Annuities have always flunked but no one has ever challenged them because of their total lack of transparency. Now with SCOTUS Cornell decision, the burden of proof has shifted to the plans to defend why they think annuities are exempt from being prohibited transactions, and for the most part they are clueless.
Most annuities in most DC plans are labeled “parties in interest” because they have a relationship with the administrator/recordkeeper. This relationship creates a potential conflict of interest and labeled a Prohibited Transaction. A Prohibited Transaction Exemption (PTE) must be used to include the annuities in the plan.
PTE’s are subject to the ERISA Impartial Conduct Standards which are a set of requirements for fiduciaries providing investment advice to retirement investors, ensuring they act in the best interest of the client, receive reasonable compensation, and avoid making misleading statements.
Annuities for decades have claimed Prohibited transaction exemptions behind PTE 84-24 and more recently PTE 2020-02 with few challenges or any accountability.[1] However, the recent SCOTUS decision clearly says plans are responsible for verifying that their investments qualify for the prohibited transaction exemptions. The PTEs that apply to the insurance products they put in their plans where most are “parties in interest” must meet the Impartial Conduct Standards.[2]
Judge Lynn when ruling on Fixed Index Annuities in 2017 stated Because “insurers generally reserve rights to change participation rates, interest caps, and fees,” FIAs can “effectively transfer investment risks from insurers to investors.”[3] this control by insurers clearly violates Impartial Conduct Standards.[4]
ERISA PTE 84-24, which is based on the Restatement of Trust, states the annuities must meet the following requirements called the Impartial Conduct Standards and Written Disclosures and Policies and Procedures backing up these standards. Most annuities I have seen do not even come close.
The Impartial Conduct Standards have 4 major obligations. A. Care Obligation B. Loyalty Obligation C. Reasonable compensation limitation D. No materially misleading statements (including by omission)
Care Obligation This obligation reflects the care, skill, prudence, and diligence – similar to Prudent Person Fiduciary standard. Diversification is one of the most basic fiduciary duties. Under the CFA pension trustee standard for acting with prudence and reasonable care the plan should seek appropriate levels of diversification.[5] Fixed annuities flunk this diversification test with single entity credit and liquidity risk. [6]
The Federal Reserve in April 2025 said “Life insurers continued to hold a significant share of risky and illiquid assets on their balance sheets” [7] Under the CFA pension trustee standard Principle #3 to Act with skill competence and diligence it cites need for awareness of investments liquidity, and any other risks. Certain types of investments …necessitate more thorough investigation and understanding than do fundamental investments, such as straightforward and transparent equity, fixed-income, or mutual fund products Annuities call for more diligence by sponsors which needs to be fully documented by plans. Plan sponsors could mitigate this credit and liquidity risk in their annuity contracts with downgrade clauses which allow liquidity at book value if the annuity issuer is downgraded but these type clauses have not been adopted for most plans.[8]
Loyalty Obligation Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Diligence is nearly impossible with misleading, nontransparent contracts, and the lack of plan/participant ownership of securities. Secret kickbacks and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors. The new fiduciary rule requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” which has been strongly opposed by the Annuity industry. Plans typically agree to Annuity contracts that avoid any fiduciary language or responsibility on the part of the issuer. [9] The Federal Reserve in 1992 exposed the varying weak state regulatory and reserve claims and most plans are not even aware of which state issued their annuity contract.[10]
Reasonable compensation limitation Annuities have a total lack of disclosure of profits, fees and compensation – effectively denying any chance for a prospective purchaser to make an “informed decision.” CFA Institute Global Investment Performance Standards (GIPS) are transparency standards on performance and fees. Annuities typically do not comply with CFA GIPS standards.[11]
Noted Morningstar analyst John Rekenthaler said in April 2022 that in selecting 401(k) investment options, “inappropriate are investments that don’t price daily.” Annuities typically do not price daily and do not provide valuation transparency.[12]
A number of lawsuits have settled with claims of excessive secret fees and spreads in annuities. An insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [13] In a report, Morningstar acknowledges that annuities fees inside 401(k) plans are challenging to understand. ‘No insurer tells you what is in the spread.’ ‘Insurance firms collect a spread”[14] I was quoted on NBC that the TIAA Fixed Annuity made spread fees of around 120 basis points. TIAA makes $billions in undisclosed profits on their fixed annuity products. TIAA annuity has been called the company’s profit “engine” driving $46.2 in bonuses to their top five executives.[15] These IPG fixed annuity contracts have been characterized by DC plan group NAGDCA as having serious fiduciary issues with hidden fees. “Due to the fact that the plan sponsor does not own the underlying investments, the portfolio holdings, performance, risk, and management fees are generally not disclosed. This limits the ability of plan sponsors to compare returns with other SVFs [stable-value funds]. It also makes it nearly impossible for plan sponsors to know the fees (which can be increased without disclosure) paid by participants in these funds—a critical component of a fiduciary’s responsibility “ [16]
No materially misleading statements (including by omission) Annuities have numerous material misleading statements in their contracts, including the total lack of disclosure of spread/fees. Under the CFA pension trustee standard for policies Trustees should … draft written policies that include a discussion of risk tolerances, return objectives, liquidity requirements.[17] Plans with annuities many times do not have Investment Policy Statements or weak IPS that do not provide transparency or accountability for the annuities.[18]
The Annuity industry thrives on secret commissions.[19] The GAO and Senator Warren reported on these commissions.[20] The annuity industry has fought the so-called Biden Fiduciary rule which would expose many annuity commissions in 401(k) plans. The annuity industry trade group that coordinates weak state insurance commissioners National Association Insurance Commissioners (NAIC) best interest rule was ridiculed by a DOL Official “compensation is not considered a conflict of interest,” All 50 State Insurance Commissioners have rejected Fiduciary standards by adopting the NAIC best interest rules.[21]
Annuities claim principal protection, but some fixed annuity contracts recently have “broken the buck” and violated their contracts by forcing significant losses on participants. The written disclosures under weak state regulations omit critical information on risks and fees also prevents any opportunity for an “informed decision.”
Conclusion
Annuities clearly flunk all 4 major obligations of the Impartial Conduct Standards and are not exempt as Prohibited Transactions.
Plans with annuities have huge fiduciary liabilities which grow larger each year. With the new Supreme Court Case CunninghamV.Cornell the risk of litigation, and potential damages have grown greatly. [22] Within 2 weeks of the decision a case of annuities as prohibited transactions has already been filed.
Plan sponsors should amend their Annuity contracts to at least stop the growth of fiduciary liability.
1. A Most Favored Nation (MFN) clause to make sure they have the best rate/largest payouts/ lowest spread fees of all the annuity providers similar clients
2. A downgrade clause that allows liquidity at full book value if the insurance company issuing the annuity is downgraded.
3. Annuity provider agrees to be ERISA Fiduciary
If they cannot get these 3 clauses – the plan must demand that the annuity provider let them out of the contract, and if not consider legal action against the insurance company.
[1] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/
[2] https://news.bloomberglaw.com/daily-labor-report/high-courts-cornell-ruling-stands-to-supercharge-401k-suits
[3] Chamber of Commerce of the United States, et. al. v Hugler, 231 F. Supp. 3d 152 (N.D. Tex. 2017) (Lynn decision), 187
[4] Attorney James Watkins writes on the Fiduciary Risks of Annuities
[5] https://rpc.cfainstitute.org/codes-and-standards/pension-trustee-code
[6] “Safe” Annuity Retirement Products and a Possible US Retirement Crisis Dr. Tom Lambert and Chris Tobe https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4761980
[7] https://www.federalreserve.gov/publications/files/financial-stability-report-20250425.pdf
[8] American Academy of Actuaries Report of the GIC With Credit Rating Downgrade October 1999 https://www.actuary.org/sites/default/files/pdf/life/gic.pdf
[9] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/
[10] . Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf
[11] https://rpc.cfainstitute.org/-/media/documents/book/rf-publication/2017/rf-v2017-n3-1.pdf
[12]https://www.morningstar.com/articles/1090732/what-belongs-in-401k-plans
[13] Annuity Executive brags on 200bps 2% fees https://www.bloomberg.com/news/articles/2013-03-06/prudential-says-annuity-fees-would-make-bankers-dance?embedded-checkout=true
[14] https://riabiz.com/a/2024/5/11/fidelity-voya-and-boa-smooth-blackrocks-launch-of-guaranteed-paycheck-etfs-but-401k-plan-participants-may-yet-balk-at-high-unseeable-fees-and-intangibility-of-benefits
[15] https://www.nbcnews.com/investigations/tiaa-pushes-costly-retirement-products-cover-losses-whistleblower-rcna161198
[16] http://www.nagdca.org/documents/StableValueFunds.pdf_ The National Association of Government Defined Contribution Administrators, Inc. (NAGDCA) September 2010
[17][17] https://rpc.cfainstitute.org/codes-and-standards/pension-trustee-code
[18] https://commonsense401kproject.com/2023/03/12/investment-policy-statements-crucial-to-fiduciary-duty/
[19] Consumer Federation of America on Biden Annuity Rule https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/
[20] https://www.gao.gov/products/gao-24-104632 and Senator Warrens reported on Annuity kickbacks.[xiii] https://www.warren.senate.gov/imo/media/doc/senator_warrens_annuity_report_-_sept_2024.pdf
[21] https://401kspecialistmag.com/all-50-states-now-on-board-with-naic-best-interest-annuity-rule/
[22] https://commonsense401kproject.com/2025/04/21/scotus-9-0-erisa-decision-in-cunningham-v-cornell-university-case-confirms-my-view-on-annuities-as-prohibited-transactions/
The CommonSense 401k Project 