State Guaranty Associations are so flimsy that none are rated by S&P or Moody’s. There is no money in them, the reserves are not in the association, only in the companies themselves.
Most did not even pay out claims in the last major default, Executive Life – only Illinois and Pennsylvania associations made partial payments, only after court orders.
I asked ChatGPT about Guarantee Associations in the context of an ERISA Fiduciary and got the following response.
⚖️ ERISA Fiduciary Standards vs. State Guaranty Associations
1. Duty of Prudence and Care (§404(a)(1)(B))
ERISA requires fiduciaries to act:
“with the care, skill, prudence, and diligence under the circumstances then prevailing…”
SIGAs do not meet the “prudent expert” standard. A prudent expert would not rely on:
An entity with no prefunding or reserve capital
No federal backing
No credit rating from any recognized rating agency
A history of failure to pay during systemic defaults (e.g., Executive Life)
As you noted, only Illinois and Pennsylvania eventually made partial payouts, and only after litigation. That alone defeats the fiduciary standard of prudent selection and monitoring.
2. Duty of Loyalty (§404(a)(1)(A))
Fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits.
If a fiduciary chooses an annuity or insurance-based structure based on a belief that the SIGA will protect beneficiaries, without disclosing its inadequacy, they may be violating their loyalty duty.
Relying on industry marketing or regulatory illusion about SIGAs—when informed sources (like the Federal Reserve, EU regulators, and academics) have raised red flags—could be seen as self-serving or negligent.
3. Duty to Monitor and Evaluate Risk
ERISA fiduciaries must continually evaluate risks and the financial condition of providers.
Given the known systemic risks, including:
Private equity ownership of insurers (Kirti & Sarin 2020)
Long-duration illiquid assets in General Accounts
Minimal real oversight by state regulators
EU regulator concern in 2017 about systemic fragility of U.S. insurance regulation
…it’s arguable that no prudent fiduciary should rely solely—or even primarily—on SIGAs as a source of security.
📚 Supporting Academic and Regulatory Warnings
Lambert & Tobe (2024) – Warn of “a possible US retirement crisis” driven by misleading safety claims of annuities.
Todd & Wallace (1992, Fed Minneapolis) – Exposed the moral hazard of undercapitalized SIGAs and deceptive perceptions of insurance safety.
Perez (2016) – Documents political interference and regulatory capture at the state level.
EU Concerns (2017) – EU regulators raised cross-border solvency concerns for U.S. insurers, especially given weak state regulation.
🚫 What This Means for Fiduciary Actions
ERISA fiduciaries should not rely on State Guaranty Associations as a primary or sufficient reason to:
Justify annuity purchases for pension risk transfers (PRTs) or 401(k) plans.
Accept insurer counterparty risk without thorough, independent due diligence.
Claim “safety” without disclosing SIGA limits, lack of reserves, and legal uncertainty.
Instead, fiduciaries should:
Require contractual provisions for downgrade protections and capital reserves.
Insist on federal-level guarantees or fully collateralized structures.
Disclose the inadequacy of SIGAs in plan documents and fiduciary reports.
🧾 Bottom Line
State Guaranty Associations offer the illusion of safety, not the substance. No fiduciary acting under the ERISA standard of prudence and loyalty should rely on them as a meaningful risk mitigator.
First I started with the four pillars of the DOL’s Impartial Conduct Standards under PTE 2020‑02:
A. Care Obligation B. Loyalty Obligation C. Reasonable Compensation D. No Materially Misleading Statements (including omissions)
Many annuity sales into ERISA plans currently fail one or more of these obligations, particularly with respect to:
Hidden spread compensation,
Inadequate due diligence on the general account backing the annuity,
Opaque or omitted disclosures,
And advisors who do not formally acknowledge fiduciary status in writing.
Have Any Annuity Contracts Accepted ERISA Fiduciary Responsibility?
✅ Very Few — and Almost Never in the Contract Itself
In general:
Group annuity contracts (e.g., used in 401(k) plans or defined benefit de-risking) may be accompanied by side agreements or representations from advisors, but:
The insurance contract itself typically does not declare the insurer (or even the selling agent) as a fiduciary.
Fiduciary acknowledgments, if they exist, come in the form of separate representations or appendices (required under PTE 2020-02 or 84-24).
🟥 In Most Cases:
Insurers explicitly disclaim fiduciary status in contracts.
Brokers or agents resist fiduciary acknowledgments—unless they’re affiliated RIAs under pressure.
Disclosure documents are vague, omitting spread compensation or how crediting rates are determined.
Examples of Industry Practice:
1. Disclaiming Fiduciary Status
Many annuity providers include contract clauses like:
“The insurer and its agents are not acting in a fiduciary capacity under ERISA or any applicable law in connection with the sale of this product.”
2. Delegating Due Diligence to the Plan Sponsor
Even in group annuity settings (e.g., stable value GICs, fixed annuity options), the language often places full fiduciary duty on the plan sponsor, e.g.:
“The Plan Fiduciary represents that it has independently evaluated the investment and insurance features of this contract.”
3. PTE 84-24 Acknowledgments—But Weakly Enforced
Some insurers may have separate PTE 84‑24 disclosure forms, which technically acknowledge:
Reasonable compensation,
Advisor acting in the best interest,
No misleading info.
But in practice, these are often:
Not thoroughly explained to the plan,
Signed by non-fiduciary agents,
Not integrated into the contract,
Poorly documented or monitored.
Recommendations for Plan Sponsors
If a plan is considering an annuity product under ERISA, the following should be required:
Fiduciary Acknowledgment Letter — from the advisor or insurer.
PTE 2020-02 or 84-24 Compliance Certificate — signed and included with plan records.
Full Disclosure Statement — fees, conflicts, and spread compensation outlined clearly.
Contract Review — ensure it doesn’t disclaim fiduciary responsibility while shifting burden to the sponsor.
Annuities have always flunked but no one has ever challenged them because of their total lack of transparency. Now with SCOTUS Cornell decision, the burden of proof has shifted to the plans to defend why they think annuities are exempt from being prohibited transactions, and for the most part they are clueless.
Most annuities in most DC plans are labeled “parties in interest” because they have a relationship with the administrator/recordkeeper. This relationship creates a potential conflict of interest and labeled a Prohibited Transaction. A Prohibited Transaction Exemption (PTE) must be used to include the annuities in the plan.
PTE’s are subject to the ERISA Impartial Conduct Standards which are a set of requirements for fiduciaries providing investment advice to retirement investors, ensuring they act in the best interest of the client, receive reasonable compensation, and avoid making misleading statements.
Annuities for decades have claimed Prohibited transaction exemptions behind PTE 84-24 and more recently PTE 2020-02 with few challenges or any accountability.[1] However, the recent SCOTUS decision clearly says plans are responsible for verifying that their investments qualify for the prohibited transaction exemptions. The PTEs that apply to the insurance products they put in their plans where most are “parties in interest” must meet the Impartial Conduct Standards.[2]
Judge Lynn when ruling on Fixed Index Annuities in 2017 stated Because “insurers generally reserve rights to change participation rates, interest caps, and fees,” FIAs can “effectively transfer investment risks from insurers to investors.”[3]this control by insurers clearly violates Impartial Conduct Standards.[4]
ERISA PTE 84-24, which is based on the Restatement of Trust, states the annuities must meet the following requirements called the Impartial Conduct Standards and Written Disclosures and Policies and Procedures backing up these standards. Most annuities I have seen do not even come close.
Care Obligation This obligation reflects the care, skill, prudence, and diligence – similar to Prudent Person Fiduciary standard. Diversification is one of the most basic fiduciary duties. Under the CFA pension trustee standard for acting with prudence and reasonable care the plan should seek appropriate levels of diversification.[5]Fixed annuities flunk this diversification test with single entity credit and liquidity risk. [6]
The Federal Reserve in April 2025 said “Life insurers continued to hold a significant share of risky and illiquid assets on their balance sheets”[7] Under the CFA pension trustee standard Principle #3 to Act with skill competence and diligence it cites need for awareness of investments liquidity, and any other risks. Certain types of investments …necessitate more thorough investigation and understanding than do fundamental investments, such as straightforward and transparent equity, fixed-income, or mutual fund products Annuities call for more diligence by sponsors which needs to be fully documented by plans. Plan sponsors could mitigate this credit and liquidity risk in their annuity contracts with downgrade clauses which allow liquidity at book value if the annuity issuer is downgraded but these type clauses have not been adopted for most plans.[8]
Loyalty Obligation Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Diligence is nearly impossible with misleading, nontransparent contracts, and the lack of plan/participant ownership of securities. Secret kickbacks and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors. The new fiduciary rule requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” which has been strongly opposed by the Annuity industry. Plans typically agree to Annuity contracts that avoid any fiduciary language or responsibility on the part of the issuer. [9] The Federal Reserve in 1992 exposed the varying weak state regulatory and reserve claims and most plans are not even aware of which state issued their annuity contract.[10]
Reasonable compensation limitation Annuities have a total lack of disclosure of profits, fees and compensation – effectively denying any chance for a prospective purchaser to make an “informed decision.” CFA Institute Global Investment Performance Standards (GIPS) are transparency standards on performance and fees. Annuities typically do not comply with CFA GIPS standards.[11]
Noted Morningstar analyst John Rekenthaler said in April 2022 that in selecting 401(k) investment options, “inappropriate are investments that don’t price daily.” Annuities typically do not price daily and do not provide valuation transparency.[12]
A number of lawsuits have settled with claims of excessive secret fees and spreads in annuities. An insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [13] In a report, Morningstar acknowledges that annuities fees inside 401(k) plans are challenging to understand. ‘No insurer tells you what is in the spread.’ ‘Insurance firms collect a spread”[14] I was quoted on NBC that the TIAA Fixed Annuity made spread fees of around 120 basis points. TIAA makes $billions in undisclosed profits on their fixed annuity products. TIAA annuity has been called the company’s profit “engine” driving $46.2 in bonuses to their top five executives.[15] These IPG fixed annuity contracts have been characterized by DC plan group NAGDCA as having serious fiduciary issues with hidden fees. “Due to the fact that the plan sponsor does not own the underlying investments, the portfolio holdings, performance, risk, and management fees are generally not disclosed. This limits the ability of plan sponsors to compare returns with other SVFs [stable-value funds]. It also makes it nearly impossible for plan sponsors to know the fees (which can be increased without disclosure) paid by participants in these funds—a critical component of a fiduciary’s responsibility “[16]
The Annuity industry thrives on secret commissions.[19] The GAO and Senator Warren reported on these commissions.[20] The annuity industry has fought the so-called Biden Fiduciary rule which would expose many annuity commissions in 401(k) plans. The annuity industry trade group that coordinates weak state insurance commissioners National Association Insurance Commissioners (NAIC) best interest rule was ridiculed by a DOL Official “compensation is not considered a conflict of interest,” All 50 State Insurance Commissioners have rejected Fiduciary standards by adopting the NAIC best interest rules.[21]
Annuities claim principal protection, but some fixed annuity contracts recently have “broken the buck” and violated their contracts by forcing significant losses on participants. The written disclosures under weak state regulations omit critical information on risks and fees also prevents any opportunity for an “informed decision.”
Conclusion
Annuities clearly flunk all 4 major obligations of the Impartial Conduct Standards and are not exempt as Prohibited Transactions.
Plans with annuities have huge fiduciary liabilities which grow larger each year. With the new Supreme Court Case CunninghamV.Cornell the risk of litigation, and potential damages have grown greatly. [22] Within 2 weeks of the decision a case of annuities as prohibited transactions has already been filed.
Plan sponsors should amend their Annuity contracts to at least stop the growth of fiduciary liability.
1. A Most Favored Nation (MFN) clause to make sure they have the best rate/largest payouts/ lowest spread fees of all the annuity providers similar clients
2. A downgrade clause that allows liquidity at full book value if the insurance company issuing the annuity is downgraded.
3. Annuity provider agrees to be ERISA Fiduciary
If they cannot get these 3 clauses – the plan must demand that the annuity provider let them out of the contract, and if not consider legal action against the insurance company.
The CommonSense 401k Project 