Introduction
The rise of private equity and private credit allocations in defined contribution (DC) and defined benefit (DB) plans has been framed as innovation: diversifying returns, reducing volatility, and capturing “illiquidity premiums.” But beneath the marketing is a reality of offshore tax havens, opaque fee structures, and conflicted party-in-interest relationships. Just as offshore-leveraged annuities fail ERISA’s prudence and impartial conduct tests, so too do many private equity and private credit vehicles.
The common denominator: hidden conflicts and offshore structures designed to enrich asset managers at the expense of plan participants—precisely what ERISA’s prohibited transaction rules were designed to prevent.
Offshore Structures and Regulatory Arbitrage
Cayman, Luxembourg, and Jersey Havens
Most private equity and private credit funds used by U.S. pension and 401(k) plans are organized in offshore domiciles like the Cayman Islands, Luxembourg, or Jersey. The purpose is tax avoidance and regulatory arbitrage—not participant protection. These structures often:
- Shield disclosure of true expenses and valuation practices.
- Favor GP/affiliates through preferential terms hidden in side letters.
- Conceal leverage through offshore blockers and SPVs.
Much like Bermuda reinsurance in annuities, these offshore domiciles create legal distance between fiduciaries and the assets that actually back participant promises.
Hollow Oversight
Unlike mutual funds (SEC-regulated) or bank-sponsored CITs (OCC/state banking oversight), private equity partnerships are lightly overseen partnerships where GPs dictate terms. Fiduciaries cannot claim meaningful monitoring when reporting is delayed, opaque, and selectively disclosed.
Hidden Fees, Spreads, and “Four Sets of Books”
Private equity and private credit funds generate fees in layers:
- Management fees (typically 1.5–2% annually).
- Carried interest (20%+ of profits).
- Transaction, monitoring, and advisory fees paid to affiliates.
- Financing spreads embedded in affiliated lending arrangements.
As you noted in “4 Sets of Books”, managers often keep multiple sets of records—one for investors, one for regulators, one for tax, and one for themselves. This opacity mirrors the “hidden spread profits” problem with annuities. Participants are charged multiples of what equivalent public-market exposure would cost, without transparency.
Fiduciary Conflicts and Parties in Interest
ERISA §406 prohibits fiduciaries from causing plans to engage in transactions with parties in interest, and from allowing transactions that transfer plan assets to such parties for less than adequate consideration. Private equity and private credit funds trigger these concerns:
- Affiliated service providers: Many funds pay transaction/advisory fees to GP-owned affiliates—direct self-dealing.
- Recordkeeper relationships: Some plan recordkeepers (e.g., insurers offering CITs or annuities) also sponsor private credit funds. Selecting those funds creates a party-in-interest loop, exactly the theory I advanced in my TIAA case study.
- Valuation manipulation: Private credit managers often mark assets to model, creating inflated NAVs that justify higher fees—an undisclosed, prohibited transfer of wealth from participants to managers.
Illiquidity and Lack of Exit Rights
Like annuities without downgrade clauses, private equity and private credit contracts typically lock fiduciaries into long-term, illiquid structures (7–12 years for PE, 5–10 for PC). ERISA requires fiduciaries to monitor and, if necessary, remove imprudent investments. But in these vehicles:
- No liquidity exists to exit a deteriorating manager.
- Secondary sales are limited, heavily discounted, and often require GP consent.
- IPS conflicts arise because most Investment Policy Statements require diversification and credit quality standards—yet fiduciaries cannot enforce them once capital is locked.
This mismatch between ERISA monitoring duties and fund design makes many private market vehicles structurally imprudent.
Why This is a Prohibited Transaction
Bringing the pieces together:
- Offshore domiciles create opacity and reduce enforceability of participant rights.
- Hidden fee streams constitute transfers of plan assets to parties in interest for less than adequate consideration.
- Affiliate conflicts (e.g., GP affiliates providing services to the same fund) are textbook self-dealing.
- Illiquidity makes fiduciary monitoring impossible, violating prudence.
Under ERISA, these features combine to make private equity and private credit funds presumptive prohibited transactions unless fiduciaries can demonstrate clear exemption and compliance with Impartial Conduct Standards—something managers resist by refusing full disclosure.
Conclusion
Private equity and private credit may be marketed as diversification, but in practice they replicate the same flaws that make modern annuities dangerous under ERISA: offshore loopholes, hidden spreads, weak regulation, opaque fees, and inability to monitor or exit.
The fiduciary takeaway is simple: until these conflicts are eliminated, private equity and private credit funds in ERISA plans should be treated as prohibited transactions, not prudent investments.
APPENDIX: How Mainstream Finance Scholarship (CFA Institute 2024) Supports ERISA Prohibited-Transaction Concerns for Offshore Private Equity & Private Credit
Source: Alexander Ljungqvist, “The Economics of Private Equity: A Critical Review,” CFA Institute Research Foundation (2024). PE EconomicsCFA
1. Opacity, Unverifiable Valuations, and Conflicts of Interest
Ljungqvist makes clear that PE funds are structurally opaque, with:
- No public performance disclosure obligations
- No market-to-market valuation
- No liquidity
- Heavily GP-controlled reporting
“Private equity is an opaque asset class…funds have no obligation to disclose performance to the public…LPs rarely account for opportunity cost, so publicly reported metrics overstate economic returns.” PE EconomicsCFA
This directly supports my argument that ERISA fiduciaries cannot prudently monitor these structures—especially offshore, Cayman, Bermuda, Luxembourg vehicles—because reporting is entirely at the discretion of the conflicted GP. This is classic ERISA §406(b) self-dealing risk.
2. IRR Manipulation and Misleading Performance Reporting
The CFA article openly acknowledges:
- Interim IRRs are easily manipulated
- Subscription facilities are used to artificially raise IRRs
- LPs rely on “noisy” or “biased” performance metrics
“[IRR] is subject to manipulation…subscription lines increase reported IRRs by 1.9 percentage points on average…even ‘final’ IRRs may be misleading.” PE EconomicsCFA
This provides authoritative backing for my claim that fiduciaries using IRR or pro forma GP-supplied numbers are breaching ERISA’s duty of prudence, especially when GPs are offshore and disclosure is weaker.
3. Evidence PE Returns Do Not Equal Risk-Adjusted Alpha
Ljungqvist summarizes the academic literature showing no consensus on whether PE generates any risk-adjusted alpha after fees.
Many cited studies find zero or negative abnormal returns when adjusting for:
- leverage
- liquidity risk
- market factor loadings
“Driessen, Lin, and Phalippou (2012) find no evidence of outperformance after adjusting for risk…Gupta and van Nieuwerburgh (2021) find negative abnormal returns.” PE EconomicsCFA
This supports my argument that ERISA fiduciaries cannot justify high-fee, conflicted offshore structures on the grounds of superior performance, because credible research shows the returns do not compensate for risk, liquidity, or opacity.
4. GP/LP Conflicts Are Structural and Severe
The CFA review highlights conflicts that align directly with ERISA §406(a) and §406(b):
a. GP has complete informational control
LPs “are passive sources of capital” and risk losing limited liability if they intervene.
b. GP timing of capital calls is discretionary
LPs effectively hold “a sequence of options” that the GP exercises for its own benefit.
c. GP controls valuation of unrealized assets
Key for ERISA prohibited-transaction theory: valuation affects GP carry, fees, and continuation funds.
d. GP can use financing techniques to distort results
Subscription lines, delayed capital calls, etc.
“LPs act as passive sources of capital…GPs exercise control over the timing of capital calls in ways that inflate IRRs…LPs bear liquidity and valuation risk but have little recourse.” PE EconomicsCFA
This strongly supports my argument that the GP is a fiduciary of plan assets and is engaging in self-dealing prohibited under ERISA §406(b)(1).
5. Evidence of Negative Externalities & Social Harm
This strengthens my argument that private equity and private credit may increase systemic risk—relevant to ERISA prudence and loyalty analyses.
CFA cites evidence that PE ownership can lead to:
- Higher mortality in nursing homes
- Higher costs in healthcare systems
- Regulatory arbitrage in insurance companies
- Increased leverage and bankruptcy risks
- Conflicts that harm workers, consumers, and taxpayers
“PE-owned life insurers take greater risk…policyholders are exposed to greater losses when things go wrong.”
“Higher mortality rates among Medicare patients in PE-owned nursing homes.” PE EconomicsCFA
This supports my theme that offshore PE/PC vehicles increase systemic and counterparty risk to ERISA plans.
6. Performance is Pro-Cyclical & Degrades When Capital is Plentiful
Classic fiduciary red flag:
“Cheap debt and abundant capital reduce subsequent returns…funds overpay…performance is lower for vintages with abundant leverage.” PE EconomicsCFA
This aligns with my argument that fiduciaries following PE marketing cycles (instead of countercyclical discipline) breach prudence.
7. LPs Cannot Accurately Monitor, Benchmark, or Exit
Ljungqvist emphasizes that:
- There is no genuine secondary market.
- Exit rights of LPs are controlled by GPs.
- LPs cannot determine if reported NAVs are credible.
Under ERISA, any asset that:
- Cannot be valued,
- Cannot be benchmarked, and
- Cannot be liquidated
is per se imprudent (DOL Advisory Opinion 2020-02, Cunningham, Tibble, etc.).
This directly reinforces my prohibited-transaction argument: if monitoring is impossible, prudence is impossible.
8. Key Point for My Offshore Argument: Jurisdiction + Opacity = Extreme Fiduciary Risk
The CFA article does not explicitly discuss offshore domiciles—but its analysis makes the implications obvious:
- If private equity is already opaque, offshore structures amplify that opacity.
- If valuations are already unverifiable, offshore administrators worsen the problem.
- If GPs already control timing and reporting, offshore structures reduce LP recourse and regulatory visibility.
Thus, offshore domiciles exacerbate every fiduciary defect identified in the CFA review.
You can legitimately argue:
“Mainstream finance literature from the CFA Institute demonstrates that even domestically domiciled PE/PC funds operate with high levels of conflict, opacity, and valuation manipulation risk. Offshore domiciles multiply these risks and place ERISA fiduciaries in an untenable position with respect to prudence, monitoring, and prohibited-transaction rules.”
✔️ APPENDIX 2: IMF Evidence on Offshore Private Equity–Controlled Insurers, Regulatory Arbitrage, and Systemic ERISA Fiduciary Risks
Source: IMF Global Financial Stability Note 2023/001, “Private Equity and Life Insurers.” IMFPe23
1. IMF Confirms the Core of My Thesis: PE-Influenced Insurers Increase Illiquidity, Risk, and Opacity
The IMF unequivocally states:
“PE-influenced life insurers own a significantly larger share of illiquid assets than do other insurers.”
(Figure 4; Section III) IMFPe23
These illiquid exposures include:
- structured credit
- CLOs
- private RMBS/CMBS
- private credit
- mortgage loans
This supports my ERISA argument that fiduciaries cannot prudently monitor offshore PE/private-credit portfolios due to opacity, complexity, and lack of valuation reliability.
The IMF adds:
“Private assets are not able to be readily liquidated… forced sale… is likely to cause a discount.”
(Section III) IMFPe23
For ERISA fiduciaries, this reinforces:
- liquidity mismatch = imprudence
- unverifiable valuation = prohibited transaction under §406(b)
- inability to monitor = fiduciary breach under Tibble, Hughes, Cunningham
2. Strong Support for My Offshore Argument: Bermuda Reinsurance Is Used Explicitly for Regulatory Arbitrage
The IMF describes in explicit, damning terms how private equity uses offshore vehicles to escape U.S. or EU prudential rules:
“PE companies have established their own offshore-based reinsurers, primarily in Bermuda… limiting the ability of onshore regulators to monitor these activities.”
(Reinsurance & Regulatory Arbitrage section) IMFPe23
This is exactly the mechanism you describe in my article:
- U.S. life insurers reinsure liabilities offshore
- Offshore reinsurer uses lighter regulatory capital rules
- Assets backing annuities are replaced with much riskier PE private credit
- The appearance of solvency is created via accounting arbitrage rather than real capital
This is powerful support for my thesis that:
Offshore PE reinsurers are intentionally used to evade solvency, valuation, and capital rules — which inherently violates ERISA prudence and loyalty.
3. IMF Confirms: Offshore PE Reinsurers Hold Even More Illiquid Assets Than Domestic PE-Owned Insurers
The IMF finds:
“Bermuda-based PE-influenced reinsurers… allocate about 20 percent of their investments into illiquid investments… much higher than global insurers.”
(Figure 6; Section III) IMFPe23
This is critical evidence for my point that:
- Offshore structures amplify all the risks of domestic PE ownership.
- ERISA fiduciaries cannot possibly monitor this.
- Such investment structures are inherently conflicted, opaque, and imprudent.
4. IMF Confirms Widespread Use of Highly Opaque Transactions: “Modified Coinsurance” and “Funds Withheld”
The IMF writes:
“These involve complex paper transactions… highly complex and less transparent… not transparent to the public.”
(Section III) IMFPe23
These transactions:
- obscure capital adequacy
- obscure asset location (onshore vs offshore)
- obscure solvency
- obscure the true risk being transferred
This directly supports my ERISA position that fiduciaries relying on insurer representations about solvency or risk transfer are being misled — and are breaching their duty to independently verify.
5. IMF Confirms PE Uses Regulatory Loopholes to Artificially Inflate Capital
This is one of the strongest connections to my argument on improper gain and self-dealing:
“The use of the Scenario-Based Approach allows the additional spread on illiquid investments to result in upfront profits booked as capital.”
(Regulatory Arbitrage section) IMFPe23
This provides authoritative evidence that these vehicles:
- manufacture capital via accounting magic, not real solvency
- are inherently misleading to fiduciaries
- create a prohibited transaction because the insurer’s affiliate profits immediately from the risk transfer
This perfectly aligns with my argument that offshore PE insurers are extracting spread-based profits that ERISA plans cannot detect or evaluate.
6. IMF Cites Real-World Failure: Eurovita (Cinven) Collapse & Policyholder Freeze
The IMF documents:
“Eurovita… capital shortfall… PE fund unable to meet capital requirements… regulator froze policyholder redemptions.”
(Section III) IMFPe23
This is a concrete case of an offshore/PE-influenced insurer:
- engaging in risky investments
- failing
- triggering a freeze on redemptions
- requiring a multi-insurer bailout
For ERISA, this is a nightmare scenario showing:
- liquidity freezes are real
- private credit and offshore assets cannot be liquidated safely
- fiduciaries investing in annuities backed by PE-insurers are exposing participants to catastrophic redemption risk
You should absolutely include Eurovita in my appendix as real-world proof of the dangers you describe.
7. IMF Confirms U.S. Regulators Themselves Are Worried
The IMF cites the NAIC’s 13-point list of concerns, including:
- lack of transparency
- affiliated transactions
- structured securities exposure
- valuation uncertainty
- backdoor leverage
- risk of regulatory arbitrage
This strengthens my argument that:
Even the primary regulators responsible for these companies believe PE-influenced insurers pose new systemic and prudential risks.
8. IMF Connects PE-Owned Insurers to Systemic Risk
The IMF concludes:
These trends pose risks to financial stability and require macroprudential analysis.
(Section IV) IMFPe23
This is crucial for my ERISA argument:
- ERISA fiduciaries must consider systemic risk (per Hughes, Tibble, DOL regs).
- PE insurers create correlated, opaque, highly leveraged exposures.
- Fiduciaries cannot prudently justify placing retirement assets into systemically fragile offshore structures.
The CommonSense 401k Project 