Charge high, opaque fees (violating the reasonable compensation prong),
Rely on complex, non-transparent disclosures (violating the no misleading statements prong),
Are marketed by non-fiduciary parties (violating care and loyalty obligations),
Fail to accept ERISA fiduciary status in the PE offering documents, disclaiming responsibility.
This makes them vulnerable on all four elements of the Impartial Conduct Standards, which apply to the DOL’s Prohibited Transaction Exemption (PTE) 2020-02 that governs conflicts of interest.
So, on its face, allowing Private Equity into 401(k)s should be a prohibited transaction unless a strong exemption applies.
🧩 2. How PE Tries to Avoid Prohibited Transaction Classification
Despite these red flags, here’s how PE sponsors and platforms often try to thread the needle:
A. Structuring through Commingled Products
PE is typically offered via:
Target Date Funds (TDFs) or
Collective Investment Trusts (CITs) These are multi-manager, pooled vehicles in which PE is only a sleeve. The fiduciary responsibilities then shift to the TDF or CIT manager, who may be a fiduciary — but the underlying PE managers are not.
➤ This layering dilutes fiduciary clarity and avoids direct ERISA responsibility for the PE firms themselves.
B. Relying on the DOL’s 2020 “Information Letter”
The Department of Labor’s 2020 Information Letter (requested by Pantheon and Partners Group) did not bless PE in DC plans, but it did not ban it either. It merely said:
“…a plan fiduciary would not violate the duties of prudence and loyalty per se by including PE as a component of a diversified investment option.”
This gave cover — but did not offer an exemption or remove fiduciary obligations. Yet many sponsors are treating it as a green light.
C. Outsourcing Fiduciary Responsibility
Plan sponsors may rely on third-party investment consultants (e.g., Mercer, Aon, Callan) or TDF providers (e.g., BlackRock, Fidelity) and claim reliance on prudence of the delegated manager.
However, delegation does not absolve fiduciary liability under ERISA § 405 (co-fiduciary liability), especially if the sponsor fails to monitor the advisor or conduct due diligence on PE’s costs, liquidity, and performance opacity.
📉 3. Why This Still Fails Under the Impartial Conduct Standards
The Impartial Conduct Standards (ICS) were developed under the DOL fiduciary rule and carried into PTE 2020-02, which applies when there are conflicted recommendations (e.g., plan fiduciaries profiting from fund inclusion or relying on conflicted consultants).
Private Equity fails ICS because:
Fees and valuation models are rarely benchmarked objectively.
Performance data is not standardized (e.g., IRRs vs. time-weighted returns).
Contracts often contain waivers of fiduciary duty, arbitration, or non-transparent fee disclosures.
There is often no fiduciary warranty under ERISA by the PE provider.
This opens the door to prohibited transaction claims, especially if the PE recommendation:
Directly or indirectly benefits the advisor/fiduciary financially.
Lacks documentation of a prudent process.
⚖️ 4. What Would Trigger Liability
Plaintiffs could pursue claims under:
ERISA §406(a) (dealing with conflicts of interest/self-dealing),
ERISA §404(a) (fiduciary duties of prudence and loyalty),
And potentially ICS violations under PTE 2020-02.
Courts and regulators could hold:
Plan fiduciaries liable for imprudence or prohibited transactions,
PE managers liable if they acted as de facto fiduciaries or benefited from self-dealing.
I think any plan sponsor who is pitched a Target date fund with any Private Equity, however small, to be wary. Private Equity will sneak into Target Date Funds first, maybe at 5% then grow to perhaps 20% to increase fees. BlackRock and Empower are cutting deals in which I believe they are getting lucrative fees from Private Equity in exchange for taking the fiduciary liability for the Private Equity in their target date funds. I would think when looking at the Private Equity sleave, it would be a party in interest. My contention is that if the Private Equity sleeve is a prohibited transaction, then the entire target date fund is a prohibited transaction.
Investment Fiduciaries James Watkins and Chris Tobe
James Watkins is an attorney with Invest Sense LLC. His current practice provides forensic fiduciary audits for plans and other trustees. Chris Tobe is the Chief Investment Officer for the Hackett Robertson Tobe Group. He works as a consultant to retirement plans and serves as a litigation consultant.
Mr. Watkins stated there are three cases that he refers to as the “responsibility trinity,” that defines the area of fiduciary responsibility right now: 1. Tibble v. Edison – recognized the Restatement of Trusts (Restatement) as a legitimate resource in resolving fiduciary issues and ruled that a plan sponsor has an ongoing fiduciary duty to monitor plan investment options for prudence 2. Hughes v. Northwestern – ruled that a plan sponsor has a fiduciary duty to ensure that each investment option within a plan is prudent and to remove any that are not 3. Brotherston v. Putnam – ruled that comparable index funds can be used for benchmarking purposes, citing Section 100 b(1) of the Restatement, that index funds are proper comparators Mr. Watkins stressed that he is a big proponent of cost benefit analysis and believes the math is not that hard to do, especially as it is being used to determine whether an investment is in the best interest of a participant. Mr. Watkins stated that the industry does not support his focus on cost benefit analysis given studies that show the majority of actively managed funds are not cost efficient.
Regarding annuities within a QDIA, Mr. Watkins noted that he most often is asked by the plan sponsor considering an in-plan annuity solution whether a participant can get out of it, and if so, how. Mr. Watkins’s understanding is the only way a participant can get out of an annuity without harsh tax penalties is to do a 1035 exchange (a tax-free exchange of an existing annuity contract, life insurance policy, or endowment for another of like kind). Mr. Watkins stated that he is aware of a lot of annuity providers trying to embed annuities into target date funds within qualified plans. He suggested that this raises the question about the 50 feasibility of a 1035 exchange in a qualified plan, and whether it is the only way you can make this move or can a participant make an exchange from a like product to another like product.
Mr. Watkins thinks that enhanced disclosures should be provided to participants with the appropriate information to ensure that they understand the annuity product, which should include the conditions for them to “break even” and how that would work if they were to surrender the annuity contract. Mr. Watkins stated that, if annuities are embedded in QDIAs, there needs to be much more meaningful, clear, and simple disclosures provided to enable the participant to make an informed decision and comply with IRC section 404(c). Mr. Watkins concluded by stating he does not believe annuities should be offered in a plan nor specifically in a QDIA. If ERISA does not require that a plan offer guaranteed income products or annuities, he does not see a reason to do so. His biggest concern is that once a participant is in an annuity, they lose control and are locked in. Mr. Watkins was asked if he has seen any ERISA 3(38) fiduciaries (those who have the authority to buy and sell assets, make strategic decisions, and otherwise handle all aspects of account investing) implementing annuity solutions in collective investment trusts or in unregistered products. He indicated that many plan sponsors are encountering products embedded in collective investment trusts and a lot of proprietary products. He believes that collective investment trusts are not transparent enough and participants do not understand or have access to information, as they would in a mutual fund that posts information in a newspaper or Morningstar. He stated that collective investment trusts typically do not publicly publish their performance results or their fees.
Mr. Tobe began his testimony by stating that target date funds hold 50% of all 401(k) assets and thinks they deserve more fiduciary oversight by regulatory agencies. Historically, TDFs have been primarily offered in mutual funds registered with the Securities and Exchange Commission (“SEC”), but the trend is that more target date assets are flowing into weakly regulated state collective investment trusts. The SEC does not allow investments in annuities, crypto currency, and private equity, for example, in mutual funds. By contrast, state-governed collective investment trusts do permit these types of investments, and do not offer the same level of disclosures and transparency as mutual funds. They also have lower capital requirements as well. 51 Mr. Tobe suggested the Council should examine federally-regulated investment vehicles being used as they are more transparent. He believes that collective investment trusts should become federally-regulated rather than being regulated at a state level. He noted that there are some collective investment trusts that are superior to mutual funds because they are “clones of a mutual fund” but have lower fees.
In his opinion, the collective investment trusts being offered by insurance companies are deploying illiquid investments (annuities, private equity). He stated that this is just a way to get highpriced annuities into the mainstream target date fund solutions. He raised concerns that there are no requirements for the insurance companies to disclose interest spreads, and that there is no transparency into the revenue that the insurance companies are earning. Mr. Tobe believes that QDIAs should be held to the highest standard, that all investments should be held to the highest federal standards, such as compliance with Global Investment Performance Standards, and that the Department should be pushing for more transparency for collective investment trusts. Mr. Tobe testified that he would not recommend annuities, private equity or crypto currency in any DC plan or embedded in a QDIA as those investments are too expensive and risky right now. When asked how participants should protect themselves from market volatility, Mr. Tobe suggested that a participant should move into the lowest risk target date fund; annuities bear embedded risks that are not readily transparent to the holder. He believes that annuities could be downgraded and that insurance companies have high default risk that translates to high risk for that component of a participants’ investment. He stated that the risks for partial annuitization are the same until there is more transparency and information on annuities.
Mr. Watkins stated that a lot of the concerns could be addressed if the insurance companies could guarantee that annuities could provide a commensurate return, but historically that has been very expensive.
Some Council members noted this was inconsistent with their professional experience and 52 suggested it should be researched further. Members of Council also questioned the witnesses’ opinions regarding the insurance companies default risks, noting that historical failure of insurance companies has been very low and less than 0.03%.
When asked where they would want to see changes that would provide them with comfort with the annuity products, Mr. Tobe suggested federal regulations that oversee the insurance agencies, coordinated in partnership with the Department for ERISA-based assets. When asked what level of fees and risk would satisfy the witnesses that a product is worthwhile, Mr. Watkins responded that the issuer would need to provide a cost benefit analysis that shows the return and guarantee. Mr. Tobe also offered a detailed example of how to diversify over 4 to 5 insurance companies to minimize the default risk and use synthetic stable value-like solutions for annuities to keep the fees low.
When asked if defined contribution plans should only use mutual funds due to their greater transparency, Mr. Tobe replied no and that he would rather see greater transparency requirements for collective investment trusts.
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 