For decades, 401(k) investment accounting lived in a relatively clean world. Most plans are used primarily:
- One set of books – a portfolio of SEC-registered mutual funds, all marked to market daily; or, around 25% used mark to market for 90% of their options, with perhaps one or 2 stable value options using book value accounting a second set of books.
Now, under Trump’s crypto and private equity in 401(k) push, we are rapidly heading toward four incompatible accounting systems inside the same retirement plan. One accounting standard is essential for transparency and accountability—but the direction we’re heading guarantees neither.
1. Mutual Funds: The Gold Standard of Market Value Accounting
Accounting Standard:
- GAAP / FASB rules for investment companies, enforced by the SEC.
- Mark-to-market daily pricing based on observable market prices.
- Independent custodians and pricing vendors.
- Audited annual reports with standardized disclosures.
Why It Works:
- Participants see a daily NAV (Net Asset Value).
- Prices are transparent, comparable, and difficult to manipulate.
- Fiduciaries can benchmark performance accurately.
This is the historic standard that most investors think applies to their 401(k) across the board. Unfortunately, it’s only true for the mutual fund portion of a plan.
2. Annuities: Book Value Accounting in the Shadows
Accounting Standard:
- Statutory accounting under the NAIC Accounting Practices and Procedures Manual.
- Regulated by a single “cherry-picked” state insurance commissioner—chosen by the insurer, not the plan sponsor.
- Assets are held at amortized cost or “book value,” not market value.
Key Differences from Mutual Funds:
- Gains/losses on investments are not reflected daily—only when sold or impaired.
- Investment returns to participants are set by the insurer’s discretion, often far below what the general account earns.
- Spread profits (difference between what the insurer earns and what it credits) are not disclosed in plan reports or participant statements.
Fiduciary Implications:
- Because statutory accounting hides market swings, risk appears lower than it is.
The DOL has largely ignored this space, and litigation has been sparse, focusing mostly on small plans where it’s too costly to sue. I believe that annuities are prohibited transactions https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/ but I think litigation could be increasing. https://commonsense401kproject.com/2025/05/10/annuities-flunk-prohibited-transactions-exemption-scotus-ruling-will-open-floodgates-of-litigation/
As I’ve argued before, annuities were the gateway drug that allowed non-standard accounting to creep into 401(k)s【https://commonsense401kproject.com/2025/08/07/trumps-crypto-and-private-equity-in-401k-push-enabled-by-the-gateway-drug-annuities/
3. Private Equity & Alternatives: Mark-to-Make-Believe
Accounting Standard:
- ASC 820 (Fair Value Measurement) applies, but with a catch—private assets are often valued using Level 3 inputs (unobservable data).
- Valuations are performed by the managers themselves or by “independent” appraisers hand-picked by the managers.
Why It’s Problematic:
- There is no daily pricing—valuations are often quarterly, lagged, and subjective.
- Conflicts of interest are rampant; managers have incentives to overstate values to boost reported returns or maintain fee levels.
- Cash flows, capital calls, and distributions make performance comparisons difficult.
I’ve called this mark to make believe because, unlike mutual funds, these valuations can be engineered to smooth returns and hide losses until a crisis forces a markdown.
ERISA Status:
I believe private equity in 401(k) plans is a prohibited transaction https://commonsense401kproject.com/2025/07/02/private-equity-is-a-prohibited-transaction-via-chat-gpt/
4. Crypto: The Accounting Wild West
Accounting Standard:
- None has fully settled on retirement plans.
- Under GAAP, crypto is treated as an indefinite-lived intangible asset—which means it is written down for impairment but never marked up until sold.
- Pricing comes from exchanges with varying reliability and susceptibility to manipulation.
Risk Profile:
- Valuation swings of 50%+ in a year.
- Custody and security risks beyond normal market investments.
- Potential for outright fabricated valuations if held in poorly regulated vehicles.
I have argued that crypto is a prohibited transaction under ERISA https://commonsense401kproject.com/2025/07/03/crypto-is-erisa-prohibited-transaction-chatgpt-do-not-use-in-401k/
but the bigger danger is that, without strong accounting rules, you may never know what your crypto holdings are really worth.
Comparison Table: The Four Sets of Books in 401(k) Plans
| Investment Type | Accounting Basis | Valuation Frequency | Regulator | Transparency Level | Fiduciary Risks |
| Mutual Funds | Market value (GAAP/FASB, SEC rules) | Daily | SEC | High – daily NAVs, audited | Low, unless fees are excessive |
| Annuities | Book value (NAIC statutory accounting) | Infrequent, market values not shown | State insurance commissioner (insurer-chosen) | Low – returns set by insurer, spread hidden | High – opaque returns, single-entity credit risk |
| Private Equity / Alternatives | “Fair value” with Level 3 inputs (ASC 820) | Quarterly or longer, lagged | SEC for registered funds; otherwise state banking/trust regulators for CITs | Low to moderate – manager-controlled valuations | High – valuation bias, illiquidity, conflicts |
| Crypto | Intangible asset model under GAAP | Continuous in theory, but source-dependent | SEC/CFTC (fragmented oversight) | Very low – price feeds vary, no unified custody standard | Very high – volatility, custody risk, fraud potential |
The Bigger Danger: Mixing the Books in Target Date Funds
The most alarming development is blended accounting inside target date funds, especially those structured as state-regulated CITs instead of SEC-regulated mutual funds.
Why this matters:
- A single target date fund could hold mutual funds (market value accounting), annuities (book value accounting), private equity (manager valuations), and even crypto—all in one NAV.
- The net asset value the participant sees will be a cocktail of different accounting standards, some transparent, some opaque.
- You could be looking at a “smooth” performance line without realizing risk is hidden under the hood.
How It Will Happen:
- Poorly regulated CITs allow private equity or annuities to be layered inside other CITs.
- I predict a 10%–15% private equity allocation will be buried inside a CIT that’s then wrapped into a target date fund.
- Advisors will tell fiduciaries that a “trusted professional manager” can handle these complex allocations—removing the incentive to dig deeper.
Pru and Principal are already structuring toxic target dates like this https://commonsense401kproject.com/2022/06/07/toxic-target-date-case-study-of-the-worst-of-the-worst/
ERISA’s Prohibited Transactions: The Untapped Defense
ERISA’s prohibited transaction rules were designed to stop creative accounting and self-dealing before they harm participants. But:
- The DOL has not enforced these rules aggressively in the annuity or CIT context.
- Litigation is only starting to touch on these accounting mismatches.
I believe annuities, private equity, and crypto in 401(k) plans are all prohibited transactions unless they fall under narrow exemptions—which most don’t in practice.
Conclusion
We are moving from one uniform, transparent accounting system to four incompatible ones inside the same retirement plan. This is not just an accounting curiosity—it is a structural shift that enables opacity, hides risk, and erodes fiduciary accountability.
Mutual funds gave us a clean, daily-marked-to-market view of investments. Annuities broke that standard, private equity exploited it, and crypto may blow it wide open. Without one standard of accounting, ERISA fiduciaries will be flying blind—and so will participants.
The CommonSense 401k Project 