In an era where fiduciary prudence should be paramount, many plan sponsors have dangerously abandoned the foundational ERISA principle of diversification in favor of single-insurer annuity contracts. Billions of dollars in retirement savings are now concentrated in fixed annuities—both general and separate account types—as well as through pension risk transfer (PRT) annuities. These contracts rely entirely on the credit risk of a single private insurance company. In doing so, plan sponsors not only increase participant risk—they also take on an additional fiduciary burden: to evaluate the solvency of that insurer, going far beyond the superficial comfort of a credit rating.

The Mirage of Ratings

Credit ratings are not a shield against fiduciary liability. The 2008 financial crisis laid bare the failures of the rating agencies, with AIG maintaining top-tier ratings until days before its collapse. Even today, insurers like Prudential—formerly designated as a Systemically Important Financial Institution (SIFI)—have lobbied to remove that designation to escape heightened scrutiny. As the Stanford Graduate School of Business has documented, this de-designation eliminates oversight that might have prevented excessive risk-taking within the general account structure.

Despite this, insurers continue to receive high ratings from S&P, Moody’s, and Fitch, often with little transparency about underlying investment risks—particularly with respect to private debt. As discussed in “Private Debt Problematic in ERISA Plans”, these opaque, illiquid assets dominate many insurer portfolios and are used to inflate yield—benefiting the insurer through spread profits while increasing default exposure for plan participants.

S&P has itself acknowledged that state-level regulation of Separate Accounts differs so widely that an identical contract could receive different ratings depending on the state of issuance. In their own words:

“While there have been insolvencies involving separate accounts, the circumstances under which a separate account might be consolidated with the insurer’s general account remain substantially undefined.”

In other words, despite claims that Separate Accounts are “insulated,” policyholders—including ERISA plans—have no clear priority in an insolvency. The assumption that Separate Accounts are safer than General Accounts is unsubstantiated without state-specific legal protections and a higher, documented rating. Yet, no recent insurer appears to have sought such enhanced Separate Account ratings for fixed annuity products—despite billions flowing into them through 401(k) and PRT deals.

State Guarantee Associations: False Security

Plan fiduciaries also wrongly assume that State Guarantee Associations (SGAs) provide meaningful protection in the event of insurer failure. As explained in “State Guarantee Associations Behind Annuities Are a Joke”, these entities are riddled with limitations:

• Coverage caps often top out at $250,000 per participant.
• Coverage is limited to annuities considered insurance policies—a classification that remains unsettled in many states for group annuity contracts.
• Plans that invest via Separate Accounts may not be covered at all.
• SGAs are slow to pay and require insolvency proceedings to trigger.

This patchwork system of protection undermines the uniform national standards intended under ERISA, replacing them with the legal uncertainty of 50 different state frameworks.

Pension Risk Transfer: A Regulatory Shell Game

In the PRT context, the problem becomes even more acute. Plan sponsors offload pension liabilities to an insurer and call it a day. But as outlined in “Pension Risk Transfer Annuities Should Be Prohibited”, this shift removes ERISA protections from participants and exposes them to pure credit risk—often without even basic downgrade protection.

These annuities, once purchased, are irrevocable. There is no mark-to-market pricing, no participant choice, and no fiduciary oversight after transfer. Unlike defined contribution plan assets—where fiduciaries can replace a fund or manager—PRT annuities place participants in the hands of a single insurer, often for life.

Incentives Misaligned: Kickbacks and Structuring Fees

Plan sponsors frequently benefit from “structuring fees,” “rebalance profits,” or “rebates” paid by insurers to corporate treasury departments. These functionally operate as kickbacks that create a dangerous conflict of interest: the employer’s financial interest in closing the pension or reducing balance sheet liabilities directly conflicts with the participants’ need for long-term security. The insurer’s profit model—maximizing spread between illiquid, risky investments and low fixed crediting rates—comes at participant expense.

Going Beyond Ratings: The Fiduciary Obligation

ERISA fiduciaries are held to the highest duties of care and loyalty. In choosing a single-issuer annuity, they must:

• Conduct independent credit analysis beyond agency ratings.
• Evaluate the insurer’s asset allocation, exposure to private debt, and leverage.
• Require downgrade protections, triggers, and collateralization where appropriate.
• Consider alternative structures, including diversified stable value arrangements that maintain ERISA protections.
• Avoid reliance on state-level guarantees or superficial representations of safety.

In the capital structure, plan participants in annuities without downgrade protections are subordinated to sophisticated Wall Street creditors, private equity owners, and even commercial reinsurers. They deserve better.

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Conclusion

If an ERISA fiduciary would not invest 100% of a participant’s 401(k) balance into the high-yield bonds of a single insurer, they should not do so implicitly by placing it into an annuity backed by that insurer’s general or separate account. Ratings are not a fiduciary process. Participants cannot diversify away from default once locked into a single-issuer annuity.

The burden is on the fiduciary to prove prudence—not to presume it.