Introduction
ERISA was enacted to impose strict fiduciary, accounting, and investment performance standards on retirement plan assets. SEC-registered mutual funds must meet these standards through transparent reporting, daily pricing, and oversight by independent boards. By contrast, insurance-based annuities operate under weaker fiduciary standards, opaque accounting rules, and undisclosed performance spreads, making them unlikely to qualify for an exemption from ERISA’s prohibited transaction rules.¹
As my earlier analyses demonstrate, annuities have become a gateway drug that opened the door to non-standard accounting and conflicted arrangements in retirement plans.²
I. Fiduciary Standards: ERISA §404(a) vs. NAIC Rule 275
ERISA §404(a) imposes explicit duties of prudence and loyalty, requiring fiduciaries to act solely in the interest of participants and beneficiaries. By contrast, NAIC Rule 275, the state insurance ‘best interest’ standard, does not include a loyalty duty and permits conflicts of interest if disclosures are made.³ Plan fiduciaries cannot rely on NAIC compliance to meet ERISA duties. A product that satisfies Rule 275 may still violate ERISA’s exclusive benefit rule, making it a prohibited transaction.
II. Accounting Standards: Book Value vs. Market Value
Mutual funds must report daily mark-to-market NAVs under SEC rules, fully reflecting gains and losses. Annuities, especially General Account or Separate Account contracts, are governed by statutory accounting. Assets are often held at amortized cost, meaning losses are hidden unless realized. Portfolios frequently contain 30–50% private credit and alternatives.⁴ Book-value accounting disguises true risk, making annuities appear ‘safe’ when underlying portfolios may be volatile or impaired.
III. Investment Performance Standards: Spreads and Opaqueness
Mutual funds disclose expense ratios, portfolio holdings, and benchmark comparisons. Annuities credit 2–3% to participants while earning 6–7% on general account assets. The undisclosed spread—sometimes over 400 basis points—represents pure insurer profit.⁵ This opacity prevents fiduciaries from assessing the reasonableness of compensation, triggering ERISA §406(b) self-dealing prohibitions.
IV. Conflicted Providers and “Party in Interest” Risks
In many 401(k) plans, the recordkeeper is also the annuity provider. As Cunningham v. Cornell highlighted, this dual role creates inherent conflicts of interest. When insurers steer plan assets into affiliated annuities, fiduciaries face direct exposure under the prohibited transaction rules.⁶
V. Transparency Suppression: Prudential and NAIC RBC Proposal
Prudential, domiciled in New Jersey, shields its quarterly solvency filings under N.J. Stat. §17-23-1, denying plan fiduciaries access to critical risk data.⁷ The NAIC Capital Adequacy Task Force has proposed banning public disclosure of insurer Risk-Based Capital (RBC) scores, even though the Society of Actuaries warns that transparency is essential.⁸ Fiduciaries cannot evaluate insurer solvency without this data, a critical factor in selecting annuities.
VI. Litigation Outlook
The Supreme Court has already narrowed available exemptions from prohibited transaction rules.² Combined with weak fiduciary standards, opaque accounting, undisclosed spreads, and active suppression of solvency data, annuities present a litigation time bomb: plaintiffs will argue that fiduciaries cannot prudently select annuities without access to solvency and fee data. Courts will increasingly view annuities as per se prohibited transactions absent full transparency. Most annuities do not have downgrade provisions, so their liquidity risks go up simultaneously with their credit risk. Fabozzi, in the 1998 Handbook of stable value, says that General Account fixed annuities have 10 times the risk of synthetic diversified stable value.
Conclusion
Annuities fail across three pillars: fiduciary duties, accounting standards, and performance transparency. SEC-registered mutual funds meet all three; annuities meet none. By continuing to rely on these weaker standards, insurers are ensuring that their products will be viewed as prohibited transactions under ERISA, and plan fiduciaries who adopt them will face heightened litigation risk.
Footnotes
¹ ERISA §406; see also https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/
² https://commonsense401kproject.com/2025/05/10/annuities-flunk-prohibited-transactions-exemption-scotus-ruling-will-open-floodgates-of-litigation/
³ Comparison of ERISA §404(a) with NAIC Rule 275; see also https://commonsense401kproject.com/2025/07/27/diversification-abandoned-why-plan-fiduciaries-must-rethink-fixed-annuities-and-pension-risk-transfers/
⁴ https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/
⁵ Spread profits analysis; see https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/
⁶ Cunningham v. Cornell Univ., 86 F.4th 961 (2d Cir. 2023).
⁷ N.J. Stat. §17-23-1.
⁸ NAIC, Capital Adequacy Task Force, Special National Meeting Packet (2025), p.56.
SOURCES
The Handbook of Stable Value Investments 1st Edition by Frank J. Fabozzi 1998 Jacquelin Griffin Evaluating Wrap Provider Credit Risk in Synthetic GICs pg. 272 https://www.amazon.com/Handbook-Stable-Value-Investments/dp/1883249422
National Association of Government Defined Contribution Administrators. 2010. 2010 Issue Brochure – What Plan Sponsors Should Know About Stable Value Funds (SVF) www.nagdca.org/documents/StableValueFunds.pdf
Shames, Mitch. 2022. “Annuities: The straw that breaks the back of retirement plan fiduciaries,” Benefits Pro. May 3, 2022. https://www.benefitspro.com/2022/05/03/annuities-the-straw-that-breaks-the-back-of-retirement-plan-fiduciaries/?slreturn=20240312164319 . Accessed on March 12, 2024.
Tobe, Christopher B. 2004. “The Consultants Guide to Stable Value.” Journal of Investment Consulting, 7(1), Summer 2004, Available at SSRN: https://ssrn.com/abstract=577603 . Accessed on March 12, 2024.
“Safe” Annuity Retirement Products and a Possible US Retirement Crisis Journal of Economic Issues Accepted 2024 Dr. Tom Lambert and Chris Tobe https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4761980
Testimony by Ben S Bernanke, Federal Reserve, US House of Representatives, Washington DC, 24 March 2009 https://www.bis.org/review/r090325a.pdf
The CommonSense 401k Project 
So, where annuities are mandated per ERISA, the tax code and REACT, such as in pension plans, they are prohibited transactions?
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Depends on the annuity if it flunks the imprudent conduct standards these suppossed mandates cannot be used as get out of jail free card. In a PRT perhaps an annuity with a downgrade clause could pass fiduciary standards.
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