Want to highlight some important new research by NBER – Risky Insurance by Joesph Briggs, Ciaran Rogers and Christopher Tonetti of Stanford.  https://www.nber.org/system/files/working_papers/w35122/w35122.pdf

The Risky Insurance paper provides an important independent confirmation of the argument Thomas Lambert and I made in our March 2026 Journal of Economic Issues article, “‘Safe’ Annuity Retirement Products and Possible Future U.S. Retirement Risks, Threats, and Shortfalls.” https://doi.org/10.1080/00213624.2026.2613361

Our paper argues that an annuity’s reported book value is not the same thing as its economic value. An insurer may report a contract at 100 cents on the dollar because the customer is not permitted to demand the underlying assets, sell the contract freely, or force the insurer to mark the obligation to market. But when actual buyers are asked what they would pay for the contract—or when consumers are asked what certain payment they would accept in exchange for the insurer’s uncertain promise—the value can fall toward 70 to 80 cents on the dollar.

The new NBER paper makes that argument much harder to dismiss.

Three Different Roads Lead to Roughly the Same 70-to-80-Cent Valuation

There are now at least three distinct ways to observe the economic discount hidden beneath annuity book-value accounting.

Valuation method	Indicated economic value
Consumers’ expected annuity payout in the NBER survey	81.5 cents per promised dollar
Consumers’ annuity certainty equivalent	73.8 cents per promised dollar
Secondary-market pricing cited in Lambert–Tobe	Often approximately 80 cents per contract dollar
Current stressed private-credit exits and tender prices	Frequently 70–85 cents per reported NAV

These are not identical measurements and should not be mechanically treated as interchangeable. But they point in the same direction: a contractual or accounting value of $1 may conceal an economic value closer to $0.70–$0.80 once liquidity, uncertainty, credit risk, contract restrictions, and the cost of immediate exit are recognized.

Our Paper Already Identified the Annuity’s 20% Liquidity Discount

Lambert and Tobe noted that annuities do not generally price or mark to market each day. An annuity holder who wants liquidity must often accept a substantial secondary-market discount. We specifically cited secondary-market firms that commonly pay approximately 80% of contractual value, meaning a person could purchase an annuity and face an immediate 20% economic loss if forced to sell it.

That was not merely an observation about retail hardship. It exposed the central accounting deception:

The insurance company reports the annuity at book value because the contract prevents the policyholder from discovering its market value.

A mutual fund normally shows the participant the market value of its assets every day. A publicly traded bond is marked to the price at which investors are willing to buy and sell it. An annuity instead reports the insurer’s contractual promise, usually without showing what an independent buyer would pay for that promise.

Illiquidity does not eliminate market risk. It conceals it.

Our paper also explained why this problem becomes more severe after a downgrade. A bond manager can sell a deteriorating security when it falls below the portfolio’s required credit standard. Most annuity holders cannot sell the issuing insurer’s promise without surrender charges, market-value adjustments, contractual restrictions, or a deep secondary-market discount. The holder therefore may be forced to ride the insurer down toward default.

The NBER Paper Independently Values the Risky Annuity at 74 Cents

The NBER authors reach a strikingly similar result through an entirely different method.

Survey respondents expected to receive, on average, only 81.5% of the annuity payments they had been promised. They also indicated that a completely certain payment of only 73.8% of the promised benefit would make them economically indifferent to retaining the risky insurance contract. The difference produces an implied annuity risk premium of about 7.7 percentage points.

The 73.8-cent figure is not a quoted secondary-market price. It is a consumer certainty equivalent. It reflects the amount of certain value respondents were willing to accept instead of bearing:

• insurer default risk;
• partial-payment risk;
• claims and contract disputes;
• delay risk;
• procedural complexity;
• and uncertainty about future performance.

Yet it lands almost precisely in the range suggested by actual illiquid-market discounts.

That convergence matters. Consumers may not know the insurer’s portfolio, spread, capital formula, offshore reinsurance arrangements, or private-credit exposure. But collectively they appear to value the promise as though it were a deeply discounted, illiquid credit instrument—not cash and certainly not a Treasury obligation.

Private Credit Creates a Second Hidden Mark-to-Market Discount

The connection becomes more troubling because life insurers increasingly hold private credit and other illiquid debt.

The precise percentage depends heavily on how “private credit” is defined. Current estimates range from approximately 20% of insurers’ fixed-income holdings under narrower definitions to roughly 35% or more of balance-sheet exposure under broader definitions. One 2026 estimate placed life and annuity insurers’ private-credit exposure at approximately 46% of total debt holdings. Therefore, it is reasonable to say that some insurers—and especially certain private-equity-affiliated insurers—have something approaching half of their debt portfolio exposed to private or illiquid credit, but it would be too broad to say every insurer is 50% private credit.

Our paper anticipated this development. We documented that private-equity-influenced insurers were moving into private asset-backed securities, private placements, leveraged credit, commercial real estate, and other difficult-to-value investments. We also explained that the regulatory system allows many of these assets to be carried using modeled values and favorable NAIC designations rather than observable market prices.

The market is now beginning to test those modeled values.

Recent offers for interests in nontraded private-credit vehicles have reportedly been made at discounts of 15% to 30% from reported NAV—equivalent to approximately 70 to 85 cents on the accounting dollar. Earlier surveys of private-credit secondary transactions showed average pricing around 85 cents on the dollar, while publicly traded private-credit vehicles have also traded at material discounts to stated NAV.

This produces a potential double-opacity structure:

1. The insurer carries private loans near modeled or reported value, even when a prompt secondary sale might produce only 70 to 85 cents.
2. The insurer then issues an annuity contract backed by that portfolio and reports the policyholder’s claim at 100 cents, even though the annuity itself may be saleable only at a substantial discount.
3. The participant sees neither markdown because both sides of the insurer’s balance sheet are insulated from ordinary market pricing.

The Annuity Is a Leveraged Claim on Assets That May Themselves Be Overstated

An annuity is not direct ownership of the insurer’s bonds, mortgages, CLOs, private loans, or affiliated investments. It is a general unsecured claim against the insurance company.

That means the annuity owner is structurally behind the insurer’s entire asset-selection process. The owner bears the consequences of:

• private-credit markdowns;
• defaults and restructurings;
• valuation errors;
• affiliate transactions;
• leverage within borrowers;
• leverage within private-credit funds;
• reinsurance leverage;
• and the insurer’s own capital structure.

The Financial Stability Board warned in 2026 that private credit can contain leverage at multiple levels: the portfolio company, fund, sponsor, investor-financing, and insurance-company levels. It also highlighted opacity, interconnectedness, liquidity mismatch, and the difficulty regulators face in detecting concentrated risk.

Thus, the annuity contract is not simply backed by a diversified portfolio of safe loans. It may be a single-entity promise backed in substantial part by private obligations that cannot be readily sold at their stated values.

A Simple Illustration

Assume an insurer reports $100 of assets supporting an annuity obligation:

Insurer assets	Book value	Possible prompt-sale value
Private and illiquid credit, 50%	$50	$35–$42.50
Public and more liquid assets, 50%	$50	$47.50–$50
Total	$100	$82.50–$92.50

This simple illustration does not establish an individual insurer’s actual liquidation value. Not every private loan would sell for 70 cents, and a forced liquidation may be either better or worse depending on credit quality, duration, transfer restrictions, and market conditions.

But the illustration shows how quickly reported surplus can disappear.

If the insurer has $100 in stated assets and $95 in policyholder and other liabilities, it appears to have $5 of capital. If those assets would produce only $85 in a stressed market sale, the insurer is not merely short of its reported capital. It may be economically insolvent by $10.

The annuity holder’s 100-cent promise would then depend on:

• continued book-value accounting;
• time to maturity;
• borrowers’ ability to refinance;
• regulatory forbearance;
• affiliated support;
• reinsurance recoveries;
• guaranty-association capacity;
• or a public rescue.

This is why a small percentage decline in insurer assets can create a much larger percentage loss in insurer capital.

The 70-to-80-Cent Range Is a Market Signal, Not Yet a Universal Appraisal

The strongest defensible formulation is not that every annuity is presently worth 70 cents. That would require insurer-specific analysis of:

• underlying asset composition;
• actual secondary bids;
• liability duration;
• surrender rights;
• ratings;
• CDS and bond spreads;
• capital and surplus;
• reinsurance;
• guaranty-association treatment;
• and contract provisions.

The stronger and more accurate statement is:

Multiple independent valuation methods suggest that many insurance promises marketed and accounted for at 100 cents on the dollar may have economic values closer to 70–80 cents when marked for liquidity, risk, and certainty.

That is more than a rhetorical claim. It now rests on:

1. actual annuity secondary-market discounts identified in Lambert–Tobe;
2. the NBER paper’s 73.8-cent annuity certainty equivalent;
3. consumers’ expectation of receiving only 81.5% of promised annuity benefits;
4. current private-credit secondary prices and tenders at material discounts to reported NAV;
5. and evidence that insurers have accumulated substantial private and illiquid credit exposure.

This Also Helps Explain the Hidden 300-to-500-Basis-Point Spread

The insurer earns a large spread partly because the customer is not receiving a liquid, market-priced security.

The insurer takes in $1 of participant money, invests it in assets that may offer elevated yields because they are illiquid, opaque, leveraged, affiliated, or risky, and then credits the participant a much lower rate. Lambert and Tobe explain that the spread equals the insurer’s general-account return minus the rate paid to participants—and that most insurers do not disclose either the complete portfolio economics or the resulting spread.

The insurer may therefore be compensated several times:

• a private-credit liquidity premium;
• a credit-risk premium;
• an origination or affiliate fee;
• an asset-management fee;
• the retained difference between asset yield and participant crediting rate;
• and surrender or liquidity restrictions imposed on the customer.

Yet the annuity holder receives the least liquid claim in the structure.

That is the fundamental asymmetry:

The insurer collects the liquidity premium, but the participant bears the illiquidity.

If private credit yields 9% or 10%, the insurer credits the participant 3% or 4%, and an immediate market sale of the contract produces only 70 to 80 cents, the annuity is not functioning like a low-cost safe investment. It is functioning like a high-spread, illiquid loan from the participant to the insurer.

The Book-Value Illusion

The industry’s defense is that the insurer does not need to sell the assets today. It can hold the private loans to maturity, collect principal and interest, and use the proceeds to meet annuity payments over decades.

That defense assumes away the very risks at issue:

• loans may default;
• borrowers may need refinancing;
• recoveries may be delayed;
• private valuations may be stale;
• annuity liabilities may accelerate;
• collateral calls may occur;
• policyholders may seek liquidity;
• reinsurance counterparties may weaken;
• and regulators may discover that reported capital was overstated.

“Hold to maturity” is not a guarantee of par recovery. It is an accounting and liquidity strategy that works only if the underlying credits ultimately perform and the insurer remains able to fund its liabilities in the meantime.

Our paper described annuities as single-entity, illiquid credit exposures rather than genuinely diversified safe investments. The NBER paper now shows that ordinary consumers appear to reach a similar conclusion when asked to value the promise. They discount it to approximately 74 cents of certainty.

The Strongest Conclusion

Lambert and Tobe argued that annuities are reported at artificial book values, shielded from daily market pricing, and backed increasingly by illiquid assets that may themselves be difficult to value. The new NBER findings provide independent household-level evidence of the same economic reality.

Consumers do not value a dollar of promised annuity payment as a dollar of safe wealth. They value it at approximately:

• 81.5 cents after allowing for expected nonpayment; and
• 73.8 cents after also pricing the uncertainty surrounding that payment.

At the same time, the private-credit assets increasingly supporting those promises may trade at 70 to 85 cents when an actual seller requires liquidity.

The central problem is therefore not merely that insurers hold risky assets. It is that the entire structure is designed to avoid the moment when either the assets or the liabilities must reveal a market price.

The private loan is carried at a modeled dollar. The annuity is carried at a contractual dollar. But when either one must be converted to cash, the market may say it is worth only 70 or 80 cents.

That gap is not harmless accounting noise. It is the hidden risk reserve that insurers have transferred to annuitants while retaining the spread, commissions, and profits for themselves.

The ERISA Problem With Buying a $0.70 Annuity for $1.00

An ERISA fiduciary would ordinarily never knowingly use $100 of plan assets to purchase an investment that becomes worth only $70 or $80 the moment the transaction closes. Calling the investment an “annuity,” recording it at book value, or preventing the participant from selling it does not eliminate the economic loss. It merely prevents the loss from appearing on a daily account statement.

That principle applies in two related settings:

1. a defined contribution plan purchasing or retaining a fixed annuity; and
2. a defined benefit plan purchasing a lifetime annuity in a pension risk transfer.

The legal details differ, especially because the decision to terminate or de-risk a pension plan may be a settlor decision. But the actual selection, pricing, and purchase of the annuity remain fiduciary acts. The Department of Labor expressly distinguishes the sponsor’s business decision to conduct a PRT from the fiduciary implementation of that decision.

The Immediate Loss Is Not Hypothetical

Our March 2026 Journal of Economic Issues paper explains that annuity contracts generally are not marked to market and often cannot be redeemed after an insurer downgrade. Where secondary markets exist, an owner needing immediate liquidity may receive only approximately 80 cents on the contractual dollar. The contract’s lack of daily pricing does not make the loss disappear; it conceals the amount that an independent buyer would actually pay.

The NBER Risky Insurance paper approaches the same issue from the purchaser’s perspective. Survey respondents expected an annuity to deliver only approximately 81.5% of its promised benefits, and their average certainty equivalent was approximately 73.8% of the promised amount. In other words, the average respondent regarded about $74 of certain value as equivalent to a nominal $100 insurance promise.

Neither number is necessarily a formal fair-value appraisal of every annuity. A secondary-market discount may include illiquidity, transaction costs, adverse selection, surrender provisions, and the buyer’s required profit. The certainty equivalent includes perceived nonpayment risk and risk aversion. But a fiduciary cannot simply ignore these measurements when they repeatedly indicate that a supposedly $100 asset has a market or certainty value of only $70 to $80.

1. Duty of Prudence: A Fiduciary Must Examine Economic Value, Not Merely Contractual Face Value

ERISA requires fiduciaries to act with the care, skill, prudence, and diligence that a knowledgeable person would use under the circumstances then prevailing. It also requires diversification to minimize the risk of large losses unless nondiversification is clearly prudent.

The key phrase is “under the circumstances then prevailing.” A fiduciary cannot knowingly purchase an annuity at $100 while disregarding evidence available at the time that:

• the contract could be resold for only $70 to $80;
• the participant cannot exit after an insurer downgrade;
• the insurer’s assets include large amounts of illiquid or modeled private credit;
• the insurer retains a substantial undisclosed investment spread;
• materially safer or more liquid alternatives are available;
• and the contract transfers the participant from a diversified ERISA plan into a single-insurer credit exposure.

The Supreme Court has emphasized that fiduciaries must conduct their own independent evaluation of investments. Participant choice does not excuse an imprudent investment option, and a fiduciary has a continuing obligation to monitor investments and remove imprudent ones.

A fixed annuity therefore cannot be defended merely by saying:

“Participants voluntarily selected it.”

Nor can a PRT annuity be defended merely by saying:

“The sponsor had the right to terminate the pension plan.”

The sponsor may have the right to decide whether to terminate or de-risk. The fiduciary must still prudently determine how plan assets are used to carry it out.

2. The Fiduciary Must Determine What the Plan Actually Receives for Its $100

The transaction should be analyzed like any other exchange of plan assets.

The plan gives the insurer:

• $100 in cash or marketable securities;
• immediate possession and investment control;
• the ability to earn returns on the assets;
• the value of participant illiquidity;
• and, frequently, a long-duration source of funding.

In exchange, the plan or participant receives:

• a contractual promise;
• no ownership of the insurer’s underlying portfolio;
• limited or no right to withdraw at fair value;
• no ordinary daily market price;
• no right to sell after a downgrade without a substantial loss;
• and exposure to the claims-paying ability of a single company.

The fiduciary inquiry cannot stop with the insurer’s promise to pay $100 eventually. It must determine the present economic value of that promise.

A prudent valuation would consider at least:

If that analysis produces a value of $75, paying $100 is not merely selecting a somewhat expensive product. It is transferring approximately $25 of participant value to the insurance structure at inception.

3. The Loss May Be a Fiduciary Loss Even Though It Is Hidden by Book-Value Accounting

ERISA does not require a participant to complete a secondary-market sale before a loss can become economically real.

Suppose a plan pays $100 million for annuity contracts that independent market evidence would value at $75 million immediately after closing. The economic loss is potentially $25 million even if:

• the insurer continues carrying the liability at $100 million;
• participants continue receiving scheduled monthly payments;
• no formal default has occurred;
• and the contract cannot be readily sold.

The industry may argue that no loss exists because the insurer intends to perform over many decades. But that confuses contractual performance with fair exchange.

A fiduciary could not prudently buy a 30-year private bond for $100 when its market value is $75 and then claim there was no loss because the issuer had not yet missed an interest payment. The fact that the annuity contract prevents ordinary price discovery makes the need for fiduciary valuation greater, not smaller.

4. The Duty of Loyalty Prohibits Using Participant Value to Benefit the Sponsor, Insurer, or Intermediaries

ERISA requires a fiduciary to act solely in the interest of participants and beneficiaries for the exclusive purposes of providing benefits and defraying reasonable plan expenses.

That creates a serious loyalty problem when the transaction’s economics are:

• the employer removes pension liabilities from its balance sheet;
• the insurer acquires assets and a profitable long-term spread;
• consultants, brokers, or affiliated firms receive compensation;
• while retirees receive a less liquid, less protected, single-entity promise worth materially less than the assets transferred.

A sponsor’s corporate benefit does not automatically make the annuity purchase unlawful. The sponsor may act in its settlor capacity when deciding whether to amend or terminate a plan. But the fiduciaries implementing the decision cannot subordinate participant interests to:

• improving the sponsor’s balance sheet;
• reducing PBGC premiums;
• increasing reported earnings;
• obtaining the cheapest PRT bid;
• preserving a business relationship with a consultant or insurer;
• or facilitating compensation for an affiliated insurance agency.

The Department of Labor’s IB 95-1 guidance states that cost cannot justify choosing an unsafe annuity and that fiduciaries cannot rely solely on insurer ratings. It requires steps calculated to obtain the safest available annuity unless competing interests justify another choice.

If a cheaper PRT annuity has an immediate market value of only 75 cents per dollar transferred, the “cheap” price may simply reflect that the retiree is receiving less valuable protection.

5. Paying $100 for $75 of Value Raises an Excessive-Compensation Question

The missing $25 does not vanish. It may represent some combination of:

• insurer profit;
• acquisition expenses;
• commissions;
• consultant or broker compensation;
• affiliated asset-management fees;
• retained investment spread;
• capital charges;
• liquidity premium retained by the insurer;
• surrender economics;
• and compensation for bearing genuine insurance risk.

Some of those expenses may be legitimate. ERISA does not require every service to be free or every annuity to be the lowest-priced contract. Current law expressly permits consideration of contract benefits and insurer financial strength alongside cost.

But expenses must still be reasonable. A fiduciary cannot assume that the full 20% to 30% difference is a reasonable insurance charge merely because it is embedded in the contract rather than itemized on an invoice.

That is particularly important for fixed annuities, where our paper explains that the insurer’s compensation often takes the form of the difference between what the general account earns and what the participant is credited. Prudential publicly described earning more than 200 basis points from annuity assets, while our analysis indicates that spreads on some products may be 300 to 500 basis points.

A prudent fiduciary should therefore demand a decomposition of the price:

Component	Required fiduciary question
Actuarial value of promised benefits	What is the present value using realistic mortality and discount assumptions?
Insurer credit risk	What return premium compensates participants for single-insurer exposure?
Illiquidity	What is the value lost through surrender and transfer restrictions?
Administrative cost	What does it reasonably cost to administer the contract?
Capital cost	How much capital is genuinely supporting the obligation?
Commissions	Who is paid, how much, and by whom?
Investment spread	What does the insurer expect to earn over the credited or payout rate?
Affiliate compensation	Are related asset managers, reinsurers, or originators being paid?
Residual profit	What remains after reasonable costs and risk compensation?

Without that analysis, the fiduciary does not know whether the plan purchased insurance or simply transferred participant assets to the insurer at an excessive price.

6. It May Also Constitute a Prohibited Transaction

ERISA §406 generally prohibits a fiduciary from causing a plan to engage in a sale, exchange, transfer, or furnishing of services with a party in interest, subject to statutory and administrative exemptions. It also prohibits certain fiduciary self-dealing and transactions involving conflicted interests.

The Supreme Court’s 2025 decision in Cunningham v. Cornell University held that a plaintiff alleging a transaction covered by §406(a)(1)(C) need not negate the §408 exemptions in the complaint. The exemptions operate as affirmative defenses.

An insurer, recordkeeper, consultant, broker, or other service provider may be a party in interest. The fiduciary defendants may then need to establish the applicable exemption, commonly including that:

• the arrangement was reasonable;
• the services were necessary;
• and no more than reasonable compensation was paid.

An immediate 20% to 30% decline in economic value could be powerful evidence against the claim that the compensation or overall arrangement was reasonable.

It would be especially troubling where:

• the annuity provider was already a plan service provider;
• the recordkeeper steered assets into its own or an affiliated fixed account;
• the consultant received direct or indirect insurance compensation;
• an affiliated broker collected commissions;
• or the employer shared economically in the spread through reduced recordkeeping charges or other concessions.

The fiduciary issue is not merely that the annuity was risky. It may be that plan assets were transferred to a party in interest on terms that included unreasonably large hidden compensation.

7. Application to Fixed Annuities in 401(k) and 403(b) Plans

For a fixed annuity retained as a plan investment, the fiduciary breach is relatively direct.

The plan remains subject to ERISA, and the fiduciary has continuing duties to:

• assess the option’s risk;
• evaluate the credited rate;
• compare it with reasonable alternatives;
• understand surrender restrictions;
• investigate the insurer’s financial condition;
• monitor the product;
• and remove it if it becomes imprudent.

A book-value feature cannot substitute for fair valuation. If the account reports $100 but an informed sale or termination would yield $75, the fiduciary should investigate:

1. why the contract is being reported at $100;
2. who receives the economic benefit of the difference;
3. whether participants receive sufficient additional return for the risk;
4. whether a diversified synthetic stable-value fund is available;
5. whether the insurer can change the credited rate unilaterally;
6. whether employer-initiated withdrawal restrictions trap the plan;
7. and whether the contract contains a meaningful downgrade exit right.

The absence of a downgrade provision is especially damaging. A conventional bond fiduciary can ordinarily sell after a downgrade. A fixed-annuity participant may be locked in as the insurer deteriorates. Paying par for an instrument that denies the most basic credit-risk control could itself support an inference of imprudence.

The Supreme Court’s Hughes decision also makes clear that offering other prudent options does not cleanse an imprudent one. A plan cannot defend a defective fixed annuity merely because participants could have selected a money-market fund or bond fund instead.

8. Application to Lifetime-Income Annuities in Defined Contribution Plans

The same analysis applies when a DC plan selects a lifetime-income product.

The SECURE Act and Department of Labor safe harbors do not authorize fiduciaries to overpay. They provide methods for satisfying aspects of the annuity-provider-selection duty when their statutory conditions are met. The Department has identified separate, nonexclusive safe harbors for DC annuity selection.

A safe harbor is not a license to ignore:

• contract price;
• market value;
• commissions;
• insurer spread;
• surrender value;
• loss of liquidity;
• or materially better alternatives.

Where a participant must surrender $100 of liquid retirement assets in return for a contract worth only $75 on an informed transferable basis, the fiduciary should be required to explain what compensating benefit justifies the $25 reduction.

Longevity insurance has value. Mortality pooling can support higher lifetime payments than a simple bond withdrawal. But that value must be calculated rather than invoked as a slogan. The fiduciary must distinguish:

• genuine mortality credits;
• legitimate insurance and administrative costs;
• and insurer extraction.

9. Application to Pension Risk Transfers

The PRT case is even more serious because the retiree generally does not choose the transaction.

Before the transfer, the retiree may have:

• a claim against a diversified pension trust;
• an ongoing employer funding obligation;
• ERISA fiduciary protections;
• PBGC insurance;
• federal disclosure rights;
• and access to federal remedies.

After the transaction, the retiree may have:

• a single insurance-company promise;
• state rather than federal solvency protection;
• limited guaranty-association coverage;
• no ongoing ERISA fiduciary protection over the transferred benefit;
• and no practical ability to sell or diversify the annuity.

The annuity may reproduce the scheduled monthly payment, but it does not reproduce the entire legal and financial package that previously supported the payment.

That means the fiduciary cannot value the PRT annuity solely by comparing monthly benefit amounts. The correct comparison is:

versus:

If $100 of pension assets buys an annuity package economically worth only $70 to $80, the fiduciary has not transferred equivalent value. It has delivered the same nominal payment while stripping away a substantial portion of the protection supporting it.

That is the PRT equivalent of replacing a federally insured diversified pension bond with a deeply illiquid, uninsured single-company obligation and pretending that the two are identical because they have the same coupon.

10. IB 95-1 Should Require More Than Ratings and Book-Value Solvency

The Department’s guidance requires consideration of the insurer’s investment portfolio, size relative to the contract, capital and surplus, liability exposure, availability of additional protection, and insurer ratings. It also cautions against relying solely on rating agencies and states that cost cannot justify an unsafe annuity.

But a meaningful modern application should also require:

• an independent fair-value estimate of the contract;
• a market-value assessment of the insurer’s assets;
• stress pricing of private-credit holdings;
• insurer CDS and bond-spread analysis;
• surrender and secondary-market valuation;
• examination of offshore and affiliated reinsurance;
• disclosure of all compensation and expected spread;
• a downgrade and replacement mechanism;
• comparison with the value of retaining PBGC-backed benefits;
• and documentation of why paying $100 for the contract is prudent.

Without these steps, “safest available annuity” becomes a competition among products all recorded at artificial par values.

11. The Damages Theory

ERISA §409 provides that a breaching fiduciary may be personally liable to restore plan losses and return profits made through the use of plan assets.

For a fixed annuity, possible loss measures could include:

• the difference between the amount invested and the contract’s fair value;
• lost returns compared with a prudent risk-adjusted alternative;
• excessive spread and commissions;
• surrender losses;
• and profits earned by fiduciaries or parties in interest from plan assets.

For a PRT, the theory is more complex because plan assets are exchanged for distributed annuity contracts. But possible measures could include:

• the amount by which the purchase price exceeded fair economic value;
• the cost of purchasing a genuinely safer contract;
• the value of a downgrade or replacement provision omitted from the contract;
• the cost of replicating PBGC and ERISA protections;
• the insurer’s or sponsor’s unjust enrichment;
• and losses resulting from excessive compensation or conflicted selection.

A simple illustration makes the core issue clear:

Transaction	Amount
Plan assets transferred	$1 billion
Independent economic value of annuity contracts	$750 million
Initial economic shortfall	$250 million
Reported accounting loss	$0
Hidden transfer of value	$250 million

The absence of a reported loss does not answer whether the fiduciary prudently exchanged $1 billion of participant assets for $750 million of economic protection.

Conclusion

An annuity contract should not receive a fiduciary exemption from valuation merely because it is one-sided, illiquid, and impossible to trade.

Indeed, those features strengthen the need for scrutiny.

A fiduciary who knowingly pays $100 for an annuity worth only $70 or $80 has not purchased safety. The fiduciary has purchased a contractual illusion of par value while transferring 20% to 30% of participant wealth to the insurer and the distribution system.

For a fixed annuity, the loss is hidden behind book-value account statements and surrender restrictions. For a lifetime-income product, it is hidden behind the appeal of a guaranteed monthly payment. For a PRT, it is hidden by comparing the amount of the pension check while ignoring the loss of PBGC protection, diversification, employer backing, liquidity, and ERISA rights.

ERISA’s duties of prudence and loyalty should require the fiduciary to value what the participant actually receives—not what the insurer prints on the contract. Where the fiduciary knows that the economic value falls immediately to 70 or 80 cents on the dollar, the purchase can support claims for imprudence, disloyalty, failure to diversify, excessive compensation, and prohibited transactions.

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