Private Equity Is Being Added on Top of Private Debt, Private Real Estate, Annuities and State-Regulated CITs

By Christopher Tobe, CFA,CAIA
The CommonSense 401k Project

Principal Financial Group has announced that it is expanding its “Featured Partner Program” to bring private markets into retirement plans.

This is being marketed as broader diversification and better long-term retirement outcomes. I see something very different: Principal is building a distribution system that can add private equity on top of the private debt, illiquid private real estate, insurance separate accounts, annuity contracts and state-regulated collective investment trusts already found across its retirement platform.

Principal is not new to private debt. Principal Alternative Credit reported nearly 40 direct-lending transactions representing more than $750 million of committed capital in 2021 and described an expansion of its private-debt capabilities. (Principal announcement). The 2026 Featured Partner expansion creates a route for Principal and outside managers to package private-market strategies for defined-contribution plans.

The participant may see one friendly label—perhaps “Target Date 2050.” Underneath it could be layer after layer of contracts, managers, affiliated entities, subjective valuations, liquidity devices and fees.

This is not diversification in any commonsense meaning of the word. It is an illiquidity and opacity layer cake.

And Principal’s own announcement practically writes the first paragraph of the future complaint.

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Principal Admits Participants May Not Be Able to Get Their Money

Principal’s August 26 announcement says it plans to collaborate with asset managers, trust companies and fiduciaries to launch a “suite” of CITs combining public and private strategies. The possible delivery systems include CIT-based target-date funds, target-risk funds, managed accounts and other asset-allocation services.

The list of participating private-market firms is a Wall Street greatest-hits collection: AllianceBernstein, Apollo, Ares, Blackstone, Blue Owl, Carlyle, Franklin Templeton, Goldman Sachs, KKR, Morgan Stanley Investment Management, Neuberger, Partners Group, PGIM and Principal Asset Management.

Then, near the bottom of the release, comes the disclosure every plan fiduciary should read slowly:

Because certain private equity investments are less liquid, the investment manager seeks to accommodate daily participant activity using other underlying investments intended to support routine contributions, withdrawals, and rebalancing. However, in some circumstances, transaction processing may be delayed, partially completed, or temporarily unavailable due to fund-level liquidity or valuation conditions.

That is not my characterization. That is Principal’s own warning.

Translated into plain English: the private assets are not daily liquid. The participant’s apparent daily access depends on other, more liquid investments being available to absorb withdrawals. If liquidity or valuation conditions deteriorate, the participant’s transaction may be delayed, only partly completed or made temporarily unavailable.

Principal calls this making private markets “more practical” for retirement plans. I call it using workers’ liquid retirement savings as the liquidity sleeve for Wall Street’s illiquid contracts.

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This Is Not Yet One Fully Disclosed Product—It Is a Product-Building and Distribution Architecture

Principal’s announcement does not identify one completed investment with a prospectus-like package of facts. It announces a program and a future suite.

The release does not tell us:

• the private-equity allocation;
• the size or composition of each liquidity sleeve;
• the complete fee stack;
• the carried-interest terms;
• the valuation policy or valuation lag;
• the leverage and subscription-line exposure;
• the identity and chartering jurisdiction of every CIT trustee;
• the authority to gate or delay participant transactions;
• the recordkeeper exit and portability terms;
• the allocation of fiduciary responsibility; or
• whether Principal’s recordkeeping economics improve when a plan selects a Featured Partner product.

Those are not minor details. Those details are the investment.

Dr. Brian Leite recently explained that a participant may see one fund while the fiduciary must oversee an ecosystem: sponsor, committee, CIT trustee, allocation manager, private-market manager, underlying funds, valuation process, liquidity sleeve and recordkeeper. His question is exactly right: who is actually responsible for what?

In litigation, I would add three more questions at every layer:

1. Who exercised discretion?
2. Who got paid?
3. What contemporaneous document proves the decision benefited participants rather than Principal and its distribution partners?

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Principal Was Already Layered Before It Added Private Equity

I first called Principal’s target-date structure a “Toxic Target Date” in 2022.

At that time, I identified a Principal target-date lineup using 13 underlying funds: five insurance-company separate accounts, four CITs and four proprietary mutual funds—with 25 share classes in the structure. Principal also disclosed exposure to nontraditional and alternative strategies, including real estate and hedge-fund strategies.

Now Principal proposes to add private equity through still more CIT-based structures.

Picture the possible chain:

Participant → target-date or managed-account solution → top-level CIT → private-market CIT or underlying fund → private-equity partnership → portfolio company.

Alongside that chain may sit:

• a Principal Life group annuity contract;
• Principal insurance separate accounts;
• private commercial real estate;
• private or less-liquid debt;
• stable-value contracts;
• public funds used as a liquidity sleeve;
• multiple managers and trustees; and
• Principal as recordkeeper and platform operator.

Every additional layer creates another place to hide fees, shift valuation responsibility, impose contractual restrictions or disclaim fiduciary status.

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Principal’s Private Real Estate Already Shows How the Liquidity Promise Can Fail

Principal does not need to imagine the liquidity problem. It already sells it.

Principal describes its U.S. Property Separate Account as an investment that primarily owns private-equity commercial real estate rather than exchange-traded securities. Its disclosure says investors may not be able to withdraw immediately because real estate sales are time-consuming and market conditions may delay or prevent them. Principal says a pre-existing contractual limitation in the group annuity contract may be used to satisfy withdrawal requests proportionately over time. (Principal disclosure).

Principal’s broader comparison of investment structures states that separate accounts are governed by group annuity contracts and overseen by state insurance departments. It also says Principal Life reserves the right to defer payments or transfers from its separate accounts under the group annuity contracts. (Principal investment-type comparison).

Now add private equity to that ecosystem.

What happens when the private-real-estate account is limiting withdrawals, private-credit marks are stale, private-equity distributions dry up and older workers are simultaneously moving or withdrawing money from the target-date fund?

Does the manager sell the publicly traded assets first?

If so, early redeemers get cash while the remaining participants are left with a more illiquid and difficult-to-value portfolio. That is a classic first-mover advantage and a potential participant-to-participant wealth transfer.

Calling the remaining liquid assets a “liquidity sleeve” does not solve this problem. It merely gives the problem a friendlier name.

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State-Regulated CITs Are the Escape Route

Principal’s announcement specifically says the new private-market products will use CITs. That matters.

Principal itself explains that CITs are not mutual funds, are exempt from registration under the Investment Company Act of 1940 and do not give investors the protections of that Act. Principal’s materials say state-chartered CITs are generally governed by state trust laws and state banking regulators, while others may be regulated by the OCC.

Existing Principal LifeTime Hybrid CIT materials identify Principal Global Investors Trust Company as trustee, Principal Global Investors as the affiliated adviser, and state that the adviser and other affiliates may receive fees. They also state that the CITs are not registered with the SEC, the State of Oregon or any other regulatory body. (Principal LifeTime Hybrid CIT disclosure).

That language does not mean the trust company operates without any legal oversight. But it does mean participants do not receive the same federal securities-law structure, public filings, independent-board framework and standardized disclosure regime they would receive in an SEC-registered mutual fund.

I recently proposed a simple CommonSense test for private assets in a 401(k):

Could this exact contract survive inside an SEC-registered mutual fund?

Same fees. Same leverage. Same GP valuation. Same liquidity. Same gates. Same carry. Same side letters. Same affiliated transactions. Same accounting.

If not, why is the answer to find a state-regulated CIT rather than to reject the contract for a participant-directed retirement plan?

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Principal’s “Featured Partner” Economics Need Discovery

Principal says the program will create value for financial professionals, plan sponsors and participants. It does not quantify who receives what value.

Principal’s platform disclosures show why fiduciaries cannot accept vague assurances. One Principal disclosure says some Featured Partner investments may qualify a plan for discounted recordkeeping fees if selected in a RetireView model. The same disclosure says an independent 3(21) fiduciary deems the option appropriate through a proprietary screening process and says the investment manager may not be paying Principal an annual inclusion fee.

“May not” is not a compensation disclosure.

Every plan considering one of these private-market products should demand:

• the complete 408(b)(2) disclosures;
• all direct and indirect compensation to Principal and every affiliate;
• platform, connectivity, data and distribution payments;
• any recordkeeping discount tied to product selection;
• compensation to the 3(21) fiduciary and the complete proprietary screening methodology;
• payments among the manager, trustee, recordkeeper and consultant;
• every underlying management fee, performance allocation and portfolio-company fee; and
• the percentage of gross investment gain ultimately retained by participants.

If selecting a Featured Partner product lowers a sponsor’s visible recordkeeping bill by moving compensation into an opaque investment layer, that is not a bargain. It is cost-shifting—and potentially a loyalty and prohibited-transaction problem.

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The Annuity Layer Creates a Separate ERISA Problem

Principal’s retirement platform is not merely an investment marketplace. Principal Life Insurance Company provides insurance products and plan administrative services, and its separate accounts are accessed through group annuity contracts.

Principal’s own materials state that all voting rights associated with mutual-fund shares held through a separate account belong to the separate account—not to the contractholders. They also state that Principal Life is the “Investment Manager” under ERISA for some separate-account assets.

That makes it essential to identify who owns the assets, who exercises authority, who receives the spread or other compensation and whether plan transactions benefit a party in interest or fiduciary.

My position remains that most fixed annuity arrangements in ERISA plans present prohibited-transaction problems. Adding private equity does not cure those problems. It can bury them under another CIT, another manager and another set of disclosures.

After Cunningham v. Cornell University, plan fiduciaries cannot responsibly wave away ERISA §406 concerns by assuming an exemption. They should identify the transaction and parties in interest, state the exemption being relied upon, and prove every condition—including reasonable compensation and adequate disclosure.

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Principal Is Selling Complexity—and Handing the Liability to Plan Sponsors

Principal boasts of $114 billion in target-date assets and more than two decades of supporting private assets on its recordkeeping platform. Scale does not make a conflicted or opaque structure prudent. It makes the potential participant exposure larger.

The old Principal disclosure I highlighted in 2022 said the ultimate decision whether a LifeTime Hybrid CIT is appropriate—and whether it may serve as a QDIA—belongs to the plan fiduciaries.

My translation then was blunt: if the sponsor is willing to buy the high-fee, high-risk product, Principal will tell the sponsor the liability is theirs.

Leite’s delivery-chain analysis makes that warning even more important. In a future lawsuit, each provider may point to its contract:

• the recordkeeper only processed transactions;
• the private-equity manager only managed the underlying assets;
• the allocation manager selected the sleeve;
• the valuation agent relied on manager-supplied data;
• the trustee relied on delegated expertise;
• the 3(21) adviser merely gave advice; and
• the plan committee made the final decision.

That is why fiduciaries must follow the authority, the money and the disclaimers before investing—not after participants are gated or losses finally appear in the marks.

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Questions Every Principal Client Should Ask Now

Before approving any Principal Featured Partner private-market product, I would demand written answers to these questions:

1. Identify every legal entity, contract, fund and fiduciary in the delivery chain.
2. Identify the trustee and chartering regulator for every CIT layer.
3. Show the private-equity, private-credit, private-real-estate and annuity exposure at every point on the glide path.
4. Show the age and source of every private valuation used in the daily unit price.
5. Show the liquidity sleeve, its opportunity cost and stress tests under simultaneous withdrawals and market declines.
6. State exactly when participant transactions can be delayed, partially completed, gated or suspended.
7. Reconcile every fee and dollar of compensation through every layer.
8. Disclose every recordkeeping discount or platform benefit tied to selecting the product.
9. Identify every affiliate and party in interest and the prohibited-transaction exemption relied upon.
10. Show a net-of-all-fees public-market-equivalent analysis for the entire target-date product—not merely the private-equity sleeve.
11. Explain whether the product can move to another recordkeeper in kind and what an exit would cost.
12. Produce the legal opinion explaining why this exact arrangement is prudent and compliant for this specific plan and participant population.

Conclusion: Principal Is Not Democratizing Private Equity—It Is Industrializing Opacity

Principal is combining its enormous retirement recordkeeping platform with private-market managers, trust companies, CITs, target-date funds, managed accounts and existing insurance structures.

That may be an impressive distribution machine. It is not automatically an appropriate retirement investment.

Participants already face Principal structures containing affiliated funds, CITs, insurance separate accounts, private commercial real estate and contractual withdrawal restrictions. Adding Apollo, Blackstone, Blue Owl, Carlyle, KKR and the rest of the private-equity industry does not simplify that structure. It adds valuation subjectivity, leverage, carried interest, long lockups and another layer of parties trying to get paid.

Principal’s own warning says participant transactions may be delayed, partly completed or temporarily unavailable.

Plan fiduciaries should believe that warning.

And plaintiffs’ lawyers should save it.

This article expresses the author’s opinions and is intended for education and fiduciary-governance discussion. It is not legal advice. The legal status of any product or transaction depends on its specific documents, parties, compensation and facts.

The Documents Fiduciaries Will Wish They Had When the Lawsuits Begin

By Christopher Tobe CFA, CAIA.
The CommonSense 401k Project

Dr. Brian Leite has performed an important service by showing what private equity inside a 401(k) really looks like. The participant may see one target-date fund or collective investment trust (CIT), but underneath that single line on the participant statement is an ecosystem: the plan sponsor, investment committee, CIT trustee, asset-allocation manager, private-market manager, underlying funds, valuation process, liquidity sleeve and recordkeeper.

That delivery chain is also a potential litigation chain.

My earlier private-equity due-diligence checklist focused on performance, fees, valuation, liquidity, complexity, conflicts and prohibited transactions. Leite’s new article, “Private Equity Has Entered the 401(k): Who Is Actually Responsible for What?”, adds the implementation question that fiduciaries cannot avoid: Who actually controls each function, who gets paid at each layer, and who bears the loss when the machinery fails?

The Department of Labor’s 2026 proposed rule may be advertised as a safe harbor, but it is not a free pass. It emphasizes that ERISA prudence remains a process-based obligation and identifies performance, fees, liquidity, valuation, benchmarking and complexity as relevant considerations. The Department also repeats the longstanding requirement that a fiduciary consider relevant facts and circumstances and then act accordingly. A committee that checks six boxes without understanding how those risks interact may be creating a plaintiff’s exhibit, not a defense. (DOL proposed rule, 91 Fed. Reg. 16088).

This new checklist is written from the perspective of the questions plaintiffs, regulators and forensic experts are likely to ask after losses, gates, stale valuations or excessive fees become visible.

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I. Map the Entire Delivery Chain—and the Fiduciary Gaps

□ 1. Identify every entity and every discretionary function

Prepare a written responsibility map identifying:

• the named plan fiduciary and investment committee;
• the appointing fiduciary;
• the target-date or asset-allocation manager;
• the CIT trustee; and what state regulates them
• the private-equity manager and submanagers;
• each underlying or feeder fund;
• the valuation agent and anyone with override authority;
• the recordkeeper and transaction processor;
• the party controlling the liquidity sleeve; and
• every affiliate receiving direct or indirect compensation.

Litigation questions

• Who selected and can remove each manager?
• Who sets the private-equity allocation?
• Who approves or challenges valuations?
• Who can impose a gate, delay a transfer or alter the liquidity sleeve?
• Which decisions were delegated, in what document and to whom?
• Did any important function fall into a gap where every provider disclaimed responsibility?

Documents to retain: trust documents, participation agreements, investment-management agreements, delegation resolutions, service-provider contracts, side letters, committee charters, responsibility matrices and all fiduciary-status representations or disclaimers.

□ 2. Test substance, not titles

Calling an entity a “trustee,” “consultant,” “platform,” or “non-fiduciary service provider” does not answer who exercised discretion or control. Determine what each party actually did.

Red flag: The private-market manager selects the underlying funds, supplies the marks, earns fees from those funds and disclaims fiduciary status, while the nominal trustee lacks the staff or data to challenge it.

□ 3. Document the selection and monitoring of delegates

Delegating investment authority does not erase the appointing fiduciary’s duty to select and monitor the delegate. Minutes should show the delegate’s qualifications, independence, resources, conflicts, valuation capability, liquidity expertise and actual monitoring standards—not merely its brand name or assets under management.

Red flag: Minutes recite “institutional quality” or “best in class,” but contain no independent analysis and no measurable removal criteria.

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II. Prove That the Committee Understood the Product

□ 4. Require a plain-English structure memorandum

Before approval, every voting fiduciary should be able to explain:

• what the plan owns at every layer;
• which assets are publicly priced and which are manager-marked;
• how and when participants can enter or leave;
• how capital calls and distributions are handled;
• where leverage exists;
• how many layers of fees apply; and
• what happens in a plan termination, recordkeeper conversion or market crisis.

Litigation question: If committee members cannot explain the structure in deposition, what evidence shows they understood it when they voted?

□ 5. Make expertise a threshold issue

The threshold question is not whether private equity is fashionable or available. It is whether this committee has the information, skill and monitoring capacity to oversee the complete arrangement. If outside expertise is required, document how the adviser was selected, paid and independently tested.

Red flag: The same consultant that recommended the product, receives revenue connected to it, operates an affiliated product or is owned by a private-equity firm.

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III. Daily Pricing Is Not Daily Liquidity

□ 6. Separate the daily unit price from the age of the underlying marks

For each private asset, disclose the valuation date, reporting lag, valuation method and whether the daily CIT value is carrying forward an older manager estimate. A daily calculated number is not necessarily a current market-clearing price.

Litigation questions

• How old were the private marks used in each day’s participant transactions?
• Were public assets marked down immediately while private assets remained stale?
• Did participants buy, sell or receive distributions at values later written down?
• Who gained and who lost from the valuation lag?

□ 7. Require genuinely independent valuation controls

Determine who provides the initial valuation, who tests it, who can override it, how conflicts are handled and whether an unaffiliated party performs meaningful review. Obtain the valuation policy and override history—not merely a statement that “independent valuation procedures exist.”

Red flag: The manager whose compensation increases with NAV supplies the valuation and the trustee almost never challenges it.

□ 8. Quantify participant-to-participant wealth transfers

Model whether stale marks allow exiting participants to receive more than the realizable value of their share, leaving remaining participants with the loss. Test the reverse problem for new contributions. This is especially serious in a default fund, where participants did not affirmatively choose the exposure.

Documents to retain: dated asset marks, override logs, subsequent write-downs, participant-level cash flows, NAV files, pricing-error reports and restitution decisions.

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IV. Stress the Liquidity Sleeve Until It Breaks

□ 9. Demand the assumptions behind the liquidity sleeve

Identify the sleeve’s size, composition, expected return, rebalancing rules and reliance on contributions, withdrawals, transfers, retirements and the behavior of investors from other plans in the same CIT.

Red flag: The liquidity model assumes normal participant flows, stable markets and uncorrelated withdrawals—the exact assumptions most likely to fail together.

□ 10. Test simultaneous market and participant stress

At minimum, model:

• a major public-market decline;
• elevated retirements and withdrawals;
• employer layoffs or bankruptcy;
• termination of one or more participating plans;
• a recordkeeper change;
• a freeze in private realizations;
• capital calls continuing while distributions stop; and
• other large CIT investors redeeming at the same time.

Document results, remediation triggers and the individual authorized to act.

□ 11. Identify the first-mover advantage

Determine whether liquid public assets are sold first to meet withdrawals, leaving remaining participants with a more concentrated, leveraged and illiquid portfolio. Specify who absorbs dilution, transaction costs and later write-downs.

□ 12. Put every gate and restriction in front of the committee

List all contractual or discretionary authority to delay, limit, suspend or price-adjust transfers and redemptions. Explain how restrictions interact with participant distributions, QDROs, hardship withdrawals, required minimum distributions, plan termination and mapping during a provider change.

Litigation question: Were participants promised ordinary daily access while material gate authority was buried several contractual layers below the fund description?

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V. Find Every Dollar of Fees and Compensation

□ 13. Calculate the total economic cost through every layer

Do not stop at the stated expense ratio of the top-level CIT or target-date fund. Include:

• trustee and CIT expenses;
• target-date or allocation-management fees;
• private-market management and performance fees;
• underlying-fund and feeder-fund expenses;
• transaction, monitoring, financing and broken-deal fees;
• subscription-line and leverage costs;
• recordkeeping, platform and distribution compensation;
• consultant, OCIO and placement payments;
• affiliate compensation; and
• the opportunity cost and management cost of the liquidity sleeve.

Report costs in dollars, basis points and as a percentage of gross investment gain retained by intermediaries.

□ 14. Reconcile disclosures against actual cash flows

Compare 408(b)(2) disclosures, Form 5500 reporting, audited financial statements, fund documents, capital-account statements, invoices and portfolio-company payments. Identify fees embedded in NAV rather than separately reported.

Red flag: The plan says it relied on a disclosed expense ratio but cannot produce a reconciliation of total compensation across the structure.

□ 15. Trace party-in-interest and affiliate payments

Build a payment map for the recordkeeper, consultant, trustee, managers, affiliates and placement agents. Determine whether an allocation, retention or removal decision affected any fiduciary’s or service provider’s compensation.

Prohibited-transaction questions

• Did plan assets flow to a party in interest or its affiliate?
• Did a fiduciary act on both sides, use its authority for its own account or receive consideration connected to a plan transaction?
• What exemption is claimed?
• Can the defendants prove every condition of that exemption—including reasonable compensation and required disclosure?

After Cunningham v. Cornell University, fiduciaries should assume that prohibited-transaction exemptions will matter in litigation rather than treating them as an afterthought.

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VI. Reject Performance Theater

□ 16. Do not compare IRR directly with public-market returns

Require PME and participant-wealth analyses based on actual cash flows. Identify the effect of subscription lines, dividend recapitalizations, leverage, NAV smoothing and the timing of exits. All comparisons must be net of every fee and the cost of liquidity support.

□ 17. Benchmark the participant’s entire product

The relevant comparison is not whether a selectively measured private sleeve beat a chosen benchmark. Compare the entire target-date fund, CIT or managed account against reasonably available, investable alternatives after fees, liquidity drag, leverage and valuation risk.

Use multiple reference points where appropriate, but do not let a “mosaic” of benchmarks become a device for avoiding a clear comparison to a low-cost public implementation.

□ 18. Preserve rejected alternatives and the ex ante analysis

Document the products considered, bids obtained, assumptions used and reasons less expensive and more liquid alternatives were rejected. Benchmarks and success criteria should be selected before results are known.

Red flag: The benchmark, peer group or time period changes after underperformance.

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VII. Test Portability, Defaults and Participant Harm

□ 19. Analyze recordkeeper dependence and exit costs

Determine whether the investment can move to another recordkeeper in kind, must be liquidated, can be gated, or gives the incumbent recordkeeper bargaining power. Price the expected and stressed cost of an exit before entry.

□ 20. Apply a higher practical standard to defaulted participants

Private equity placed inside a target-date QDIA reaches participants who may never have chosen it, understood it or known it was there. Evaluate the plan’s actual population: age, turnover, withdrawal patterns, loan usage, retirements, layoffs and concentration in the default. Do not substitute a generic industry demographic study for plan-specific data.

□ 21. Require understandable participant disclosure

Disclosure should plainly state the private allocation, valuation lag, liquidity mechanism, possible gates, leverage, total layered cost and conflicts. A glossy description of “institutional access” is not a risk disclosure.

Litigation question: Would a reasonable participant understand that a daily displayed value may include old private marks and that daily operation depends on a finite liquidity sleeve?

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VIII. Build a Monitoring and Exit Record Before Trouble Arrives

□ 22. Adopt measurable watch-list and removal triggers

Triggers should include:

• valuation exceptions or widening secondary-market discounts;
• liquidity-sleeve breaches;
• gates or delayed transactions in any underlying vehicle;
• leverage increases;
• fee or affiliate changes;
• manager turnover;
• regulatory, litigation or audit findings;
• persistent PME underperformance; and
• deterioration in portability or recordkeeper support.

Assign the person responsible, the reporting frequency and the required response.

□ 23. Monitor the interaction of all six risk factors

Fees, performance, liquidity, valuation, benchmarking and complexity are not independent boxes. A larger liquidity sleeve may reduce returns and increase cost. Stale valuation may suppress reported volatility and distort benchmark comparisons. More provider layers may raise both fees and monitoring risk. Minutes must show that the committee analyzed these interactions.

□ 24. Pre-negotiate the exit

Before investing, document who can terminate each provider, notice periods, redemption queues, gates, in-kind distribution rights, secondary-sale procedures, valuation adjustments, participant communication duties and responsibility for losses or pricing errors.

Red flag: The entry presentation is detailed; the exit plan is a sentence saying liquidity is “expected” to be available.

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IX. The Litigation File: Minimum Documents Fiduciaries Should Be Able to Produce

A fiduciary that approves private equity in a 401(k) should expect a request for at least the following:

• all committee minutes, decks, notes and emails concerning selection and monitoring;
• the complete provider and fiduciary responsibility map;
• every contract, trust document, side letter and fiduciary disclaimer;
• requests for proposals, bids and rejected alternatives;
• all fee disclosures and actual compensation reconciliations;
• valuation policies, dated marks, override logs and pricing-error records;
• liquidity models, assumptions, stress tests and breach reports;
• participant demographic and transaction-flow analysis;
• performance files, PME calculations and benchmark-change history;
• conflict questionnaires and affiliate/payment maps;
• 408(b)(2), Form 5500 and audit materials;
• recordkeeper portability and conversion analyses;
• watch-list reports and evidence of action taken; and
• the written exit plan.

If those documents do not exist, generic minutes drafted by counsel after a quarterly presentation will not recreate the investigation.

Conclusion: One Fund on the Statement, Many Defendants in the Complaint

Leite is right that fiduciary governance must cover the complete arrangement. My additional point is blunt: every unexplained handoff in that arrangement can become a litigation theory.

Who controlled the allocation? Who supplied the valuation? Who tested it? Who controlled liquidity? Who got paid? Who could remove the manager? Who knew the assumptions were failing? Who documented the reasonably available alternatives? And who was supposedly responsible when every provider’s contract pointed somewhere else?

Private equity does not become liquid, transparent, cheap or objectively valued because it is placed inside a poorly regulated state bank CIT and wrapped in a target-date fund. Nor does product availability establish fiduciary prudence. A platform’s willingness to process the product is not a legal opinion, a valuation audit, a liquidity guarantee or an exemption from ERISA’s prohibited-transaction rules.

The sales pitch will emphasize access. The lawsuit will emphasize process, conflicts, documents and losses. Fiduciaries should complete this checklist before participants’ retirement money becomes the test case.

This checklist is for fiduciary-governance and educational purposes and is not legal advice. The application of ERISA depends on the facts, governing documents, parties, transactions and available exemptions.

Private equity firms can originate the loans, own the borrowers, value the assets, collect the fees—and leave retirement savers holding the insurance-company promise

A major new paper by George Washington University Law School’s Michael Rand and New England Law’s Melinda Roth helps expose what I believe is one of the most dangerous developments in American retirement finance: life insurers are being turned into captive funding machines for private credit.

Their paper, “Private Credit’s Private Conflicts: Agency Costs, Conflicts of Interest, and the Convergence of Private Equity and Private Credit,” describes giant alternative-asset managers that simultaneously operate:

• private-equity funds;
• private-credit funds;
• direct-lending vehicles;
• Business Development Companies;
• insurance subsidiaries; and
• affiliated financing and valuation platforms.

The historical separation between owner, lender, investment manager and fiduciary is disappearing. In its place is a vertically integrated Wall Street machine that may originate a loan, own the borrower, finance the borrower, restructure the debt, determine the loan’s value and collect fees at every level.

Then the resulting private-credit assets are deposited into a life insurer whose annuities are sold to workers and retirees as “guaranteed.”

That is not diversification.

That is not independent underwriting.

That is not transparent price discovery.

In my opinion, it is a giant conflict-of-interest machine resting on the backs of annuity owners, 401(k) participants, teachers in 403(b) plans and retirees whose pensions have been transferred to insurance companies.

Life insurance has become the cheap-money engine for private credit

Rand and Roth describe how private-capital mega-firms have acquired or partnered with insurers to obtain what they call stable, low-cost insurance float. They specifically point to Apollo and Athene, KKR and Global Atlantic, and Blackstone’s insurance partnerships.

This is the heart of the business model.

The insurer collects billions of dollars from annuity owners. Those long-term promises provide affiliated asset managers with an enormous pool of comparatively cheap and predictable money. The asset manager then puts that money into private loans, structured securities, collateral loans and other assets that it may originate, manage and value itself.

The private-capital firm collects the fees and spreads today.

The insurance company makes promises lasting for decades.

The annuity owner bears the ultimate credit and liquidity risk.

Rand and Roth cite an IMF warning that an increasing share of insurers’ private-credit exposure is being sourced through affiliated managers or private-credit partnerships. The IMF says these arrangements require special attention because of conflicts of interest and lack of transparency.

I would put it more bluntly: When the same financial organization effectively sits on both sides of the transaction, the word “affiliate” may matter more than the credit rating printed on the investment.

The manager may be paid to avoid admitting the loan is bad

Rand and Roth identify a fundamental private-credit valuation conflict.

Unlike a publicly traded bond, a private loan does not trade every day. There may be no observable market price forcing the manager or insurer to recognize deterioration immediately. The manager often determines the value of the very assets on which its fees are calculated.

That creates an obvious incentive to delay write-downs.

The paper explains how payment-in-kind interest, covenant-lite lending and “amend-and-extend” restructurings can postpone default recognition. A borrower that cannot pay cash may be allowed to add more debt to the loan balance. The manager can record income it has not actually received, maintain the loan near its previous reported value and continue collecting fees.

This is Wall Street’s version of extend and pretend.

The loan may look like 100 cents on the financial statement while an actual buyer might pay only 70 or 80 cents—or perhaps far less during a crisis. As I previously wrote, some private-credit investors would rather remain trapped and hide a 26% loss than sell and reveal the cash value of the investment.

That accounting game becomes much more dangerous inside an insurance company.

An insurer must eventually produce cash to pay death benefits, annuity withdrawals, pension benefits and contract surrenders. It cannot pay a retiree with a manager’s estimated NAV. It cannot meet a cash obligation with PIK interest that was never received.

When withdrawals rise or confidence falls, the difference between reported value and cash value stops being theoretical.

Ratings agencies can remain behind the curve

The insurance industry’s standard response is that its private-credit holdings are investment grade and that the insurer itself has a strong financial-strength rating.

That response gives me little comfort.

Private assets do not generate the constant price signals produced by public markets. Ratings agencies frequently depend upon information supplied by issuers, asset managers and modeling firms. A structured private asset may receive a high rating based upon assumptions that have never been tested through a severe liquidity crisis.

Ratings may therefore confirm the accounting model instead of challenging it.

If the asset remains near par on the insurer’s books, the borrower has not formally defaulted, PIK interest is still being accrued and the manager has amended the loan to avoid recognizing trouble, what exactly forces an immediate downgrade?

Usually nothing.

The downgrade may arrive only after the economic deterioration has already occurred. By then, a retirement plan holding an annuity may be trapped by surrender restrictions, market-value adjustments, transfer limitations or regulatory orders.

This is why I have repeatedly argued that annuities used in retirement plans need enforceable downgrade provisions. Participants must be allowed to exit before rehabilitation or insolvency—not years afterward when a regulator finally announces that the insurer is in trouble.

A rating is not liquidity. A rating is not a market price. And a rating issued after the exits have closed is not participant protection.

Annuities in ERISA plans multiply the conflicts

These dangers are especially serious when an insurer’s annuity is placed inside a 401(k) or 403(b) plan.

The participant is not receiving a diversified portfolio of bonds. In a general-account annuity, the participant is receiving the unsecured promise of one insurance company. The insurer controls the assets, selects the affiliated managers, determines the investment strategy and generally keeps the spread between its investment earnings and the amount credited to participants.

The participant commonly receives little meaningful disclosure concerning:

• the insurer’s actual investment spread;
• private-credit origination and management fees;
• affiliate transactions;
• internal valuation methods;
• PIK income;
• offshore reinsurance;
• collateral-loan concentration;
• the cash value of illiquid assets;
• surrender restrictions; or
• what happens after a financial-strength downgrade.

In my opinion, this is not merely a prudence problem. It raises ERISA prohibited-transaction questions.

ERISA does not simply ask whether an investment produced an acceptable return. Section 406 addresses transactions between plans and parties in interest, the use of plan assets for a party in interest, fiduciary self-dealing, divided loyalties and compensation received from parties dealing with a plan.

When an insurer or affiliated manager is already providing services to the plan, controls the investment assets, directs money into affiliated private-credit structures, values those assets and receives compensation from the arrangement, fiduciaries should not assume this is an ordinary investment purchase.

The prohibited-transaction analysis should come first.

The industry should have to identify every relevant party in interest, every affiliate, every layer of compensation and every exemption on which it relies. It should not be allowed to hide behind the word “spread” or bury the conflicts inside an insurance-company general account.

Rand and Roth recommend that ERISA’s procedural protections should not cover private-market investments managed by integrated private-equity and private-credit platforms unless there is genuine structural separation, independent valuation oversight and an audit confirming that affiliated credit and equity funds do not hold opposing positions in the same borrower.

That is a minimum safeguard. I would go further for annuities: no adequate disclosure, no independent valuation, no downgrade exit and no demonstrated prohibited-transaction exemption should mean no place in an ERISA plan.

Security Benefit demonstrates why this is not academic

I recently wrote that Security Benefit may be the greatest major-carrier annuity risk since AIG.

Security Benefit reported nearly $67 billion in admitted assets and an extraordinary concentration in collateral loans. It reportedly held 47% of all collateral loans held by the entire U.S. life-insurance industry in 2024.

A relatively modest reduction in the value of a portfolio that large could consume billions of dollars of apparent balance-sheet protection. A 10% reduction in Security Benefit’s reported assets would be approximately $6.7 billion.

Private-credit accounting can postpone the recognition of such losses. It cannot eliminate them.

The broader federal investigation involving Mark Walter’s insurance empire has already shown why affiliations matter. Delaware Life reportedly reclassified its affiliated investments from less than 5% to approximately 42% of assets. Investigators are examining whether intermediary structures obscured connections between insurance-funded loans and Walter-related businesses.

That does not prove Security Benefit is insolvent. It does prove that regulators, ratings agencies, fiduciaries and annuity purchasers should stop accepting “unaffiliated” as though it were a self-proving fact.

Rand and Roth’s paper explains the underlying architecture: overlapping private-equity, private-credit, insurance and financing entities can create conflicts that existing securities, fiduciary, corporate and contract law were never designed to handle.

State guaranty associations will not repair a private-credit valuation hole overnight

The final sales pitch is always the same:

Don’t worry. The annuity is protected by a state guaranty association.

As I explained in “State Guaranty Associations Behind Annuities Are Still a Joke”, this is not remotely equivalent to FDIC insurance.

State guaranty associations are primarily post-funded. They generally obtain money by assessing surviving insurers after a failure. Coverage is capped, divided among different states and dependent upon lengthy rehabilitation or liquidation proceedings.

The system does not maintain an enormous national pool of cash ready to replace a multibillion-dollar hole immediately.

A rescue is also much harder when the failed insurer’s assets consist of private loans, affiliated investments, structured securities and offshore reinsurance recoverables that cannot be independently valued or sold without a substantial discount.

An assuming insurer is not going to accept questionable private assets at the failed company’s claimed value. It will demand cash, additional assets or protection against future losses.

Where will that money come from?

Eventually it may come from assessments against other insurers—many of which may own the same kinds of private-credit assets and may be suffering from the same market conditions. The guaranty system could therefore extract liquidity from surviving insurers at precisely the worst moment.

Private equity collects the fees in good times. Other insurers, policyholders and potentially taxpayers inherit the bill when the strategy collapses.

A “guaranteed” annuity is only as good as the hidden assets and conflicted institutions behind it

My earlier analysis found that a supposedly “guaranteed” annuity may have an economic value of only 70 or 80 cents on the dollar. Rand and Roth help explain why that discount may not appear on an insurer’s financial statements until it is too late.

They expose a system in which:

• private-equity owners control borrowers;
• affiliated credit funds finance those borrowers;
• managers restructure their own loans;
• valuation agents price illiquid assets;
• PIK interest substitutes for cash;
• fees are calculated from those valuations;
• insurers provide the cheap funding; and
• annuity owners receive the final promise.

Calling the resulting product “guaranteed” does not make these conflicts disappear.

It merely moves them behind the insurance-company curtain.

Retirement fiduciaries must look through the annuity contract and examine the actual assets, affiliates, compensation, valuation methods, reinsurance arrangements and liquidity supporting the promise. They must demand an enforceable right to exit after material deterioration or downgrade. They must also conduct a real ERISA prohibited-transaction analysis instead of accepting the insurer’s assurance that everything has been bundled into an undisclosed spread.

Rand and Roth have provided an important legal map of the conflicts. Now retirement regulators and fiduciaries must stop pretending those conflicts end when private credit enters an insurance company.

They do not end.

They become the annuity owner’s problem.

My comment connects the federal rulemaking to recurring transparency, access, fee, valuation and governance problems in public pensions

By Christopher Tobe, CFA, CAIA | The Commonsense 401k Project

I have submitted a formal comment to the Securities and Exchange Commission opposing the proposed rescission of Investment Advisers Act Rule 206(4)-5, the federal pay-to-play rule governing investment advisers that seek or hold state and local government business.

The SEC’s September 3, 2026 proposal would remove the rule’s two-year compensation timeout following certain covered political contributions. It would also eliminate Rule 204-2(a)(18), which requires covered registered advisers to preserve specified records concerning associates, government clients, contributions, political action committees and paid solicitors. SEC Chair Paul Atkins has said the current rule is overly prescriptive, burdensome and capable of imposing disproportionate consequences for small or unrelated contributions. The proposal states that antifraud law, fiduciary duties, compliance programs and codes of ethics are likely sufficient to address pay-to-play risk.

I dispute that assessment. In my submitted comment, I explain that general antifraud authority operates mainly after misconduct and harm have occurred, whereas Rule 206(4)-5 provides an objective preventive restraint. I also argue that deleting the associated records would make later detection and investigation more difficult.

What Pension Fight Club shows across party lines

The public-pension documentary Pension Fight Club provides broader context for my submission. I appear in the film alongside current and former trustees, elected officials, union leaders, teachers, journalists, academics and forensic investigators from multiple states and political backgrounds. Again and again, the film returns to the same governance failures: limited access to investment contracts, difficult-to-measure fees, private-market valuation, customized benchmarks, consultant conflicts and resistance encountered by trustees and beneficiaries seeking information.

While no one can prove pay to play due to the lack of Transparency around Citizens United there is a consensus that this Dark Money has a significant influence in the background.

Its relevance to the SEC proceeding is evidentiary and structural: public-pension decisions can involve enormous financial mandates, complex chains of influence, confidential contracts and limited transparency. Those features make an explicit exchange of money for business difficult to prove—and make preventive records more important.

The people highlighted in the film ask the questions I have been asking for years: What is the pension paying? What is it receiving? Who selected the manager? Who evaluates the consultant? Can trustees see the governing contract? Are performance and risk being measured against credible standards? My SEC comment places those questions within the narrower framework of political contributions and adviser selection.

Influence can operate outside a direct campaign contribution

In a separate Commonsense 401k Project analysis, I described financial-industry participation in organizations serving pension trustees, administrators, treasurers, auditors and other public financial officials. I identified sponsorships, commercial memberships, conference access, speaking opportunities, advisory roles and networking benefits offered by organizations including NCPERS, NCTR, NASRA, NAST, NASACT, SFOF, NASP and CII.

I expressly stated that ordinary membership or sponsorship does not prove corruption, a quid pro quo or an improper mandate. My point is that paid access can create a structural conflict when firms competing for public assets also help finance the organizations that educate and convene the officials overseeing those assets. I called for disclosure of payers, amounts, sponsorship tiers, conference participation, speaking opportunities and subsequent public-pension business.

That distinction matters for the SEC debate. Rule 206(4)-5 addresses specified political contributions and solicitation practices; it does not regulate every form of commercial access. The surrounding ecosystem nevertheless affects the economic baseline against which the Commission is evaluating repeal. Political contributions are one channel within a much larger market for proximity to decision-makers.

Ohio and Kentucky: access, appointments and infrastructure investing

My recent Ohio and Kentucky articles examine relationships among public officials, pension governance, financial networks and data-center investment policy. I discuss SFOF connections, the roles of state treasurers and auditors, the Ohio STRS dispute, and public incentives or pension capital associated with data-center development. The conclusions in those articles are mine.

For this SEC rulemaking, I focus on narrower factual questions: Which officials can appoint or influence pension decision-makers? Which financial firms or affiliated organizations fund conferences, policy networks or campaigns involving those officials? Which firms later seek advisory, investment or infrastructure mandates? What records permit regulators and the public to reconstruct the sequence?

My submitted comment argues that a federal recordkeeping floor is valuable because state systems differ in their definitions, disclosure rules, procurement practices and enforcement resources. I offer the Ohio and Kentucky material as a reason to examine those gaps, not as proof that every identified relationship violated Rule 206(4)-5.

Private equity, Apollo and the transparency problem

In several Commonsense articles, I address Apollo, its public-pension relationships, Leon Black’s documented financial relationship with Jeffrey Epstein, and calls for pension systems to reconsider or disclose their exposure. I also discuss Senator Ron Wyden’s investigations and the transparency of financial relationships involving Epstein.

In my opinion, these materials raise serious reputational, due-diligence and governance questions. They do not, standing alone without full transparency, establish that Apollo obtained a particular public-pension mandate through a covered political contribution. Their relevance here is that large private-market mandates combine valuable fees, confidential partnership structures, long lockups and limited public visibility. In my view, removing a preventive federal rule and standardized contribution records would reduce accountability in a market already difficult to examine.

I have also criticized the absence of some public pension funds from securities cases involving Apollo-related losses and questioned whether pension fiduciaries investigated or disclosed their decisions adequately.

Crypto supplies a documented warning about concealed political money

The SEC comment cites the FTX experience as evidence that sophisticated financial actors can route political money through intermediaries. The U.S. Department of Justice stated when Samuel Bankman-Fried was sentenced that he had used customer funds, among other purposes, to make millions of dollars in political contributions to candidates from both major parties. Former FTX executive Ryan Salame was separately sentenced after admitting participation in contributions intended to obscure Bankman-Fried’s association and curry political favor.

Those criminal cases did not concern selection of a public-pension adviser. Their relevance is limited but concrete: campaign-finance records may not reveal the true economic source of a contribution without additional records, investigation and anti-circumvention rules. In my Indiana crypto article, I extend that concern to state retirement policy; the political characterizations there are my opinion.

Fees, consultants, benchmarks and staff incentives

My other articles address public-pension consultants, private-market fees, performance reporting, customized benchmarks and staff incentive compensation. My Ohio STRS work alleges that competing performance measures were used and that the more favorable number affected bonuses. I have called for consistent, investable and independently verifiable benchmarks.

These issues are not themselves pay-to-play violations. They are relevant because they affect the consequences of manager selection. If a politically connected or otherwise favored manager receives a mandate, opaque fee reporting, subjective valuation and slow or customized benchmarks may make it harder to determine whether the decision harmed beneficiaries. Consultant conflicts can further weaken the independence of the selection and monitoring process.

What the submitted SEC comment requests

My filing asks the SEC to retain Rule 206(4)-5 and Rule 204-2(a)(18). I also offer narrower alternatives if the Commission concludes that the current rule imposes excessive consequences in technical cases. Those alternatives include increasing de minimis thresholds, improving the cure process, tailoring the lookback for non-supervisory employees, using tiered sanctions and creating clearer guidance concerning which public offices are covered.

My central claim is straightforward: the Commission should compare targeted amendments with complete rescission before removing both the preventive rule and its records. The SEC proposal is subject to public comment under File No. S7-2026-31.

Sources and related reading

SEC proposing release, IA-6994, File No. S7-2026-31

SEC Chair Paul Atkins statement on the proposed rescission

Pension Fight Club is now streaming

Wall Street’s public-pension influence machine

Ohio STRS: Follow the money and the SFOF/Ramaswamy connections

Wyden’s Epstein report and pension exposure to JPMorgan and Apollo

Public-pension performance standards and benchmarks

Consultants, conflicts and public-pension performance

Indiana crypto and retirement-plan legislation

The culture of redactions in pensions and private markets

DOJ: Samuel Bankman-Fried sentenced to 25 years

DOJ: Ryan Salame sentenced to 90 months

Congress has found the supposed problem with complicated insurance products: the SEC requires insurers to disclose too much.

Representatives Zach Nunn of Iowa (Athene, Principal)  and Brittany Pettersen of Colorado (Empower) have introduced the deceptively named CLEAR Forms Act, H.R. 10234. The insurance-industry-backed legislation would require the SEC to create new registration forms for registered index-linked life insurance, contingent deferred annuities and other registered non-variable insurance contracts.

Its most dangerous provision instructs the SEC to “limit the disclosures” about an insurance company to those required by existing Form N-4 or Form N-6.

That could make it harder—not easier—to uncover the next Mark Walter.

Walter’s insurers show why company disclosure matters

Walter-related insurers—including Delaware Life, Clear Spring Life, formerly Guggenheim Life, and Security Benefit—sell billions of dollars of fixed, indexed and variable annuities.

Their SEC filings have revealed information consumers could never learn from glossy annuity brochures.

A huge SEC registration statement for the Gainbridge OneUp registered index-linked annuity disclosed that:

• Clear Spring retained index risk on certain fixed indexed annuities;
• Clear Spring purchased the derivatives and performed the hedging;
• Gainbridge paid Clear Spring an allowance tied to the “option budget”;
• The companies had reinsurance, tax-sharing, administrative-services and books-and-records agreements; and
• Affiliates provided accounting, actuarial, marketing and operational services.

That is what indexed-annuity disclosure should reveal. The index is merely  a derivative swap over the top of an annuity. The important questions are who holds the money, who manages it, who receives the fees and what risks sit on the insurer’s balance sheet. Read the SEC filing.

Delaware Life proves these are not theoretical concerns

In 2026, Delaware Life acknowledged that its audited 2025 financial statements had been delayed. It then offered rescission rights for certain payments into SEC-registered variable-annuity and variable-life contracts. Read the rescission filing.

Separately, Delaware Life and Clear Spring disclosed major errors in how Walter-related private-credit investments had been classified. Delaware Life’s reported affiliated exposure reportedly rose from less than 5% to approximately 40% of invested assets after reclassification.

This is exactly why consumers need more information about the insurer—not merely a shorter explanation of caps and participation rates.

The bill protects the wrong party

The CLEAR Forms Act says purchasers should receive information needed to make “knowledgeable decisions.” But it then places a statutory ceiling on what the SEC may demand about the issuing insurance company. Read H.R. 10234.

A future prospectus could explain:

• The index;
• The buffer;
• The participation rate;
• The surrender period; and
• The lifetime-income formula.

Yet it could provide far less useful information about:

• Ultimate ownership and control;
• Affiliated private-credit investments;
• Loans to companies controlled by the insurer’s owner;
• Affiliate management and origination fees;
• Offshore reinsurance;
• Assets without observable market prices;
• Internal-control failures; and
• The insurer’s real liquidity risk.

In other words, the customer could understand the product’s formula while remaining blind to the financial empire backing the promise.

Traditional indexed annuities are already largely hidden

The bill does not directly cover most traditional fixed indexed annuities because they are already exempt from SEC registration and can hide behind weak state regulation.

That makes the legislation even more troubling. Congress should be extending securities-level transparency to more general-account products—not importing the weaker insurance-disclosure model into federally registered products.

Security Benefit’s Foundations, Strategic Growth and Total Value annuities and Delaware Life’s Retirement Stages and DualTrack products illustrate the problem. Customers receive contracts, illustrations, rate sheets and sales brochures, but not the comprehensive public-company disclosure expected for ordinary securities.

The insurer can change future caps, participation rates and spreads. The purchaser remains locked in by surrender charges. The company keeps the investment spread while the customer bears its single-entity credit and liquidity risk.

Bottom line

The Walter investigation was not triggered because an annuity participation rate was confusing.

It arose from questions about ownership, affiliated transactions, private credit and the use of insurance-company assets across a sprawling financial empire.

Those are precisely the disclosures Congress should strengthen.

The next Mark Walter will not be exposed by a “consumer-friendly” summary prospectus. He will be exposed by following the money through insurers, asset managers, affiliates, reinsurance vehicles and private loans.

The CLEAR Forms Act could make that trail harder to follow.

It should be renamed the Concealing Loans, Entities, Affiliates and Risks Act.

Index Annuities Are a Scam

Security Benefit May Be the Biggest Annuity Risk Since AIG—and the State Guaranty System Is Not Ready

State Guaranty Associations Behind Annuities Are Still a Joke—And Private Equity Has Made the Joke More Dangerous

Waiting until Security Benefit is officially declared insolvent to discuss the danger would be absurd. By then, annuity owners would already be trapped, regulators would already have imposed restrictions, questionable assets would already be difficult to sell, and the state guaranty associations would be scrambling to construct a rescue with money they do not presently possess.

Security Benefit may be the largest major-carrier annuity risk since AIG.

The company reported approximately $66.83 billion in admitted assets and $59.53 billion in liabilities as of June 30, 2026. Behind those reassuring statutory numbers lies an extraordinary concentration in collateral loans, private assets and transactions connected to the sprawling sports-finance-insurance empire built around Guggenheim, Todd Boehly, Mark Walter and their former associates.

Security Benefit reportedly held 47% of all collateral loans held by the entire U.S. life-insurance industry in 2024. One of those loans—approximately $185 million—was linked to Boehly’s interest in the Los Angeles Dodgers. Regulators have warned that collateral loans are being used to obtain lower capital charges than would apply if insurers held the underlying risky assets directly. Security Benefit and the Kansas Insurance Department successfully pushed the NAIC to delay stronger capital rules until 2027. Financial Times

That is not a minor accounting disagreement. It goes directly to whether Security Benefit’s reported capital adequately reflects the economic risks supporting tens of billions of dollars of annuity promises.

The federal investigation is a warning that cannot be ignored

The Justice Department and SEC investigations into Mark Walter’s insurance empire concern allegations that billions of dollars of apparently “unaffiliated” private-credit investments may actually have supported Walter-connected businesses.

Delaware Life subsequently restated its affiliated investments from less than 5% to approximately 42% of assets. Federal prosecutors reportedly are examining whether intermediary companies obscured the financial connections between insurer-funded loans and Walter’s broader business empire. Reuters

Security Benefit has not been publicly identified as the recipient of those subpoenas. But treating it as safely removed from the problem ignores the history and structure of the enterprise.

Walter and Guggenheim helped build the modern private-equity insurance machine that included Security Benefit. Boehly came out of the same Guggenheim organization. The Dodgers transaction connected Walter, Boehly, Guggenheim and insurance money. Security Benefit subsequently held a collateral loan backed by Boehly’s Dodgers interest. Meanwhile, Security Benefit became the overwhelmingly dominant insurance-industry user of the very collateral-loan structure regulators say may permit capital arbitrage.

The federal investigation next door is not proof that Security Benefit is safe. It is a warning flare illuminating the same financial architecture:

• insurer money;
• private-credit intermediaries;
• assets classified as unaffiliated;
• sports and other holdings connected to insurance-company owners;
• statutory accounting that may understate the underlying risk;
• weak state regulation; and
• affiliated managers extracting fees while annuity owners bear the ultimate credit risk.

The correct question is not whether Security Benefit has already been charged with a crime. The correct question is why retirement savers should wait for a subpoena, downgrade or receivership order before being allowed to escape.

A small valuation change could consume Security Benefit’s apparent cushion

Security Benefit’s reported admitted assets exceed its reported liabilities by approximately $7.3 billion. But when a company has nearly $67 billion of assets, that apparent cushion can disappear with a relatively modest valuation adjustment:

Reduction in reported asset value	Approximate amount
5%	$3.34 billion
10%	$6.68 billion
15%	$10.02 billion
20%	$13.37 billion

A 10% adjustment would consume almost the entire reported difference between admitted assets and liabilities.

Private credit makes this calculation particularly dangerous. Publicly traded bonds reveal losses continuously. Private loans, collateral loans and affiliated investments can remain near par because no market transaction forces the owner to recognize the cash price.

An insurer can report an asset at 100 cents while the amount that could actually be realized during a crisis is 70 or 80 cents. That accounting discretion ends when frightened annuity owners demand their money or a receiver must transfer the contracts to another insurer.

Security Benefit’s risk is therefore not merely that some private loans might eventually default. The more immediate danger is that the company could be unable to convert reported asset values into sufficient cash without recognizing large losses.

The state guaranty associations could not write a $10 billion check

NOLHGA reported approximately $7.53 billion of nationwide annual allocated-annuity assessment capacity for 2023. The industry cites this number as though $7.53 billion were sitting in a national reserve fund.

It is not.

The state guaranty-association system is largely post-funded. Its supposed capacity consists of legal authority to assess surviving insurers after a failure. That authority is:

• divided among 50 states and the District of Columbia;
• subject to different state statutes;
• generally limited to approximately 2% of applicable premiums annually;
• based on historical premium volume;
• not immediately collectible;
• not freely transferable among states; and
• frequently reimbursed through future state premium-tax credits.

NOLHGA is a coordinating organization, not a federal insurer with access to Treasury or Federal Reserve liquidity.

A Security Benefit failure would not be allocated according to where adequate assessment capacity happened to exist. Each state association would generally be responsible for Security Benefit annuity owners living in that state. A state containing a disproportionate share of Security Benefit contracts could face obligations far larger than its immediate ability to assess surviving insurers.

The nationwide total therefore conceals precisely the state-by-state mismatch that would matter during an actual liquidation. NOLHGA assessment reports

Future assessment authority does not pay present claims

The guaranty associations would not necessarily need to replace all $59.5 billion of Security Benefit’s liabilities. They would receive some assets from the estate, and contractual benefits above state caps would be left behind as claims against the failed insurer.

But any solvent insurer asked to assume Security Benefit’s annuities would demand enough assets and capital to support them. If the private assets could not be reliably valued—or if they were worth materially less than their statutory carrying values—the buyer would demand billions in additional funding.

That money would be needed before assessments could be collected over many subsequent years.

The associations would then face an ugly menu:

• borrow against future assessments;
• issue bonds;
• impose a surrender moratorium;
• restrict transfers and withdrawals;
• stretch payments over several years;
• reduce credited benefits;
• impose liens on contracts;
• divide the business among several insurers; or
• leave more obligations in the insolvent estate.

The Chicago Fed confirms that guaranty associations may issue bonds when annual assessments are insufficient, but they are not required to do so. It also explains that associations may seek court approval for permanent policy or contract liens when annual assessment capacity cannot meet their obligations or when economic conditions make reductions supposedly in the “public interest.” Federal Reserve Bank of Chicago

That means even the advertised $250,000 annuity protection is not the equivalent of an FDIC-insured deposit payable promptly in cash.

Executive Life already proved that guaranty associations do not make everyone whole

Security Benefit’s defenders want consumers to believe state guaranty associations would simply step in and honor covered annuities. Executive Life demonstrates otherwise.

Pulitzer Prize-winning journalist Gretchen Morgenson explains what actually happened in These Are the Plunderers, page 107:

“It wasn’t until later that it became apparent how disastrous the deal would be for policyholders. Courts in at least two states—Illinois and Pennsylvania—later concluded that the buyout arrangement driven by Garamendi had been unlawful. As a result guaranty funds in those two states had to make up their Executive Life policyholders’ losses.

“Most everyone else did not get made whole on their losses. In 2001 a forensic auditing firm concluded that policyholders’ damages were $3.9 billion.”

Executive Life remains the largest failure previously handled by the guaranty associations. Approximately $3.7 billion was assessed, yet policyholders received radically different treatment depending upon their contracts, location and timing.

Some were transferred and protected. Others spent years in uncertainty. Some received only a fraction of their promised payments. Some annuitants suffered approximately 30% payment reductions for two and one-half years. Approximately 1,500 Executive Life of New York structured-settlement annuitants ultimately faced benefit reductions.

Now compare that history with Security Benefit.

Executive Life’s guaranty-association assessments totaled about $3.7 billion. A 10% downward valuation adjustment to Security Benefit’s reported assets would equal approximately $6.7 billion. A 15% adjustment would exceed $10 billion.

Security Benefit could require a rescue several times larger than the largest one the system has ever completed.

Security Benefit poses the exact danger Granato identifies

Andrew Granato and Pranjal Drall explain that state guaranty assessments are imposed according to premium volume rather than the risks created by individual insurers. Conservative insurers therefore finance the failures of competitors that pursued more aggressive investment and capital strategies.

The system allows an aggressive insurance owner or affiliated asset manager to collect:

• investment-management fees;
• private-credit origination fees;
• spreads between annuity crediting rates and investment returns;
• financing benefits for affiliated or connected enterprises; and
• increased equity value produced by lower regulatory capital requirements.

If the strategy succeeds, the owners and managers keep the gains. If it fails, the insurer absorbs the losses, policyholders lose benefits above statutory limits, competing insurers are assessed, and taxpayers reimburse many of those assessments through premium-tax credits. University of Texas Law School

Security Benefit’s extraordinary use of collateral loans makes it a prime example of this problem. The risk was concentrated inside the insurer, while the eventual cost could be shifted to everyone else.

The state guaranty system could become a contagion machine

A Security Benefit failure would probably not occur in isolation. The conditions severe enough to impair its private-credit and collateral-loan portfolio would likely also be damaging other insurers holding:

• private credit;
• CLOs;
• commercial real-estate loans;
• private asset-backed securities;
• affiliate-originated investments; and
• offshore reinsurance recoverables.

The guaranty associations would then assess surviving insurers already suffering from the same market losses.

The mechanism is procyclical:

Instead of stopping contagion, the guaranty system could accelerate it by extracting liquidity from the remaining insurers during the worst point in the crisis.

That is precisely why the federal government rescued AIG. Washington did not wait to discover whether fragmented state receiverships and post-failure assessments could handle a giant, interconnected insurance collapse.

Waiting for insolvency means waiting until annuity owners are trapped

State regulators habitually tell the public that an insurer meets statutory capital requirements until the day they seize it. That is not meaningful protection for an annuity owner.

The relevant warning points occur earlier:

• affiliated exposure rises;
• private assets become increasingly opaque;
• regulators postpone stronger capital charges;
• ownership structures become more complicated;
• related companies begin selling assets or attempting restructurings;
• auditors or whistleblowers identify reporting weaknesses;
• federal authorities issue subpoenas;
• ratings outlooks deteriorate; and
• market liquidity disappears.

By the time a court issues a liquidation order, the ability to protect the participant has largely vanished. Surrender rights can be frozen. Downgraded assets cannot be sold without recognizing losses. The participant becomes an involuntary creditor of the insurer, receiver and guaranty association.

This is why annuities used in ERISA plans need meaningful downgrade and exit provisions. Participants should be able to leave when the insurer’s financial strength deteriorates—not years later, after a court officially confirms what markets and regulators should have recognized earlier.

Bottom line

Security Benefit may represent the greatest major-carrier annuity danger since AIG because it combines:

• nearly $67 billion of admitted assets;
• enormous annuity obligations;
• extraordinary concentration in collateral loans;
• disputed capital treatment;
• exposure connected to the Dodgers;
• historical ties to the Guggenheim insurance operation;
• weak state oversight;
• and a federal investigation exposing potentially hidden affiliations elsewhere in the same insurance and private-credit ecosystem.

The state guaranty associations are not prepared to replace a multibillion-dollar hole at a company of this size. They possess future assessment authority, not present capital. Their protection is fragmented, capped, conditional and vulnerable to years of delay.

Executive Life showed that many policyholders can remain unpaid even after billions are assessed. Security Benefit could be several times larger, harder to value and more interconnected with private credit.

Calling annuities “guaranteed” while relying on this system is not consumer protection. It is an invitation to wait until the exits have been locked.

State Guaranty Associations Behind Annuities Are Still a Joke—And Private Equity Has Made the Joke More Dangerous

Could Teachers’ Annuities Be the Next Casualty of the LA Dodgers Insurance Unwind?

The Trump administration is preparing to tell 401(k) fiduciaries that they must not use workers’ retirement savings to advance environmental, social or political objectives.

At the same time, the administration is trying to make it easier—and legally safer—for those same fiduciaries to funnel workers’ savings into private-equity firms that have spent years publicly pledging allegiance to the United Nations’ Principles for Responsible Investment.

Apparently, an investment becomes “woke” only when it is transparent, low fee, publicly traded and easy to remove from a 401(k). Put the same ESG commitments behind a private-equity curtain, add layers of fees and carried interest, and Republican regulators suddenly call it “democratizing access.”

Two 401(k) Rules Going in Opposite Directions

Luis Garcia at the Wall Street Journal identified the contradiction.

The Department of Labor is reportedly preparing a proposal that would reverse the Biden-era ESG rule and require 401(k) fiduciaries to concentrate exclusively on “pecuniary” considerations. Daniel Aronowitz, head of DOL’s Employee Benefits Security Administration, has characterized ESG and diversity-oriented investment strategies as potentially “disloyal” to retirement savers.

But DOL has already proposed another rule intended to encourage target-date funds and other 401(k) options to invest in private equity, private credit, real estate, infrastructure, cryptocurrency and other alternative assets.

The March 2026 proposal would give fiduciaries a presumption of prudence when they follow specified procedures. It repeatedly emphasizes “maximum discretion” for fiduciaries and openly says that one purpose is to reduce the litigation risk that has discouraged private-market investments.

One rule effectively says:

Do not let nonfinancial environmental or social considerations influence a 401(k) investment decision.

The other says:

We want to protect fiduciaries who place workers into opaque private-market funds—many managed by firms that have formally promised the United Nations that they will incorporate ESG considerations into investment decisions.

That is not a coherent fiduciary policy. It is a political exemption for Wall Street.

Wall Street Journal: Trump Administration Rulemakers Diverge on 401(k) Investment Offerings

DOL’s proposed private-assets safe harbor

What Private-Equity Firms Promised the United Nations

The Principles for Responsible Investment, commonly called PRI or UN-PRI, were launched with United Nations support. Investment managers that become signatories commit to six principles, including commitments to:

1. Incorporate ESG issues into investment analysis and decision-making.
2. Be active owners and incorporate ESG issues into ownership policies and practices.
3. Seek ESG disclosures from the entities in which they invest.
4. Promote acceptance of the principles throughout the investment industry.
5. Cooperate with other signatories to implement the principles.
6. Report on their activities and progress toward implementing them.

PRI does not merely ask managers to acknowledge that climate, labor practices or governance failures can affect investment values. Its principles call for ESG incorporation, active ownership, industry promotion and public reporting.

Signing PRI also does not prove that every fund managed by a signatory is an ESG fund—or that the manager faithfully follows its promises. That distinction matters. But it does prove that the firm made a public, institutional commitment to incorporate and promote the very considerations Republican officials now condemn as “woke” when used elsewhere in retirement plans.

PRI: Becoming a signatory

PRI signatory directory

Private Equity Has Played Both Sides

Many of America’s largest alternative-asset managers have participated in PRI or related ESG and climate initiatives while simultaneously cultivating Republican politicians who attack ESG.

KKR, for example, has been identified in PRI materials as a signatory since 2009. Apollo appeared among PRI’s new signatories in 2021. Major private-market managers have built ESG departments, issued sustainability reports, marketed impact strategies and sought capital from pension systems with responsible-investment mandates.

Private equity was happy to speak the language of ESG when that helped raise trillions from California, New York, university endowments and European institutions.

Now that political power has shifted, the same industry speaks the language of energy dominance, national security, data centers and “democratizing” investment access. The label changes. The fundraising machine does not.

The key question is not whether private-equity executives are genuinely woke. It is whether Republican officials are willing to enforce their anti-ESG principles when enforcement might interfere with the fees collected by their major Wall Street allies.

So far, the answer appears to be no.

Florida Already Demonstrated the Hypocrisy

Florida officials led one of the nation’s loudest attacks on ESG investing. But the Florida Retirement System continued employing hundreds of outside investment managers, including many firms that had signed PRI or made comparable ESG commitments.

My earlier review of Florida’s investment holdings identified approximately 575 separate manager mandates, partnerships or investment vehicles. I could confirm that managers associated with approximately 201 of those relationships had signed PRI.

Florida’s holdings included multiple funds connected with some of the world’s largest alternative managers, including approximately:

• 3 Apollo funds
• 12 Blackstone funds
• 9 Carlyle funds
• 2 KKR funds
• 4 JPMorgan funds
• 4 Oaktree funds
• 11 Thoma Bravo funds

These counts should not be misrepresented as 201 separate ESG funds. They demonstrate something more politically revealing: Florida attacked ESG in public while continuing to send pension money to managers that had made institutional ESG commitments.

The state did not purge private equity. It did not eliminate the managers’ high fees, illiquid structures, self-valued assets or conflicts of interest. It largely purged the word “ESG.”

Florida Retirement System 2020–21 ACFR, investment listings at pages 123–133

Ohio and Kentucky Are Running the Same Play

Ohio’s retirement systems employ many of the same high-fee private-equity and private-credit managers. Yet Ohio’s anti-ESG political network attacks selected public investment managers while leaving the alternative-investment establishment remarkably undisturbed.

The State Financial Officers Foundation, or SFOF, has helped convert “anti-woke investing” into a national political fundraising vehicle. But politicians associated with that movement have not demonstrated the same enthusiasm for confronting private-equity firms, data-center financiers or alternative managers that support them.

In Ohio, the connections among STRS investments, Republican political figures, SFOF, QED, Vivek Ramaswamy and Wall Street money deserve far more scrutiny.

Ohio STRS: Follow the Money—and Follow QED’s Seth Metcalf, SFOF and Ramaswamy Connection

Ohio’s Data-Center Money Machine: Husted, Ramaswamy, Faber, SFOF and Wall Street

Kentucky presents a similar shell game. Politicians attack ESG while maintaining relationships with private-market firms that have long used ESG commitments to attract institutional money.

Allison Ball’s ESG Shell Game: Follow the Money From Kentucky to KKR to SFOF

Investigations by Katya Schwenk and Julia Rock at The Lever and Lauren Windsor at Zeteo have documented how the anti-ESG campaign intersects with political money, state financial officers and private financial interests.

The Lever: Alleged Fraudsters Are Fueling Trump’s “Fraud” Crusade

May 2026 SFOF letter

The Lever: How Dark Money Enabled Vivek Ramaswamy’s Cash Grab

Zeteo: Kreifels’ “War on Woke” Cash Grab in Alaska

Private Equity Presents the Bigger Fiduciary Problem

A publicly traded ESG mutual fund generally provides daily pricing, published holdings, standardized expense disclosures and daily liquidity. A fiduciary can compare it against public benchmarks and remove it without waiting years for the manager’s permission.

Private equity may provide none of those protections.

Workers can face:

• Management fees, carried interest and portfolio-company charges that are difficult to calculate.
• Illiquid holdings that cannot be sold when participants need their money.
• Manager-generated valuations rather than observable market prices.
• Return smoothing that disguises volatility and correlation.
• Stale valuations that can make a target-date fund appear less risky than it really is.
• Subscription lines and other financial engineering that can inflate reported internal rates of return.
• Conflicts involving affiliated advisers, insurers, lenders, continuation funds and portfolio companies.
• ESG and impact claims that are even harder to verify than those made by public mutual funds.

If DOL is genuinely worried about fiduciaries sacrificing participants’ financial interests to political or social objectives, private-market impact funds should be examined at least as closely as publicly traded ESG funds.

Instead, DOL proposes to give alternative investments a special presumption of prudence.

That is not removing politics from 401(k)s. It is selecting which politically connected industry receives regulatory protection.

Require Private-Equity Firms to Choose

Before any PRI-signatory manager receives access to 401(k) target-date funds or protection under DOL’s proposed safe harbor, plan fiduciaries should obtain clear written answers:

1. Is the manager currently a PRI signatory?
2. Which PRI commitments apply to the manager and the proposed fund?
3. Does the manager incorporate environmental or social considerations into investment decisions?
4. Are those considerations treated only as financially material risks, or does the fund pursue separate impact objectives?
5. Has the manager marketed substantially similar strategies as ESG, sustainable or impact investments to other investors?
6. Does the fund’s compensation depend on valuations supplied by the manager?
7. Can participants independently determine all management fees, carried interest and portfolio-company charges?
8. What liquidity, valuation and conflict protections exist specifically for 401(k) participants?
9. Has the manager’s political positioning changed while its underlying investment practices remained substantially the same?
10. If ESG considerations are supposedly “disloyal,” why should a firm that promised to incorporate and promote them receive a federal 401(k) safe harbor?

DOL should also publish a cross-reference of alternative managers seeking 401(k) access against PRI and other climate, sustainability and impact-investing commitments.

The Bottom Line

The administration’s message appears to be:

ESG is dangerous when used to select a transparent mutual fund—but acceptable when embedded inside an opaque, illiquid and extremely expensive private-equity fund.

Republican officials are not necessarily eliminating ESG from retirement investing. They may simply be clearing away lower-fee competition while granting politically connected private-equity firms privileged access to trillions of dollars in 401(k) savings.

Private equity signed the “woke pledge” when doing so helped raise public-pension money. Now it supports politicians attacking that pledge while asking them to open the 401(k) vault.

Workers should not be forced to finance both sides of Wall Street’s political shell game.

A big thank you to ERISA attorney Fred Reish for calling attention to one of the most important—and least understood—parts of the Department of Labor’s proposed alternative-investment rule: liquidity.   https://www.linkedin.com/pulse/alternative-assets-20dol-proposal-six-defined-factors-fred-reish-17mgc/  

The DOL’s proposal identifies six factors for fiduciaries to consider: performance, fees, liquidity, valuation, performance benchmarks and complexity. But from the perspective of an ordinary 401(k) participant, liquidity deserves considerably more attention.

Fred makes an especially important distinction: there are really two liquidity questions.

Can the participant get his or her money out?

And:

Can the plan get its money out?

Those are not necessarily the same thing.

401(k)s Already Have Illiquid Investments: Annuities

The debate over bringing private equity and private credit into 401(k)s sometimes makes illiquidity sound like a completely new problem.

It isn’t.

Historically, some of the largest illiquid investments in ERISA defined-contribution plans have been insurance-company annuity and stable-value contracts.

Fred specifically points to general-account guaranteed income products that may contain surrender charges or 12-month puts, as well as stable-value collective trusts that can impose market-value adjustments when a plan removes the investment.

That is plan-level illiquidity.    To get book value accounting treatment, stable value must provide participant-level liquidity or “benefit responsiveness.”   These are very different.

Plan level liquidity can become extremely important when a fiduciary decides that an investment is no longer prudent.

Imagine discovering that your insurer has been downgraded, its private-credit portfolio is deteriorating, or its credit spreads have exploded—and then discovering that getting the plan’s money out requires waiting 12 months or longer or accepting a substantial market-value adjustment.

The liquidity restriction that seemed harmless when everything was going well suddenly becomes extraordinarily important.

Annuity Liquidity Risk Is Getting Bigger, Not Smaller

This deserves even greater scrutiny as the retirement industry pushes lifetime-income annuities deeper into 401(k) plans.

At the same time, the insurance companies backing those promises have themselves moved further into private credit, structured assets, affiliated investments and offshore reinsurance.

As I recently documented, regulators are increasingly concerned about insurers’ growing exposure to illiquid assets. The IMF has found that private-equity-influenced insurers tend to hold more illiquid assets, while the BIS has specifically identified increased liquidity risk, valuation opacity and supervisory complexity in the transformed life-insurance industry.

That creates liquidity risk on top of liquidity risk:

The participant owns an illiquid insurance contract backed by an insurer increasingly investing in illiquid assets.

A supposed long-term retirement advantage can become a serious disadvantage precisely when the fiduciary most needs the ability to act.

Now Add Private Equity and Private Credit

Private equity and private credit make this problem much more complicated.

The DOL acknowledges that alternative assets are often less liquid than publicly traded stocks and bonds. It also says fiduciaries must consider whether redemptions by other plans or investors could adversely affect the investment’s liquidity.

That second point is crucial.

Liquidity isn’t merely a contractual question:

“Can we redeem this investment?”

The better question is:

“What happens when everybody wants to redeem it at the same time?”

A private-credit fund might normally satisfy redemptions without difficulty because new money is coming in and few investors are leaving.

A financial crisis reverses those flows.

Suddenly the manager has three choices: sell loans into a distressed market, impose gates or restrict withdrawals, or have remaining investors effectively provide liquidity to investors who escape first.

That is precisely when reported private-asset values may prove very different from actual cash values.

Daily Liquidity Can Become an Accounting Illusion

The most interesting—and potentially dangerous—development is likely to be putting private assets inside target-date funds.

Fred predicts that this is probably where private funds will enter participant-directed plans. The participant could continue trading the TDF daily while the fund itself owns illiquid private investments.

That raises a fundamental consumer-protection question:

How can an investment containing assets that cannot be sold daily promise participants daily liquidity?

Someone has to provide the liquidity.

A TDF might own:

60% publicly traded stocks,

25% publicly traded bonds,

10% private equity/private credit,

and 5% insurance or other illiquid assets.

A participant sees one price every afternoon and assumes everything underneath that number is comparable.

It isn’t.

The public stocks were priced by actual transactions seconds before the market closed.

The private-equity holding might be based on a manager valuation weeks or months old.

A private loan might be carried near par even though selling it immediately would require a substantial discount.

An insurance contract might be carried at contract value even though terminating it could trigger a surrender restriction or market-value adjustment.

Yet they are blended together into one daily TDF price.

Liquidity and Valuation Cannot Be Separated

This is why I don’t think fiduciaries can responsibly analyze the DOL’s Liquidity Factor independently from its Valuation Factor.

Suppose a participant wants $100,000 from a TDF.

The TDF pays $100,000 in cash.

But if the private assets supporting part of that $100,000 cannot actually be sold at their reported values, the participant who leaves may receive more than his or her economically accurate share of the portfolio.

Who absorbs that difference?

The participants who remain.

That creates the possibility of a first-mover advantage—the exact opposite of what we should want inside retirement plans.

A participant shouldn’t have to understand private-market valuation methodologies to determine whether yesterday’s $10 TDF share was really worth $10.

Crypto Is Different—but It Doesn’t Solve the Problem

Crypto presents a somewhat different liquidity issue.

Major cryptocurrencies can trade continuously and can sometimes be extremely liquid. So I would not simply put Bitcoin into the same “illiquid asset” category as private equity, private credit or an insurance general-account contract.

The larger concerns are extreme volatility, market structure, custody, valuation during market disruption, and whether liquidity remains dependable during stress.

The recent push to make crypto available through 401(k) brokerage windows nevertheless illustrates the broader problem: the retirement system is rapidly introducing investments with risks that the traditional mutual-fund 401(k) architecture was not designed around.

“Long-Term Investor” Should Not Become an Excuse

The DOL makes a reasonable observation: retirement investors, particularly younger workers, have long investment horizons and therefore may be capable of accepting some illiquidity in exchange for an illiquidity premium.

But fiduciaries should be careful with that argument.

A plan may have a 50-year life. A participant does not.  People retire. They change jobs.

They roll over their accounts. They get divorced. They die. They take distributions.

Companies merge. Plans terminate. Investment committees replace managers.

And sometimes a fiduciary needs to remove an investment because something has gone badly wrong.

That is when liquidity matters most.

The Participant Question Should Be Simple

The financial industry can produce hundreds of pages explaining liquidity waterfalls, tender mechanisms, NAV methodologies, redemption gates, insurance-company puts and secondary-market transactions.

The participant needs something much simpler.

If I need my money tomorrow, what is it actually worth tomorrow?

And the fiduciary needs to ask an equally simple question:

If we decide tomorrow that this investment is no longer prudent, how quickly can we get every participant’s money out—and at what price?

Fred Reish deserves credit for bringing attention to the Liquidity Factor. The DOL is also right to require fiduciaries to consider liquidity at both the participant and plan levels and to require investments to be capable of delivering the liquidity promised to participants.

But I would go further.

Liquidity should not merely be another box on a six-factor fiduciary checklist.

For annuities, private equity, private credit and target-date funds mixing liquid and illiquid investments under different valuation systems, liquidity may be one of the most important risks of all.

Because an investment’s reported value matters considerably less when you discover you can’t actually sell it for that value.

And retirement participants shouldn’t discover that distinction when they need their money.

———————————————

State Guaranty Associations Behind Annuities Are Still a Joke—And Private Equity Has Made the Joke More Dangerous

Crypto Is Exposing the 401(k) Brokerage-Window Loophole — Private Equity Could Be Next

SEC Mutual Fund Standards Are Slipping — But Not Fast Enough for Private Equity, Which Is Turning to State-Regulated CITs – 2 roads into your 401(k)

ERISA Private Equity Fiduciary Due Diligence Checklist

Target Date Fund Fiduciary Due Diligence Guardrail Checklist

Jim Watkins’ Fiduciary Protocols Expose the Real Problem with Fixed Annuities -a Prohibited Transaction

When I wrote in 2025 that state guaranty associations were a flimsy substitute for real insurance of annuity promises, the industry could dismiss the concern as theoretical.     https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/

It isn’t theoretical anymore.

The Federal Reserve, Treasury, IMF, Bank for International Settlements and even state insurance regulators are now wrestling with a life-insurance industry that has fundamentally changed. Insurers are holding more private credit and other illiquid assets. Private-equity firms and affiliated asset managers increasingly control insurance assets. Enormous blocks of U.S. annuity liabilities have been moved through offshore reinsurance structures, particularly Bermuda. And the state guaranty-association system standing behind these promises remains essentially the same post-failure assessment mechanism designed decades ago.

It isn’t the FDIC. It isn’t even close.

The Chicago Fed Has Now Said the Quiet Part Out Loud

A remarkably useful 2024 Federal Reserve Bank of Chicago study explains exactly how different the insurance guaranty system is from federal deposit insurance.

The FDIC is designed around a national, prefunded system capable of resolving banks quickly. State insurance guaranty associations instead operate state by state and are funded after an insolvency occurs, primarily by assessing surviving insurers. Those assessments are subject to annual statutory limits.

The Chicago Fed concludes that it is simply “unclear how the insolvency of a relatively large U.S. insurer would impact the state guaranty fund system.”

It goes further. A sufficiently large failure could require states to assess surviving insurers for many years, while benefit payments could exceed the money coming in from those assessments. Associations might then have to borrow to bridge the difference.

That is a long way from:

Your annuity is guaranteed.

A more accurate description is:

If your insurer fails, a state-created association may eventually provide statutorily limited benefits, financed largely by assessments imposed on the other insurers that have not yet failed.

The Numbers Show How Thin the Backstop Is

NOLHGA’s own nationwide data make the scale problem obvious.

Its November 2024 report showed nationwide annual assessment capacity in 2023 of approximately:

Account	Reported annual capacity
Life	$4.08 billion
Allocated annuity	$7.53 billion
Unallocated annuity	$73 million
Health	$8.47 billion
All categories combined	$20.16 billion

Those numbers are not a giant pool of cash sitting in a vault waiting for claims. They are principally the statutory capacity to assess insurers after failures occur.

For perspective, Federal Reserve data show that U.S. life insurers’ general accounts alone held about $7.53 trillion of financial assets at year-end 2025.

I would not claim that the $20 billion capacity should equal $7.5 trillion of insurer assets—the two numbers measure different things. But the comparison demonstrates the magnitude problem. The supposed backstop is tiny relative to the insurance balance sheets it ultimately stands behind.

And annuity protection is capped at the individual-policy level as well. NOLHGA itself gives the example of a $300,000 annuity in a state with a $250,000 guaranty benefit: the association guarantees $250,000, while the remaining $50,000 generally becomes a claim against the failed insurer’s estate.

That matters enormously for wealthy retirees, pension-risk-transfer retirees and institutional retirement arrangements involving benefits far above ordinary individual coverage limits.

We Already Ran the Experiment: It Was Called AIG

The best historical evidence remains AIG.

Ben Bernanke testified in March 2009 that without the federal rescue, some of AIG’s enormous insurance subsidiaries likely would have entered state rehabilitation proceedings, “leaving policyholders facing considerable uncertainty about the status of their claims.”

He also warned that doubts about insurance products could have produced a run on the broader insurance industry.

Bernanke later gave an even more revealing answer when Senator Jim Bunning suggested that New York’s insurance regulator should have handled AIG. Bernanke responded that the state regulator:

“did not have the capacity to deal with a global insurance company”

whose failure threatened the financial system.

But the Congressional Oversight Panel made the guaranty-association point even more explicitly.

Its investigation concluded that an AIG failure likely would have imposed a significant burden on state guaranty funds and the surviving insurers assessed to finance them. More importantly, because state laws limit annual assessments, the Panel found that AIG’s size likely would have caused guaranty-fund assessments to hit those statutory caps.

The Panel further concluded that it was unclear whether individual state guaranty funds had sufficient capital—or access to capital—to deal with the resulting shortfall.

That is the citation I would put immediately after the Bernanke discussion.

The federal government didn’t wait around in 2008 to see whether fifty state mechanisms could handle a giant insurer collapse.

It rescued AIG.

And Today’s Insurers May Be Harder to Resolve Than the Insurers the Guaranty System Was Built For

The disturbing part is what has happened since AIG.

The Federal Reserve reported in 2025 that life insurers’ exposure to below-investment-grade corporate debt had roughly doubled since the financial crisis. Insurers increasingly obtain this exposure not only through direct loans but through CLOs, BDCs, joint-venture loan funds and other structures involving affiliated asset managers.

The Fed describes some of these arrangements as “complex and arguably opaque” and says they can exploit loopholes in rating methodologies and accounting standards. It even describes an insurer-affiliated structure in which underlying consolidated leverage could reach approximately 12-to-1, while substantial exposures were not transparently consolidated at the insurer level.

That should terrify anyone whose answer to annuity credit risk is:

Don’t worry. There is a state guaranty association.

Private Equity Has Turned Insurance Into a Private-Credit Funding Machine

The NAIC says it had identified 137 private-equity-owned U.S. insurers at year-end 2024, rising to 139 by June 2025. The NAIC specifically identifies related-party investments, structured securities and cross-border reinsurance as areas demanding additional monitoring.

The IMF estimates that U.S. private-equity-influenced life insurers control well over $1 trillion of assets, more than 15% of U.S. life-insurance assets in its analysis. It also finds that PE-influenced insurers tend to hold more illiquid assets.

The Bank for International Settlements reached an even broader conclusion in 2025. It said the life-insurance industry had undergone a “profound structural transformation” involving:

private equity ownership, riskier and more opaque assets, increased derivatives usage and greater reliance on asset-intensive offshore reinsurance.

The BIS concluded that insurers’ systemic importance has increased and specifically identified greater liquidity risk, interconnectedness, valuation opacity and supervisory complexity.

In other words, the insurance industry has moved toward structures that are harder to value, harder to understand, more interconnected and potentially harder to liquidate.

The guaranty system hasn’t remotely evolved at the same speed.

Then Wall Street Moved the Annuity Liabilities Offshore

The offshore numbers may be the biggest addition to the original article.

The IMF found that Bermuda long-term reinsurance assets exceeded $1 trillion, with PE-influenced reinsurers accounting for roughly half of Bermuda’s long-term reinsurance assets in the data it examined. It also found that PE-influenced Bermuda reinsurers allocated substantially more assets to illiquid investments than typical global insurers.

And it has accelerated.

AM Best reported that Bermuda accounted for more than 40% of all reserves ceded by U.S. life-annuity writers in 2024 and more than 60% of reserves associated with transactions effective during 2023 and 2024.

Recent 2026 reporting based on AM Best data indicates that offshore reinsurers accounted for almost 56% of ceded annuity reserves in 2025, with Bermuda still dominant and Cayman gaining ground.

Even Treasury is now paying attention. In May 2026, Treasury Secretary Scott Bessent met with state insurance commissioners specifically to discuss private credit, “the movement of U.S. life and annuity reserves to offshore jurisdictions,” private-letter ratings and offshore reinsurance supervision.

That is an extraordinary sentence.

America is selling retirees a product marketed as guaranteed, while an increasingly large share of the economic machinery supporting those guarantees has migrated through complex offshore reinsurance structures.

PHL Variable Shows What “Guaranteed” Means Before the Guaranty Association Even Arrives

We don’t need to wait for the next AIG to see how messy this can become.

PHL Variable Insurance Company entered rehabilitation in Connecticut in May 2024. By December 2025, its rehabilitator concluded that rehabilitation was not feasible and that liquidation would ultimately be required.

During rehabilitation, some annuity payments and transactions have been restricted by court order.

Its own SEC disclosures now warn customers:

“There is a significant risk that the financial guarantees and obligations under your contract will not be fulfilled.”

The disclosures say liquidation benefits will be subject to state guaranty-association limits—typically $250,000 for annuities—and explicitly warn that general-account guarantees may not be paid in full.

That is what an insurance “guarantee” looks like when the guarantor actually gets into trouble.

The guarantee does not magically transform into Treasury securities.

First comes rehabilitation.

Then restrictions.

Then litigation.

Then valuation.

Then potentially liquidation.

Only then does the statutory guaranty system become fully relevant.

And anything over applicable coverage limits may become a creditor claim against an insolvent estate.

Private Credit Makes the Timing Problem Worse

This is where the private-credit problem connects directly to guaranty associations.

A guaranty association doesn’t create economic value. Ultimately someone has to recover value from the insolvent insurer’s assets, transfer policies to another insurer, or raise money by assessing surviving insurers.

That process is much easier when an insurer owns transparent, liquid securities.

It becomes harder when the balance sheet contains private loans, affiliated investments, CLOs, private asset-backed securities and offshore reinsurance recoverables whose real cash value may be uncertain during a crisis.

The Fed recently noted that leverage among the largest life insurers remained in the upper quartile of its historical range and that insurers have steadily increased holdings of risky and illiquid assets.

And we are now seeing real-world evidence of the gap between private-credit NAVs and cash prices. Recent private-credit tender offers have produced bids at substantial discounts to reported values. As I recently wrote, refusing to sell at 74 cents allows an investor to continue reporting something much closer to $1.00.

That accounting option becomes much less useful when an insurer needs actual cash to meet policyholder obligations.

The Fundamental Flaw: The Healthy Insurers Have to Rescue the Failed Insurers

This is the part most retirement savers are never told.

The guaranty association generally doesn’t sit on a gigantic prefunded reserve comparable to the FDIC Deposit Insurance Fund.

The system largely works by sending an assessment to the surviving insurers.

That was manageable when failures were isolated.

But imagine several heavily interconnected annuity insurers simultaneously suffering losses on:

private credit, CLOs, affiliated loans, real estate, asset-backed finance or offshore reinsurance recoverables.

The companies being assessed to rescue the failed insurers could themselves own similar assets.

That creates a procyclical mechanism:

Insurer A fails → Insurers B, C and D are assessed → B, C and D are already suffering the same market losses → their liquidity and capital decline just when the guaranty system asks them for more cash.

The Congressional Oversight Panel recognized exactly this danger in examining AIG: guaranty-fund assessments could have pulled additional liquidity out of surviving insurers during an already severe liquidity crunch.

Private equity and private credit have made that common-exposure problem substantially more important.

State Guaranty Associations Were Designed for a House Fire. Wall Street Is Building a Wildfire.

That is the updated argument.

State guaranty associations have a legitimate purpose. They can work reasonably well when an individual insurer fails and the rest of the industry remains healthy.

That does not mean they are adequate protection against systemic annuity risk.

They are:

post-funded rather than meaningfully prefunded;

state-by-state rather than national;

subject to policyholder benefit limits;

subject to annual assessment limits;

dependent on surviving insurers remaining solvent and liquid;

potentially slow because they operate through rehabilitation and liquidation proceedings;

and essentially untested against simultaneous failures of today’s giant, private-credit-heavy, offshore-reinsured annuity complexes.

The Chicago Fed admits the system has never really been tested against the failure of a relatively large U.S. insurer.

The Congressional Oversight Panel concluded that AIG likely would have pushed guaranty assessments to their statutory caps.

Bernanke warned that AIG’s insurers could have ended up in rehabilitation with policyholders uncertain about their claims.

And Washington responded by bailing AIG out rather than conducting the experiment.

What ERISA Fiduciaries Should Ask

This is particularly important for pension-risk transfers, fixed annuities in 401(k)s and new lifetime-income products.

A fiduciary shouldn’t be allowed to say simply:

The insurer is highly rated and the state guaranty association provides additional protection.

The questions ought to be:

What is the participant’s actual guaranty-association coverage limit?

How much of the insurer’s portfolio is private or otherwise illiquid?

How much is affiliated?

How much has been reinsured?

Where is the reinsurer domiciled?

What collateral actually secures that reinsurance?

What happens if the reinsurer fails?

What happens if the domestic insurer is downgraded?

Can the participant exit before insolvency?

What are the insurer’s CDS and bond spreads telling us?

And what happens to the guaranty association if several insurers owning the same private-credit risks fail together?

That is why I continue to believe a meaningful downgrade clause is vastly more valuable than telling retirees that somebody may protect them after the insurer is already insolvent.

The sensible time to protect a retiree is before the fire reaches the guaranty association.

Could Teachers’ Annuities Be the Next Casualty of the LA Dodgers Insurance Unwind?

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Bloomberg: Private Credit Investors Would Rather be Trapped and Hide a 26% Loss Than Admit It

Kansas 401(k) Conflicts Paper -documents participant losses from historic affiliate relationships  –  Wall Street moves to new deceptive practices

Private equity, state-regulated CITs and annuities could make the “best-performing 2040 fund” the fund with the most aggressively manufactured numbers.

For years, one of the simplest ways to evaluate a target-date fund has been to compare it with other funds having the same vintage.

Compare a 2040 fund with other 2040 funds. Compare a 2050 fund with other 2050 funds.

That sounds reasonable.

It is also becoming dangerously easy to game.

I could design a 2040 target-date fund that appears to outperform most conventional 2040 funds without appearing to take substantially more risk.

The trick is not necessarily superior investment management.

The trick is changing the ruler used to measure risk.

How I Would Build the “Best” 2040 Fund

Start with an ordinary 2040 target-date fund holding publicly traded stocks and bonds.

Then replace part of it with private equity and private credit.

Public stocks are marked to market every trading day. If stocks fall 20%, everybody sees the loss.

Private equity is different. Managers periodically estimate what their investments are worth. Those valuations can move slowly even when public markets are crashing.

That creates an enormous statistical advantage.

Smoothed valuations → lower reported volatility → lower measured correlation → apparently better diversification → apparently better risk-adjusted performance.

I have previously called this the private-equity diversification illusion.

It doesn’t necessarily mean the investment became less risky.

It means the reported price moved less frequently.

My recent discussion of continuation funds shows how the valuation problem can go even further. A private-equity manager can potentially participate on both sides of a transaction in which an asset moves from an existing fund into a continuation vehicle. The resulting transaction can then appear to validate a valuation even though the same manager remains involved with the asset.

That is a very different price-discovery mechanism from selling 100,000 shares of Microsoft on Nasdaq.

Now Use the Fake Low Volatility to Buy More Stocks

Here is where the target-date comparison really breaks down.

Suppose a conventional 2040 fund holds:

70% stocks + 30% bonds.

Now suppose my competing 2040 fund contains private equity whose reported volatility and correlation are artificially suppressed by stale or smoothed valuations.

My portfolio model may conclude that private equity provides wonderful “diversification.”

Suddenly I can build something economically closer to:

80%–90% equity and equity-like risk + much less conventional fixed income.

During a rising market, my 2040 fund should outperform the boring 70/30 competitor.

But when Morningstar, consultants or fiduciaries compare the two funds, my reported standard deviation may not look dramatically higher.

I have seemingly created something wonderful:

Higher return without higher risk.

Except I haven’t.

I have combined real market volatility with accounting volatility and treated them as if they were the same thing.

Garbage risk statistics in.

Beautiful efficient frontier out.

Private Equity Can Juice Both Sides of the Equation

This isn’t merely about understated risk.

Private-market valuation practices can potentially improve both sides of the conventional risk/return comparison.

On the return side, private assets are not continuously marked by independent markets. Managers exercise substantial valuation judgment.

On the risk side, those same infrequent valuations suppress measured volatility and correlation.

Jay Rogers makes the larger transparency problem forcefully in his recent column, “Private Equity’s Trojan Horse Is Headed for Your 401(k).” Rogers notes that private equity and private credit increasingly can reach workers through target-date funds and CITs, while asking the fundamental question: who verifies the price? He also points to the enormous migration of target-date assets toward CIT structures.   https://www.bedfordgazette.com/editorial/private-equitys-trojan-horse-is-headed-for-your-401-k/article_002fc029-f229-4d70-9b55-a2d13689475d.html

That question becomes even more important when fiduciaries start comparing one target-date vintage against another.

The manager controlling the least transparent assets may be given a statistical advantage over the manager holding transparent securities.

Then I Would Game the “Safe” Side of the Portfolio

Why stop with private equity?

I can potentially make the fixed-income portion look artificially safe too.

Instead of holding publicly traded bonds that are continuously marked to market, put some of the supposedly conservative allocation into fixed annuities backed by an insurance company’s general or separate account.

The insurer may itself hold large amounts of private credit and other illiquid assets.

Now we have another layer where market volatility can disappear from the target-date fund’s reported statistics.

A conventional bond fund immediately reflects changing interest rates, credit spreads and market prices.

An insurance contract may continue reporting a stable contract value or crediting rate.

That does not mean its underlying economic risk disappeared.

The volatility disappeared from the reported number.

That distinction is critical.

A fixed annuity backed by increasingly illiquid private credit should not magically receive a lower risk score merely because nobody marks the contract to market every afternoon.

And Then There Are State-Regulated CITs

This becomes especially concerning as the target-date market migrates from SEC-registered mutual funds toward collective investment trusts.

As I discussed previously, private equity has potentially found two roads into the 401(k): loosening restrictions involving registered products and the much less uniform world of state-regulated CITs.

CITs are not subject to the same registration, disclosure and reporting regime as mutual funds. Rogers reports that CITs have now overtaken mutual funds in target-date assets, citing Sway Research data showing CITs at 55% of TDF assets as of June 30, 2026.

CIT regulation varies by state.  Pennsylvania is fairly solid.   In Nevada anything goes.

But it makes the fiduciary’s job harder, particularly if a CIT contains layers of private equity, private credit, insurance products or other assets whose valuations cannot easily be independently reconstructed.

A label saying “2040 Target Retirement CIT” tells you almost nothing about what is underneath it.

Crypto Could Make the Problem Almost Absurd

Once we accept the proposition that assets with unusual pricing characteristics can be mixed with conventional securities and evaluated using conventional risk statistics, where does it stop?

Crypto demonstrates the problem from the opposite direction.

Its volatility is obvious, but establishing a sensible expected return, correlation regime and long-term retirement-risk assumption is extraordinarily difficult.

Yet an optimizer needs numbers.

Give it assumptions and it will produce an allocation.

That doesn’t make those assumptions reliable.

Private equity can make risk appear artificially low because prices don’t move enough.

Crypto can produce optimization results that are extremely sensitive to whatever return, volatility and correlation assumptions somebody decides to feed into the model.

Different problem.

Same warning:

The sophistication of the output does not improve the quality of the inputs.

The “2040” Label Is Not a Benchmark

This is why fiduciaries need to stop treating vintage-year comparisons as if they were apples-to-apples comparisons.

Two funds can both say 2040 while having radically different:

• public-equity exposure;
• private-equity exposure;
• private-credit exposure;
• liquidity;
• valuation frequency;
• insurance-company credit exposure;
• leverage;
• true equity beta; and
• dependence on manager-estimated prices.

Comparing their returns and standard deviations without adjusting for those differences could reward the fund with the least transparent valuation system.

That turns prudent benchmarking upside down.

The manager marking everything to market gets punished with volatility.

The manager estimating private assets quarterly gets rewarded with “stability.”

Fiduciaries Need a New Target-Date Guardrail

My earlier Target Date Fund Fiduciary Due Diligence Guardrail Checklist argued that fiduciaries need to look through the target-date wrapper and understand what they actually own. https://commonsense401kproject.com/2026/05/30/target-date-fund-fiduciary-due-diligence-guardrail-checklist/

That principle becomes even more important as private markets enter TDFs.

A fiduciary comparing target-date funds should not simply ask:

“How did this 2040 fund perform versus other 2040 funds?”

The better questions are:

How much actual economic risk did each manager take?

Which assets were independently marked to market?

Which returns came from manager-estimated NAVs?

Have private-market returns been unsmoothed before calculating volatility and correlation?

How much equity-equivalent exposure does the portfolio really contain?

Are annuity values masking changes in insurer credit or liquidity risk?

Could private-credit valuations be suppressing apparent fixed-income volatility?

Can the fiduciary independently reproduce the valuation, risk and benchmark calculations?

If the answer to the last question is no, the fiduciary should be extremely reluctant to call one 2040 fund “better” than another.

The Perfect Rigged Target-Date Fund

If my objective were simply to win the target-date-fund horse race, I know what I would be tempted to build.

Load the growth allocation with private equity whose valuations move slowly.

Use those artificially attractive volatility and correlation statistics to justify more equity exposure.

Put private credit and fixed annuities into the supposedly conservative side of the portfolio.

Package everything inside a lightly disclosed state-regulated CIT.

Perhaps sprinkle in crypto using whatever long-term assumptions make the optimizer happy.

Then compare my fund’s reported return and reported standard deviation against boring SEC-regulated 2040 mutual funds holding publicly traded stocks and bonds.

My fund could look brilliant.

More return.

Less apparent volatility.

Wonderful diversification.

Same 2040 label.

But the comparison could be largely meaningless.

Private equity doesn’t become safer because somebody hasn’t marked it down yet.

An insurance contract doesn’t become riskless because its value doesn’t flash on a Bloomberg screen.

And two target-date funds don’t become comparable simply because somebody stamped “2040” on both of them.

As Wall Street moves private equity, private credit and insurance products deeper into America’s default retirement investments, the easiest target-date fund to make look good may increasingly be the one whose risks are hardest to see.

Appendix: New Research Confirms the Problem — “Same Target Date” Does Not Mean “Same Risk”

A new target-date-fund study provides unusually direct empirical support for the central argument of this article: a 2040 fund is not necessarily comparable to another 2040 fund simply because both have “2040” in their names.

Mitchell Bollinger’s forthcoming research, Same Target Date, Different Risk: A Survivor-Bias-Free Reassessment of Target-Date Funds with Investable Style Analysis, examines the CRSP survivor-bias-free universe of target-date funds using a methodology designed to recover their changing investment exposures. Its central conclusion is remarkably straightforward: “The label on a target-date fund fixes the year, not the risk.” Among major TDF providers, two funds with the same retirement year can differ by roughly 20 percentage points of equity exposure and several percentage points of expected volatility.

That distinction matters enormously when funds are ranked by historical performance. Bollinger finds that, following rising equity markets, selecting the best-performing fund within a target-date vintage tends to select the higher-risk fund rather than the more skilled manager. The three-year rank correlation between trailing returns and recovered equity exposure is approximately +0.30 overall and rises to +0.36 following equity-market gains. After equity losses, the relationship reverses. In other words, performance chasing among same-vintage TDFs can become risk chasing.

The economic consequences can be enormous. Bollinger stress-tests today’s TDF allocations against the Global Financial Crisis. Among 2025 funds, the highest-equity fund would have suffered an estimated drawdown of roughly 34%, compared with about 10% for the lowest-equity fund bearing the same 2025 label. For 2030 funds, the corresponding figures were approximately 35% versus 19%.

Earlier NBER Research Was Already Warning Us

This builds on John Shoven and Daniel Walton’s 2020 NBER study, An Analysis of the Performance of Target Date Funds. Their returns-based style analysis found that TDFs generally followed their advertised glide paths, but also demonstrated substantial risk even as participants approached retirement. During the February 19–March 23, 2020 market collapse, long-dated TDFs generally lost 30–35%, while 2025 funds—then designed for workers only about five years from retirement—lost approximately 20–25%.

Shoven and Walton also found that past TDF performance had remarkably little predictive power. A fund that outperformed by one percentage point annually in the earlier period was associated with only about 9 basis points of additional annual performance in the subsequent period. Their conclusion was essentially that past winners largely reverted toward the mean.

Their study also showed why looking underneath the vintage label matters. Style analysis found long-dated TDFs with effective equity exposure exceeding 80%, while equity exposure declined as retirement approached and bonds increased. Importantly, their results were distributions—not a single mandatory asset allocation dictated by the year printed on the fund.

Even the Measurement Tools Can Be Gamed or Mislead

Bollinger’s companion methodological research adds another warning that is particularly relevant to fiduciaries comparing TDF performance. Conventional returns-based style analysis can itself mismeasure exposures and alpha.

The standard methodology often constrains style weights to sum to one without providing a free intercept. Bollinger finds that this can cause a flat investment-management fee to leak into the estimated exposures rather than appearing fully as reduced alpha. In his example, of a 50-basis-point fee, only about 22 basis points appeared as lower measured alpha; roughly 28 basis points were absorbed into the fitted benchmark. The higher the fee, the greater the potential distortion.

Performance fees can create an even stranger result: because they alter the shape of net returns, they can reduce fitted upside beta and thereby create the appearance of market-timing skill.

Bollinger proposes “Investable Style Analysis,” which attempts to solve these problems by tracking changing exposures and comparing the fund against actual investable factor portfolios. In simulated funds, the method approximately halved the error of conventional rolling-window analysis and eliminated an approximately 20-basis-point upward bias over five years. On Vanguard’s TDFs, it reconstructed the published equity glide path from returns alone to within roughly 0.9 percentage point across eleven vintages.

There is an additional benchmark warning. If the benchmark fails to contain an exposure actually held by the fund, the omitted exposure can show up as supposed managerial skill. Bollinger demonstrates the problem with a passive Canadian index fund: when Canada was absent from the benchmark opportunity set, the completely passive fund generated approximately two percentage points per year of spurious “alpha.”

Why This Could Become Much Worse With Private Markets

This last point is where the research intersects with the concern raised in this article.

Bollinger’s empirical work is principally about publicly traded assets. It does not establish that private equity, private credit, annuities or crypto are currently being used to manipulate TDF comparisons. But the methodology illustrates why introducing difficult-to-measure assets could make vintage comparisons even more problematic.

If two public-market 2040 funds can already differ by 20 percentage points of equity exposure, calling them both “2040” plainly does not establish equivalent risk.

Now imagine that one 2040 fund also contains private equity carried at manager-reported valuations, private credit without continuous market prices, or an insurance general-account product whose reported value does not fluctuate like a publicly traded bond portfolio.

The comparison problem becomes substantially harder.

A fund can potentially appear to have lower volatility without actually bearing less economic risk. That apparent reduction in measured volatility can then provide room for additional return-seeking exposure elsewhere in the portfolio. A conventional comparison may conclude that Fund A produced a higher return at similar measured risk when the real difference is that some of Fund A’s risk was simply harder to observe.

That is the critical lesson from these papers for fiduciaries:

Do not compare the performance of two target-date funds until you have first established that you are actually comparing comparable risks.

The target year is a label. It is not a risk classification.

And once private assets, insurance products and other non-marked or difficult-to-benchmark investments enter target-date funds, the opportunity for a misleading same-vintage comparison becomes greater, not smaller.

Suggested citations

Bollinger, Mitchell. Same Target Date, Different Risk: A Survivor-Bias-Free Reassessment of Target-Date Funds with Investable Style Analysis. Manuscript prepared for peer review. The study uses the CRSP Survivor-Bias-Free U.S. Mutual Fund Database and reports that roughly 54% of TDFs ever launched had closed, with defunct funds having worse nominal returns and higher fees than survivors—another reason historical comparisons based only on today’s available TDFs can flatter the industry.

Bollinger, Mitchell. When Fees and Alphas Distort Style Recovery: Introducing Fee and Alpha Robust Investable Style Analysis. Research manuscript. The paper argues that conventional no-intercept returns-based style analysis can push fees and alpha into estimated factor loadings and proposes a fee-robust investable alternative.

Shoven, John B., and Daniel B. Walton. “An Analysis of the Performance of Target Date Funds.” NBER Working Paper No. 27971, October 2020.

I think the 34% versus 10% drawdown for two 2025 funds is the killer statistic for your article. It makes the point immediately: same vintage, radically different risk. Then your private-equity/private-credit argument becomes the next logical question—if vintage comparisons are already this unreliable with observable public-market exposures, what happens when some of the risk is buried in assets whose prices themselves are smoothed?

SEC Mutual Fund Standards Are Slipping — But Not Fast Enough for Private Equity, Which Is Turning to State-Regulated CITs – 2 roads into your 401(k)

Private Equity Can Sell an Asset to Itself—and Call It a Market Price