club captures something the industry desperately wants to avoid: ordinary retirees beginning to ask questions.
The film repeatedly focuses on:
secrecy,
intimidation,
missing records,
hidden fees,
consultant conflicts,
and retaliation against pension critics.
One recurring theme is that pension beneficiaries are treated as adversaries once they demand transparency. Free trailer at https://pensionfightclub.com/ low fee for full movie.
That aligns perfectly with the findings of the CalPERS investigation, which documented coordinated efforts by pension officials and industry allies to undermine participant scrutiny and participant-funded investigations.
The message from the industry is clear:
Participants may fund the system. But they are not supposed to understand the system.
The DOL’s Proposed Rule Is a Gift to Wall Street
The DOL claims its proposal is “asset neutral.”
But there is no such thing as neutrality when one side:
As Phalippou warns, allowing private equity into participant-directed retirement plans without strict disclosure and benchmarking rules does not reduce risk.
It merely transfers the risk to retirement savers.
The irony is overwhelming.
ERISA imposed strict disclosure rules on mutual funds precisely because regulators recognized that retirement savers could not evaluate opaque products.
Now the DOL proposes opening 401(k)s to products far more opaque than anything ERISA originally allowed.
This is not modernization.
It is deregulation for Wall Street’s most secretive and highest-fee industry.
The Core Problem Is Not Complexity — It Is Incentives
Private equity defenders constantly argue that critics simply “do not understand” sophisticated investments.
That is false.
The issue is not complexity.
The issue is incentives.
The industry earns dramatically higher fees when:
valuations are opaque,
benchmarks are fictional,
costs are hidden,
and comparisons are impossible.
Transparency threatens the economics of the business itself.
That is why private equity fights:
public records requests,
disclosure reform,
benchmark standardization,
independent valuation review,
and participant oversight.
If private equity truly delivered superior risk-adjusted returns after all fees and expenses, transparency would help the industry.
Instead, the industry treats transparency as an existential danger.
Looking “Under the Hood” of CIT-Based Target Date Funds
Core Fiduciary Principle
Target Date Funds (“TDFs”) frequently comprise 50% or more of total 401(k) assets and often serve as the plan’s Qualified Default Investment Alternative (“QDIA”).
but each underlying investment component individually.
Historically, most Target Date Funds operated within SEC-registered mutual funds, where:
accounting standards,
valuation rules,
leverage restrictions,
liquidity requirements,
performance reporting,
and fee disclosure obligations provided meaningful investor protections.
However, increasingly, Target Date Funds are being moved into weakly regulated state-bank Collective Investment Trusts (“CITs”), where fiduciaries may encounter:
hidden leverage,
opaque valuation methodologies,
affiliated transactions,
undisclosed spread compensation,
private credit,
private equity,
insurance products,
crypto exposure,
and other difficult-to-value assets that historically were restricted, impractical, or prohibited within SEC mutual funds.
The fiduciary obligation therefore requires substantially enhanced due diligence.
I. TARGET DATE FUND STRUCTURE REVIEW
A. Vehicle Structure
Questions
Is the TDF:
SEC mutual fund,
CIT,
insurance separate account,
managed account,
or hybrid structure?
Who regulates the structure?
Is the CIT overseen by:
OCC,
state banking regulator,
or trust company?
Key Concern
State-bank CITs may operate under materially weaker disclosure and transparency requirements than SEC mutual funds.
B. Underlying Holdings Transparency
Questions
Are complete underlying holdings disclosed?
How frequently?
Daily?
Quarterly?
Annually?
Is “look-through” transparency available for all underlying vehicles?
Red Flags
“Proprietary confidential holdings”
Delayed reporting
Aggregated or vague asset descriptions
Refusal to disclose private holdings
II. UNDERLYING ASSET CLASS REVIEW
A. Private Equity Exposure
Questions
Does the TDF contain:
private equity,
venture capital,
co-investments,
secondary funds,
continuation vehicles?
Required Due Diligence
PME benchmarking
IRR vs. time-weighted return comparison
Fee layering analysis
Capital call liquidity modeling
Valuation methodology review
Key Questions
Are valuations independently verified?
Are assets Level 3?
Are marks controlled by the manager?
Are continuation funds used to avoid losses?
Red Flags
Non-investable benchmarks
IRR-only reporting
Missing public market comparisons
Hidden carried interest
Subscription credit lines
B. Private Credit Exposure
Questions
Does the TDF contain:
direct lending,
private debt,
BDC exposure,
CLOs,
NAV loans,
structured credit,
mezzanine lending?
Required Due Diligence
Default stress testing
Recovery analysis
Liquidity modeling
Mark-to-market methodology review
Critical Questions
Who rates the underlying private credit?
Moody’s?
S&P?
Fitch?
KBRA?
internal models?
Egan-Jones?
Are ratings investment grade only because of weak methodologies?
Red Flags
Level 3 pricing
Internal marks
Illiquid side pockets
Affiliated originations
Weak independent valuation
C. Annuity / Insurance Exposure
Questions
Does the TDF contain:
fixed annuities,
guaranteed income products,
synthetic wraps,
insurance separate accounts,
guaranteed minimum withdrawal products?
Required Due Diligence
Insurer CDS spreads
Credit ratings
State insurance regulator review
Downgrade clause analysis
Spread compensation disclosure
General Account asset review
Critical Questions
Is there a downgrade termination clause?
What percentage of General Account assets are:
Treasuries,
private credit,
commercial real estate,
structured products?
Is the insurer privately owned by private equity?
Red Flags
No liquidity rights
Book-value-only accounting
No mark-to-market transparency
Captive reinsurance
Hidden spread compensation
D. Crypto / Digital Asset Exposure
Questions
Is there direct or indirect crypto exposure?
Through:
ETFs,
venture funds,
tokenized assets,
miners,
stablecoins,
exchanges,
private blockchain vehicles?
Required Due Diligence
Custody review
Valuation review
Counterparty review
Liquidity analysis
Regulatory status review
Red Flags
Offshore custodians
Unregulated exchanges
Token valuation opacity
Leverage
Staking arrangements
III. ACCOUNTING AND VALUATION REVIEW
A. Mark-to-Market Transparency
Questions
Which assets are:
Level 1,
Level 2,
Level 3?
What percentage relies on:
models,
appraisals,
manager discretion?
Key Concern
CITs may create “stale NAV” problems where risk is materially understated.
B. Performance Benchmarking
Questions
Are benchmarks:
investable,
transparent,
independently calculated?
Red Flags
CPI-plus benchmarks
Custom blended benchmarks
Self-created benchmarks
Non-public benchmark methodologies
Required Analysis
Compare:
actual returns,
volatility,
drawdowns,
Sharpe ratios, against:
low-cost public index alternatives.
C. Smoothing and Return Manipulation
Questions
Are valuations artificially smoothed?
Does the TDF show unusually low volatility inconsistent with underlying risks?
Red Flags
“Too smooth” performance
Reduced reported volatility from appraisal-based assets
Infrequent pricing
IV. LIQUIDITY AND REDEMPTION RISK
A. Liquidity Mismatch
Questions
Can daily participant liquidity be supported if:
underlying assets are multi-year illiquid investments?
Key Concern
401(k) participants may have daily liquidity rights while underlying assets may require:
years to liquidate,
lockups,
gates,
or side pockets.
B. Suspension Rights
Questions
Can:
withdrawals,
transfers,
exchanges,
or redemptions be suspended?
Red Flags
Gate provisions
Market stress restrictions
Delayed NAV processing
V. FEES, SPREADS, AND CONFLICTS
A. Layered Fees
Questions
Are there:
management fees,
performance fees,
carried interest,
wrap fees,
consulting fees,
sub-advisory fees,
recordkeeping revenue sharing?
Required Analysis
Calculate:
total look-through cost,
all indirect compensation,
embedded spread compensation.
B. Proprietary Product Conflicts
Questions
Are underlying investments:
proprietary,
affiliated,
revenue-sharing arrangements,
or tied to recordkeeper compensation?
Red Flags
Proprietary CITs
Affiliated private funds
Captive insurance products
Shelf-space payments
VI. REGULATORY AND LEGAL REVIEW
A. SEC vs. CIT Protections
Questions
Which SEC protections are absent because the TDF operates as a CIT?
Important Areas
Performance fee restrictions
Liquidity rules
Independent board oversight
Valuation controls
Public disclosure standards
B. ERISA Prohibited Transaction Analysis
Required Question
Has independent ERISA counsel issued a written legal opinion explaining:
why the TDF structure does not involve prohibited transactions,
why all compensation is reasonable,
and why affiliated arrangements comply with ERISA §§406(a) and 406(b)?
Special Concern
Underlying:
annuities,
proprietary private credit,
insurance products,
and affiliated private funds may create hidden party-in-interest conflicts.
VII. STRESS TESTING
Required Scenario Analysis
Stress Events
30% private credit markdown
commercial real estate collapse
insurer downgrade
liquidity freeze
crypto crash
redemption run
private equity write-downs
Questions
What happens to:
participant balances,
liquidity,
transfer rights,
NAV calculations,
and fiduciary exposure?
VIII. CORE FIDUCIARY QUESTIONS
Fiduciaries Should Ask:
Transparency
Can we fully explain every major underlying investment?
Liquidity
Are participants promised daily liquidity backed by illiquid assets?
Valuation
Are assets genuinely marked to market?
Compensation
Is hidden spread or affiliated compensation present?
Benchmarking
Are returns genuinely superior after all fees and risks?
Prudence
Would these investments survive SEC mutual fund scrutiny?
IX. DOCUMENTATION REQUIREMENTS
Committee Files Should Include
Full look-through holdings
Asset class risk memoranda
Independent valuation reviews
Benchmark comparisons
Liquidity stress tests
Prohibited Transaction legal opinions
Fee and spread analyses
CDS and insurer reviews
Regulatory assessments
X. CENTRAL FIDUCIARY WARNING
The movement of Target Date Funds from SEC mutual funds into opaque CIT structures may permit inclusion of:
hidden leverage,
private credit,
private equity,
annuities,
crypto exposure,
and difficult-to-value assets that historically faced meaningful SEC constraints.
Because TDFs frequently represent the majority of participant retirement assets, fiduciaries must analyze each underlying component investment individually — not merely rely on the Target Date Fund label, branding, or consultant assurances.
The fiduciary duty is not to trust the surface level fund.
This checklist is intended to assist ERISA fiduciaries, consultants, investment committees, and plan sponsors in evaluating fixed annuity products offered within 401(k), 403(b), stable value, guaranteed income, or pension risk transfer structures.
The objective is to determine:
whether the annuity provides adequate compensation for insurer credit and liquidity risk,
whether the contract may involve prohibited transaction concerns,
whether hidden spread compensation exists,
and whether the product is prudent relative to available alternatives.
I. CREDIT QUALITY AND MARKET-BASED RISK REVIEW
A. Public Debt Yield Comparison
Questions
What yield is the insurer currently paying on publicly traded senior notes?
What spread over Treasuries does the market require?
How does the annuity credited rate compare to:
senior note yields,
subordinated debt yields,
institutional funding costs,
and peer insurer bond spreads?
Key Analysis
If the insurer issues senior notes at 5.3% while crediting annuity holders only 3.0%, evaluate:
retained spread,
hidden compensation,
and whether participants are undercompensated for insurer credit risk and illiquidity.
Documentation
Current note prospectuses
TRACE bond yields
Bloomberg yields
Treasury spread analysis
B. Credit Default Swaps (CDS)
Questions
What is the insurer’s current 5-year CDS spread?
Has CDS widened materially over:
1 year,
3 years,
or since contract inception?
Does the CDS market imply deterioration inconsistent with insurer ratings?
Key Analysis
CDS spreads may provide a more market-sensitive measure of insurer default risk than rating agencies.
Suggested Thresholds
<50 bps = lower perceived risk
50–100 bps = moderate concern
100 bps = elevated concern
Rapid widening = potential early warning signal
Documentation
Bloomberg CDS data
ICE/CMA pricing
Historical spread charts
C. Ratings Review
Questions
What are the:
Moody’s,
S&P,
Fitch,
AM Best ratings?
Are ratings on:
negative outlook,
watchlist,
or downgrade review?
Have ratings agencies cited:
commercial real estate,
private credit,
liquidity,
or valuation risks?
Important
Ratings often lag actual market deterioration.
Documentation
Ratings reports
Outlook changes
Recent downgrade history
II. CONTRACT STRUCTURE AND LIQUIDITY
A. Downgrade Clause
Critical Question
Does the annuity permit termination or liquidation upon:
ratings downgrade,
CDS widening,
RBC deterioration,
or insolvency concerns?
Questions
Is there a downgrade trigger?
At what level?
BBB?
BB?
Can assets be moved without:
surrender charges,
market value adjustments,
or penalties?
Key Analysis
Absence of downgrade rights may expose participants to trapped-credit risk.
Interviewer: Jeffrey H. Snyder Guest: Christopher Tobe, CFA, CAIA Topic: ERISA litigation, annuity risk, private credit, target-date funds, and pension transparency Film Referenced: Pension Fight Club
Introduction
Jeffrey Snyder: Christopher, welcome back. You’ve been deeply involved in ERISA litigation and fiduciary analysis for years, especially surrounding retirement-plan annuities and alternative investments. There seems to be a new wave of litigation developing around these products. What are you seeing?
Christopher Tobe: What we’re seeing now is a widening divide between the very largest retirement plans and the mid-sized plans that receive far less public attention. The mega-plans attract headlines, but many of the most significant fiduciary issues are occurring in plans ranging from roughly $100 million to $1 billion in assets—particularly regional hospital systems and similar employers.
A major issue is the use of fixed annuity products paying participants approximately 2%, while comparable products in the marketplace are paying closer to 4% or higher. That spread can represent a very large transfer of value away from participants over time.
The litigation focus increasingly comes down to a simple question: Are participants receiving reasonable value for the risks they are taking?
The Hidden Economics of Fixed Annuities
Snyder: You spent years inside the insurance industry helping structure these products. Explain how the economics actually work.
Tobe: I spent seven years at Transamerica helping manufacture and manage these products, including separate-account and synthetic annuity structures. One of the least understood aspects of the industry is the insurer spread.
Insurance companies may earn 6% or 7% on underlying investments—today often including private credit, private mortgages, and less liquid assets—while crediting participants only 2%.
The difference becomes the insurer’s spread.
That spread is rarely transparent. In many cases, participants have no meaningful way to evaluate whether they are being compensated fairly relative to the underlying risks.
Some providers, such as TIAA, historically paid substantially higher crediting rates and maintained lower spreads. Other providers may pay rates far below market alternatives.
From a litigation standpoint, those differences become measurable damages.
Snyder: There has been growing concern about insurance companies loading up on private credit exposure. Is that risk being underestimated?
Tobe: Yes—significantly underestimated.
Many people still assume insurance-company general accounts primarily hold traditional investment-grade bonds. Increasingly, that is no longer true.
Today, many insurers are heavily invested in private credit and less transparent structured investments. Participants often do not realize that their supposedly “safe” retirement products may contain substantial liquidity and credit risk.
In my view, these products can represent some of the riskiest investments inside retirement plans precisely because participants bear risks they cannot properly see or evaluate.
The fundamental fiduciary question becomes whether these structures constitute prohibited transactions under ERISA and whether plan fiduciaries fully understand the embedded conflicts.
Snyder: Retirement-income solutions are being heavily marketed right now. Are plan sponsors prepared for the fiduciary responsibilities that come with them?
Tobe: I remain skeptical of placing annuity products inside retirement plans.
Participants who want annuities can purchase them independently outside the plan structure. Embedding them inside ERISA plans creates additional fiduciary complexity and litigation exposure.
Despite the marketing push, actual adoption of many of these products remains relatively modest. The larger issue continues to be traditional fixed annuity arrangements and the lack of transparency surrounding them.
Many fiduciaries still do not fully understand how these products are priced, how spreads are generated, or how much risk is being transferred to participants.
Snyder: Target-date funds now dominate many retirement plans. What are fiduciaries missing?
Tobe: About half of retirement-plan assets are now invested through target-date structures, which means fiduciaries absolutely must understand what is inside them.
Many target-date funds are well-designed products. But fiduciaries cannot simply compare performance charts without understanding the underlying asset allocation and investment structure.
Asset allocation drives the majority of long-term outcomes.
Much of the litigation surrounding target-date funds ignores that reality. Two funds with different glide paths, different equity allocations, or different exposure to private assets should not automatically be compared as if they are interchangeable.
The real question is transparency: What exactly does the participant own?
Collective Investment Trusts and Regulatory Arbitrage
Snyder: You’ve raised concerns about collective investment trusts, or CITs. Why?
Tobe: Traditional SEC-regulated mutual funds operate under robust disclosure and accounting standards. Increasingly, however, retirement plans are moving toward state-regulated collective investment trusts.
Some CITs are entirely appropriate. Others are beginning to incorporate harder-to-value investments such as private equity, private credit, and annuity structures.
My concern is that the industry is gradually moving toward less transparent regulatory environments.
Whenever financial structures become more opaque, fiduciary risk increases.
Plan sponsors need to understand not only the investment itself, but also the regulatory framework governing it and the protections—or lack of protections—available to participants.
Transparency and the Problem of “Black Box” Investing
Snyder: You often talk about transparency as the core issue. Why is it so important?
Tobe: Because transparency ultimately determines accountability.
With traditional mutual funds, fiduciaries can generally see the underlying holdings, pricing mechanisms, and expenses.
With many contract-based investments—annuities, private equity partnerships, private credit vehicles, and certain alternative structures—that visibility disappears.
Once transparency disappears, meaningful oversight becomes much more difficult.
That is true in both ERISA plans and public pension systems.
Snyder: You recently released a documentary film titled Pension Fight Club. What is the film about?
Tobe: The film examines the growing conflicts surrounding public pensions, private equity, hidden fees, and pension governance.
It includes pension trustees, whistleblowers, journalists, fiduciary experts, and former public officials discussing how secrecy increasingly dominates parts of the pension-investment system.
One of the most troubling realities is that even pension trustees themselves are sometimes denied access to underlying private equity contracts and side letters.
That level of secrecy creates enormous governance concerns because these arrangements can involve billions of dollars in commitments, substantial hidden fees, and highly subjective valuation methodologies.
Many of the same transparency issues we see emerging in 401(k) litigation also exist inside large public pension systems.
pensionfightclub.com
Closing Thoughts
Snyder: What is the larger takeaway for fiduciaries and retirement investors?
Tobe: The central issue is transparency.
Participants, fiduciaries, and trustees cannot properly evaluate risks they are not allowed to see.
Whether we are discussing annuities, private credit, collective investment trusts, or private equity, the common theme is the gradual migration toward more opaque investment structures.
That trend increases both fiduciary risk and systemic risk.
The retirement system functions best when investments are transparent, independently priced, and fully understandable to the people whose retirement savings are at stake.
The fund’s staffers receive “excessive compensation” despite its dismal performance. Four executives make more than $1 million a year, another four more than $900,000 and 26 earn between $500,000 and $900,000.
From the new groundbreaking CalPERS report and NBC report . CALPERS CEO Marcie Frost made $1.4mm despite not having a college degree and is one of 8 making over $900,000 a year. There are 34 making over $500,000 a year and 86 making over $300,000 a year. This is not only an insult to taxpayers and government employees but is so excessive it might endanger the tax status of the plan. These salaries are so excessive that even a mid-level investment employee, the Managing Investment Director of ESG, was singled out in a recentoversight letter from the U.S. House Committee on Education and the Workforce to officials at CalPERS for making $624,024 as one of the factors in challenging the tax status of the plan. https://edworkforce.house.gov/uploadedfiles/02.12.26_calpers_loss_oversight_letter_will_instructions.pdf
Excessive Staff Compensation Driven by Bogus Benchmarks
Compensation levels at CalPERS now extend far beyond the norms of public administration. The Governor of California earns approximately $234,000 annually, yet dozens of CalPERS employees earn multiples of that amount. CEO compensation increased from roughly $406,000 in 2018 to more than $1.24 million in 2024, an increase of more than 200 percent—far outpacing the wage growth of the public workers whose retirement security the fund exists to protect.
Executive incentives rely heavily on CalPERS’ custom policy benchmarks and discretionary organizational metrics rather than direct comparison to transparent market benchmarks. As a result, compensation can rise even during periods marked by leadership instability, governance controversy, and poor investment performance.
Compensation advisor GCA benchmarks CalPERS executives against private-sector investment professionals, despite fundamental differences in risk exposure, compensation volatility, and personal capital at risk inflating compensation bands while requiring no performance accountability.
In short, CalPERS pays higher than private sector salaries for investment performance that would result in termination in the private sector. An independent Inspector General would fundamentally alter the structure in which salaries are justified, evaluate the relationship between compensation escalation and measurable long-term net performance, as well as recommend claw back or deferral structures tied to realized economic outcomes rather than interim marks.
Our new 255 page Forensic investigation CalPERS: America’s Misled and Misleading Pension Leader captures the twisted relationship CALPERS has with Private Equity whose 4 leading players are Apollo, KKR, Blackstone & Carlyle where CALPERS invests billions. Private Equity extracts from CA Taxpayers over $5 billion a year in fees from secret no-bid contracts with CALPERS. https://www.rpea.com/view/download.php/news/calpers-investigation-report
In an 2025 interview with CNBC’s “Squawk on the Street”, CalPERS CEO Marcie Frost after smirking, gratuitously reassured her Private Equity Partners:
Frost refused to provide any unredacted Private Equity contract of over 400 from open records request for the Forensic Investigation in timely matter.
Frost is paid $1.4 million per year and like Jeffrey Epstein does not have a college degree.
Our report mostly covers the overall twisted relationship with Private Equity but I wanted to focus on the most sick relationship of all, Apollo. The report does break 3 major Apollo related stories.
2. Apollo admits that 75-80% of its assets are from public pensions. CalPERS as major US pension leader has contributed $billions to Apollos profits.
3. Apollo total commissions to xCalpers Trustee Villabous – who committed suicide – were significantly higher $35mm vs. $22 mm in placement agent fees which was number most widely circulated. The SEC number did not include the $13.2 mm commission Villabous got from CALPERS purchasing an equity stake in Apollo stock. It cites and references the AFT and AFLCIO letters tying Apollo to Jeffrey Epstein. And the following table.
CALPERS corruption was so broad that despite the Forensic Investigation being 255 pages only a few pages were dedicated to Apollo. So, I have put together a piece on a timeline that explores more issues in depth.
For years before the current Private Debt meltdown and the Jeffrey Epstein scandal CALPERS has been in a conflicted relationship with Apollo. Since 2000 it is estimated that CALPERS has paid $10 to $14 billion in fees to Apollo in secret no-bid contracts. In 2007 it actually purchased an ownership interest in Apollo. CALPERS supposed independent investment consultant Wilshire is secretly owned by Apollo. These conflicts continued for decades and are still going on. A former Trustee collected $35 million in secret commissions from Apollo but died from “suicide” before he could be put in prison. However, the CALPERS Executive Director did go to prison for 5 years on Apollo related transactions. This period in time overlaps the time (2005-2019) when Leon Black of Apollo was the largest funder of Jeffrey Epstein admitting to paying over $170 million to him for “tax” advice.
CalPERS in 1998 put $150 million in the Apollo Investment Fund IV, and in 2001 $250 million Apollo Investment Fund V. But in 2007 it went to a new level.
Alfred Villalobos served as and was on the CalPERS’ Board from 1992 to 1995. After leaving the CALPERS board he eventually in the early 2000s created his placement agent firms ARVCO and CF partners which received over 95% of its revenue strictly from Apollo. Charles “Chuck” Valdes served on the CalPERS board for 25 years and was Chair of the Investment Committee from 1988 to 1999 and again from 2005 to 2007. Federico Buenrostro was a Senior California state official before joining CALPERS as CEO in 2002.
Villalobos, via his placement agency ARVCO contracted with Apollo Management VI, L.P. on or about May 25, 2005, for a $650 million investment. Villalobos received $3,864,734 in commissions secretly from Apollo for this placement.
Villalobos successfully induced CalPERS to invest $200 million in Apollo Alternative Assets, L.P. on or about July 27, 2006, and received a $4.4 million commission from Apollo.
Villalobos, Valdes, and Buenrostro made a ten-day trip together in November of 2006, ostensibly to attend the two-day Capital Markets Conference in Dubai. They flew together from San Francisco to London on November 17,2006 and then from London to Dubai the next day. Then on to Hong Kong, where they were picked up by a limousine. They then took a 30-minute helicopter ride from Hong Kong to Macau, a famous gambling location. https://oag.ca.gov/news/press-releases/brown-files-suit-against-former-calpers-officials-and-freezes-assets-alfred?
In May of 2007 a senior CalPERS investment officer Leon Shahinian responsible for evaluating a multibillion-dollar Apollo Private Equity commitment was invited to a due diligence meeting with Leon Black at Apollo’s offices in New York prior to attending a black-tie event at the Museum of Modern Art (“MOMA”) honoring Apollo founder Leon Black. Shahinian made no effort to book a commercial flight to New York, choosing instead to accept former trustee now placement agent Alfred Villalobos’ offer to fly with him there by private jet.
Villalobos and ARVCO, his placement agent firm apparently paid for all the travel arrangements for the trip, and later billed Apollo over $8,000 for the suite and related hotel charges, over $1,500 in car service fees, and over $50,000 for the use of the private jet. Villalobos was later reimbursed for these costs by Apollo, including the jet.
One month after his trip to New York, Shahinian made a presentation to the Investment Committee of the Board chaired by Valdes regarding the proposed investment in Apollo Management VII, L.P and it was approved in July 2007. Villalobos received a secret $3.5 million commission from Apollo for this transaction.
In September 2007, CalPERS purchased a $601 million ownership stake (8.6%) in Apollo ahead of Apollo’s listing on Goldman Sachs’ private exchange. After the buy in, the relationship went to a higher level. Villalobos received a secret $13.2 million commission from Apollo for this transaction.
In early 2008 Villalobos placed several Apollo European funds and received $1 million in commissions. CalPERS invested $1 billion in Apollo Credit Opportunity on or about April 15, 2008, and as compensation, Villalobos received $9,070,833 in commissions from Apollo.
For nearly 2 years this scheme operated in silence until the SEC sent a formal inquiry to Villalobas firm ARVCO on July 17, 2009, and some stories around placement agents dribbled out in late 2009 by the Sacramento Bee. The scheme was not caught by any CALPERS internal controls, and many believe it was Buenrostro’s x-wife who was listed as providing testimony to the U.S. DOJ.
The Steptoe report focused on Villalobos and Buenrostro who were guilty but covered up many others who should have received more scrutiny especially Epstein linked Apollo. Philip S. Khinda (lead author of the review report) simultaneously negotiated and then memorialized in a “new strategic relationship agreement” with Apollo Global Management in a April 16, 2010 letter addressed to Leon D. Black, explicitly praising Apollo’s cooperation with the still-ongoing review. https://documents.latimes.com/calpers-special-review/?_gl=1*1pjpo7m*_gcl_au*NTcwOTU0NTEyLjE3NjkzNjUyNDk
So while Apollo paid the placement agent fees (kickbacks) over $35 million to Villalobos and made the $billions in excessive fees they escaped any accountability for this scandal. Coincidentally, Steptoe & Johnson were Epstein’s criminal attorneys when he died in prison in 2019.
The media attention did not break big until 2010 with articles in the Wall Street Journal and New York Times. The California Attorney General filed Civil Actions, and the FBI and other agencies opened criminal probes May-June 2010.
In April 2012, the SEC charged former CalPERS CEO Federico Buenrostro and his close associate/placement agent and former trustee Alfred Villalobos with falsifying investor disclosure letters to induce Apollo to pay placement-agent fees the SEC said Apollo supposedly would not otherwise have paid without those disclosure letters. In August 2014, the U.S. Attorney’s Office (NDCA) described a superseding indictment alleging Villalobos conspired with Buenrostro in connection with a $3 billion CalPERS investment into Apollo-managed funds, that Villalobos acted as Apollo’s placement agent through ARVCO, and that fraudulent investor disclosure letters were created after CalPERS offices declined to sign.
In January 2015, Villalobos died in what authorities described as an apparent suicide, just before trial in the CalPERS corruption case. Buenrostro was sentenced to 5 years in prison. Reporting at the time underscored that Apollo itself was not accused of wrongdoing in that episode (above the law)— that even though they benefited the most from the corruption they appeared to be immune from any accountability.
Apollo was rewarded with continuing exposure and significant growth. CalPERS’ Private Equity Program performance table lists Apollo Investment Fund VIII (2013)with a $350 million commitment. This is in addition to an additional $800 million commitment to Private Credit.
CALPERS is regularly referred to as “America’s top Pension fund” and is seen by other pensions as a first mover and policy setter. Apollo co-founder Joshua Harris admitted at a 2013 meeting of the Philadelphia Board of Pensions that the firm’s capital base was overwhelmingly dependent on public retirement systems. Asked directly whether Apollo had many public pension investors, Harris responded bluntly that “almost all” of Apollo’s capital came from public funds, estimating that roughly 75% to 80% of Apollo’s capital was supplied by public pension plans. Many other state pension plans invested $billions with Apollo based on CALPERS lead. https://www.phila.gov/pensions/PDF/IM_03_28_13_Investment_Minutes.pdf
While CALPERS has refused to disclose any of these Apollo contracts unredacted in our open records request, Pennsylvania accidently released their Apollo Investment Fund VIIIcontract, (which is the same one CalPERS has) and it is publicly available on the Naked Capitalism web site. https://trove.nakedcapitalism.com/LPAs/verified-as-LPAs/Apollo_Investment_Fund_VIII_LPA_S1.pdf Apollo agreements make use of offshore vehicles, parallel structures, and non-California governing law. The contracts embed the possibility of NAV smoothing, delayed recognition of impairment, and performance presentation that cannot be independently reconstructed. Each agreement centralizes valuation authority in the General Partner. Independent valuation is not mandated as binding. Audit rights are limited. Third-party valuation is discretionary. Apollo explicitly permitted affiliates to engage in other investment activities, to manage competing funds, to allocate opportunities among affiliated vehicles, and to pursue co-investment structures. In 2016 Apollo Private Equity was fined $52 million by the SEC for Investor Protection violations misleading fund investors about fees and excessive expenses and I could find no record of CALPERS addressing this.
On Jan. 25, 2021, Apollo filed a SEC Form 8-K that included two exhibits: a letter from then-CEO Leon Black to Apollo’s limited partners, and an investigative report from the law firm of Dechert LLP. The Dechert report takes pains to minimize Epstein’s ties with other Apollo executives, including CEO Marc Rowan. https://www.sec.gov/Archives/edgar/data/1411494/000119312521016405/d118102d8k.htm
In 2021, Wilshire was acquired by private equity firms CC Capital Partner and Motive Partners. That same year, Apollo Global Management, Inc., acquired up to a 24.9 percent minority stake in Motive’s management company and Apollo and its affiliates became limited partners in Motive managed vehicles. To our knowledge this was not disclosed to board. Having you so-called independent consultant Wilshire owned by a manager Apollo that they are supposed to evaluate is an egregious conflict of interest.
Performance losses based on Apollo’s own self-reported numbers are around $3 billion. Actual losses may be another $1billion or more if Apollo Private Credit and Private Equity were marked to market.
that Apollo itself and CEO Marc Rowan had much deeper ties to Jeffery Epstein than previously disclosed in the 2001 SEC filing and that Apollo chief Marc Rowan consulted Epstein on firm’s tax affairs.
The February 2026 complaint filed with the U.S. Securities and Exchange Commission by the American Federation of Teachers and American Association of University Professors who both represent CALPERS members alleges that Apollo’s disclosures may have been materially incomplete or misleading.
The complaint goes into detail the contradiction of the 2021 SEC disclosures and the recently disclosed Epstein Files uncovered by the FT.
The unions asked the Commission to investigate whether Apollo’s prior disclosures about it and its executives’ ties to Jeffrey Epstein painted an “inaccurate and incomplete picture.” Their letter pointed to newly released Epstein documents referring to Marc Rowan, including meetings at Apollo’s offices, breakfasts involving Rowan, Leon Black, and Epstein, discussions of donor-advised funds, tax matters, a possible Apollo inversion, and other business-related contacts. The letter concluded that the 2021 disclosures may have offered “an inaccurate depiction of the extent of Apollo’s ties with Jeffrey Epstein” and said the SEC should investigate whether the statements were materially false or misleading.
However, CalPERS has spent $millions in staff hours trying to block even this small amount of transparency. https://www.calpers.ca.gov/documents/202605-full-agenda-item08a-02-a/download?inline With the support of Private Equity industry CalPERS at this time seems to have killed this Private Equity transparency bill, denying it a hearing.
The conflicted CALPERS – Apollo relationship has cost participants and taxpayers $billions. Excessive fees as high as $14 billion. Additional performance drag of many more $billions.
With Apollos culture being exposed by the Epstein connections, it is way past time for CALPERS to part ways with this parasitic vendor.
The CommonSense 401k Project 