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.”
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.
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:
The general partner’s reported net asset value.
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
Pensions should also publish three separate performance records:
Performance using manager-reported NAV.
Performance using independently adjusted market values.
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 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.
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.
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.
How Business Models, Not Market Share, Explain Fees, Conflicts, and ERISA Litigation
Most analyses of the 401(k) industry rank providers according to assets under management, number of plans, or participants.
While useful, these rankings fail to explain why some providers consistently appear in ERISA excessive-fee litigation while others rarely do.
This paper proposes a different framework.
Rather than organizing providers by size, the industry is better understood by business model—specifically, how providers acquire business and how they are compensated.
Viewed through this lens, approximately 99 percent of the non-mega-plan marketplace falls into four distinct competitive tiers.
Those tiers explain much of the variation in fees, fiduciary conflicts, prohibited transaction risk, and ultimately ERISA litigation.
The Evolution of Competition
The retirement industry has experienced three major competitive eras.
1980-1995
Competition centered on insurance products.
Guaranteed Investment Contracts.
Fixed annuities.
Traditional separate accounts.
Insurance companies dominated.
1995-2010
Competition shifted toward mutual funds.
Index funds by Vanguard.
Stable Value in the larger plans migrates from fixed annuities to synthetic by 2000
Target-date funds led by Fidelity around 2005.
Open architecture.
Vanguard and Fidelity dramatically increased market share.
2010-Present
Vanguard and Fidelity Mutual Funds are up to over half the assets. But the other half scrambles for profits :
Mutual Funds continue to be important Huge growth of Target Date Mutual Funds
Collective Investment Trusts (CIT) used by players like Vanguard, and Fidelity to lower fees especially in larger plans, but used by the others to hide fees.
Lot of noise but not much adoption of Managed accounts, Guaranteed income, Private equity, Private credit
Synthetic Stable value separately managed dominated mega plans, while synthetic based CIT products namely Vanguard RST and Fidelity MIPS dominate in larger plans. Smaller plans still have lots of high risk high fee fixed annuities
The common characteristic is lower fees from Vanguard and Fidelity but reduced transparency and increased opportunities for additional compensation from the rest.
Four Competitive Tiers
Tier 1
Vanguard
Business strategy:
Lowest possible participant cost.
Primary competitive weapon:
Low expenses.
Very limited conflicts.
Little reliance on revenue sharing.
Minimal insurance products.
No commissioned sales force.
Benchmark for fiduciary pricing.
ERISA litigation:
Relatively uncommon.
Both Mutual funds and Collective Investment Trusts are transparent and low cost
Tier 2
Fidelity
Business strategy:
Institutional full-service provider.
Primary competitive weapon:
Technology.
Administration.
Investment platform.
Scale.
Generally below-average costs.
Both Mutual funds and Collective Investment Trusts are transparent and low cost
Unlike much of the industry, Fidelity generally wins business through direct institutional relationships rather than commissioned insurance distribution.
Tier 3
TIAA
Business strategy: Higher education. Hospitals. Non-profits.
403(b) specialization. Insurance companies have interpreted that synthetic stable value is not allowed in 403b. TIAA is by far the largest provider of General Account Fixed Annuities over $300 billion, which contain secret spread fees of around 150 basis points. The 403bs the control typically have 30% to 40% of assets in fixed annuity product. The second largest product is an annuity holding real estate which is controversial. Mutual funds make up most of the other assets.
Historically a unique organization with extensive insurance expertise but a mission-driven client base. But seems to be straying more into Tier 4 (as documented in NBC pieces by Gretchen Morgenson).
Fee levels generally fall between Fidelity and the traditional insurance marketplace. Most fees are hidden buried in Insurance products Strong relationships lots of sponsorships to universities especially
Tier 4
Insurance Distribution Model
Examples include:
Principal
Lincoln
John Hancock
MassMutual
Prudential
New York Life
Nationwide
Transamerica
Voya
AIG Valic
MetLife
American United Life
Corebridge
Equitable
Ameritas
Security Benefit
Many legacy recordkeeping systems have now been consolidated under Empower.
The provider names have changed.
The compensation model largely has not.
How Tier Four Wins Business
Unlike Vanguard and Fidelity, many Tier Four providers rarely compete solely on participant fees.
Instead, they compete through weakly disclosed commissions. .
Typical distribution partners include
Insurance agents
Financial advisors
Broker-dealers
Registered investment advisors
Retirement consultants
Third-party administrators
Those intermediaries frequently receive compensation through one or more of:
Revenue sharing
Insurance commissions
Asset-based advisory fees
Sub-transfer agency payments
Proprietary investment management fees
Marketing allowances
Recordkeeping credits
The participant rarely sees most of these payments.
Why This Matters
Every business model creates incentives.
Tier One incentives:
Lower fees.
Larger scale.
Operational efficiency.
Tier Four incentives:
Increase gross revenue per participant.
Increase proprietary product usage.
Increase insurance assets.
Increase advisory relationships.
Increase revenue sharing.
These incentives are entirely rational from a business perspective.
They also create significantly greater fiduciary risk.
The Litigation Universe
One surprising conclusion from my ERISA database is that litigation is highly concentrated.
Approximately
693,000 Micro plans
48,000 Small plans
6,800 Mid-Major plans
2,200 Large plans
only 442 Mega plans
Most excessive-fee litigation occurs in only a few thousand plans. Only 9500 are over $100 million in assets, about a third are not in Vanguard or Fidelity, so 3500 or 4.6% of plans. So the other 95% are dependent on a weak EBSA division of the Department of Labor.
Even more interesting, the overwhelming majority involve Tier Four business models.
That observation is not accidental.
Higher compensation systems naturally produce more opportunities for:
prohibited transactions,
revenue-sharing disputes,
proprietary fund claims,
insurance commission issues,
excessive recordkeeping fees,
conflicts of interest.
A Different Way to Measure Market Share
Traditional industry reports measure
Assets.
Participants.
Plans.
Revenue.
I believe a more meaningful measurement is:
How much of the market is sold rather than bought?
That single question largely determines
fee levels,
transparency,
conflicts,
litigation,
and ultimately participant outcomes.
Conclusion
The American 401(k) marketplace is often described as highly competitive.
It is.
But providers are not competing on the same terms.
Vanguard competes by lowering costs.
Fidelity competes through scale and technology.
TIAA competes through specialization.
Much of the remaining industry competes through distribution networks that compensate intermediaries for selling retirement products.
Those four business models explain far more about fees, fiduciary conflicts, and ERISA litigation than conventional market-share statistics ever will.
The biggest issue missing from the Kentucky pension litigation isn’t standing. It’s transparency.
“From 2008 to 2012, while serving as a Kentucky Retirement Systems trustee, I was not allowed to know the names of the underlying hedge funds inside three hedge fund-of-funds managers. If I could not know what the pension owned, neither could taxpayers, beneficiaries, or outside experts. Fifteen years later, remarkably little has changed.”
I asked then and was denied and voted against Blackstone they are still keeping this secret.
After reading the transcript of the July 1, 2026 hearing before Franklin Circuit Judge Phillip Wingate, I was struck less by what was said than by what was never discussed.
For nearly 70 pages, attorneys debate standing, settlements, declaratory judgments, releases, and procedural authority.
Yet almost no one discusses the investments themselves.
That is remarkable considering the litigation ultimately concerns billions of dollars of pension assets entrusted to alternative investment managers.
As someone who served as a Kentucky Retirement Systems trustee from 2008 through 2012, I found the omission painfully familiar.
The Transcript Is About Procedure, Not Investments
Judge Wingate repeatedly tries to understand the procedural maze being placed before him.
At several points he questions why the parties appear to be attempting, through different legal vehicles, to accomplish essentially the same objective. He even comments that it sounds like “the same stuff” argued previously.
The discussion revolves around:
standing
settlement authority
declaratory judgment
releases
jurisdiction
Those are important legal issues.
But there is a much larger issue sitting silently in the courtroom.
What exactly did Kentucky Retirement Systems own?
No one asks.
No one answers.
The Missing Layer
Most public discussion has centered on Blackstone.
But Blackstone was only one part of a much larger structure.
The pension system invested through three hedge fund-of-funds, which in turn invested in approximately thirty underlying hedge funds.
That second layer remains almost completely invisible.
Ironically, it was largely invisible even to trustees.
During my four years on the Board, I was never allowed to know the identities of the underlying hedge funds held inside these fund-of-funds structures.
Not only were the names withheld.
So were:
underlying management fees
incentive fees
side letters
liquidity restrictions
partnership agreements
operational due diligence reports
Even today, beneficiaries still cannot readily determine exactly what those fund-of-funds owned.
That should concern every taxpayer.
The Question Nobody Asked
Reading the transcript, one question kept coming to mind.
Who actually knew?
If trustees did not know the identities of the underlying hedge funds, then someone certainly did.
Was it:
investment staff?
outside consultants?
fund-of-funds managers?
outside counsel?
Discovery should answer that question.
Because governance depends upon information.
A fiduciary cannot supervise investments whose identity remains hidden.
Judge Wingate’s Questions Point Toward a Larger Problem
One of the more interesting moments occurs when Judge Wingate essentially says he does not understand how one person’s settlement can dispose of broader claims. Later he reminds counsel that “you can’t settle tier three because of you all.”
Although the judge is addressing procedural issues, his comments reflect a broader concern.
Who owns these claims?
Who has authority over them?
And perhaps most importantly:
Who gets to know the facts before they disappear inside a settlement?
Those observations become especially important if discovery has not yet reached the underlying investments.
Discovery Is Key
The transcript reveals an enormous amount of legal energy devoted to procedural questions.
But discovery should continue well beyond those issues.
If this case proceeds, discovery should include:
every underlying hedge fund held through each fund-of-funds
all subscription agreements
partnership agreements
side letters
quarterly reports
redemption notices
valuation reports
consultant due diligence files
fee schedules
communications discussing confidentiality
Without those documents, no one can fully evaluate whether fiduciary duties were satisfied.
Who selected each underlying hedge fund?
Who removed managers?
Who negotiated fees?
Who approved side letters?
Who monitored liquidity?
Who received valuation reports?
Which trustees, if any, were allowed to review those materials?
Those answers would tell us far more about Kentucky’s hedge fund governance than another procedural hearing ever could.
Transparency Is the Missing Remedy
Judge Wingate spends much of the hearing trying to determine who has authority to settle claims and what legal vehicle should govern those settlements.
Those questions matter.
But there is another remedy the court should not overlook.
Transparency.
Discovery is not merely a litigation tool.
It is one of the few mechanisms capable of opening a black box that has remained closed for nearly two decades.
Fifteen Years Later, We Still Don’t Know
As a former trustee, I find it astonishing that fifteen years after I left the Board, the central transparency problem appears largely unchanged.
Back then, trustees were expected to oversee billions of dollars invested through hedge fund-of-funds without being permitted to identify all of the underlying managers.
Today, the litigation risks ending with another procedural ruling before those underlying investments ever become public.
That would be a missed opportunity.
The real value of this litigation is not simply deciding who has standing.
It is finally allowing beneficiaries, taxpayers, and fiduciaries to see what they have been paying for all along.
The Kentucky pension litigation should not end with another debate over procedure.
It should end with discovery that opens the hedge fund black box.
Congress is once again considering legislation that would allow 403(b) retirement plans to invest in Collective Investment Trusts (CITs). More than 30 financial industry organizations are urging the Senate to act, arguing that teachers, nonprofit employees and clergy deserve access to the same institutional investment vehicles already available in many 401(k) plans.
There is merit to that argument.
Many Collective Investment Trusts are excellent investment vehicles.
Vanguard’s Retirement Savings Trust (RST) funds are an excellent example. Low-cost institutional index strategies offered through CITs can reduce expenses for participants.
But Congress should recognize one important fact:
The CIT market of 2026 is not the CIT market of twenty years ago.
Today, the same legal structure that can deliver a low-cost Vanguard index fund can also deliver private equity, private credit, insurance-company separate accounts, lifetime-income products, and multiple layers of affiliated financial products.
Those are entirely different worlds.
Congress Is Looking at the Wrong Problem
Supporters frame the legislation as a simple fairness issue.
Why should 401(k) participants have access to institutional CITs while many 403(b) participants do not?
That is a reasonable question.
A better question is this:
If Congress expands access to CITs, what protections should participants receive in return?
Unfortunately, almost all of the lobbying has focused on expanding access.
Very little has focused on expanding fiduciary protections.
The Fee Story
The retirement business has changed dramatically.
Large defined contribution plans increasingly use index funds costing roughly 10 to 30 basis points.
Competition from Vanguard, Fidelity, BlackRock and others has pushed investment costs steadily lower.
Meanwhile, many alternative products remain dramatically more expensive.
Traditional insurance products often contain spreads and embedded compensation measured in hundreds of basis points.
Academic studies of traditional private-equity funds, including work by Oxford professor Ludovic Phalippou, have estimated total costs that can approach several hundred basis points once management fees, carried interest and other expenses are considered.
That economic reality matters.
As traditional investment management became less profitable, the industry’s fastest-growing products increasingly became those where fees are harder to observe and harder to compare.
The New Reality of Collective Investment Trusts
Many of today’s newest retirement products no longer consist simply of diversified portfolios of publicly traded stocks and bonds.
Instead, a participant’s money may move through several legal structures before reaching the underlying investments.
A target-date CIT may invest in another CIT.
That CIT may invest in an insurance-company separate account.
The separate account may invest in private-equity or private-credit partnerships.
Each legal structure has different disclosure rules.
Different accounting standards.
Different regulators.
Different fiduciaries.
Participants, however, usually receive one unit value.
The complexity is increasing.
Congress should recognize that reality before expanding these products to millions of additional retirement savers.
If Congress Passes the Bill, It Needs Guardrails
Congress should not simply expand access.
It should modernize investor protections.
At a minimum:
1. Require federally supervised trustees for ERISA CITs.
If a CIT is offered to ERISA retirement plans, it should be administered by an OCC-supervised national bank or federal savings association—not through regulatory shopping among state-chartered trust companies.
The legal structure should not depend upon selecting the least demanding supervisory regime.
2. Apply one fiduciary standard to all 403(b) participants.
One of the greatest weaknesses in today’s retirement system is that roughly half of 403(b) participants receive ERISA protections while many public-school teachers, public universities and governmental employers do not.
Congress should not expand investment complexity while leaving millions of educators outside ERISA’s fiduciary framework.
If anything, Congress should use this legislation to move toward one national fiduciary standard for all employer-sponsored defined contribution plans.
3. Full look-through fee disclosure.
Participants should see every layer of compensation.
Investment-management fees.
Insurance spreads.
Private-equity management fees.
Carried interest.
Performance allocations.
Consulting compensation.
Revenue sharing.
Affiliated compensation.
If participants ultimately bear the cost, they should see it.
4. Full look-through investment disclosure.
Participants should know when their target-date fund ultimately owns:
private equity;
private credit;
insurance-company separate accounts;
real estate partnerships;
infrastructure funds; or
other illiquid investments.
The legal structure should not obscure the economic investment.
5. Independent valuation standards.
Where illiquid assets are used, fiduciaries should understand who values those assets, how often they are valued, and whether any independent verification occurs.
Don’t Repeat the Mistakes of the Past
Supporters correctly point out that many CITs are less expensive than comparable mutual funds.
That is true.
But not every CIT looks like Vanguard.
Some are simple institutional index funds.
Others are becoming delivery systems for increasingly complex, higher-fee products.
Congress should not assume they are all the same.
The Bottom Line
This legislation should not be a choice between “allow CITs” and “ban CITs.”
The better approach is straightforward.
Allow low-cost institutional investment vehicles.
But require modern safeguards that reflect today’s retirement marketplace—not the marketplace that existed twenty years ago.
If Wall Street wants access to millions of additional teachers, professors and nonprofit employees, it should welcome stronger fiduciary protections, stronger fee disclosure and stronger federal oversight.
The best CITs have nothing to fear from transparency.
Fidelity now indexes roughly one-third of the assets it manages.
BlackRock became the world’s largest asset manager largely through index investing.
Large institutional 401(k) plans increasingly pay between 10 and 30 basis points for broadly diversified index portfolios.
For Wall Street, that is a crisis.
The traditional mutual fund business has become extraordinarily efficient—and extraordinarily unprofitable compared to what came before.
So the industry needed a new business model.
That model is built around products that are difficult to compare, difficult to value, and difficult to benchmark.
The Economics Tell the Story
Consider the economics.
Large index mutual funds:
10–30 basis points.
Traditional fixed annuities:
approximately 200–400 basis points once spreads and embedded compensation are considered.
Traditional private-equity funds:
approximately 300–600 basis points after management fees, carried interest and other costs, consistent with numerous academic studies, including work by Ludovic Phalippou.
This is not a small pricing difference.
It is an entirely different business.
Every trillion dollars that moves from a 20-basis-point product to a 300-basis-point product represents tens of billions of dollars of additional annual revenue.
That is the economic incentive driving today’s retirement-product innovation.
Mutual Funds Became Too Competitive
SEC-registered mutual funds are remarkably transparent.
Daily pricing.
Portfolio disclosure.
Comparable expense ratios.
Morningstar comparisons.
Independent boards.
Public filings.
Competition works.
When every investment manager owns essentially the same publicly traded securities, fees inevitably fall.
The index revolution proved that.
Wall Street’s answer was not to compete harder.
It was to move into investments that cannot easily be compared.
The New Business Model
The industry’s growth areas now have remarkably similar characteristics.
Private equity.
Private credit.
Insurance products.
Lifetime-income products.
Collective investment trusts.
Insurance separate accounts.
These products often involve multiple legal structures before participants reach the underlying investments.
A target-date collective investment trust may invest in another collective investment trust.
That trust may invest in an insurance-company separate account.
The separate account may invest in private-equity or private-credit funds.
Every additional legal structure creates another layer of administration.
Another layer of valuation.
Another layer of contracts.
Another layer of compensation.
Most importantly, another layer that makes straightforward fee comparisons increasingly difficult.
Why State-Regulated Collective Trusts?
This is where an interesting pattern emerges.
I have yet to identify a current SEC-registered open-end mutual fund that owns traditional annuity contracts.
Likewise, I have not identified a current OCC-supervised ERISA collective investment trust holding the kinds of private-equity partnerships now being promoted for participant-directed target-date funds.
Instead, many of the industry’s newest products appear to be organized through state-chartered trust companies.
Nevada.
Oregon.
Maine.
It raises an obvious question.
If these investments are as straightforward as their sponsors claim, why are they increasingly being introduced through legal structures outside SEC mutual funds and, increasingly, outside direct OCC-supervised collective investment trusts?
Complexity Protects High Fees
High fees are easiest to sustain when comparisons become difficult.
Participants know how to compare an S&P 500 index fund charging 0.03%.
They have a much harder time comparing:
a target-date collective investment trust;
investing in another collective investment trust;
investing in an insurance separate account;
investing in a portfolio of private-equity partnerships.
At that point, what exactly is the participant comparing?
The benchmark?
The valuation methodology?
The insurance spread?
The carried interest?
The management fee?
The consulting fee?
The recordkeeping fee?
The answer is often: all of them.
Or none of them.
The New Toll Road
Think of the modern retirement system as a highway.
Traditional index investing is a public interstate.
Efficient.
Transparent.
Low cost.
Private markets increasingly resemble a series of toll booths.
Every legal structure can collect a fee.
Every intermediary can justify another charge.
Every additional layer makes it more difficult for participants—and sometimes even fiduciaries—to determine the total cost of reaching the underlying investments.
The investment itself may not have changed very much.
The economics certainly have.
Fiduciaries Should Follow the Money
Investment committees are often told these products are about diversification.
Or access.
Or innovation.
Those claims deserve careful evaluation.
But fiduciaries should begin with a simpler question.
Who benefits economically from moving retirement assets out of 20-basis-point index funds and into products costing several hundred basis points?
Until that question is answered clearly, every additional legal structure should be viewed not simply as an investment vehicle, but as part of the product’s overall economic design.
The retirement industry did not abandon low-cost mutual funds because they stopped working.
It abandoned them because they became too inexpensive.
That is the story behind private equity, private credit and modern annuity products.
A new academic report provides unusually strong evidence for a central argument made in both the our investigation of Ohio STRS and our broader CalPERS report: public-pension compensation systems can reward staff for an internally manufactured version of performance that is materially better than the pension’s underlying financial record.
STRS’s publicly reported investment return exceeded the authors’ independently calculated return derived from audited financial information in 19 of the 20 fiscal years from 2003 through 2022.
The average difference was approximately 0.33 percentage points annually. The authors estimate that the annual differences represented about $4.8 billion when added together and approximately $9.3 billion when compounded over the full period. They emphasize that the $9.3 billion is not the amount of bonuses improperly paid; it is their estimate of the cumulative difference between the performance story presented to stakeholders and the growth indicated by their audited-data calculation.
The Critical Compensation Connection
The report does not merely identify two different performance figures. It connects the difference directly to incentives:
STRS reportedly based investment-staff bonuses on the higher, internally reported return.
Those reported returns were not themselves the subject of the CPA opinion covering the financial statements.
Ohio OPERS, used as a comparison, based bonuses on audited results.
OPERS showed a much smaller, bidirectional discrepancy: its reported return was higher in some years and lower in others.
That comparison is important. OPERS operated in the same state, under similar economic conditions, yet its differences looked more like ordinary measurement variation. At STRS, the difference overwhelmingly went in one direction—the direction that favored staff compensation.
The authors calculate that obtaining 19 favorable differences in 20 years would have a probability of less than 0.01 percent if overstatement and understatement were equally likely. Their conclusion is appropriately qualified: methodological differences may explain part of the gap, but the pattern is most consistent with an incentive problem.
This is about as close as an academic paper is likely to come to saying:
STRS maintained one performance number grounded in audited financial information and another, more favorable number used to justify bonuses.
It Reinforces the CommonSense “Everyone Gets Paid to Pretend” Thesis
In May, the CommonSense 401k Project described the private-market valuation system as a “perfectly aligned incentive system”:
private-equity managers benefit from high reported net asset values;
private-credit managers benefit from delaying defaults and write-downs;
consultants benefit from preserving complex, high-fee programs;
pension staff benefit from reported outperformance and bonuses.
The process was summarized in five steps:
Private assets are not marked to an observable market.
This is why Private Equity is not allowed in SEC registered Mutual Funds.
The new STRS study supplies direct empirical support for the pension-staff portion of that thesis. We previously argued that pension employees’ bonuses depend on reported returns and non-investable benchmarks, creating a powerful reason not to recognize losses promptly.
The academic study now finds precisely the pattern that theory predicts: the number associated with compensation was almost always higher than the number the authors derived from audited financial data.
This moves the issue beyond a generalized concern about opaque private assets. It identifies a measurable institutional mechanism through which optimistic reporting can enrich the people responsible for producing and defending it.
From our 2024 numbers it has gotten worse with higher excessive salaries many who now work from home
highly compensated investment personnel control private-market allocations, valuation inputs, benchmarks and performance narratives;
lower-paid accounting and financial-control personnel are expected to verify the resulting numbers;
boards generally rely more heavily on the investment staff than on the accountants.
That report argued that Ohio had created a system in which “the dealmakers are rewarded for growth and complexity” while “the watchdogs are underpaid and outgunned.”
Mendenhall and Sutter provide a concrete example of the consequences. The externally audited financial information and the investment office’s reported performance existed in the same annual reports, but they apparently did not produce the same result. The investment office’s preferred result was then used for compensation.
Thus, the problem is not simply that CFA-type investment personnel make more money than CPA-type accounting personnel. The deeper problem is that the better-paid side controls the performance number on which its own bonuses depend.
The CalPERS Parallel Is Even Larger
The CalPERS investigation identified a similar structure, although CalPERS accomplishes it primarily through engineered benchmarks and private-asset valuation conventions rather than the exact STRS calculation examined in the new paper.
CalPERS pays some of the highest public-pension compensation in the country despite chronic underperformance. The investigation found:
The report concluded that compensation was supported by internally constructed policy benchmarks and discretionary organizational measures rather than straightforward comparisons with investable, low-cost alternatives.
Only 15 percent of the CalPERS CEO incentive award was tied to total-fund investment performance, and even that portion was measured against CalPERS’ own policy benchmark. A five-basis-point advantage over that engineered benchmark could reportedly produce the full performance payout.
The CalPERS report describes a closed validation loop:
Staff help construct the strategy and benchmark.
Performance is measured against the internally designed benchmark.
Consultants validate the benchmark and compare compensation with selected peers.
The board approves bonuses based on the consultant-supported results.
No one tests compensation against the simple investable portfolio beneficiaries could actually have owned.
Private-market valuation lag adds another layer. CalPERS benchmarks include quarter-lagged private-market indexes, appraisal-based valuations and assumed illiquidity premiums. During market declines, those features defer recognition of losses, making interim performance appear better and allowing bonuses to be paid before economic deterioration becomes visible.
Ohio STRS chose the same Goverance Consultant as CALPERS to reinforce the same excessive pay for false performance system.
Two Systems, the Same Basic Trick
The STRS and CalPERS mechanisms are not identical, but the governing principle is the same.
External economic reality
Compensation reality
Audited financial position
Internally reported return
Observable public-market alternatives
Custom policy benchmark
Current market losses
Lagged private-market valuations
Net returns and opportunity cost
Consultant-approved “value added”
Long-term beneficiary outcome
Annual bonus eligibility
At STRS, the new research calls this effectively two performance records: one exposed to external audit discipline and another used for internal evaluation and compensation.
At CalPERS, the second record is constructed through benchmarks, appraisal-based valuations, discretionary metrics and consultant certification.
In both cases, the staff are not necessarily falsifying a formal general ledger. Therefore, “two sets of books” should be understood as a description of two systems of performance measurement, not a claim that auditors discovered criminal double-entry accounting. But the economic result can be similar: the official number presented for compensation is more favorable than the measure stakeholders would use to evaluate the pension’s real opportunity cost.
The Real Scandal Is the Incentive Design
The report’s proposed minimum reform is straightforward: performance compensation should be based exclusively on independently verified results derived from audited financial information.
That is a start, but the CalPERS findings show that merely calling something “audited” may not be sufficient when private assets remain dependent on manager marks and lagged appraisals. A serious reform should require:
Compensation based on long-term net performance after all fees and expenses.
Comparison with transparent, investable opportunity-cost benchmarks.
Independent valuation authority outside the investment department.
Multi-year deferral and clawbacks when private-market values are subsequently reduced.
Public reconciliation of every performance figure to the audited financial statements.
An independent inspector general with access to valuation records, contracts, benchmark histories and compensation calculations.
Bottom Line
The new report strongly reinforces the Ohio and CalPERS investigations.
The May CommonSense articles on Ohio argued that opaque valuations, artificial benchmarks and excessive pension-staff compensation form a single system. The STRS study provides evidence of that system in operation: the performance number used to pay investment bonuses was systematically more favorable than the result the authors calculated from audited financial information.
The CalPERS investigation demonstrates the same underlying practice on a much larger scale. Staff and consultants construct the benchmarks, private-market marks soften or postpone losses, the internally generated result is declared successful, and enormous compensation follows.
Public pension staff do not need to beat the market when they are permitted to choose the accounting lens, design the measuring stick and collect bonuses from the version of reality that makes them look best.
The CFA Institute has diagnosed yesterday’s disease while today’s patient is dying from something entirely different.
By Chris Tobe, CFA, CAIA
The new CFA Institute Research Foundation monograph Investment Committees: Governance and Design Choices deserves praise. It is one of the best academic treatments of investment committee behavior I have read in years. It synthesizes decades of behavioral finance research into a thoughtful discussion of groupthink, status bias, anchoring, and decision-making “noise.” It even proposes an innovative idea: instead of allowing dominant personalities to steer committee discussions, require each committee member to independently submit portfolio recommendations anonymously before discussion begins. The committee’s decision would then reflect the average of those independent judgments rather than the loudest voice in the room. https://rpc.cfainstitute.org/sites/default/files/docs/research-reports/rf_scherer_investmentcommittees_online.pdf
Twenty years ago, this paper might have represented the cutting edge of institutional governance.
Today, however, it feels like a diagnosis of a disease that has largely disappeared.
The problem facing investment committees in 2026 is not that they are making honest mistakes. The problem is that many committees have stopped asking the questions that matter.
The World the CFA Paper Describes
The CFA paper assumes a traditional institutional investor. Committee members gather monthly. They review economic forecasts. They debate equity versus bonds. The CIO may dominate discussion. Members may anchor on the first opinion expressed. Groupthink can emerge.
Behavioral biases distort decisions. These are all real problems. The research on committee psychology is excellent, and the proposed reforms could improve many investment committees. But underlying the entire paper is one crucial assumption:
Committee members are honestly trying to maximize participant returns.
That assumption once described much of institutional investing. It increasingly does not especially in my world of U.S. Public Pensions and 401(k) plans.
The Investment Committee Has Changed
Over the last two decades, alternatives have fundamentally changed the role of investment committees especially in U.S. Public Pension Plans.
The traditional committee once allocated among:
U.S. equities
International equities
Bonds
Cash
Today many public pension committees spend nearly half their meetings discussing:
private equity
private credit
hedge funds
infrastructure
real estate partnerships
continuation funds
GP-led restructurings
insurance products
These are not transparent securities. They are contractual relationships.
And contracts create conflicts. The committee’s most important job is no longer deciding whether stocks should be 58% or 62% of the portfolio.
It is determining whether fiduciaries are entering relationships that participants cannot evaluate.
The Questions That Never Get Asked
After serving as an expert witness in ERISA litigation for more than a decade, and doing public pension reviews for over 2 decades, I have reviewed thousands of committee materials. I have served as a trustee of a $20 billion pension fund.
The missing discussions are remarkably consistent.
Committees rarely ask:
How much are we really paying?
Who receives every layer of compensation?
What conflicts exist?
How are these assets actually valued?
What happens if liquidity disappears?
Who benefits from secrecy?
Why are these contracts unavailable for public review?
Instead, committees often spend hours debating issues around 1 of several hundred investments, and get just the consultants boiler plate presentations on the economy.
The CFA paper spends nearly eighty pages discussing committee dynamics. It spends almost no time discussing conflicts of interest. That omission illustrates how much institutional investing has changed.
The New Governance Failure
Behavioral finance remains important. But today’s governance failures are structural.
Increasingly, committees are approving investments whose economics cannot be independently verified. Consider private equity. Many public pensions now allocate 30% to 40% of assets to private markets.
Yet those investments frequently rely on:
manager-supplied valuations
confidential side letters
confidential partnership agreements
confidential fee arrangements
confidential financing structures
In many cases even the Investment Committee members are not allowed to see these private equity contracts.
Ironically, many of these investments cannot satisfy the transparency principles long promoted by the CFA Institute’s own Global Investment Performance Standards (GIPS). When nearly half of a pension portfolio consists of assets that resist standardized performance verification, governance problems become far more serious than groupthink. They become problems of accountability.
Investment Policy Statements Have Become Hollow
This is where the CFA paper and modern ERISA litigation diverge. The paper assumes committees operate within robust Investment Policy Statements.
My public pension investigations and litigation experience suggests something different.
Many IPS documents have become increasingly vague precisely where specificity matters most.
Instead of requiring fiduciaries to document:
fee limits
liquidity standards
valuation methodologies
conflict disclosures
prohibited transaction reviews
insurance credit standards
they often contain broad statements about “diversification,” “prudent investing,” or “appropriate alternative investments.”
An IPS that avoids measurable standards protects fiduciaries far better than it protects participants.
That is not an accident.
Governance Theater
One of the CFA paper’s best observations is that many investment committees have become governance rituals rather than genuine decision-making bodies. Meetings are held. Minutes are written. Consensus is achieved. This is 99% of committee meetings.
As a Kentucky Pension trustee of a $20 billion fund, I would make written objections to investment decisions around a lack of transparency to be entered into the minutes, after I found them scrubbed from previous minutes. The rest of the board then voted to scrub my written comments from the minutes. I the only investment expert of 12 was removed from the investment committee led by a trustee who later served a 5 year prison term.
Committees now often perform diligence around information that has already been filtered by consultants, investment managers, placement agents, legal counsel, and proprietary confidentiality agreements.
Trustees are frequently asked to approve billion-dollar commitments after seeing only a fraction of the relevant information. The meeting itself becomes evidence that a prudent process occurred—even when the most important information was never available.
The Elephant in the Committee Room
Perhaps the most surprising omission in the CFA monograph is private equity.
These are no longer niche issues. They define modern institutional governance.
From Behavioral Finance to Fiduciary Finance
The CFA Institute has made an important contribution. It explains how committees think. The next generation of research must explain what committees are obligated to investigate. Those are very different questions. Behavioral finance asks: How do groups make better decisions?
Modern fiduciary governance asks: What information must fiduciaries obtain before any prudent decision is even possible? That distinction increasingly defines pension governance.
The Next Generation of Governance
The next major advance in committee governance will not come from better meeting procedures.
It will come from requiring committees to document objective fiduciary standards before investments are approved.
Future Investment Policy Statements should require documented analysis of:
total fees from every source
valuation methodology
secondary market evidence
liquidity stress testing
conflicts of interest
prohibited transaction analysis
insurance credit risk
benchmark selection
GIPS compliance where applicable
independent verification of reported returns
Those questions matter far more than who speaks first during committee meetings.
Conclusion
The CFA Institute deserves credit for improving the science of investment committee behavior. But today’s governance crisis is no longer primarily behavioral. It is informational.
When trustees knowingly approve billions of dollars in investments whose valuations, fees, contracts, and risks remain largely hidden, the problem is not groupthink. It is fiduciary blindness. The greatest governance reform of the next decade will not be quieter committee meetings or anonymous portfolio voting.
It will be restoring the simple principle that fiduciaries cannot prudently approve what they are not allowed—or unwilling—to fully examine.
The new Kitces article by Richard Chen is framed as a practical due-diligence guide for RIAs reviewing private equity, private credit, hedge funds, venture, and real estate funds. But read in the 401(k)/403(b) context, it becomes something more important: an admission that private funds require a level of legal, operational, valuation, liquidity, conflict, side-letter, expense, and monitoring diligence that most participant-directed retirement plans are not equipped to perform. https://www.kitces.com/blog/private-equity-debt-fund-due-diligence-checklist-ria-fiduciary-governing-documents-operational/?
That is the key point. Chen does not write like a private-equity critic. He writes like a careful securities lawyer. Yet his checklist confirms my core argument: private markets are not simply “another asset class.” They are structurally different from mutual funds and public securities because the investor often lacks reliable pricing, daily liquidity, standardized disclosure, transparent fees, equal rights, and meaningful legal recourse.
This fits directly with my earlier critique of PwC’s private-equity-in-401(k)s paper. https://commonsense401kproject.com/2026/06/10/pwc-accidentally-says-the-quiet-part-out-loud-about-private-equity-in-401ks/ PwC emphasized “embedding” private markets inside defined contribution structures and estimated a massive fee opportunity for the industry. My response was that the real strategy is not participant choice, but default placement through TDFs, CITs, consultants, recordkeepers, and bundled fiduciary narratives.
Chen’s article strengthens that argument because he says fiduciaries cannot rely on sponsor pitch books or marketing materials. They must review governing documents, conflicts, gates, side pockets, side letters, expense allocation, indemnification, valuation procedures, service providers, cybersecurity, litigation history, and ongoing monitoring. That is not a minor administrative burden. That is a full legal and operational due-diligence regime.
The most important sentence for ERISA litigation is Chen’s warning that fiduciary diligence is not a one-time event. Even in closed-end illiquid funds, the inability to redeem “does not suspend the duty of care.” In fact, it intensifies monitoring obligations. That is devastating to the industry’s argument that private equity can be safely dropped into a TDF sleeve and forgotten for ten years.
Chen also highlights one of the central private-market fraud risks: valuation. Private fund sponsors often control or influence the values used to calculate management fees, carried interest, reported performance, and NAV. This matches my prior ERISA checklist: fiduciaries should not rely on IRR, custom benchmarks, stale marks, or manager-controlled accounting when deciding whether participants actually benefit.
The article is also useful on liquidity. Chen separates ordinary illiquidity from “very illiquid” structures: lockups, notice periods, fund-level gates, investor-level gates, side pockets, and suspension rights. In a daily-valued 401(k) system with loans, withdrawals, transfers, QDIA flows, and participant panic risk, that is not a feature. It is a structural mismatch.
The side-letter section may be especially important. Chen admits that different investors in the same fund may receive better fees, better reporting, better liquidity, co-investment rights, or most-favored-nation protections. That creates a simple ERISA question: how can a fiduciary prove participants received prudent, loyal, and comparable terms if other investors secretly received better ones?
The expense-allocation section also supports litigation. Chen notes that private funds may shift broken-deal costs, legal costs, regulatory expenses, travel, technology, insurance, placement-agent fees, and other overhead to investors. That directly supports the argument that private equity fee disclosure in DC plans is not merely incomplete — it may be fundamentally misleading.
The weakness in Chen’s piece is that it still treats private funds as suitable if the adviser checks enough boxes. For ERISA plans, that may be too forgiving. A retail RIA recommending a small allocation to a wealthy accredited investor is not the same as a plan fiduciary embedding opaque private assets inside default retirement vehicles for ordinary workers.
Chen/Kitches confirms that private equity in 401(k)s is a fiduciary minefield. If fiduciaries cannot obtain the LPAs, side letters, valuation files, expense allocations, liquidity terms, fee offsets, indemnification provisions, cyber controls, service-provider reports, litigation history, and ongoing monitoring records, they should not put private equity in participant-directed retirement plans. And if consultants, CIT providers, or managers refuse to provide those materials, that is not a diligence problem to be managed — it is the fiduciary red flag itself.
The CommonSense 401k Project 