Annuities are Prohibited
Under ERISA §406, any transaction between a plan and a “party in interest” — such as the plan’s insurer, recordkeeper, or trustee — is per se prohibited. That includes the purchase or maintenance of a fixed annuity contract from an insurer that profits from spreads, affiliated services, or undisclosed compensation.
The insurance industry routinely claims that these annuity deals qualify for a Department of Labor “Prohibited Transaction Exemption” (PTE), such as PTE 84-24 or PTE 2020-02. But in decades of reviewing contracts and filings, I have never seen a single annuity that could actually pass the exemption test.
Each PTE requires that:
- Compensation be reasonable and disclosed;
- The transaction be in the best interest of participants; and
- No misleading statements be made.
Annuities fail on all three. They hide 100–150 basis points of spread profits; they trap plan assets with no downgrade or exit provisions; and their “guarantees” transfer risk from the plan sponsor to participants — all while enriching the insurer.
Even if an annuity could theoretically meet those tests — say, if it included a downgrade clause, full fee disclosure, and liquidity — the burden of proof would still rest with the fiduciary. The Second Circuit’s 2025 decision in Cunningham v. Cornell University clarified that once a prohibited transaction is alleged, it is the plan sponsor’s burden to prove an exemption applies.
In practical terms:
- Every fixed annuity is a prohibited transaction by default.
- The plan fiduciary must prove — not assume — that an exemption is valid.
- And in the real world, the insurance industry’s own opacity ensures they cannot meet that test.
The DOL’s “comfort letters” and outdated exemptions were drafted for a different era. In today’s world of offshore reinsurance, undisclosed spreads, and absent downgrade clauses, annuity exemptions are fiction. Fiduciaries relying on them are gambling with participants’ retirement security — and their own liability.
Appendix November 25, 2025
In the current 4 ongoing cases of fixed annuities as Prohibited Transactions filed since Cunningham V. Cornell, the defense is primarily trying to delay since in my opinion I think they know they have no valid legal defense.
Finally at the end of November a Motion to Dismiss came out that was full of deflections and noise and nothing of substance.
In the entire 27-page Motion to dismiss brief, plan:
❌ Never invokes §408
❌ Never claims PTE 84-24 applies
❌ Never claims §408(b)(2) applies
❌ Never argues the annuity contract is exempt under any DOL rule
❌ Never argues Annuities spread is “reasonable compensation”
❌ Never claims the plan assets are not being used for the insurer’s benefit
❌ Never argues the fiduciaries obtained “no less favorable terms than arms-length”
NOTHING
ERISA clearly says:
✔ Any transaction with any party-in-interest involving plan assets is prohibited.
✔ Any indirect compensation is prohibited.
✔ Any fiduciary self-dealing is prohibited.
Plan does not dispute ANY of these elements.
Thus:
There is no legally valid exemption defense anywhere in the MTD. Everything is noise. There appears to be no real defense for Fixed annuities as Prohibited Transactions
Appendix: Single-Entity Credit Risk, Diversification, and the Illusory Safety of Annuities
A. Single-Entity Credit Risk and the Core Fiduciary Principle of Diversification
One of the most fundamental principles of fiduciary investing—embedded in ERISA §404(a)(1)(C)—is diversification. The purpose of diversification is not to enhance returns, but to eliminate uncompensated risk, particularly the risk that outcomes hinge on the solvency or behavior of a single counterparty. Courts, regulators, and modern portfolio theory all recognize that avoidable single-entity risk is presumptively imprudent unless justified by extraordinary countervailing benefits.
Insurance annuities offered in 401(k) plans violate this principle at their core. Whether structured as general-account fixed annuities, group annuity contracts or,pension risk transfer annuities. or insurance-wrapped collective investment trusts, these products expose participants to concentrated credit risk in a single life insurer. The participant’s principal and credited interest are not diversified across a portfolio of issuers; they are contingent on the ongoing solvency, capital management, reinsurance strategy, and asset allocation decisions of one institution.
By contrast, virtually every alternative capital-preservation vehicle available to ERISA fiduciaries—mutual funds, pooled stable-value funds, diversified bond funds—spreads credit exposure across dozens or hundreds of issuers and multiple guarantors. The elimination of single-issuer dependency is precisely the risk control diversification is meant to achieve.
The persistence of annuities in 401(k) plans therefore represents a stark departure from baseline fiduciary norms.
B. Why Annuities Are Structurally Inconsistent with ERISA Diversification Standards
ERISA does not require fiduciaries to eliminate all risk, but it does require them to eliminate unnecessary and uncompensated risk. Single-entity credit exposure in annuities is both.
From a risk-return perspective, annuities offer no unique benefit that requires concentrating credit exposure in one insurer:
- They do not provide higher expected returns than diversified alternatives.
- They do not provide superior liquidity.
- They do not provide inflation protection.
- They do not provide diversification benefits relative to other plan assets.
Indeed, as shown in prior work on the stable-value efficient frontier, single-insurer annuities typically lie below the efficient frontier—offering lower returns at higher risk than pooled stable-value products. When a fiduciary selects a product that increases credit risk while simultaneously reducing expected return, the decision cannot be reconciled with prudence.
The industry’s response—that insurers are “highly rated” or “heavily regulated”—misses the fiduciary point. Diversification is not optional merely because a counterparty is perceived as safe. Enron, Lehman Brothers, AIG, and Silicon Valley Bank were all highly rated until they were not. ERISA fiduciaries are not permitted to gamble participant assets on the continued health of a single institution when diversification is readily available.
C. Downgrade Provisions: The Risk Control That Annuities Systematically Avoid
One of the most telling features of annuity contracts used in retirement plans is the absence of meaningful downgrade provisions. In sophisticated fixed-income investing, downgrade triggers are standard risk-management tools. They allow an investor to:
- Terminate exposure if a counterparty’s credit deteriorates,
- Demand collateral or restructuring,
- Reallocate assets before losses become irreversible.
In the annuity context, downgrade provisions would allow a plan fiduciary to exit or mitigate exposure if the insurer’s credit profile weakens—precisely the moment when participant assets are most at risk.
Yet most annuity contracts offered in 401(k) plans either:
- Contain no downgrade trigger, or
- Include downgrade language so weak or discretionary as to be meaningless, or
- Impose punitive market-value adjustments that deter fiduciaries from exercising exit rights.
This omission is not accidental. Downgrade provisions reduce insurer profitability by constraining asset allocation, limiting leverage, and curtailing the ability to extract spread income from riskier assets. As a result, insurers systematically resist contract terms that would allow fiduciaries to respond rationally to credit deterioration.
From a fiduciary perspective, this is indefensible. A product that locks participants into a deteriorating credit exposure—while preventing fiduciaries from acting—is fundamentally inconsistent with prudence and loyalty.
D. Credit Default Swaps: The Risk Metric the Industry Does Not Want Fiduciaries to See
Credit default swaps (CDS) provide a market-based, continuously updated measure of default risk. Unlike credit ratings, CDS prices respond in real time to changes in asset quality, leverage, liquidity, and systemic stress. For sophisticated investors, CDS spreads are a primary tool for monitoring counterparty risk.
As demonstrated in prior analysis, CDS markets often price life insurers as meaningfully riskier than their ratings suggest. In some cases, CDS-implied default probabilities are an order of magnitude higher than what fiduciaries would infer from insurer marketing materials or statutory filings.
Yet CDS information is almost never disclosed or discussed in the annuity selection process. Insurers do not reference CDS spreads in participant disclosures, and plan fiduciaries are rarely encouraged—by consultants, recordkeepers, or insurers themselves—to examine them.
The reason is straightforward: acknowledging CDS-implied risk would undermine the core sales narrative of annuities as “safe” and “guaranteed.” Moreover, if fiduciaries explicitly recognized this risk, they would be compelled either to diversify away from single-insurer exposure or to demand risk-mitigating features that reduce insurer profitability.
Thus, the industry’s silence on CDS is not a neutral omission; it is a structural feature of a business model dependent on opacity.
E. Why the Suppression of Risk Controls Matters Under ERISA §406
The systematic avoidance of diversification, downgrade protections, and market-based credit risk metrics has direct implications under ERISA’s prohibited-transaction rules.
Annuities are per se transactions with a party in interest. To be lawful, they must qualify for an exemption. But exemptions require that compensation be reasonable and that transactions be in participants’ best interests.
A product that:
- Concentrates risk in a single counterparty,
- Prevents fiduciaries from responding to credit deterioration,
- Suppresses widely accepted risk metrics,
- And delivers inferior risk-adjusted returns,
cannot plausibly be described as “reasonable” or “in the best interests” of participants.
Moreover, the insurer’s resistance to downgrade provisions and risk transparency reveals the economic conflict at the heart of the annuity model: participant safety and insurer profitability move in opposite directions. ERISA does not permit fiduciaries to subordinate participant protection to a service provider’s profit margins.
F. Fiduciary Implications
Once single-entity credit risk is properly framed, the fiduciary implications become unavoidable:
- Diversification is not optional under ERISA; annuities violate it by design.
- Risk-mitigation tools exist (downgrade provisions, CDS monitoring, diversification), but are deliberately excluded from annuity contracts.
- The exclusion benefits insurers financially, not participants.
- Failure to address these risks cannot be cured by disclosure alone, because participants cannot diversify away insurer credit risk within the product.
Accordingly, annuities in 401(k) plans are not merely risky—they are structurally misaligned with ERISA’s fiduciary architecture. This misalignment supports the conclusion that, absent radical redesign, annuities should be treated as prohibited transactions rather than permissible investment options.
The CommonSense 401k Project 