Insurance companies are under weak, captive state regulation, which allows them to hide excessive risks and fees behind contracts with little to no meaningful disclosure. Fiduciaries under ERISA, however, are required to know the risks and fees in any investment before committing participant assets, and to monitor those risks on an ongoing basis. One-sided, secretive annuity contracts make it especially challenging to quantify damages or evaluate prudence.[1]
Pulitzer Prize–winning journalist Gretchen Morgenson has repeatedly exposed the hidden risks and fees buried in TIAA’s General Account fixed IPG annuity products in 401(k) type plans. In her August 2024 NBC News investigation, I was quoted as estimating that TIAA extracts excessive hidden spread profits of over 120 basis points (1.2%) annually on its flagship annuity, TIAA Traditional.[2]
Just one year later, in September 2025, I repeated my claim that TIAA’s hidden annuity spreads range from 120 to 150 basis points. Still, not a single insurer has challenged the accuracy of these numbers. Instead, TIAA’s spokesman declined to disclose what the company earns on these products, dismissing the question as ‘competitive and proprietary information.'[3]
Legal and Fiduciary Framework
Documenting that one-sided annuity contracts are ERISA Prohibited Transactions should be easier after the Supreme Court’s ruling in Cunningham v. Cornell. The Court clarified that since most annuity providers in plans are a party in interest, fiduciaries therefore have a duty to know and evaluate these spreads and risks.[4] Dr. Tom Lambert and I have an upcoming paper in the Journal of Economic Issues documenting these risks.[5] I have also written extensively in my blog about how annuities flunk prohibited transaction tests.[6]
With Pension Risk Transfer (PRT) annuities, one way to measure risk is to compare an annuity with downgrade provisions to one without. Insurers, because such provisions are less profitable, claim they will not write annuities with downgrade provisions. Yet such annuities have been issued in the past and could be again. Fiduciaries, in collusion with annuity providers, fail to ask for downgrade provisions because of monetary incentives.[7]
Annuity providers refuse to disclose risk and fees, but after Cunningham v. Cornell, judges may begin compelling disclosure in ERISA discovery. In the meantime, damages must be estimated through a variety of methods.[8]
My experience at Transamerica for 7 years, making profits, was that we wanted at least 200 basis points for any spread annuity product, general account, or separate account. Industry knowledge was that most insurers (who belonged to LIMRA) had similar 200-400 bps spreads, the exception being TIAA with lower spreads, 120 to 150 basis points with higher yields. Since spreads and general account returns are still (illegally under ERISA) secret, in litigation, we have taken the difference between the 2% yield of Prudential IPG GA vs. the 4.5% yield of TIAA to capture at least half the total spread profits to measure damages.
Measuring Annuity Risk: Credit Default Swaps and the Illusion of ‘Zero Risk’
1. The Problem of Measuring Annuity Risk
Insurance companies that issue Institutional Pension Guarantees (IPG) and PRT annuities often argue that the credit and liquidity risk embedded in these products is negligible or even ‘zero.’ In practice, the opposite is true:
• Single-Entity Credit Risk: Annuity obligations are backed solely by one insurance company. Default risk is concentrated.[9]
• Liquidity Risk: Annuities are long-duration obligations (often 10–30 years) that cannot be traded or hedged.[10]
2. Credit Default Swaps as a Proxy for Risk
Credit default swaps (CDS) provide one of the few market-based ways to measure credit risk. Short-term (1–5y) CDS spreads exist for insurers like MetLife, Prudential, Lincoln, and Athene. Longer horizons (10–20y) are illiquid or unavailable.[11]
3. The Regulatory and Fiduciary Gap
When insurers claim annuity risk is ‘too high to measure,’ they shift the burden of disclosure onto fiduciaries and participants. This creates fiduciary blind spots and regulatory loopholes. State regulators focus on solvency metrics that mask true long-term risk, while insurers misleadingly compare annuities to Treasury-like guarantees.[12] UPDATE November 6, 2025: Insurers use small ratings agencies to get favorable ratings on Private Credit. The SEC is investigating Egan-Jones for this Practice. Egan Jones has only 20 analysts rating over 5000 different issues. https://www.bloomberg.com/news/articles/2025-11-06/egan-jones-probed-by-sec-over-its-credit-ratings-practices Bloomberg Analysis of NAIC shows that capital charges for AA-rated issues are half of what an A rating is, so the incentive in $billions is to inflate ratings
4. Policy Implications and Recommendations
Recommendations include: (a) transparency in disclosures, (b) stress testing scenarios, (c) enhanced federal oversight to prohibit misleading ‘risk-free’ marketing, and (d) requiring downgrade provisions in PRT contracts.[13]
Conclusion: The central paradox of annuity risk is this: the longer the promise, the greater the exposure—yet the harder it is to measure. The absence of a CDS market beyond 5 years signals that risks are too high or uncertain to price.[14]
Market Snapshot: Indicative Insurer CDS (bps)
| Issuer | Tenor | Latest Level (bps) | As-of Date |
| MetLife | 5Y | 62.0 | Sep 30, 2025 |
| AIG | 5Y | 74.2 | Sep 30, 2025 |
| Prudential Financial | 5Y | 57.6 | Sep 30, 2025 |
| Lincoln National | 5Y | 97.8 | Sep 30, 2025 |
| Athene | 5Y | 111.8 | Sep 30, 2025 |
Chapter: Insurer Yield Curves, Spread Profits, and Tail Risk
Insurance company general accounts are fundamentally different from Treasuries or diversified mutual funds. They carry unique credit, liquidity, and tail risks, but convert these into spread profits largely invisible to policyholders and even fiduciaries.[15]
1. Yield Curve Steepness
Insurer portfolios rely on long-dated, illiquid assets with much steeper yield curves than Treasuries. The insurer pockets the maturity premium.[16]
2. Spread Profit Decomposition
Policyholders see short-duration crediting rates, while hedging costs and residual profits flow to the insurer.[17]
3. Misperception of Tail Risk
Investors struggle to distinguish between 1-in-100 and 1-in-10,000 events, despite the 100-fold difference. Insurers exploit this by monetizing tail risk.[18]
4. Regulatory Optics vs. Economic Risk
Treasury-based hedges shorten reported duration to ~2–3 years, but true long-horizon risks remain embedded.[19]
5. Fiduciary Implications
Fiduciaries must not confuse lack of market pricing with absence of risk. Disclosures should highlight steep curves, spread profits, and tail risk.[20]
Footnotes / Sources
1. ERISA fiduciary obligations, DOL regulations: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/what-is-erisa
2. Gretchen Morgenson, NBC News, Aug 2024: https://www.nbcnews.com/investigations/tiaa-pushes-costly-retirement-products-cover-losses-whistleblower-rcna161198
3. NBC News, Sep 2025 reporting on TIAA annuity spreads: https://www.nbcnews.com/news/us-news/rhode-island-sheriffs-retirement-account-woes-bring-scrutiny-state-run-rcna229290
4. Cunningham v. Cornell University, Supreme Court (2023).
5. Lambert & Tobe, forthcoming, Journal of Economic Issues. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4763269
6. Commonsense401kProject blog: https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/ https://commonsense401kproject.com/2025/05/10/annuities-flunk-prohibited-transactions-exemption-scotus-ruling-will-open-floodgates-of-litigation/ https://commonsense401kproject.com/2025/07/27/diversification-abandoned-why-plan-fiduciaries-must-rethink-fixed-annuities-and-pension-risk-transfers/ https://commonsense401kproject.com/2025/08/12/4-sets-of-books-how-trumps-401k-push-opens-the-door-to-accounting-chaos/ https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/
7. Example downgrade provisions in annuity contracts (see case filings, expert reports).
8. Post-Cunningham ERISA litigation implications. https://news.bloomberglaw.com/daily-labor-report/high-courts-cornell-ruling-stands-to-supercharge-401k-suits
9. NAIC Risk-Based Capital reports: https://content.naic.org
10. Fabozzi, Handbook of Stable Value Investments.
11. ICE / Investing.com CDS quotes for PRU, LNC, etc.: https://www.investing.com
12. State regulator solvency rules vs. economic risk, NAIC: https://content.naic.org
13. DOL Advisory Opinion 2025-04A: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2025-04a
14. Richard Ennis, critiques of pension fund assumptions: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4678722
15. Moody’s and Reuters reporting on offshore reinsurance/private credit: https://www.reuters.com
16. NAIC data on private credit/mortgage holdings: https://content.naic.org
17. Company filings on new money yields and crediting rates (10-Ks, Statutory Statements).
18. Kahneman & Tversky, Prospect Theory literature.
19. NAIC reports on derivatives and ALM hedges: https://content.naic.org
20. Fiduciary case law and expert commentary (see Cunningham v. Cornell, Grink v. Virtua, etc.).
22 Testimony by Ben S Bernanke, Federal Reserve, US House of Representatives, Washington DC, 24 March 2009 https://www.bis.org/review/r090325a.pdf
23https://www.federalreserve.gov/publications/files/financial-stability-report-20250425.pdf
24 The Last SIFI: the Unwise and Illegal Deregulation of Prudential Financial” by Jeremy Kress. https://www.stanfordlawreview.org/online/the-last-sifi-the-unwise-and-illegal-deregulation-of-prudential-financial/
25 Tobe, Christopher B., The Consultants Guide to Stable Value. Journal of Investment Consulting, Vol. 7, No. 1, Summer 2004, Available at SSRN: https://ssrn.com/abstract=577603
26 Applebaum, Eileen. 2023. “Letter to ERISA Advisory Council on Private Equity and Life Insurance and Annuity Companies.” https://cepr.net/letter-to-erisa-advisory-council-on-private-equity-and-life-insurance-and-annuity-companies/
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