SCOTUS’ 9-0 ERISA decision in Cunningham v. Cornell University case– confirms my view on Annuities as Prohibited Transactions

April 21, 2025May 10, 2025 / jwatkins / Leave a comment

SCOTUS 9-0 ERISA decision – confirms my view on Annuities as Prohibited Transactions

By Chris Tobe, CFA, CAIA

The Supreme Court ruled unanimously in favor of 401(k) Transparency, while also placing the burden of proof on plan sponsors alleging that they are protected under an exception to the Prohibited Transaction rules. This rule facilitates forcing disclosures on conflicts of interest and hidden fees.[i] Investments that the managers have the potential for a conflict of interest are labeled “Parties of Interest” in the DOL/IRS 5500 forms attached financials for ERISA plans. These parties in interest have the burden of proof that they have an exemption from the Prohibited Transactions rules.

Fixed Annuities, known as IPG’s, are prevalent in large ERISA DC plans. The largest IPG is TIAA Retirement Choice Annuity which is central in the Cornell plan and, along with Fidelity, the focus of the SCOTUS decision.

I believe that all annuities are prohibited transactions due to the inherent conflict of interest issues, and in most cases, the annuity issuer and annuity salesperson are labeled in plans as parties in interest. Prohibited transaction exemptions are subject to meeting certain requirements. But the DOL does not even attempt to enforce them. Many plans just blindly accept the claims of annuity salesmen that these contracts have a “get out of jail free card” in the form of a PTE.

Prohibited Transactions Exemption PTE 84-24

Annuities for decades have claimed Prohibited transaction exemptions behind PTE 84-24. However, plans are responsible for verifying that the prohibited transaction exemptions apply to the insurance products they put in their plans. This SCOTUS decision and future similar cases may force accountability for the first time.

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.

The Impartial Conduct Standards have 4 major obligations. A. Care Obligation B. Loyalty Obligation C. Reasonable compensation limitation D. No materially misleading statements (including by omission)

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. Fixed annuities flunk this with single entity credit and liquidity risk. Diligence is nearly impossible with misleading, nontransparent contracts, and the lack of plan/participant ownership of securities.[ii] The Federal Reserve in 1992 exposed the weak state regulatory and reserve claims.[iii]

Loyalty Obligation Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Secret kickbacks and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors. In most cases, the annuity investor has little chance of even breaking even on the investment. The exemption requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” Annuity contracts avoid any fiduciary language or responsibility.

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.” They also have secret kickback commissions.[iv] A number of lawsuits have settled with claims of excessive secret fees and spreads. An insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [v]

No materially misleading statements (including by omission) Annuities have numerous material misleading statements, including the total lack of disclosure of spread/fees. They claim principal protection, but some fixed annuity contracts recently have “broken the buck” and violated their contracts. The written disclosures under weak state regulations omit critical information on risks and fees also prevents any opportunity for an “informed decision.”

GOING FORWARD

While Annuities are by far the largest area involved, I believe SCOTUS’ Cunningham decision will result in some significant consequwemces:

ERISA class action 401k litigation will explode especially against conflicted products like annuities[vi]
Plans are now talking about taking legal action against vendors, who tricked them into these non-transparent products[vii]
Plans will be more reluctant to take on non-transparent products like annuities[viii]
Plans will be more reluctant to take on non-transparent products like crypto and private equity[ix]
Plans will be more reluctant to do non-transparent administrative practices like revenue sharing[x]

Plan Sponsors with fixed annuity contracts should demand
: 1. A MFN clause to make sure they have the best rate. A MNF (Most Favored Nation) clause is a clause that states that money managers are getting the lowest fee for their pension clients.
2. A downgrade lause that allows liquidity at full book value if the insurance company issuing the annuity is downgraded.

Annuities are clearly prohibited transactions that do not qualify for an exemption but have used their lobbying power in Washington and in states, to exempt themselves from all accountability. This recent SCOTUS decision may help get accountability and transparency in plans through litigation.

[i] https://www.fingerlakes1.com/2025/04/18/supreme-court-cornell-erisa-401k-fees-decision-2025

[ii] https://commonsense401kproject.com/2024/03/26/just-how-safe-are-safe-annuity-retirement-products-new-paper-shows-annuity-risks-are-too-high-for-any-fiduciary/

[iii] Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

[iv] https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/

[v] https://www.bloomberg.com/news/articles/2013-03-06/prudential-says-annuity-fees-would-make-bankers-dance?embedded-checkout=true

[vi] https://commonsense401kproject.com/2024/11/19/burden-of-proof-is-on-plan-sponsors-hoping-to-qualifyfor-annuity-prohibited-transactions-exemption/

[vii] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/

[viii] https://fiduciarywise.com/cunninghamvcornelluniversity/

[ix] https://www.linkedin.com/pulse/retirement-plan-sponsors-investment-advisors-should-take-ron-rhoades-zfp8c/?trackingId=cl6WVzR8TvCNYE2H6M59WQ%3D%3D

[x] https://commonsense401kproject.com/2022/04/02/revenue-sharing-in-401k-plans/

Annuities Exposed as Prohibited Transaction in 401(k) Plans

October 10, 2024 / jwatkins / Leave a comment

By Christopher B. Tobe, CFA, CAIA

Annuities should not be allowed in 401(k)s. ERISA created the concept of Prohibited Transactions to prohibit any investments with clear Conflicts of Interest. I testified to the ERISA Advisory Council – US Department of Labor in July of 2024 on the danger of allowing annuities to be hidden inside of Target Date Funds. [i] I have co-written a paper with Economics Professor Tom Lambert on the excessive risks of annuities.[ii]

Perhaps with the exception of Crypto and Private Equity no investment better describes what should be a prohibited transaction more than annuity contracts.

Annuities are a Fiduciary Breach for 4 basic reasons.[iii]

Single Entity Credit Risk
Single Entity Liquidity Risk
Hidden fees spread and expenses
Structure -weak cherry-picked state regulated contracts, not securities and useless reserves

So why do we still see annuities in 401k plans? The reason is intense lobbying by the insurance industry, that has blocked any transparency or oversight.

Annuity providers claim to be barely legal by relying on an Prohibited Transaction Exemption (PTE 84-4) a “get out of jail free card” obtained by $millions of lobbying by the insurance industry.

Biden Fiduciary Rule

The new Biden Fiduciary rule would provide transparency that would further expose these annuity products’ conflicts of interests. The insurance industry has forue shopped in Texas in the Fifth Circuit for judges who agree with blocking transparency to block it for now.

At the Certified Financial Planner Board of Standards Connections Conference in Washington October 2024, DOL officials called out annuities as prohibited transactions. [iv] Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration, laid out the reasons why the Biden Labor Department continues to fight for a fiduciary rule ““To me it continues to be kind of nonsensical that you’re expecting any of your clients to walk into someone’s office and have in their head: ‘I’m dealing with this person who’s going to sell insurance to me, this person is relying on [Prohibited Transaction Exemption] PTE 84-24, not [PTE] 2020-02. Those things shouldn’t mean anything to the average American. And we shouldn’t expect them to.”

broker-dealer space transformed what it means to be in the advice market,” Khawar said. “When we looked at the insurance market, though, we didn’t quite see the same thing.”

Under the National Association of Insurance Commissioners’ model rule, for example, “compensation is not considered a conflict of interest,” Khawar said. “So there are pretty stark differences between what you see in the CFP standard, the Reg BI standard, and what has now been adopted by almost every state, one notable exception of New York, which has adopted a standard that is significantly tougher than the NAIC model rule.” [v] That process is “the CFP standard, the DOL standard, it’s the SEC standard for investment advisors and it’s Reg BI,” Reish continued. What it’s not? “The NAIC model rule,” Reish said.

“The NAIC model rule does not require the comparative analysis[vi]

Khawar added: “It’s not going to matter whether you’re providing advice about an annuity, a variable annuity, fixed income annuity, indexed annuity, security or not.” The goal with the 2024 rule, Khawar added, is to “have a common standard across the retirement landscape so that all retirement investors would be able to make sure that when someone is marketing up front best-interest advice, that that’s the standard they’d be held to by the regulator and the customer.”

Under the Employee Retirement Income Security Act, “being a fiduciary is critical to the central question of whether or not the law or consumer protections have fully kicked in or not,” Khawar added.

The Government Accounting Office wrote a piece in August in support of the Biden Fiduciary rule. They saw the problem as so severe that they suggested that IRS step in to help the DOL Better Oversee Conflicts of Interest Between Fiduciaries and Investors especially in the Insurance Annuity Area. [vii] Senator Elizabeth Warren in defense of the Biden Fiduciary rule prepared a report on the numerous conflicts of interest in annuity commissions and kickbacks. [viii]

Annuities days of hiding behind PTE 84-4 are over

Prohibited transaction exemptions are subject to meeting certain requirements. They include

The Impartial Conduct Standards.
Written Disclosures.
Policies and Procedures
Annual Retrospective Review and Report

The Impartial Conduct Standards have 4 major obligations.

A. Care Obligation

B. Loyalty Obligation

C. Reasonable compensation limitation

D. No materially misleading statements (including by omission)

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. Fixed annuities flunk this with single entity credit and liquidity risk. Diligence is nearly impossible with misleading nontransparent contracts, and the lack of plan/participant ownership of securities. The Federal Reserve in 1992 exposed the weak state regulatory and reserve claims.[ix]

Loyalty Obligation

Annuity contracts are designed to avoid all fiduciary obligation with no loyalty to participants. Secret kickback and commissions place the financial interests of the Insurers and their affiliates over those of retirement investors.[x]

The exemption requires the advisor to show their loyalty with a “Fiduciary Acknowledgement Disclosure.” Annuity contracts avoid any fiduciary language or responsibility.

Reasonable compensation limitation

Annuities have a total lack of disclosure of profits, fees and compensation. They have secret kickback commissions.

A number of lawsuits have settled with claims of excessive secret fees and spreads. An Insurance executive bragged at a conference of fees over 200 basis points (2%) in 2013. [xi]

No materially misleading statements (including by omission)

Annuities have numerous material misleading statements, including the total lack of disclosure of spread/fees. They claim principal protection, but some fixed annuity contracts recently have broken the buck and violated their contracts. The written disclosures under weak state regulations omit critical information on risks and fees.

Most plans with annuities do not have Investment policy statements, since most fixed annuities would flunk them on diversity and transparency and not be allowed. Annuities cannot provide the transparency to follow CFA Institute Global Performance Standards (GIPS) so they do not comply.[xii] Most 401(k) committees with insurance products do not review such annuity products, since they clueless on what they are. Consultants for plans with annuities do not review the annuities most of the time since they are conflicted and they themselves receive kickbacks from annuity providers.

Annuities as a Prohibited Transaction

Annuities hide most of their compensation. They are typically secret no bid contracts with no transparency and numerous conflicts of interest. They are subject to weak state regulations (sometimes categorized as NAIC guidelines). Many times they are a party of interest and shift profits from annuities to make other fees appear smaller.

Annuities are clearly prohibited transactions, but have used their lobbying power in Washington and in states to exempt themselves from all accountability.

[i] https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/

[ii] https://commonsense401kproject.com/2024/03/26/just-how-safe-are-safe-annuity-retirement-products-new-paper-shows-annuity-risks-are-too-high-for-any-fiduciary/

[iii] https://commonsense401kproject.com/2022/05/11/annuities-are-a-fiduciary-breach/

[iv] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[v] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[vi] https://www.thinkadvisor.com/2024/10/07/top-dol-official-sees-a-nonsensical-reality-at-heart-of-fiduciary-fight/

[vii] GAOJuly24 Retirement Investments: Agencies Can Better Oversee Conflicts of Interest Between Fiduciaries and Investors

Click to access FiduciaryConflictsofInterest_OMB.pdf

https://www.thinkadvisor.com/2024/08/28/conflicted-ira-advice-widespread-as-fiduciaries-lack-oversight-watchdog-finds/

https://www.gao.gov/products/gao-24-104632

[viii] Warren Study – Annuity kickbacks

Secret kickback commissions https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/

[ix] Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

[x] https://consumerfed.org/annuity-industry-kickbacks-cost-retirement-savers-billions/

[xi] https://www.bloomberg.com/news/articles/2013-03-06/prudential-says-annuity-fees-would-make-bankers-dance?embedded-checkout=true

[xii] https://commonsense401kproject.com/2023/02/01/401k-plan-sponsors-should-look-to-cfa-code-for-investment-governance/

Chris Tobe DOL Testimony

July 31, 2024August 1, 2024 / jwatkins / Leave a comment

Testimony to ERISA Advisory Council – US Department of Labor by Chris Tobe, CFA, CAIA July 10, 2024

I want to concentrate on the largest QDIA – Target Date Funds. Target Date Funds (TDF’s) are now above 50% of all 401(k) assets. They deserve more fiduciary oversight by regulatory structure and internal policy – not less. Historically Target Date Funds in SEC registered mutual funds have been a solid norm. The industry wants to insert high fee high risk non-transparent contracts like Annuities, Private Equity and Crypto into Target Date funds, but SEC registered mutual funds transparency requirements prevent them, so they seek to open up other structures particularly Collective Investment Trusts (CITs).

Target Date Funds are the dominant default option or QDIA (Qualified Default Investment Alternatives) in most plans resulting in the highest level of fiduciary responsibility. They are the most non-transparent plan investment option and the easiest to hide fees and play performance games. Despite the high level of fiduciary risk, TDF’s are specifically designed to avoid accountability and thus need the most scrutiny.[1]

QDIA History

I have been involved in the QDIA issue for over 17 years when I wrote and signed the 2006 QDIA letter for AEGON Institutional Markets In late September 2023 I, along with former Assistant Labor Secretary Phyllis Borzi, briefed the White House Office of Management and Budget (OMB) and the Department of Labor on the proposedFiduciary Rule now out but under legal attack. I emphasized the severe fiduciary issues that surround contract products like annuities and private equity. I urged the need for strong fiduciary standards especially as annuities and private equity are being put in Target Date funds which are QDIA’s which need the highest level of transparency and accountability.[1]

Federally Regulated Structures

I believe the highest levels of transparency and accountability are in federally regulated investment structures with underlying federally regulated securities. No matter the structure plans and participants need transparency down to the underlying SEC registered stocks and bonds. Not a dead end to a piece of paper or a contract with no federal protections.

SEC registered mutual funds, while not perfect, are a fairly transparent structure that in general provides the accountability needed for the QDIA. The fiduciary analysis that James Watkins did earlier depends on the transparency of SEC Mutual Funds. Once we get away from Federally regulated mutual funds the issues with transparency and accountability multiply

I think the DOL to properly regulate needs a partner federal regulator in investments– i.e. the SEC on mutual funds, with CIT’s perhaps the OCC to ensure protection of retirement assets.

Target Date CITS

Collective Investment Trusts or CITS have grown by $ billions especially as Target Date Funds in the QDIA role.

There is a general assumption that CITs are regulated by the Federal Government Office of Comptroller of the Currency. Some CITs are regulated by the OCC while most used in 401(k)s are regulated by one of 50 state bank regulators. This allows CITs to choose their own state regulator who may or may not have lax oversight. [1]

Some CITs have full transparency down to the security level and are clones of established mutual funds such as Vanguard and Fidelity and are actually superior because of lower fees to the mutual funds, but many do not. In May 2023, SEC chair Gary Gensler sounded the alarms on CIT’s “Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, requirement for regular reporting on holdings to investors…”.[1] With these lax rules they can hide high fees and high risks in non-securities, contracts such as private equity, crypto and annuities.[2]

Accumulation 99% – Decumulation1%

Small 401k balances are the biggest threat to retirement security. The median balance reported by Fidelity in May was only $28,900[3] Fees are a major drag on balances over time.

For Decumulation just make withdrawals on a calculator without the added fees and risks of an annuity there is already a low-cost solution. Many 401k plans on web site give you a withdrawal amount for a certain number of years. The Decumulation issue is primarily a sales push by the annuity industry

On Longevity Risk I am more concerned with participants outliving their weak state regulated insurance company than outliving their income. Risk and high fees on annuities create more problems than they solve.

Annuities are sold not bought. I spent 7 years in institutional annuity product design with AEGON/Transamerica.I believe if participants were ever given full disclosures on inflation adjusted income, fees and risks in annuities they would never choose them themselves. According to the Federal Reserve[1] and my latest submitted paper[2] annuity risks are excessive.

Starting only in the last month the trade press has started saying the quiet part out loud mentioning the fact spread/fees are not disclosed could be problematic for putting annuities into target date funds.[3] These spread/fees have been some of the best kept secrets in investments slipping out last in 2013 when an executive bragged at a conference, they were over 200 basis points. [4] Under any fiduciary analysis annuities should be prohibited transactions and are only allowed under an exemption.[5]

The annuity industry is trying to get the DOL to aid them tricking or forcing their products onto participants. This requires the use of cherry-picked state insurance regulators for the insurance contracts and the use of cherry-picked state banking regulators to hide these products in poorly state regulated CIT’s. [6]

Participant support you see in industry polls is driven by the perception of an annuity as close to the size of a social security payment. The average person has 12 different jobs, and with the median balance would produce an annuity of maybe $250 a month. [7] Since Social security is indexed to inflation, and annuities are not, most will be immaterial in $$ to social security (5% to 10%). Participants, when given a choice and full transparency, will for the most part avoid annuities.

I am perplexed why the DOL would help in blocking transparency to participants

Mutual funds are not perfect

While they are the most transparent vehicle currently, Target Date Mutual Funds are not without issues. Changes and differences in Asset Allocation are not easy to follow and understand by participants. James Watkins calls it the Black Box issue around changing asset allocations. Here is what I said in my Pensions & Investments piece in May.

Yet even in an SEC regulated mutual fund, performance can be manipulated more easily in Target Date Funds. For example, a 2040 fund could have a 90% Equity/10% Fixed allocation with high fees and outperform in most time periods a 2040 fund with a 80% Equity and 20% fixed allocation with low fees. Performance manipulation games are even easier in a state regulated CIT. If the performance is not broken down by asset class and risk adjusted for asset allocation it is useless to a fiduciary.^[14]

QDIA Recommendations

QDIA investments should be held to the highest fiduciary standards of transparency and accountability.

I would never recommend a state regulated annuity product because of the excessive hidden fees and risks for any part of a 401k plan. I would never recommend Private Equity or other non-regulated contract for any part of a 401k plan. I would never recommend Crypto or related non-regulated products to any part of a 401(k) plan.

Blessing any of these products for the QDIA creates many risks in the future

SEC registered Mutual Funds are OK for now, but outside them structures should have 100% underlying plan/participant ownership in SEC registered securities – stocks and bonds. This can be tested by using investments which can and are willing to adhere to CFA Institute Global Investment Performance Standards (GIPS) [2].

Collective Investment Trusts (CIT’s) should be Federally regulated by the Office of Comptroller of Currency (OCC), not by the weakest of 50 cherry picked state banking regulators.

The DOL should be pushing for more transparency, not allowing less.

BIO

Chris Tobe, CFA, CAIA has over 20 years’ experience working with 401(k) investments as a consultant and currently is the Chief Investment Officer for Hackett Robertson Tobe. His opinions do not necessarily reflect those of HRT. He works directly as a consultant to retirement plans and serves as a litigation consultant on many ERISA cases. He writes a column for the Commonsense 401K Project and has an upcoming book 401k Investments- Target Date and Stable Value

Notes
[1] https://commonsense401kproject.com/2022/04/30/problems-with-target-date-funds/

[2] [1] https://commonsense401kproject.com/2023/11/05/annuity-junk-fees-in-current-401k-plans/

[3] https://commonsense401kproject.com/2022/02/22/cits-collective-investment-trusts-in-401k-the-good-and-the-bad/Natalya Shnitser Boston College – Law School November 2023 https://clsbluesky.law.columbia.edu/2023/11/09/overtaking-mutual-funds-the- hidden-rise-and-risk-of-collective-investment-trusts/; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4573199 pg.25

[4] [1] SEC May 2023 https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-investment-company-institute-05252023#_ftnref27

[5] https://commonsense401kproject.com/2022/06/07/toxic-target-date-case-study-of-the-worst-of-the-worst/

[6] https://www.msn.com/en-us/money/retirement/you-think-your-401-k-looks-bad-these-people-are-doing-worse-don-t-be-one-of-them/ar-BB1oVuPe?item=themed_featuredapps_enabled?loadin

[7] Federal Reserve Bank of Minneapolis Summer 1992 Todd, Wallace SPDA’s and GIC’s http://www.minneapolisfed.org/research/QR/QR1631.pdf

[8] https://ir.library.louisville.edu/faculty/943/

[9] https://riabiz.com/a/2024/5/11/fidelity-voya-and-boa-smooth-blackrocks-launch-of-guaranteed-paycheck-etfs-but-401k-plan-participants-may-yet-balk-at-high-unseeable-fees-and-intangibility-of-benefits

[10] https://www.bloomberg.com/news/articles/2013-03-06/prudential-says-annuity-fees-would-make-bankers-dance?embedded-checkout=true

[11] https://commonsense401kproject.com/2022/05/11/annuities-are-a-fiduciary-breach/

[12] https://commonsense401kproject.com/2024/03/26/just-how-safe-are-safe-annuity-retirement-products-new-paper-shows-annuity-risks-are-too-high-for-any-fiduciary/

[13] https://www.msn.com/en-us/money/retirement/you-think-your-401-k-looks-bad-these-people-are-doing-worse-don-t-be-one-of-them/ar-BB1oVuPe?item=themed_featuredapps_enabled?loadin [1] https://www.pionline.com/industry-voices/commentary-target-date-funds-fiduciary-risks