Jim Watkins’ recent article on fiduciary prudence protocols is one of the best practical guides I have seen for investment committees. It is written as a roadmap for plan sponsors who genuinely want to satisfy ERISA’s prudence requirements before selecting an investment. As I read it, however, I kept thinking about the more than forty fixed annuity ERISA cases in which I have worked as an expert. The surprising thing is not how well Jim’s protocols fit those cases. The surprising thing is how many of those protocols appear never to have been followed. https://fiduciaryinvestsense.com/2026/07/21/fiduciary-prudence-protocols-proactive-fiduciary-risk-mitigation-strategies-for-plan-sponsors-and-other-investment-fiduciaries/

More importantly, Jim’s article unintentionally reinforces something I have been writing for several years. The real problem with many general-account fixed annuities is not simply that they are expensive or opaque. The problem is that they begin as transactions with a party in interest. That means the burden should be on the fiduciaries to prove that an exemption applies—not on participants to prove that something went wrong years later. That changes the entire conversation.

For years, the retirement industry has debated whether fixed annuities are prudent investments. I believe that is asking the wrong question. The first question should be: Was the transaction lawful in the first place? That distinction matters because a committee can spend hours discussing interest rates, guarantees, ratings and participant demand while never asking the question ERISA asks first. Has the plan entered into a prohibited transaction with a party in interest? If the answer is yes, the fiduciaries must establish that an exemption applies.

Jim Watkins makes exactly this point in his prohibited transaction protocol. He reminds fiduciaries that transactions with parties in interest should never be treated as routine business. They require documentation, evidence and a clear demonstration that the statutory exemption has actually been satisfied.

That sounds simple. In practice, it becomes extraordinarily difficult for many fixed annuity products. The reason is hidden compensation. Unlike a mutual fund, where every investor can see the expense ratio, a general-account annuity usually pays participants only a declared crediting rate. What participants do not see is the insurer’s investment spread. The insurance company owns the underlying assets. It earns the full portfolio return. It decides how much interest participants receive. It keeps the difference. That spread is compensation. Yet it is usually invisible to participants and, in many cases, largely invisible to the fiduciaries approving the product.

That raises a commonsense question. How can a committee conclude compensation is reasonable if it does not know what the compensation is? That is not merely a disclosure problem. It is a prohibited transaction problem. For years I have argued that hidden spreads make it nearly impossible for fiduciaries to demonstrate that the insurer’s compensation is reasonable, one of the central requirements of the statutory exemptions under ERISA.

Jim’s article reaches the same destination from a different direction. He says fiduciaries should have documentation proving costs are reasonable. I simply ask: Where is that documentation? Show me the insurer’s gross portfolio yield. Show me the actual spread retained by the insurer. Show me the analysis comparing that spread with transparent alternatives. Show me where the investment committee discussed whether the spread itself—not merely the credited rate—was reasonable. In over forty cases, I have never seen those documents. Instead, committees usually receive presentations showing insurer ratings, historical crediting rates and marketing material explaining why participants like guarantees. That is not the same thing.

 Another part of Jim’s article struck me because it perfectly matches one of my longstanding themes. He repeatedly tells fiduciaries to compare investments with reasonable alternatives. That sounds obvious.

But with plans with Fixed Annuities they and their consultants compare their rates vs the rates of  investments with 1/10^th the risk like synthetic stable value and money market funds.  This risk deception is like comparing a junk bond fund vs. a U.S. Treasury fund.  No one would buy that Junk bond would outperform its bench mark longterm at 3.5% when a Treasury return was 3.2%.  But this is done if plans over and over.

General-account annuities with significant Private credit and other privately valued assets. Insurance accounting. Opaque spreads. That should concern every fiduciary. Jim repeatedly emphasizes that fiduciaries need reliable evidence before investing participant money. A glossy insurance presentation is not evidence. A credit rating is not evidence. A declared crediting rate is not evidence. The evidence should include the insurer’s actual economics, the hidden spread, liquidity restrictions, employer-initiated event provisions, downgrade risks, surrender provisions and a meaningful comparison with transparent alternatives.

If those materials are missing, it is hard to argue that the committee completed the investigation Jim describes. Perhaps the most important lesson from Jim’s article is that documentation cannot manufacture an exemption. Good minutes cannot make hidden compensation transparent. A consultant’s recommendation cannot eliminate a prohibited transaction. A high credit rating cannot eliminate conflicts of interest. Calling something “guaranteed” does not make it prudent. Nor does it satisfy ERISA. The committee still has to prove that the insurer’s compensation was reasonable and that the statutory exemption applies. That burden becomes extremely difficult when the insurer controls the assets, controls the accounting, controls the crediting rate and controls the information necessary to calculate its own compensation.

That is why I believe Jim Watkins’ article deserves to be read by every plan sponsor—and every ERISA plaintiff’s attorney. Jim wrote it as a guide for fiduciaries who want to avoid litigation. I read it as something else as well. It is a roadmap for discovery. Every protocol in his article should leave a paper trail. If the committee truly followed those protocols, there should be documents showing exactly how it evaluated insurer compensation, compared transparent alternatives, analyzed conflicts of interest, reviewed liquidity restrictions and established the prohibited transaction exemption. If those documents do not exist, the issue is no longer simply whether the committee skipped a few prudent steps. The issue may be whether it can prove the transaction was exempt from ERISA’s prohibited transaction rules in the first place. That is where I believe the next generation of fixed annuity litigation is headed.

Jim Watkins’ Fiduciary Prudence Protocol	What Should Be Documented	What Often Happens with Fixed Annuities
Identify participant needs	Why is an insurance product necessary instead of a lower-cost alternative?	Often begins with the assumption that participants “need guarantees” without documenting why. Automatic from insurance company recordkeepers to enhance recordkeeping fees
Evaluate all reasonably available alternatives	Compare against synthetic stable value, money market funds, short-term bond funds, Treasury options, and other capital preservation investments.	Frequently limited to recordkeepers own products at best comparisons among similar high risk high fee insurance products.
Conduct a thorough risk analysis	Review credit risk, downgrade provisions, concentration risk, liquidity restrictions, market value adjustments, portability, and termination provisions.	Committees mostly ignore, at most rely on insurer credit ratings and marketing materials.
Analyze all fees and compensation	Document insurer spreads, commissions, revenue sharing, affiliate compensation, and all direct and indirect compensation.	The insurer’s spread—the largest source of compensation—is typically undisclosed and therefore not analyzed.
Investigate conflicts of interest	Review consultant relationships, insurance affiliations, commissions, proprietary products, and other financial incentives.	Insurance company and consultant conflicts are often secret with undisclosed fees facilitated via insurance commissions
Use meaningful benchmarks	Benchmark both risk and return against comparable alternatives using transparent costs.	Committees frequently benchmark fixed annuities with 10 times the risk or more against synthetic SV and money markets. Ignoring hidden spreads and differing risk profiles.
Review contract provisions	Analyze surrender charges, employer-initiated event clauses, market value adjustments, and participant withdrawal restrictions.	Most fiduciaries never receive or carefully review the complete insurance contract before approval or have their fiduciary counsel review.
Evaluate participant disclosures	Ensure participants receive understandable disclosure of all material fees, risks, restrictions, and guarantees.	Participants generally receive only the credited rate, while insurer spreads and many risks remain undisclosed.
Document the decision-making process	Committee minutes should show questions asked, alternatives considered, expert advice obtained, and reasons for selection.	Minutes often simply reflect acceptance of consultant or insurance company recommendations.
Monitor continuously	Regularly review spreads, insurer financial condition, ratings changes, contract competitiveness, and available alternatives.	Monitoring typically focuses on the credited rate rather than whether the contract remains prudent relative to market alternatives.

Annuities Break ERISA’s Disclosure Rules

The SEC Quietly Killed Stable Value Mutual Funds in 2004 — And That Tells You Everything About Private Equity, Fixed Annuities, and Prohibited Transactions in 401(k)s

TIAA Traditional Annuity Is a Prohibited Transaction

Stable Value Industry Admits Synthetic Funds Are Safer — and Why That Makes General Account Annuities a Prohibited Transaction