Author: ChrisTobe

With Annuity Rates in 401(k) Plans: You Get What You Negotiate

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Welcome Back to the Dealership—Without the Internet

There was a time not too long ago when buying a car meant walking into a dealership and bracing for a battle. You knew better than to pay the sticker price. There was no CarFax, no Kelly Blue Book at your fingertips—only your grit and your negotiating skills stood between you and a bad deal. Fast forward to today, and while consumers have gained power in most financial transactions thanks to transparency and competition, one part of the retirement world remains stubbornly stuck in that old sales model: fixed annuities in 401(k) plans.

When it comes to these insurance-based investments, especially general account fixed annuities, the rate you receive isn’t always about the market—it’s about your leverage. Your negotiating power. And for too many plans, that means quietly accepting returns well below what other, savvier plans are earning. The result? A two-tiered system where uninformed or unempowered fiduciaries leave millions on the table while others cash in.

Sticker-Price Rates for the Uninitiated

Let’s start with what most plan sponsors and fiduciaries are seeing: general account fixed annuity 2 to 3% rates with some less than 2%. In most cases, these rates have been locked in for years. Plan fiduciaries assume that’s the best available. They’ve never asked for better. They trust the insurance company’s glossy marketing and ratings and their consultants.

Prudential, for example, publicly posts general account rates of 3%–4% on consultant platforms like FI360/Broadridge. Some like TIAA and Mass Mutual post rates of 4%-5% for basically the same or less risky product.  But the rates with many insurers like Prudential can vary from 1.5% to nearly 7%, with little rhyme or reason.  In at least one case, a savvy union plan in New Jersey negotiated a general account fixed annuity rate of 6.8%—within the same 401(k) framework.

Yes, you read that right. Nearly five full percentage points higher than what other plans were receiving from the same insurer for the same product type. The only difference? They knew they could ask.

A Broken Marketplace

What we’re seeing is not an efficient marketplace. It’s a holdover from a time when product pricing was opaque and negotiation was king. But here’s the problem: this isn’t used car sales. These are retirement assets regulated by ERISA, with fiduciary standards that prohibit arbitrary pricing structures that benefit one plan over another without justification.

If an insurance company retains total discretion over annuity rates, then it also retains the ability to allocate higher yields to preferred clients—possibly to reward larger assets, political influence, or favored consultants—and lower yields to everyone else. This unequal treatment is not only unfair; it’s potentially unlawful under ERISA.

As I argued in this recent piece, annuities in 401(k) plans often constitute prohibited transactions when they are offered with non-transparent, discretionary pricing structures. If plan fiduciaries do not negotiate, they are not fulfilling their duty of loyalty or prudence under ERISA.

Consultants Are Not Always Your Friend

A deeper concern is that some consultants—the very advisors plan sponsors rely on to protect them—are complicit. Rather than push for higher negotiated rates or run competitive bids, some simply accept posted rates or worse, recommend insurers where they may have their own compensation arrangements or conflicts.  Some consultants have insurance licensees where they can receive hidden insurance commissions.  Sometimes rates are burned off to pay for recordkeeping fees, consultant fees etc. 

Some consultants may use databases like FI360/Broadridge, which show insurer-published general account rates many conflicted consultants do not even do that. But unless they go further—soliciting competitive proposals or uncovering the higher rates being granted to others—they are not doing their job. Worse, in some cases they actively steer plans toward underperforming fixed annuities while pocketing fees from the insurers themselves.

A Fiduciary Wake-Up Call

The key message for fiduciaries of 401(k) plans is this: you get what you negotiate.

If your plan holds a general account annuity yielding 2%-4%, and you’ve never asked for more, you may be in violation of your fiduciary duty. Your peers—especially in larger or union-affiliated plans—may be earning triple your rate simply because they demanded better terms.

That’s not just a bad deal. It’s a fiduciary breach.

The Solution: Demand Transparency and Competition

  1. Require Competitive Bids – Treat your annuity provider like any other investment manager. Get multiple quotes. Benchmark rates.
  2. Disclose the Spread – Insist on full transparency on how the insurer earns money. What’s the gross yield on their general account? What are they keeping?
  3. Use Independent Experts – Be cautious of consultants who may have undisclosed relationships with insurers. Get independent advice or a second opinion.
  4. Document the Negotiation – Keep records of the steps you took to secure the best rate. It’s your defense in any potential ERISA litigation.
  5. Over time get rid of your Conflicted Non-Transparent fixed annuities,  switch to a diversified Synthetic based stable value fund like the Vanguard RST, or Fidelity MIPS, this may take time because many fixed annuities are known as “Roach Motels” you easily get in but getting out may require a substantial penalty

Conclusion

Fixed annuities in 401(k) plans should not be sold like used cars. They should reflect a competitive, prudent process.

In the end, it’s simple: when it comes to annuity rates, you get what you negotiate—or what you fail to.

The Great Annuity Mirage: How ‘Separate Accounts’ Continue to Mislead

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Back in the early 1990s, after the fallout from several major insurance company failures, the industry scrambled for a new story to tell. Enter the ‘separate account’ — a clever rebranding of the same old insurance guarantee wrapped in a new package. Meant to reassure jittery retirement plan sponsors, these products were marketed as safer, more transparent, and more sophisticated than their general account predecessors. By 2000, most of the larger plans had moved on to synthetic diversified stable value as a prudent fiduciary choice. However, many mid-size to smaller plans, with a few large plans, have held on to this misleading product.

A Glossy Exterior, a Hollow Core

Separate accounts claim to offer a customized portfolio insulated from the insurer’s broader financial health. But the reality is far less reassuring. Plan sponsors hold nothing more than a contractual promise. They don’t own the assets, they can’t see inside the portfolio, and they have no control over the investment strategy. The insurer remains in full command — and the assets remain on its balance sheet. There are no strict investment guidelines, so if the annuity provider is downgraded, they can shift the high-quality assets supposedly in the Separate account ie, investment grade, and replace them with illiquid private credit.

Behind the Curtain: How the Spread Game Works

Here’s the secret sauce: insurers earn a ‘spread’ — the difference between what their investments yield and what they credit to plan participants. Sometimes that spread is over 2%, and that’s just what we can see. Insurers disclose yields on a selective basis, and often only once a year, making it impossible for fiduciaries to truly assess whether the rates offered are fair or competitive. One former Transamerica manager even described a ‘true-up’ day, where the safer, prettier assets are momentarily held just long enough to create a nice snapshot for clients. The rest of the month? Back to the riskier general account.

No Transparency, No Fiduciary Duty

Separate account contracts typically avoid any fiduciary obligations. There’s no obligation to disclose holdings, no responsibility to ensure investment prudence, and no transparency into fees, risks, or performance. The entire structure functions as a black box, with the insurer firmly in control. And if the insurer fails? Plan assets tied to a separate account are not guaranteed safe harbor — they could be frozen, impaired, or even lost in a liquidation.

Why Consultants Still Fall for It

Despite the red flags, many retirement plan consultants continue recommending these products. Why? Sometimes it’s a matter of inertia — separate accounts have been around so long that they’ve become familiar. Other times, it’s conflict: insurers often reward consultants through indirect compensation or other incentives. Whatever the reason, the end result is the same: plan participants are exposed to unnecessary risk while insurers quietly profit.

Better Alternatives Already Exist

Synthetic GICs — stable value products with transparent plan-owned bond portfolios and independent wrap providers — offer a far safer, more fiduciary-friendly alternative and are used by the majority of large plans. These products separate management, ownership, and strict transparent investment guidelines and crediting rate formulas.

The Illusion Persists

It’s time to call separate accounts what they are: a mirage. They simulate transparency. They simulate safety. But at their core, they rely on the same concentration of risk, lack of disclosure, and one-sided control that make general account annuities so problematic. Fiduciaries owe their participants better.

Accounting and Q&A NOTES

There are 3 tests to show that a Separate Account is a Fake

  1. Lack of strict investment guidelines in the contract. This allows the insurance company, when they get in a liquidity credit squeeze, to swap out the higher grade bonds in the suppossed separate reference portfolio with alternative private credit, perhaps worth 80 cents on the dollar.
  2. Lack of a strict crediting rate formula in the contract. While they will pretend to calculate a rate off of a reference portfolio of higher quality, that is mostly a game to justify the low yield. They control all the inputs to the formula with no transparency, so they can manipulate it to anything they want
  3. No Downgrade provision. If it were really separate, they would not mind giving out.

PWC did a good description of a Separate Account Fixed Annuity in some 401 (k) 5500 financials

The Plan is a party to a fully benefit-responsive investment contract with the John Hancock Trust
Company, LLC (“John Hancock”) for the years ended December 31, 2023, and 2022. John
Hancock maintains the contributions in a general account. The account is credited with earnings
on the underlying investments and charged for participant withdrawals and administrative
expenses. The contract earnings represent the income from specific assets owned by John
Hancock in a pooled separate account. The contract issuer is contractually obligated to repay the
principal.

Maersk does not own any assets or a portfolio,  just a contract.   JH bases the rate they pay in the contract on a lower-yielding subset of assets they own in a separate account portion of the general account.  The general account is filled with investments ranging from 2% to 12%.    They carve out in a pretend portfolio some of the lower-yielding and lower-risk and come up with a rate of 3% pay it out. So they make a general account return of 7% overall and keep a 4% spread as profit.  The plan takes nearly half of the alternatives, but only gets the returns of the lowest 1/4.

There are many more examples of Separate Account examples (MassMutual Great Grey). In Chapter 32 on Separate Accounts in the book on US tax reserves for Life Insurers, Separate Account revenues are rolled up with General Account revenue on tax reporting. The DOL in 20111-07A disclosure clearly distinguishes Separate Account from Synthetic Stable Value. Blue Prairie in a 2014 study, found that the Separate Account had a 60% higher duration than synthetic, 4.42 vs. 2.53. See also the Mercer Nevada Presentation.

S&P, in general, gives the same crediting rates to General Account and Separate Account annuities from the same issuers. S&P analysts, in a chapter in the Handbook of Stable Value Investments, show that states differ so much in their credit protection for separate accounts that identical contracts could result in different ratings in different states:

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“Diversification Abandoned: Why Plan Fiduciaries Must Rethink Fixed Annuities and Pension Risk Transfers”

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In an era where fiduciary prudence should be paramount, many plan sponsors have dangerously abandoned the foundational ERISA principle of diversification in favor of single-insurer annuity contracts. Billions of dollars in retirement savings are now concentrated in fixed annuities—both general and separate account types—as well as through pension risk transfer (PRT) annuities. These contracts rely entirely on the credit risk of a single private insurance company. In doing so, plan sponsors not only increase participant risk—they also take on an additional fiduciary burden: to evaluate the solvency of that insurer, going far beyond the superficial comfort of a credit rating.

The Mirage of Ratings

Credit ratings are not a shield against fiduciary liability. The 2008 financial crisis laid bare the failures of the rating agencies, with AIG maintaining top-tier ratings until days before its collapse. Even today, insurers like Prudential—formerly designated as a Systemically Important Financial Institution (SIFI)—have lobbied to remove that designation to escape heightened scrutiny. As the Stanford Graduate School of Business has documented, this de-designation eliminates oversight that might have prevented excessive risk-taking within the general account structure.

Despite this, insurers continue to receive high ratings from S&P, Moody’s, and Fitch, often with little transparency about underlying investment risks—particularly with respect to private debt. As discussed in “Private Debt Problematic in ERISA Plans”, these opaque, illiquid assets dominate many insurer portfolios and are used to inflate yield—benefiting the insurer through spread profits while increasing default exposure for plan participants.

S&P has itself acknowledged that state-level regulation of Separate Accounts differs so widely that an identical contract could receive different ratings depending on the state of issuance. In their own words:

“While there have been insolvencies involving separate accounts, the circumstances under which a separate account might be consolidated with the insurer’s general account remain substantially undefined.”

In other words, despite claims that Separate Accounts are “insulated,” policyholders—including ERISA plans—have no clear priority in an insolvency. The assumption that Separate Accounts are safer than General Accounts is unsubstantiated without state-specific legal protections and a higher, documented rating. Yet, no recent insurer appears to have sought such enhanced Separate Account ratings for fixed annuity products—despite billions flowing into them through 401(k) and PRT deals.

State Guarantee Associations: False Security

Plan fiduciaries also wrongly assume that State Guarantee Associations (SGAs) provide meaningful protection in the event of insurer failure. As explained in “State Guarantee Associations Behind Annuities Are a Joke”, these entities are riddled with limitations:

  • Coverage caps often top out at $250,000 per participant.
  • Coverage is limited to annuities considered insurance policies—a classification that remains unsettled in many states for group annuity contracts.
  • Plans that invest via Separate Accounts may not be covered at all.
  • SGAs are slow to pay and require insolvency proceedings to trigger.

This patchwork system of protection undermines the uniform national standards intended under ERISA, replacing them with the legal uncertainty of 50 different state frameworks.

Pension Risk Transfer: A Regulatory Shell Game

In the PRT context, the problem becomes even more acute. Plan sponsors offload pension liabilities to an insurer and call it a day. But as outlined in “Pension Risk Transfer Annuities Should Be Prohibited”, this shift removes ERISA protections from participants and exposes them to pure credit risk—often without even basic downgrade protection.

These annuities, once purchased, are irrevocable. There is no mark-to-market pricing, no participant choice, and no fiduciary oversight after transfer. Unlike defined contribution plan assets—where fiduciaries can replace a fund or manager—PRT annuities place participants in the hands of a single insurer, often for life.

Incentives Misaligned: Kickbacks and Structuring Fees

Plan sponsors frequently benefit from “structuring fees,” “rebalance profits,” or “rebates” paid by insurers to corporate treasury departments. These functionally operate as kickbacks that create a dangerous conflict of interest: the employer’s financial interest in closing the pension or reducing balance sheet liabilities directly conflicts with the participants’ need for long-term security. The insurer’s profit model—maximizing spread between illiquid, risky investments and low fixed crediting rates—comes at participant expense.

Going Beyond Ratings: The Fiduciary Obligation

ERISA fiduciaries are held to the highest duties of care and loyalty. In choosing a single-issuer annuity, they must:

  • Conduct independent credit analysis beyond agency ratings.
  • Evaluate the insurer’s asset allocation, exposure to private debt, and leverage.
  • Require downgrade protections, triggers, and collateralization where appropriate.
  • Consider alternative structures, including diversified stable value arrangements that maintain ERISA protections.
  • Avoid reliance on state-level guarantees or superficial representations of safety.

In the capital structure, plan participants in annuities without downgrade protections are subordinated to sophisticated Wall Street creditors, private equity owners, and even commercial reinsurers. They deserve better.

Conclusion

If an ERISA fiduciary would not invest 100% of a participant’s 401(k) balance into the high-yield bonds of a single insurer, they should not do so implicitly by placing it into an annuity backed by that insurer’s general or separate account. Ratings are not a fiduciary process. Participants cannot diversify away from default once locked into a single-issuer annuity.

The burden is on the fiduciary to prove prudence—not to presume it.

Many in Congress get donations from firms linked to Jeffrey Epstein – KY Congressman Andy Barr Example

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Many members of Congress have received $millions from financial firms linked to Jeffrey Epstein. Andy Barr of KY a member of the US House Financial Services Committee is a good example.

Here’s an in-depth article exploring the network linking Congressman Andy Barr to major financial contributors with ties to Jeffrey Epstein:

💸 Andy Barr’s Financial Industry Backers

🚀 Apollo Global Management

  • In the 2023–2024 election cycle, Apollo Global Management emerged as one of Barr’s top contributors, donating $55,800 via individuals and PACs Forbes+13OpenSecrets+13Business Insider+13.
  • Apollo’s connection to Jeffrey Epstein is well‑documented through its former CEO, Leon Black, who reportedly paid Epstein around $158 million between 2012 and 2017 for tax and estate planning—an arrangement that entangled significant public scrutiny and congressional investigation Vanity Fair+3Axios+3The Daily Beast+3.

🏦 JPMorgan Chase & Co.

  • In the first quarter of the 2025 election cycle, Barr’s campaign received the maximum $10,000 donation from the JPMorgan PAC OpenSecrets.
  • JPMorgan’s entanglement with Epstein included a prolonged relationship even after his 2008 criminal conviction, forcing internal compliance to raise red flags as late as 2013 Axios+9Business Insider+9TIME+9.
  • In 2022, the bank sued former executive Jes Staley, accusing him of deliberately shielding Epstein and neglecting red flags in order to keep Epstein as a client Axios+3AP News+3TIME+3.

Beyond Apollo and JPMorgan: Other Connections

Barr hasn’t only received funds from these two; he’s also tapped into other banks and private equity firms later scrutinized for Epstein links:

  • Wells Fargo: Contributed a total of $39,932 during the 2023–2024 cycle OpenSecrets. While Wells Fargo itself hasn’t been directly linked to Epstein, its high-ranking executives and financial dealings have come under broader oversight as part of financial industry safeguards post-Epstein revelations.
  • Blackstone Group: Donated $39,204 in the same cycle OpenSecrets. Co-founded by Stephen Schwarzman, Blackstone has not been tied to Epstein in the same way Apollo was; however, it remains part of the broader private‑equity ecosystem that’s been called to account by investigations like those spearheaded by Senator Ron Wyden Senate Finance Committee.

⚠️ The Epstein Backdrop

  • Leon Black’s controversy: The former Apollo CEO paid Epstein nearly $170 million for financial advice—and settled for $62.5 million with the U.S. Virgin Islands over his alleged enabling of Epstein’s illicit activities AP News+4The Daily Beast+4Forbes+4.
  • JPMorgan’s long delay: The bank kept Epstein as a client until 2013, despite internal concerns following his 2008 guilty plea The New Yorker.

Linking the Dots: Barr & Epstein-Linked Money

FunderAmount DonatedEpstein Link
Apollo Global Management$55,800Leon Black payments to Epstein; public controversy
JPMorgan Chase PAC$10,000Bank’s long relationship; executive lawsuit involvement
Wells Fargo$39,932Part of general financial ecosystem with Epstein oversight
Blackstone Group$39,204Ecosystem affiliation; under scrutiny in Epstein probe

Why 401(k) Plans Need a Strong Investment Policy Statement (IPS): A Fiduciary Firewall Against Risky and Conflicted Investments

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A well-crafted Investment Policy Statement (IPS) is not merely a procedural formality—it is the fiduciary firewall that protects 401(k) plan participants from the encroachment of conflicted, high-fee, and opaque investment products. In the absence of a strong IPS, plan sponsors expose themselves—and their participants—to a host of fiduciary landmines, including private equity, cryptocurrency, and insurance-based annuities that fail the Department of Labor’s Impartial Conduct Standards and risk classification as prohibited transactions under ERISA.

The IPS: Cornerstone of Fiduciary Oversight

“If an employee benefit plan does not have an investment policy statement, it does not have an investment policy.”
— IFEBP Investment Policy Handbook, Eugene Burroughs

A detailed IPS is essential to satisfying the fiduciary duties of prudence, loyalty, and diversification under ERISA. As the CFA Institute’s Pension Trustee Code of Conduct underscores, trustees must “draft written policies that include a discussion of risk tolerances, return objectives, liquidity requirements,” and review these policies at least annually to ensure they remain current.

The Department of Labor (DOL) reaffirmed this in its amicus brief in Pizarro v. Home Depot, stating that vendors have strong incentives to exploit plan design weaknesses, and that ultimate accountability for plan investments resides squarely with the plan sponsor.

From Mutual Funds to Murky Waters: The Rise of CITs and Alternatives

Historically, 401(k) plans were dominated by SEC-registered mutual funds, which provided relatively robust protections via daily pricing, audited disclosures, and strict regulation. Today, over 50% of 401(k) assets are housed in target date funds (TDFs)—and increasingly, these are delivered via poorly state-regulated Collective Investment Trusts (CITs) instead of mutual funds. While CITs promise lower fees, they often come with less transparency, fewer investor protections, and more hidden leverage or illiquid assets.

Without an IPS that explicitly defines allowable structures, asset classes, liquidity limits, and credit quality minimums, plan sponsors may unknowingly allow risky assets like:

  • Private credit or private equity vehicles priced internally
  • Insurance company annuities backed by opaque general accounts
  • Cryptocurrency products that fail liquidity, valuation, and prudence tests

Contract-Based Products and Annuities: Unacceptable Fiduciary Risks Without IPS Controls

The shift toward contract-based investment products—especially fixed annuities within DC plans—is perhaps the most troubling. These investments:

  • Fail diversification screens, often representing single-issuer credit exposure
  • Lack downgrade provisions (unlike traditional bond funds), leaving participants stuck in junk-rated or insolvent insurance contracts
  • Obscure fees and spread profits, particularly in general and separate account annuities
  • Violate GIPS performance transparency standards required for prudent monitoring

As noted in Fi360’s Fiduciary Handbook for Plan Stewards, these investments often cannot be valued reliably or marked to market and can present major conflicts of interest—especially when offered by a plan’s recordkeeper.

Each TDF Is a Bundle of Risk: Call for Sub-Policy Statements

According to Ron Surz, co-author of Fiduciary Handbook for Understanding and Selecting Target Date Funds, each target date fund should be governed by its own IPS. This is especially critical as modern TDFs increasingly embed exposure to non-transparent alternatives like:

  • Private equity stakes
  • Real estate limited partnerships
  • Derivatives and synthetic structures

A sound IPS must:

  • Disclose the asset-level guidelines within each TDF
  • Demand transparency on holdings, fees, and valuation methodology
  • Prohibit assets that are not SEC-registered or that lack daily pricing
  • Require performance benchmarking against risk-adjusted, diversified indices

Avoiding Prohibited Transactions and Conflicts of Interest

The presence of annuities or proprietary alternative products tied to the recordkeeper or affiliated parties raises red flags for prohibited transaction claims under ERISA §406. Fi360 stresses that fiduciaries must “avoid or manage conflicts of interest in favor of the investors and beneficiaries.” Disclosure alone is insufficient—conflicted investments must be affirmatively excluded or justified via documented due diligence.

As the CFA Institute and Fi360 both emphasize, fiduciaries must:

  • Adopt written investment guidelines specifying asset classes and due diligence protocols
  • Evaluate each option inside TDFs as if it were a stand-alone fund
  • Reject opaque products that cannot meet minimum fiduciary standards for liquidity, transparency, and valuation

Conclusion: A Weak IPS Is a Breach Waiting to Happen

There is growing consensus—from the CFA Institute, Fi360, and the DOL—that weak IPS documents enable fiduciary breaches. Without an IPS that explicitly bans or scrutinizes illiquid, high-risk, or non-transparent investments, sponsors may:

  • Breach fiduciary duties of prudence and loyalty
  • Invite litigation over prohibited transactions
  • Allow vendors to exploit structural loopholes for their own benefit

In short, a strong IPS is a fiduciary necessity, not a formality. It is the legal and ethical framework that separates prudent governance from reckless delegation. It must evolve with the changing landscape of target date funds, CITs, and alternative assets—before it’s too late for participants and plan fiduciaries alike.

Recommended Reading and References

Private Debt problematic in ERISA Plans

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Private Debt is in DB and DC pension plans.  In 401k plans it is limited so far mostly to Insurance Company Separate Accounts and other stable value products, but there are plans to increase its use dramatically by hiding it in Target Date Funds.   Private Debt is problematic for a number of reasons The following is from ChatGPT

VIOLATION OF ERISA’S DUTY OF PRUDENCE

Inclusion of Private Credit, Private Mortgages, and Other Illiquid, Self-Priced Assets

  1. Plans breached their fiduciary duties by offering and/or maintaining investments in private credit, private mortgages, and other illiquid private debt instruments within the Plan’s investment lineup, in violation of the prudent man standard of care and the Impartial Conduct Standards incorporated by regulation under ERISA.
  2. ERISA §404(a)(1)(B), 29 U.S.C. §1104(a)(1)(B), mandates that plan fiduciaries act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use.”
  3. Under ERISA’s Impartial Conduct Standards, fiduciaries must:
    • Act in the best interest of the plan and participants;
    • Charge no more than reasonable compensation;
    • Refrain from making misleading statements or omissions about risks or characteristics of investments.
  4. The growing use of Private Credit, Private Mortgages, and similar private debt instruments in ERISA retirement plans—either through direct investments, pooled vehicles such as collective investment trusts (CITs), or via allocations in target-date funds (TDFs)—fails to meet these obligations for the following reasons:

A. Self-Pricing and Lack of Transparency Violates Prudent Fiduciary Conduct

  1. Unlike publicly traded debt securities, private credit and mortgage loans are generally not marked to market and lack reliable, third-party price discovery. Many are valued using internal models by asset managers or by affiliated valuation agents—creating obvious conflicts of interest.
  2. Industry studies and academic research have documented how private debt assets are often “smoothly priced” or marked to model, which artificially suppresses volatility, misleading fiduciaries and participants about the true risk of these investments.
  3. As noted in the CFA Institute’s guidance on fair value pricing (Refresher Readings on GIPS and Risk Standards), reliance on self-pricing undermines comparability, transparency, and ultimately fiduciary prudence:

“Valuations derived from internal models, absent market validation, are inherently susceptible to bias and present conflicts when used to report performance or fees.”

B. Credit Risk Not Accurately Reflected: Ratings by Unregulated or Conflicted Firms

  1. Many private debt instruments are assigned credit ratings not by nationally recognized statistical rating organizations (NRSROs) but by smaller, conflicted firms such as Egan-Jones, which have been previously sanctioned by the SEC for rating conflicts and failing to properly manage issuer-pay conflicts.
  2. In SEC v. Egan-Jones Ratings Co., the SEC found repeated compliance failures, reinforcing that ratings used for fiduciary investment decisions must be independently verifiable and subject to rigorous controls. Use of such ratings in retirement plans undermines ERISA’s prudence standard and exposes plan participants to credit losses that are systematically under-disclosed.

C. Lack of Liquidity Creates Participant Harm in Defined Contribution Plans

  1. Many private credit and mortgage assets are held in vehicles with multi-year lockups or limited redemption terms, inappropriate for the liquidity needs of daily-valued, participant-directed ERISA plans.
  2. Target-date funds (TDFs) and pooled vehicles holding private credit often fail to disclose liquidity limitations or redemption restrictions clearly to participants, despite ERISA’s requirement that plan information not be misleading. This structure raises the same concerns that led the SEC to place limits on illiquid investments in mutual funds.

D. Valuation and Risk Mischaracterization Is a Fiduciary Breach

  1. In Whitley v. JPMorgan Chase & Co., No. 12 Civ. 2548 (S.D.N.Y.), plaintiffs alleged that synthetic stable value funds using smoothed or manipulated private credit valuations constituted imprudent investments. Similarly, the American Century arbitration with JPMorgan uncovered concealed private credit holdings in layers of CITs, affirming the systemic risk of hidden illiquidity and valuation opacity.
  2. These cases demonstrate that failure to properly vet, monitor, and disclose the true risks of private debt and mortgage exposures may constitute fiduciary imprudence and violate the statutory obligations imposed by ERISA §404.

E. Excessive Fees Hidden in Complex Structures

  1. Private credit and private real estate vehicles often layer management, servicing, origination, and performance fees, resulting in total compensation that exceeds reasonable bounds—in violation of ERISA’s requirement that only reasonable compensation be paid to service providers (§408(b)(2)).
  2. The lack of pricing transparency and comparables in private debt enables fee padding, where fiduciaries cannot accurately benchmark fees against public alternatives. This inability to assess the reasonableness of compensation itself constitutes a breach of fiduciary duty.

F. New Study Debunks Private Credit Craze

The Journal of Private Markets Investing (Fall 2025) just published a seminal study that debunks the private credit performance ‘pitch’:

  • Across all seasoned vintage years (2015–2020), a significant share of Total Value to Paid-In (TVPI) is composed of Residual Value (RVPI or unliquidated loans) rather than realized cash returns (DPI).
  • This underscores a potential major risk in the private credit asset class as this illiquid investment performance is largely dependent upon fund managers’ assessment of their values (“mark-to-myth”).
  • When compared to appropriate public market benchmarks, the study find that private credit funds – both senior (direct lending) and mezzanine – do not exhibit significant outperformance.

The three authors are affiliated with Johns Hopkins Carey Business School and UC Davis Graduate Management School, respectively.

The study is attached and the link. https://www.pm-research.com/content/iijpriveq/24/1/109

Were State Pensions indirectly funding Jeffrey Epstein via Apollo?

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I asked ChatGPT questions on Jeffrey Epstein and ties to Apollo and state pensions and it came up with this interesting story.

Here is a structured summary of the known facts and plausible linkages:

🔴 1. Leon Black’s Relationship with Epstein (2000–2018)

  • Black paid Epstein $158 million between 2012 and 2017 for “tax and estate planning services,” even after Epstein’s 2008 conviction for soliciting a minor.
  • Black continued associating with Epstein until at least 2018, including visiting his Manhattan townhouse and wiring large payments through Epstein-controlled entities.
  • A 2021 investigation commissioned by Apollo found that Black used Epstein’s advice personally, but no Apollo funds were allegedly involved.

Sources:

🟠 2. Apollo Clients: Public Pensions with Investments During the Epstein Period

Apollo received billions in commitments from public pensions during the time of Black’s Epstein payments:

🔹 CALPERS (California Public Employees’ Retirement System)

  • CALPERS had over $1 billion committed to Apollo funds throughout the 2000s and 2010s.
  • In 2021, CALPERS publicly expressed concern after the Epstein revelations:

“We are troubled by the allegations surrounding Mr. Black… We are monitoring the situation closely.”
— CALPERS spokesperson, January 2021 (per Reuters)

  • Yet CALPERS continued investing in Apollo funds during this period.

🔹 New York State Common Retirement Fund (NYSCRF)

  • NYSCRF had invested in Apollo funds since at least 2004.
  • No public statements were made regarding the Epstein connection.
  • [State Comptroller Thomas DiNapoli] did not comment after the Epstein story broke.

🔹 PSERS (Pennsylvania Public School Employees’ Retirement System)

  • PSERS invested in Apollo throughout the 2000s and 2010s.
  • In 2021, PSERS halted new investments in Apollo citing “reputational concerns,” though it’s unclear if the Epstein revelations or fee transparency were the primary driver.

Sources:

🔵 3. Epstein’s Financial Ties: Were Public Funds Ever Routed Through Apollo or Epstein Entities?

There is no public evidence that Jeffrey Epstein directly managed or influenced public pension fund assets. However:

  • Epstein had ties to multiple billionaires and institutions that did business with Apollo, such as:
    • Glenn Dubin, co-founder of Highbridge Capital (later acquired by JPMorgan)
    • Les Wexner, former L Brands CEO, who helped fund Epstein early on
  • Epstein had extensive ties to JPMorgan, which continued banking him until 2013. JPMorgan is also a massive pension fund service provider (recordkeeping, private equity).

🟡 4. Legal and Reputational Fallout: Are Fiduciaries Complicit?

Despite:

  • Epstein’s 2008 conviction
  • Ongoing media coverage
  • Black’s continued payments until 2017

Many pension funds continued (or even increased) their allocations to Apollo funds during this time. This raises fiduciary questions, including:

🔹 Did pension fund staff and consultants perform enhanced due diligence after 2008?
🔹 Should ongoing associations with figures like Epstein have triggered ethics reviews or investment committee action?
🔹 Are fiduciaries responsible for investing in firms led by individuals involved in known predatory or criminal associations?

These questions are especially relevant under ERISA’s duty of prudence and loyalty for Taft-Hartley and other quasi-ERISA public funds.

🧾 Summary Table: Epstein–Apollo–Pension Fund Triangulation

EntityRelationship to EpsteinRelationship to ApolloPension Exposure
Leon BlackPaid Epstein $158M; personal and professional relationshipCo-founder, CEO until 2021CALPERS, PSERS, NYSCRF, and others
CALPERSNone directly documentedMajor LP in Apollo PE fundsContinued investment through 2021
PSERSNone directly documentedBarred Apollo in 2021Long-time investor
NYSCRFNo public commentMajor Apollo LPContinued investment
JPMorganEpstein’s bank until 2013; now facing civil suitsCo-investor and counterparty to Apollo in some dealsRecordkeeper and PE manager for public pensions

🔚 Conclusion

While no direct Epstein–public pension link has been publicly documented, the indirect reputational and fiduciary exposure from Apollo’s long-term relationship with Epstein is substantial. The fact that most pensions continued to fund Apollo after Epstein’s first conviction in 2008—and after public reporting of payments—raises critical questions about the due diligence, risk oversight, and accountability of plan fiduciaries.

Apollo Global Management has managed to avoid full accountability despite a history of serious legal and ethical violations involving both misleading fee practices and pay-to-play corruption, largely due to a combination of structural legal advantages, regulatory capture, and a complicit investment culture in the pension fund world. Here’s a breakdown of how Apollo has avoided deeper consequences:

1. SEC Fine in 2016 — No Admission of Guilt

In 2016, Apollo paid $52.7 million to settle SEC charges that it misled investors about:

  • Accelerated monitoring fees after portfolio company sales
  • Failure to disclose conflicts of interest regarding interest from loans made to its funds
  • Inadequate supervision regarding a senior partner’s expense-related misconduct

⚠️ Why this wasn’t true accountability:

  • No criminal charges were filed.
  • Apollo did not admit or deny the allegations.
  • The fine was relatively small compared to Apollo’s multi-billion-dollar asset base.

👉 This is a typical outcome of SEC settlements with large private equity firms: civil penalties, no admissions, and limited deterrent effect.

Source:
SEC Press Release (2016)
AI-CIO Coverage

2. CALPERS Corruption Scandal — Apollo Avoided Legal Exposure

Apollo was deeply entangled in the CALPERS pay-to-play scandal in the 2000s. The scandal involved:

  • Alfred Villalobos former LA Deputy Mayor and CALPERS Trustee as a placement agent was paid millions to steer CALPERS money to Apollo
  • Fred Buenrostro, CALPERS CEO, who forged documents and later pled guilty
  • Apollo paid Villalobos over $48 million in fees between 2002 and 2008

Villalobos committed suicide in 2015 before serving a prison term. Buenrostro was sentenced to 4.5 years in prison.

⚠️ Why Apollo escaped further consequences:

  • Apollo claimed it was defrauded by Villalobos and that it relied on Buenrostro’s forged documents.
  • The DOJ and SEC did not pursue charges against Apollo.
  • The Dodd-Frank Act outlawed such placement-agent arrangements after the fact.

Apollo was later barred by the Pennsylvania Public School Employees’ Retirement System (PSERS) in 2021 due to lingering concerns, a rare action by a major pension.

Sources:

3. Regulatory Capture & Pension Fund Complicity

Despite scandals, Apollo continued to receive allocations from:

  • CALPERS
  • PSERS (until 2021)
  • Other state and union pension funds, even after media coverage of improprieties

⚠️ Key reasons for this continued support:

  • Pension boards and consultants often have conflicts of interest.
  • Limited transparency into private equity fees and arrangements.
  • Consultants and gatekeepers benefit from keeping these relationships intact.

4. Legal and Structural Impunity

Apollo benefits from:

  • Delaware corporate law that limits fiduciary accountability
  • Limited partner agreements that heavily protect general partners
  • Mandatory arbitration clauses that block class actions or public lawsuits
  • Weak enforcement by DOL and SEC, which often ends with settlements

Summary Table: Apollo’s Avoidance of Accountability

IncidentMisconductConsequenceAccountability Gap
2016 SEC FineMisleading fees, self-dealing$52.7M settlement, no admission of guiltNo executives punished
CALPERS ScandalPay-to-play with CEO and trusteeBuenrostro jailed, Villalobos diedApollo faced no charges
PSERS BlacklistPension barred new commitments2021 halt after internal investigationToo little, too late
Broader industry practicesExcessive fees, hidden termsIndustry-wide normalizationLPs and consultants complicit

Conclusion:

Apollo has avoided real accountability not because the facts were unclear, but because:

  • The private equity industry enjoys legal and regulatory insulation.
  • Pension fiduciaries are either unwilling or unable to act.
  • Enforcement agencies are often reactive and understaffed.

Target Date Benchmarks – ChatGPT

/ ChrisTobe / 1 Comment

Target-date funds are over 50% of 401(k) assets.  Litigation around target date funds I think shows a lack of knowledge around investment performance.    Target date funds were created to hide fees and mask performance concerns, and are impossible to benchmark.  In fact, many were created to manipulate benchmarks.   I feel many plaintiff attorneys are not getting the full potential out of their cases by not looking under the hood of Target Date funds to find out what is really going on. 

In my testimony for the June 2009 joint SEC-DOL hearing on target date funds, I contended that it’s huge growth would further concentrate management into an oligopoly and higher fees. I also criticized the target date structure as a step backward for transparency of fees, performance, and risk. I thought it would push plans toward a one-provider, closed platform that would lead to conflicts of interest and higher fees.

Target Date Fund Asset Allocation Drives Risk and Performance

Asset allocation is the main driver of performance and risk.  Because of the lack of transparency and investment policy guidelines, performance gaming of the benchmark in target date funds in invited.  Target date fund specialist Ron Surz warns against target date funds holding high equity allocations for those close to retirement

Joe Nagengast of Target Date Analytics in the June 2009 joint SEC-DOL hearing on target date funds. “The way to win the short-term performance horse race for target date funds (and the resulting market share) has been, in many time periods, through higher equity allocations.”

I asked ChatGPT to elaborate on this issue and specifically benchmarking to the S&P target date fund index

—————————————————————————-

From ChatGPT.  Asset allocation explains ~90% of return variability, then comparing TDFs with vastly different glide paths or allocations is not apples-to-apples.

⚖️ Why It’s a Problem

401(k) Target Date Funds often differ dramatically in:

  • Equity vs. bond allocations (e.g., 90/10 vs. 60/40 at the same “target date”)
  • Glide path design (to retirement vs. through retirement)
  • Exposure to alternatives, real assets, or high-yield bonds
  • Risk levels (volatility and drawdown potential)

So, simply comparing returns (e.g., over 1, 3, or 5 years) may reward higher-risk funds during bull markets, misleading fiduciaries and participants.

🧠 Bottom Line

You cannot responsibly compare TDFs on return alone when their asset allocations diverge. Fiduciaries must benchmark based on:

  • Risk-adjusted performance
  • Glide path risk levels
  • Appropriateness for the participant demographic
  • Alignment with ERISA’s fiduciary standards

ChatGPT said:

benchmarking Target Date Funds (TDFs) to something like the S&P Target Date Fund Index can be misleading and easily gamed, particularly because:

  1. Benchmarks like the S&P Target Date Index only reflect the average allocation (e.g., average equity/glidepath of funds in that vintage),
  2. There is no requirement that the TDF match the risk profile of the benchmark, and
  3. A higher equity allocation will often outperform the benchmark in bull markets, misleading fiduciaries into thinking the fund is “better managed” rather than just riskier.

🔎 How This Benchmarking Can Be Gamed

TDF managers can “game” the benchmark by:

  • Allocating more to equities (especially international or small-cap)
  • Taking more duration risk in bonds
  • Adding alternative assets like private equity or real estate (often with smoothed NAVs)
  • Using leverage (in CITs especially)

These tactics may result in higher performance in a rising market compared to the benchmark, even though the fund is taking on significantly more risk.

📊 Examples of Equity Overweighting vs. Benchmark

Let’s compare some common 2040 TDFs with the S&P Target Date 2040 Index, which in 2024 had approximately:

  • Equity: ~74%
  • Fixed Income: ~24%
  • Cash/Other: ~2%
Target Date FundEquity AllocationOverweight vs S&P IndexComments
Fidelity Freedom 2040 (Investor)~84%+10%Higher US equity tilt, more aggressive glidepath
T. Rowe Price Retirement 2040~89%+15%Very equity-heavy approach; often leads in returns in bull markets
American Funds 2040~78%+4%Slight overweight, includes active mgmt in underlying funds
Vanguard Target Retirement 2040~72%-2%Closest to S&P Index; more conservative relative to peers
BlackRock LifePath Index 2040~74%0%Benchmarked tightly to average; often used as a baseline
State Street Target Retirement 2040 (CIT)~78%+4%Slightly more risk in equity; often embeds alternatives in CITs

Sources: Fund prospectuses, Morningstar, 2024 allocation snapshots

⚠️ Fiduciary Implications under ERISA

  • Plan fiduciaries may be misled into thinking a fund is “better performing” when it simply takes more risk.
  • Impartial Conduct Standards under ERISA require fiduciaries to consider both performance and risk—a higher return via higher risk is not inherently better.
  • Courts may ask: Did the fiduciary understand that this TDF’s outperformance came from taking more risk than the benchmark?
  • This is especially risky when plan sponsors do not document why they selected or retained a more aggressive fund.

🧠

2. How Much Does It Matter?

  • The 1986 Brinson, Hood & Beebower (BHB) study found that asset allocation explained 93.6% of the variation in quarterly returns of pension fund portfolios.
  • Later updates and critiques (e.g., by Ibbotson & Kaplan in 2000) clarified that while asset allocation doesn’t explain everything, it still dominates over market timing or security selection in terms of predicting return variability.
    • Strategic asset allocation (long-term mix) accounts for about 90% of return variability.
    • Tactical allocation, timing, and security selection account for much less.

3. Impact on Performance vs. Variability

  • Asset allocation drives risk-adjusted returns, not just variability.
  • Picking the right mix of stocks, bonds, and alternatives greatly affects total returns, especially over longer horizons.
  • During market crises or recoveries, asset classes behave very differently—diversification reduces drawdowns.

Key Takeaway

  • TDFs should not be benchmarked only on return versus the S&P TDF Index—risk-adjusted performance and glidepath assumptions matter. A 2040 fund with 90% equity will likely beat the benchmark in good years, but may collapse harder in downturns—especially harming near-retirement investors if the glidepath is too steep.

There are no valid benchmarks for Target Date Funds.  Comparing funds with different asset allocations does not work either.  Target date funds are specifically designed to avoid accountability and thus need the most scrutiny. You have to look under the hood at the individual investment allocations and benchmark those.   Attorneys are defying investment principles and basic math in insisting on using TDF benchmarks in litigation.

Hiding Private Equity in 401(k) Target Date Funds risks the entire TDF as a Prohibited Transaction- ChatGPT

/ ChrisTobe / 1 Comment

Hiding Private Equity in 401(k) Target Date Funds risks the entire TDF as a Prohibited Transaction- ChatGPT

Because Private Equity is clearly an ERISA prohibited transaction,  https://commonsense401kproject.com/2025/07/02/private-equity-is-a-prohibited-transaction-via-chat-gpt/  it can create the false illusion that it adds value to a portfolio like a Target Date fund by overstating performance and understating risks.   As I testified to the ERISA advisory committee last year, SEC-registered mutual funds will not allow this ruse, but that weak state-regulated Collective Investment Trusts (CIT’s) would. https://commonsense401kproject.com/2025/06/29/erisa-advisory-council-testimony-released/ 

Target Date funds that allocate to Private Equity, can become Prohibited Transactions.

I asked ChatGPT how Private Equity cheats on performance and risk.  

⚠️ Core Concern:

Private Equity (PE) self-reports inflated returns and artificially smooths volatility, which distorts inputs used in mean-variance optimization (MVO), risk-parity models, and target-date glidepaths.

🔍 How the Distortion Happens:

1. Self-Reported, Marked-to-Model Valuations

  • Unlike publicly traded equities, PE funds are not marked to market.
  • General Partners (GPs) have wide latitude in determining “fair value” using Level 3 inputs under GAAP/IFRS.
  • There’s no external price discovery like in public markets—creating upward bias in reported IRRs and TVPIs.

Example: GPs may hold a portfolio company at $2.3B valuation for 12 months—until a sale occurs at $1.8B, but all the prior return models assumed $2.3B.

2. Return Smoothing Reduces Apparent Risk

  • PE firms smooth returns by reporting only quarterly, and avoiding mark-downs in downturns unless forced (e.g., in LP secondaries).
  • This lowers measured standard deviation, making PE appear less risky than it truly is.

Ludovic Phalippou, in multiple SSRN papers, shows that real economic volatility of PE is closer to or greater than public equities, but accounting practices mask this.

3. Low Correlation Is Largely an Illusion

  • PE is often shown to have low correlation with the S&P 500 or public equity indices.
  • This is not because the underlying assets are fundamentally different—but because quarterly smoothed valuations fail to reflect the real-time economic correlation.

Empirical studies (e.g., Ang, Chen, Goetzmann 2013) show that lagged public-equity returns can explain much of PE fund performance.

📉 Implications for Asset Allocation Models:

1. Misleading Inputs into MVO and Risk Budgeting

  • MVO and Black-Litterman-type optimizations overweight PE due to inflated Sharpe ratios (high returns / low volatility).
  • Allocators wrongly assume PE offers high return with diversifying low risk.

2. Target-Date Funds and Pension Glides Paths Are Over-Allocating

  • Plan sponsors may use PE-heavy CITs or TDFs based on deceptively low risk and attractive correlation stats.
  • This is especially problematic in state-regulated CITs, where oversight of inputs is weak.

3. Stress Testing Fails to Capture Liquidity & Downside Risk

  • Smoothing hides tail risk and liquidity gaps during downturns (e.g., GFC, COVID).
  • PE dry powder and capital calls may spike just when public markets are down.

🔎 Supporting Academic and Regulatory Sources

  • Ludovic Phalippou, “An Inconvenient Fact: Private Equity Returns & the Billionaire Factory”
    → Calls out manipulated IRRs, opaque fees, and correlation illusions.
  • Andrew Ang (Columbia/BlackRock)
    → PE appears low beta only due to infrequent marking; in reality, it is leveraged equity.
  • U.S. SEC under Gensler has warned of valuation opacity and risk-model distortions in private funds.
  • CFA Institute (2021 paper):
    “Asset Allocation to Alternative Investments” (CFA Institute, 2025):
    Highlights that illiquid assets often have stale and artificially smoothed returns, recommends testing for serial correlation, and states clearly that analysts “need to unsmooth the returns to get a more accurate representation of the risk and return characteristics of the asset class.” blogs.cfainstitute.org+13cfainstitute.org+13
  • 2019 SSRN paper “Unsmoothing Returns of Illiquid Assets” by Couts, Gonçalves, and Rossi, which critiques existing methods and proposes a novel three-step unsmoothing technique—highly relevant for private equity modeling. papers.ssrn.com+2
  •  

🧨 Bottom Line:

Private equity appears safer and more diversifying than it really is because it controls its own marks.
This undermines the integrity of asset allocation models and can lead to over-allocation, particularly in pensions, endowments, and TDFs.

This misrepresentation may expose fiduciaries to legal risks under ERISA’s Impartial Conduct Standards or trust law’s duty of prudence—especially if they’ve failed to adjust for these distortions.

These distortions also apply to private debt, hedge funds, real estate, and other ERISA prohibited transactions like Crypto https://commonsense401kproject.com/2025/07/03/crypto-is-erisa-prohibited-transaction-chatgpt-do-not-use-in-401k/

And Annuities  https://commonsense401kproject.com/2025/06/13/annuities-are-prohibited-transactions-via-chat-gpt/

Target Date funds that use any inputs that are prohibited transactions are at a high risk of making the entire TDF a Prohibited Transaction.

Crypto is ERISA Prohibited Transaction – ChatGPT – do not use in 401(k)

/ ChrisTobe / Leave a comment

I asked this question

How can cryptocurrency not be an ERISA Prohibited Transaction under the Impartial Conduct Standards? Is Bitcoin different than other types? Does putting Crypto in an ETF fix it?

ChatGPT said:

Great question—cryptocurrency, including Bitcoin, poses serious risks under ERISA’s fiduciary and prohibited transaction rules, especially when evaluated through the lens of the Impartial Conduct Standards (ICS) issued by the Department of Labor (DOL) in the context of the Fiduciary Rule and PTE 2020-02.

Let’s break this down:

🔹 ERISA Fiduciary Duties & Impartial Conduct Standards

Under ERISA, fiduciaries must:

  1. Act prudently (duty of care)
  2. Act loyally (duty of loyalty—no self-dealing or conflicts)
  3. Pay only reasonable compensation
  4. Not make misleading statements or omissions

The Impartial Conduct Standards, applicable to rollovers and IRA advice under PTE 2020-02, reinforce these duties and apply broadly when fiduciaries recommend or select investments for ERISA-covered plans or IRAs.

🔶 Why Cryptocurrency (like Bitcoin) Often Violates These Standards

  1. Lack of a prudent process:
    • DOL issued Compliance Assistance Release 2022-01 warning fiduciaries to “exercise extreme care” before including crypto in retirement plans.
    • Crypto’s volatility, speculative nature, custodial risks, and regulatory uncertainty raise prudence red flags.
  2. Duty of loyalty / potential for conflicts:
    • Many crypto providers (e.g., exchanges, fund managers) stand to profit from high fees or self-dealing structures.
    • Fiduciaries recommending crypto could be conflicted if they share revenue, hold equity in crypto firms, or lack independence.
  3. Reasonable compensation:
    • Many crypto platforms and funds (e.g., Grayscale Bitcoin Trust) charge excessive fees relative to the risk/return profile—potentially violating the “reasonable compensation” standard.
  4. Risk of misleading statements:
    • Marketing crypto as “hedges against inflation,” “digital gold,” or “safe diversification” can be misleading if not backed by robust fiduciary analysis.

⚖️ Prohibited Transaction Risk

Crypto holdings may involve:

  • Conflicted compensation (e.g., revenue-sharing with crypto platforms),
  • Use of plan assets in self-dealing by fiduciaries or related parties,
  • Indirect party-in-interest transactions, such as recommending affiliated crypto custodians or ETFs.

This could trigger ERISA §§ 406(a) and 406(b) violations unless a DOL exemption applies—and none exist specific to crypto.

🔹 Is Bitcoin Different from Other Cryptocurrencies?

Yes, Bitcoin is viewed somewhat differently, but it’s not exempt from fiduciary scrutiny:

  • Bitcoin is not a security, per SEC Chair Gensler (most others are), which may reduce some regulatory hurdles.
  • Bitcoin has longer history, greater liquidity, and institutional acceptance than most altcoins.
  • However, its volatility, custodial concerns, and speculative nature still pose ICS and prudence issues under ERISA.

🔹 Does Putting Bitcoin in an ETF Solve the Problem?

Not necessarily. Using a Bitcoin ETF (e.g., BlackRock’s IBIT or Grayscale’s GBTC) addresses some custodial and valuation issues, but fiduciary risks remain:

  • Still speculative and volatile—may not meet prudence test.
  • High fees (especially with trusts like GBTC) may violate “reasonable compensation.”
  • ETF sponsor conflicts (e.g., marketing fees, cross-selling) may still trigger 406(b) violations.
  • DOL has not approved any PTE specific to crypto ETFs in retirement plans.

🔍 Key DOL Guidance & Enforcement

  • 2022 DOL Crypto Guidance: Warned fiduciaries about crypto’s inclusion in 401(k)s; issued investigative subpoenas to plans considering it.
  • ForUsAll v. DOL: Lawsuit over DOL’s crypto warning; DOL defended its authority to flag fiduciary risks.
  • Ongoing enforcement: DOL is watching this space closely and likely to bring enforcement actions if crypto is imprudently included in plans.

✅ Summary

QuestionCrypto (esp. Bitcoin) in DC Plans
Is it a Prohibited Transaction under ERISA?Very likely yes unless clearly exempt and without conflicts
Does it violate the Impartial Conduct Standards?Often yes — due to volatility, lack of prudence, high fees, and conflicts
Is Bitcoin treated differently?Slightly, but not enough to justify inclusion
Does a Bitcoin ETF fix this?No — may reduce some risks, but not prudence or ICS violations

📌 Bottom Line for Fiduciaries

Unless crypto becomes clearly supported by regulatory exemptions, has stable pricing, low fees, and a credible long-term track record in retirement portfolios, its inclusion in ERISA plans is a high-risk move likely to draw litigation and regulatory scrutiny.