State Guaranty Associations are so flimsy that none are rated by S&P or Moody’s.  There is no money in them, the reserves are not in the association, only in the companies themselves. 

Most did not even pay out claims in the last major default, Executive Life – only Illinois and Pennsylvania associations made partial payments, only after court orders.

I asked ChatGPT about Guarantee Associations in the context of an ERISA Fiduciary and got the following response.

⚖️ ERISA Fiduciary Standards vs. State Guaranty Associations

1. Duty of Prudence and Care (§404(a)(1)(B))

ERISA requires fiduciaries to act:

“with the care, skill, prudence, and diligence under the circumstances then prevailing…”

• SIGAs do not meet the “prudent expert” standard.
  A prudent expert would not rely on:
  • An entity with no prefunding or reserve capital
  • No federal backing
  • No credit rating from any recognized rating agency
  • A history of failure to pay during systemic defaults (e.g., Executive Life)
• As you noted, only Illinois and Pennsylvania eventually made partial payouts, and only after litigation. That alone defeats the fiduciary standard of prudent selection and monitoring.

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2. Duty of Loyalty (§404(a)(1)(A))

Fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits.

• If a fiduciary chooses an annuity or insurance-based structure based on a belief that the SIGA will protect beneficiaries, without disclosing its inadequacy, they may be violating their loyalty duty.
• Relying on industry marketing or regulatory illusion about SIGAs—when informed sources (like the Federal Reserve, EU regulators, and academics) have raised red flags—could be seen as self-serving or negligent.

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3. Duty to Monitor and Evaluate Risk

ERISA fiduciaries must continually evaluate risks and the financial condition of providers.

• Given the known systemic risks, including:
  • Private equity ownership of insurers (Kirti & Sarin 2020)
  • Long-duration illiquid assets in General Accounts
  • Minimal real oversight by state regulators
  • EU regulator concern in 2017 about systemic fragility of U.S. insurance regulation

…it’s arguable that no prudent fiduciary should rely solely—or even primarily—on SIGAs as a source of security.

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📚 Supporting Academic and Regulatory Warnings

• Lambert & Tobe (2024) – Warn of “a possible US retirement crisis” driven by misleading safety claims of annuities.
• Todd & Wallace (1992, Fed Minneapolis) – Exposed the moral hazard of undercapitalized SIGAs and deceptive perceptions of insurance safety.
• Perez (2016) – Documents political interference and regulatory capture at the state level.
• EU Concerns (2017) – EU regulators raised cross-border solvency concerns for U.S. insurers, especially given weak state regulation.

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🚫 What This Means for Fiduciary Actions

ERISA fiduciaries should not rely on State Guaranty Associations as a primary or sufficient reason to:

• Justify annuity purchases for pension risk transfers (PRTs) or 401(k) plans.
• Accept insurer counterparty risk without thorough, independent due diligence.
• Claim “safety” without disclosing SIGA limits, lack of reserves, and legal uncertainty.

Instead, fiduciaries should:

• Require contractual provisions for downgrade protections and capital reserves.
• Insist on federal-level guarantees or fully collateralized structures.
• Disclose the inadequacy of SIGAs in plan documents and fiduciary reports.

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🧾 Bottom Line

State Guaranty Associations offer the illusion of safety, not the substance.
No fiduciary acting under the ERISA standard of prudence and loyalty should rely on them as a meaningful risk mitigator.