By Chris Tobe, CFA, CAIA
A recent Cerulli Study exposes Guaranteed Income Annuities not only as unnecessary, but as creating ERISA Fiduciary Issues.[i] I warned of this in my 2022 blog post on how income annuities are a fiduciary minefield.[ii]
“Cerulli Edge—U.S. Retirement Edition,” finds that as of 2024, 91% of asset managers believe guaranteed lifetime income options carry a negative stigma. “Annuities continue to face perception issues due to high fees, complexity, lack of transparency, and concerns about insurer solvency, all of which deter plan participants,” says Idin Eftekhari, a senior analyst at Cerulli. “The tradeoff between liquidity and a guaranteed income stream is unappealing for many participants.[iii]
The argument that you need annuities to provide lifetime income is debunked as well.
Cerulli also points to lower cost transparent liquid methods of providing monthly income called “structured drawdown strategies” as superior alternatives to annuities.[iv]
Annuities are a Fiduciary Breach
I wrote in 2022 that all annuities are a fiduciary breach [v] While Guaranteed Income Annuities are still small in 401(k)s, I believe they are being used to justify even worse annuity products like IPG Fixed Annuities and Index annuities. Immediate Participation Guarantee (IPG) is a Group fixed annuity contract (GAC) written to a group of investors in a DC Plan and not individuals. [v]
IPG group annuities have no maturity, and set whatever rate they want without a set formula.
https://www.dfs.ny.gov/system/files/documents/2021/04/out_ipg_da_2000.pdf
Annuities are contracts that are an ERISA Prohibited Transaction. Annuity providers claim their products are subject to Prohibited Transaction Exemption 84-4, but I have found that most annuities I have seen do not qualify for the exemption.[vi]
Annuity contracts are regulated by weak state insurance commissioners, and most plan sponsors are clueless to that fact. The National Association of Insurance Commissioners (NAIC) sets weak national standards, but some state insurance commissioners have even weaker regulations. NAIC’s prime goal is to prevent any national regulation or transparency as evidenced in this letter to Congress. [vii] NAIC is currently trying to hide insurers Risk Based Capital (RBC) scores to hide significant risk from consumers. [viii]
There is an attempt to hide annuities in Target Date Funds in weak state regulated CIT’s in which I testified on to the DOL Advisory Committee in July 2024.[ix]
Annuity contracts shift all the fiduciary burden from themselves to the plan. Thus, the burden of proof is on plan sponsors regarding if their plan annuity qualifies for an exemption from being classified as a prohibited transaction.[x]
Annuities Credit & Liquidity Risk High & Getting Higher
A recent Federal Reserve paper exposes poor state & offshore regulation of Life Insurance companies that issue Annuities. The FED’s main problem is the hiding and understating of credit, liquidity & leverage risks.[xi]
The FED economists contend that life and annuity issuers make investments in what amount to loans to risky firms look stronger by funneling the weak loans through arrangements — such as business development companies, broadly syndicated loan pools, collateralized loan obligations, middle-market CLOs and joint venture loan funds — that qualify for higher credit ratings.[xii] “These arrangements seek to shift portfolio allocations towards risky corporate debt while exploiting loopholes stemming from rating agency methodologies and accounting standards.”[xiii]
Insurance risk experts Larry Rybka, Thomas Gober, Dick Weber Michelle Gordon highlight the addition of risks from Reinsurance in a recent trade publication. Rybka says The life insurance and annuities industry, he said, has become “like the Wild West.” Carriers are abusing reinsurance,”[xiv] “It’s a shell game and, in general, the regulators are not paying attention,” said Dick Weber,[xv] Gober says It’s not just offshore reinsurers that can largely skirt U.S. accounting standards, he said. There are also “captive” reinsurance companies within the U.S. mostly in Vermont, South Carolina, and Delaware. “The lack of transparency with these affiliated reinsurance companies, both captive and offshore, is the single biggest threat to U.S. policyholders and annuitants,” said Gober.[xvi]
Michelle Gordon says that advisors should check the creditworthiness of any insurance companies they recommend to clients, she said, though most don’t or can’t because of lax ratings standards. “The non-codification of insurance advisement results in sub-optimization of consumer protections,” she said.[xvii]
Fiduciaries should be aware of these risks and have a duty to defend and justify these risks if they put annuities in their plans.
[i] https://401kspecialistmag.com/offering-guaranteed-income-not-as-essential-as-initially-perceived/
[ii] https://commonsense401kproject.com/2022/02/10/401k-lifetime-income-a-fiduciary-minefield/
[iii] https://401kspecialistmag.com/offering-guaranteed-income-not-as-essential-as-initially-perceived/
[iv] https://401kspecialistmag.com/offering-guaranteed-income-not-as-essential-as-initially-perceived/
[v] https://www.dfs.ny.gov/system/files/documents/2021/04/out_ipg_da_2000.pdf
[vi] https://commonsense401kproject.com/2022/05/11/annuities-are-a-fiduciary-breach/
[viii] https://content.naic.org/sites/default/files/naic2025federalfinancialprioritiesletter.pdf
[x] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/
[xiii] https://www.thinkadvisor.com/2025/03/24/fed-researchers-see-life-insurers-filling-up-on-junk-assets/
[xvi] https://www.fa-mag.com/news/annuities-and-life-insurance-are-at-risk–advisors-warn-81810.html?section=303 [1] https://www.fa-mag.com/news/annuities-and-life-insurance-are-at-risk–advisors-warn-81810.html?section=303
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