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Why 401(k) Consultants Should Be Included as Defendants in ERISA Litigation

/ ChrisTobe / Leave a comment

The Hidden Conflicts, Kickbacks, and CIT Incentives That Make Consultants the Most Dangerous and Least-Litigated Actors in the 401(k) Ecosystem

I. Introduction: The Invisible Hand Behind Most 401(k) Abuses

Most 401(k) excessive-fee or prohibited-transaction cases focus on:

  • recordkeepers,
  • asset managers,
  • plan committees, or
  • corporate fiduciaries.

But one powerful player has remained largely untouched by litigation:

👉 The 401(k) consultant.

In theory, consultants exist to protect plan sponsors by:

  • providing objective advice,
  • benchmarking fees,
  • evaluating investments, and
  • negotiating recordkeeping arrangements.

In practice, many consultants:

  • hold insurance licenses,
  • operate through broker-dealers,
  • receive undisclosed indirect compensation,
  • design investment menus tilted toward proprietary or paying partners,
  • push state-regulated CITs loaded with hidden fees, and
  • embed themselves in the RFP process so they can “validate” their own recommendations.

My 2022 article (“Conflicted 401(k) Consultants—Should Plan Sponsors Fire Them, Sue Them, or Both?”) warned that consultants were the least transparent but most influential actors in the system.

Today, with the explosion of CITs, Target Date Funds, and revenue-sharing through trust structures, the case for including consultants as defendants has become overwhelming.

II. Consultants Are Parties-in-Interest Under ERISA — Making Their Compensation a Prohibited Transaction

Under ERISA §3(14), any service provider receiving compensation from the plan is a party-in-interest.

This includes:

  • consultants,
  • investment advisors,
  • broker-dealer reps,
  • insurance-licensed consultants,
  • dual registrants (RIA + broker).

Under ERISA §406(a):

A fiduciary cannot cause a plan to engage in a transaction with a party-in-interest.

Meaning:

  • If a consultant receives any form of compensation tied to the products they recommend,
  • and the plan buys the product based on their advice,
    👉 it is automatically a prohibited transaction.

Under ERISA §406(b):

  • Fiduciaries cannot use their authority to gain additional compensation.
  • Fiduciaries cannot act on behalf of an adverse party.
  • Fiduciaries cannot receive compensation from any source related to the transaction.

When a consultant:

  • recommends a CIT,
  • a target-date fund,
  • a stable-value product,
  • a recordkeeper’s proprietary platform, or
  • a bundled investment “suite”

and receives compensation tied to that choice,
👉 it is per se illegal under §406(b).

III. The New Era of Consultant Conflicts: CITs, TDFs & Hidden Compensation

CITs (Collective Investment Trusts)—especially state-regulated CITs—are the perfect vehicle for consultant conflicts because:

✔ They avoid SEC reporting

(no prospectus, no N-PORT, no holdings report)

✔ They hide fee layers

(no public disclosure of sub-TA, trustee fees, wrap fees, admin fees, platform access payments)

✔ They allow revenue-sharing without detection

(no requirement to itemize payments)

✔ They can embed alternative assets

(private equity, private credit, crypto sleeves)

✔ They are often sold by consultant-affiliated broker-dealers

(which collect soft dollars and platform fees)

This creates the modern version of the old insurance kickback model.

🔥 In the 1990s–2010s:

Insurance-licensed consultants were caught receiving secret commissions for pushing group annuity products.

🔥 In the 2020s–present:

Consultants now receive indirect compensation for pushing CITs—the new opaque bucket where revenue-sharing is easiest to hide.

State-Regulated Collective Investment Trusts (CITs) as Vehicles for ERISA Prohibited Transactions

IV. Consultants Have Already Paid Millions in ERISA Settlements — and More Cases Are Coming

While most lawsuits do NOT name consultants, the few that have done so show how powerful those claims can be.

✔ Lockton Advisors (Norton Healthcare Case)

Case: Disselkamp v. Norton Healthcare
Settlement: $5.75 million
What happened:
Lockton was sued as a co-fiduciary for steering the plan into high-fee arrangements and failing to monitor compensation.
The settlement demonstrates that consultants are exposed when named.

✔ Northern Trust (AutoZone Case)

Case: Iannone v. AutoZone
Settlement: $2.5 million (2025)
Consultant role:
Northern Trust is not only an asset manager but also an ERISA “consultant” and fiduciary to plan menus.
Plan participants alleged that its advice steered assets into its own underperforming products.

Consultants structured many of the recordkeeping and investment lineups in these cases, but plaintiffs’ attorneys often fail to name them.

Russell paid a $500k settlement in Royal Caribbean https://news.bloomberglaw.com/employee-benefits/russell-will-pay-500-000-to-exit-royal-caribbean-401k-lawsuit?context=search&index=2

V. Why Plaintiffs SHOULD Sue Consultants

1. They design the investment lineup

Often more so than the plan fiduciaries.

2. They run the fee benchmarking process

Which is often a sham designed to validate their own recommended vendors.

3. They steer plans into CITs paying undisclosed compensation

4. They frequently operate with dual licenses

(RIA + broker + insurance agent) — the worst conflict structure in ERISA.

5. Their Form ADV disclosures are intentionally vague

“May receive third-party compensation related to business arrangements…”
= a red flag that indirect compensation exists.

6. They help plans rubber-stamp conflicted recordkeeper relationships

7. They are co-architects of the TDF QDIA market

CIT TDFs now hold over $2 trillion, much of it through consultant-designed architecture.

Consultants are not bystanders.
They are the engineers behind the conflicted 401(k) system.

VI. Litigation Theory: How to Plead Consultant Liability

A plaintiff should plead the following counts:

Count I — Prohibited Transactions (§406(a))

Consultant = party-in-interest
Plan purchased products recommended by consultant
Indirect compensation flowed from product provider to consultant

Count II — Fiduciary Self-Dealing (§406(b))

Consultant was a fiduciary and received additional compensation related to its advice

Count III — Breach of Duty of Prudence (§404(a))

Consultant recommended opaque, conflicted CIT structures
Consultant failed to benchmark recordkeeping fees
Consultant failed to provide transparent disclosures

Count IV — Co-Fiduciary Liability (§405)

Plan fiduciaries relied on consultant’s advice
Consultant knowingly participated in breaches by recordkeepers and asset managers

VII. Conclusion: Consultants Must Become Standard Defendants in 401(k) Litigation

The time for giving consultants a free pass is over.

They are:

  • conflicted,
  • opaque,
  • compensated in hidden ways,
  • instrumental in the CIT expansion, and
  • central players in nearly every excessive-fee, revenue-sharing, and TDF-corruption scheme.

Suing only the plan sponsor or recordkeeper is no longer sufficient.
Consultants must be part of the defendant group.

APPENDIX A — Reprinted Table: SEC Fines Against Conflicted Retirement Consultants

(Reconstructed from my 2022 article)

FirmViolationSEC Action / FineSummary
Aon HewittFailure to disclose conflicts$1.6 millionAccepted compensation from investment providers while advising ERISA plans.
VALIC / AIGAnnuity steering & undisclosed payments$40 millionKickbacks paid to consultants promoting annuities to 403(b) and 457 plans.
CAPTRUSTRevenue-sharing disclosure failures$1.7 millionFailed to disclose compensation from product providers.
RIA “Dual Registrants” (industry-wide)Undisclosed revenue-sharing and shelf-space agreementsMultiple enforcement actionsConsultants used advisor platforms to collect hidden fees.
Broker-Dealer Affiliated ConsultantsSoft-dollar and platform kickback violationsMultiple finesPayments disguised as research, marketing, or data support.

Commonsense 401(k)  Consultants  https://commonsense401kproject.com/2022/03/09/conflicted-401k-consultants-should-plan-sponsors-fire-them-sue-them-or-both/

 

✅ 1. Consultants can receive compensation connected to CITs — but it rarely appears as a traditional “commission.”

Unlike annuities (which frequently paid overt sales commissions or “street level comp”), CITs do not typically pay direct sales commissions to advisors or consultants.

But CITs do allow a wide range of indirect, hidden, or platform-based fees, including:

✔ Sub-TA (sub-transfer agency) payments

✔ Recordkeeping rebates

✔ “Platform access” or “shelf-space” payments

✔ Revenue-sharing from the underlying funds held inside the CIT

✔ “Trustee administrative fees” paid to intermediaries

✔ Consulting/marketing support agreements

✔ Soft-dollar style “research arrangements”

✔ Product placement fees

✔ Wrap fees baked into the CIT operating expense

✔ Spread-based profits inside stable value CITs (a big one)

These are economically identical to commissions — they just aren’t called that.

✅ 2. Why consultants love CITs: they open more channels for hidden compensation than mutual funds.

Mutual funds have:

  • SEC Form N-1A disclosures
  • N-PORT/N-CEN transparency
  • Strict distribution rules
  • 12b-1 fee disclosure
  • Anti-pay-to-play requirements

CITs have:

  • No SEC filings
  • No public prospectus
  • No disclosure of revenue-sharing
  • No public audit reports
  • No rules prohibiting embedded platform payments or deal arrangements

In other words:

CITs were designed to bypass the disclosures that would reveal conflicts of interest.

Consultants — especially large broker-dealer affiliated consulting firms — have migrated from mutual fund revenue-sharing to CIT revenue-sharing because it is harder for ERISA plaintiffs and DOL examiners to detect.

✅ 3. Consultants with insurance licenses ARE the ones most likely to engage in these conflicts

My observation is exactly right.

There is a long history of:

  • Insurance-licensed consultants
  • Broker-dealer–affiliated consultants
  • Captive distribution agents
  • “Dual registrants” (RIA + broker + insurance license)

…receiving kickbacks for steering plans into certain products.

This was rampant with:

  • Group annuities
  • Fixed annuity “stable value” funds
  • Guaranteed investment contracts
  • General account products with spreads

Those same consultants are now deeply involved in CIT distribution, especially in:

  • Stable value CITs
  • Target-date CITs
  • Collective trust versions of proprietary asset managers

✅ 4. Can consultants receive compensation from Fidelity CITs specifically?

Short answer: Yes. Not directly as a commission — but very much indirectly.

Fidelity CITs (like all CITs) allow the following potential flows:

1. Sub-TA or recordkeeping-offset arrangements

Fidelity does not always pay these directly to consultants, but they may pay them to intermediaries or broker-dealers who then pass revenue to reps.

2. Platform or shelf-space payments

Broker-dealer affiliated consultants can receive compensation through “shelf placement” agreements.

3. Managed-account / advice platform revenue splits

Many consultants operate “co-managed” or “model portfolio” platforms that integrate Fidelity CITs, and receive fees based on assets directed into the model.

4. Conference sponsorships, travel, marketing reimbursements

Common in the industry and economically equivalent to soft-dollar payments.

5. Indirect compensation from sub-advised funds inside Fidelity CITs

Fidelity’s Blend and Index CITs hold third-party sub-advised components.
Those sub-advisors can (and often do) make payments to consultants.

6. Fiduciary consulting fees reimbursed through recordkeeping revenue

This is extremely common:

  • Recordkeeper pays consultant
  • Consultant places CITs that benefit recordkeeper
    → Prohibited transaction

7. “White label CIT” arrangements with revenue splits

Some consultants create “white label” or “unitized” CITs where they themselves collect trustee, management, or admin fees.

This is one of the dirtiest parts of the industry.

✅ **5. Is this compensation disclosed in Form ADV?

Almost always: NO.**

Here’s how they avoid disclosure:

They classify CIT payments as:

  • “Platform compensation”
  • “Consulting reimbursement”
  • “Research support”
  • “Marketing assistance”
  • “Non-cash compensation”
  • “Expense credits”
  • “Operational support”

ADV Part 2 requires disclosure of conflicts, not the specific amount, and consultants exploit that.

CIT-based payments almost never appear on a Schedule A (insurance disclosure) or on brokerage statements.

✅ 6. This creates a clean ERISA prohibited-transaction theory

Consultants receiving ANY of the above are:

✔ Parties-in-interest (ERISA §3(14))

Therefore, ANY compensation is a prohibited transaction under §406(a).

✔ Fiduciaries receiving additional compensation (ERISA §406(b)(3))

If they influence fund selection, this is, per se, illegal.

✔ Co-fiduciaries in a self-dealing scheme (§405)

Sponsors failed to monitor hidden conflicts.

This is the same theory used in:

  • Yale 403(b)
  • Cornell
  • MIT
  • Hughes v. Northwestern (Supreme Court — fiduciary monitoring failure)

And increasingly in revenue-sharing / CIT fee cases.

✅7. Important: Fidelity is not the only CIT provider with these conflicts, but it is one of the largest.

And because Fidelity CITs are:

  • state-regulated (NH)
  • opaque
  • non-SEC reporting
  • deeply integrated with Fidelity recordkeeping

—They are exceptionally fertile ground for undisclosed consultant compensation.

Consultants influence:

  • menu architecture
  • QDIA selection
  • TDF default mapping
  • benchmarking studies
  • manager search RFPs
  • “fee analysis” reports
  • advice and rollover platforms

Every one of these can be monetized.

🔥 Summary (for litigation & investigation use)

Yes — consultants can receive disclosed OR undisclosed compensation tied to CITs, including Fidelity CITs.

CITs make this much easier because they operate outside SEC scrutiny and allow:

  • revenue-sharing
  • platform fees
  • shelf-space arrangements
  • sub-TA payments
  • soft-dollar equivalents
  • affiliate routing
  • hidden spreads
  • product-placement payments

These payments are:

• Almost never visible to plan fiduciaries

• Almost never disclosed in the consultant’s ADV

• Almost always prohibited transactions under ERISA

• Often tied directly to selecting or retaining the CIT QDIA

This is a major litigation opening and likely the next wave of ERISA enforcement.

State-Regulated Collective Investment Trusts (CITs) as Vehicles for ERISA Prohibited Transactions

/ ChrisTobe / Leave a comment

How Opaque, Non-SEC-Regulated Target-Date Products Create Structural Conflicts, Hide Fees, Inflate Risks, and Enable Party-in-Interest Self-Dealing

I. Introduction: The Quiet Rise of State-Regulated CITs in 401(k) Plans

Over the last decade, Collective Investment Trusts (CITs)—private pooled vehicles chartered under state banking law—have displaced SEC-registered mutual funds as the dominant structure inside 401(k) Target Date Funds (TDFs).
Most participants and many fiduciaries do not know that their “Target Date Fund” is not a mutual fund, carries no SEC oversight, and exists inside the murky regulatory environment of a single state bank regulator.

As Natalya Shnitser of Boston College Law School documented in Overtaking Mutual Funds: The Hidden Rise and Risk of CITs, this migration was encouraged by asset managers because CITs allow:

   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4573199 pg.25

  • Lower disclosure requirements
  • Deeper fee structures (including revenue-sharing)
  • Alternative assets that would be prohibited or limited in mutual funds
  • Contractual opacity that prevents fiduciaries from evaluating risks or costs
  • Unmonitored, self-dealing transactions with plan service providers

In May 2023 SEC chair Gary Gensler  https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-investment-company-institute-05252023#_ftnref27   “Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, [nor any] requirement for regular reporting on holdings to investors…”.

These characteristics make CITs, especially state-regulated TDFs, natural vehicles for ERISA prohibited transactions—including both §406(a) party-in-interest transactions and §406(b) fiduciary self-dealing.

This concern is reflected in:

Commonsense401kProject: Target Date Funds in State-Regulated CITs—Risk and Prohibited Transaction Basis   https://commonsense401kproject.com/2025/11/02/target-date-funds-in-state-regulated-collective-investment-trusts-citsrisk-and-the-basis-for-a-prohibited-transaction-claim/

Tobe Testimony Before ERISA Advisory Council, 2025* https://commonsense401kproject.com/2025/06/29/erisa-advisory-council-testimony-released/

Since Cunningham v. Cornell if the CIT is a parties in interest the burden is on the defense to prove that it is not a Prohibited Transaction.

II. Regulatory Arbitrage: CITs Exist Outside the SEC Regime

A. What CITs avoid compared to mutual funds

Investor ProtectionSEC Mutual FundState-Regulated CIT
Prospectus✔ Required✘ None
Statement of Additional Information✔ Required✘ None
N-PORT / N-CEN disclosures✔ Required✘ None
N-CSR semi-annual reports✔ Required✘ None
Limits on illiquid assets✔ 15% cap✘ No limit
Independent board✔ Required✘ No requirement
Public audit✔ Mandatory✘ Often not disclosed

Result:
CITs provide no reliable public record of holdings, liquidity, risk exposures, valuation methods, counterparty risks, or fee layers.

B. State regulators were never designed for ERISA oversight

Most CITs are chartered under a small number of states—e.g., New Hampshire, Delaware, South Dakota—whose banking departments:

  • have minimal staff,
  • do not require public disclosure,
  • do not review investment risk,
  • do not monitor fees, and
  • do not enforce ERISA fiduciary duties.

Thus, a CIT Target Date Fund is an ERISA plan investment regulated by a state banking clerk rather than by the SEC.

This regulatory arbitrage is exactly what allows hidden compensation, opaque allocations, and conflicts of interest—all foundational elements of ERISA prohibited transactions.

III. How CITs Enable ERISA Prohibited Transactions

There are three major pathways through which CITs create structural prohibited transactions, even when fiduciaries believe they are saving fees.

A. Prohibited Transaction Pathway #1: CITs Allow Asset Managers to Sell Their Own Products to Plans (ERISA §406(a))

Under ERISA §406(a)(1)(A), (C), and (D), a plan fiduciary cannot cause the plan to purchase investments from a party-in-interest.

CITs make this violation easy and nearly invisible because:

  1. The CIT trustee, sub-advisor, and platform provider are often affiliates of the recordkeeper.
  2. The CIT holds proprietary underlying funds, managed by affiliates of the same institution.
  3. The CIT agreement often discloses no underlying holdings, making it impossible for fiduciaries to detect self-dealing.

This creates a multi-layer prohibited transaction, where each dollar flowing into a CIT TDF automatically flows into affiliated funds—often through multiple revenue streams.

The Commonsense 401(k) “Revenue Sharing as Prohibited Transaction” article documents exactly how these arrangements have hidden indirect compensation for years.

B. Prohibited Transaction Pathway #2: CITs Enable Fiduciary Self-Dealing (ERISA §406(b))

Under §406(b), no fiduciary may:

  • deal with plan assets for its own account,
  • receive additional compensation, or
  • act on behalf of an adverse party.

CITs facilitate all three:

1. Menu construction conflicts

Recordkeepers or their affiliates design TDF CITs whose underlying components include:

  • affiliated large-cap funds
  • affiliated bond funds
  • affiliated real-asset or REIT funds
  • affiliated money market funds
  • affiliated “alt” sleeves (private equity, private credit)
  • funds with hidden fixed, index and other separate account annuities

Every dollar directed into the TDF becomes a dollar of revenue for the platform’s affiliates.

2. Hidden indirect compensation

Revenue-sharing is documented extensively in:

  • Commonsense 401(k): Why Revenue Sharing Is a Prohibited Transaction
  • SEC studies and enforcement actions
  • The hidden-stream analysis in Shnitser’s CIT paper

CIT trust documents typically avoid publishing:

  • shelf fees
  • sub-transfer agency fees
  • platform fees
  • “trustee administrative fees”
  • wrap fees
  • indirect compensation from underlying managers

3. Fiduciary cannot monitor what it cannot see

Because CITs many times

are opaque, a fiduciary:

  • cannot evaluate risk,
  • cannot identify underlying investments,
  • cannot review performance drivers,
  • cannot benchmark the TDF to an SEC-regulated equivalent,
  • cannot detect conflicts of interest.

This creates a Tibble v. Edison duty-to-monitor violation by definition.

C. Prohibited Transaction Pathway #3: CITs Allow Hidden Alternative Assets (Private Equity, Private Credit, Crypto)

This risk is already documented in:

  • Commonsense 401(k): Hiding Private Equity in Target Date Funds
  • Commonsense 401(k): Toxic Target Date Funds
  • Brokerage Windows Exposed by Crypto
  • Target Date Benchmarks: The ChatGPT Analysis
  • Tobe’s Testimony Before the ERISA Advisory Council

Why this matters:

Mutual funds must comply with SEC liquidity and valuation rules and cannot easily add:

  • private equity
  • venture capital
  • private credit
  • structured credit
  • crypto exposure
  • hedge-fund-style derivatives
  • long-lockup assets

CITs have no such constraints.

Thus, a CIT Target Date Fund can quietly embed:

  • 5%–15% private equity
  • illiquid private credit pools
  • crypto ETFs or crypto derivative exposure
  • real-estate private placements
  • offshore alternative vehicles

…without plan sponsors or participants knowing.

Why this is a prohibited transaction

If a party-in-interest provides these alternative products through a CIT structure:

  • The CIT trustee uses its fiduciary authority to place plan assets in affiliated or compensated vehicles (ERISA §406(b)(1)).
  • The CIT manager receives additional compensation for selecting its own or its affiliates’ alternatives (§406(b)(3)).
  • Plan fiduciaries lack the information required to evaluate the prudence of these alternatives—an independent breach under §404(a)(1)(B).

This is the “dark-pool prohibited transaction” problem.

IV. Why CITs Fail the ERISA Prudence Standard

Under ERISA §404(a), fiduciaries must act:

  • with the care of a prudent expert,
  • for the exclusive benefit of participants, and
  • based on complete and accurate information.

Because CITs do not disclose:

  • holdings
  • risks
  • valuation methods
  • liquidity
  • alternative exposures
  • revenue-sharing
  • indirect compensation
  • fee layers
  • benchmarking methodology

…it is impossible for a fiduciary to conduct the required prudence analysis.

You cannot prudently monitor what you cannot see.

(Tibble, Hughes, Sweda, NYU, Yale, MIT)

Therefore, CITs—especially CIT TDFs used as QDIAs—fail prudence as a matter of structure, not performance.

V. CIT Target-Date Funds as QDIAs: A Systemic ERISA Failure

In my 2025 ERISA Advisory Council testimony, you explained that:

  • The DOL never evaluated the risks of CITs when issuing the QDIA rule in 2007.
  • The QDIA regulation assumed TDFs would be SEC-regulated mutual funds.
  • The DOL did not anticipate that state-regulated CITs would replace mutual funds.

Today, a majority of QDIA flows sit inside:

  • non-transparent,
  • state-regulated,
  • conflict-ridden,
  • alternative-enabled,
  • recordkeeper-profit-center CITs.

This aligns with my earlier work:

  • Problems with Target Date Funds
  • Toxic Target Date Funds: Worst of the Worst
  • Target Date Benchmarks: ChatGPT

This makes QDIA a huge source of ERISA prohibited transactions.

VI. Damages Framework

Damages in cases involving state-regulated CIT TDFs include:

1. Overcharges from hidden revenue-sharing

Often 20–80 bps annually.

2. Underperformance vs. SEC-regulated benchmarks

Especially vs. Freedom Index, Vanguard, or Morningstar peer averages.

3. Alternative asset risk premiums

Participants bear the liquidity risk while the manager captures the premium.

4. Valuation smoothing

CITs often “smooth” alternative asset valuations, masking losses and exacerbating sequence-of-returns risk.

5. Prohibited transaction disgorgement

All indirect compensation flowing to party-in-interest affiliates must be returned.

VII. Conclusion: CITs Are the Primary Structural Mechanism Enabling ERISA Prohibited Transactions in 401(k) Target-Date Funds

State-regulated CITs:

  • Avoid SEC oversight
  • Hide conflicts and fee layers
  • Allow self-dealing with affiliates
  • Enable alternative assets hidden from participants
  • Conceal indirect compensation
  • Prevent fiduciaries from evaluating prudence
  • Create built-in ERISA §406 prohibited transactions
  • Fail the §404 prudent-expert standard
  • Endanger retirement security for over 100 million workers

CITs are not merely a “cheaper version” of mutual funds.
They are the central tool enabling modern 401(k) prohibited transactions.

Given the opacity, conflicts, and inability to monitor risk, CIT TDFs should be disallowed as QDIAs and prohibited for ERISA plans unless:

  • all holdings are publicly disclosed,
  • all fee layers are disclosed and unbundled,
  • no affiliated products are used,
  • no revenue-sharing exists, and
  • independent fiduciaries oversee the structure.

Until then, CITs remain the most dangerous, least transparent, and most conflict-ridden structure in the modern 401(k) system.

1. CIT Basic structure: who owns whom?

  • Great Gray Trust Company, LLC is the trustee and fiduciary for a large family of bank collective investment trusts (“Great Gray Funds”). These CITs are explicitly exempt from ʼ33/ʼ40 Act registration. Great Gray Trust Company+2Great Gray Trust Company+2
  • Great Gray Trust Company is a wholly-owned subsidiary of Great Gray Group, LLC. Great Gray Trust Company
  • Madison Dearborn Partners (“MDP”), a large private-equity firm, purchased Great Gray from Wilmington and now owns Great Gray Group. Lever+1
  • MDP is actively investing across financial services and wealth / retirement platforms (NFP, Wealthspire, Fiducient, etc.), with Great Gray specifically identified as an “investment trust service provider” in its portfolio. Wall Street Journal

Great Gray is the fiduciary trustee over state-regulated CITs that hold private markets, and Great Gray itself is owned by a private-equity sponsor whose business model is to grow fee flows into private markets and wealth platforms.

2. Great Gray’s specific role in pushing private markets via CITs

From their own marketing:

  • They describe themselves as a “center of the retirement ecosystem,” working with 200+ recordkeepers and a broad web of advisers and intermediaries. Great Gray Trust Company
  • They emphasize that CITs are exempt from ʼ33/ʼ40 registration, and that the trustee (Great Gray) “maintains ultimate fiduciary authority over the management of, and investments made in, the Funds.” Great Gray Trust Company+2Great Gray Trust Company+2
  • They are now explicitly building target-date CITs with private equity and private credit exposure—Panorix TDF series with BlackRock providing the glidepath and private markets sleeves; Wilshire as sub-advisor. PLANADVISER+3Great Gray Trust Company+3BlackRock+3
  • They publish advisor FAQs and “CIT 101” pieces explaining how to incorporate private markets into DC plans and “debunking misconceptions” about CITs, positioning themselves as the primary evangelist for the structure. Great Gray Trust Company+2Great Gray Trust Company+2

That directly supports my“state-regulated CITs as vehicles to hide private equity” thesis: the whole point of this product push is to embed PE/PC inside a bank CIT wrapper overseen by a trustee that is itself owned by a PE sponsor.

3. Additional vertical conflict: RPAG acquisition and distribution

That creates a “vertical stack”:

PE sponsor (MDP) → Great Gray Group →
• Great Gray Trust (CIT trustee / manufacturer)
• RPAG (advisor platform pushing models & product selection)

So when an RPAG-aligned advisor recommends a Great Gray CIT or a TDF filled with private markets, the same private-equity sponsor ultimately profits at multiple levels: platform economics, trustee fees, potentially sub-advisor or related-party economics (and of course increased AUM in private markets, which tend to have higher fees and longer lock-ups).

For ERISA, that’s fertile ground for:

  • Party-in-interest status under ERISA §3(14) for the trust company, the parent, and potentially affiliated managers/platforms that receive compensation from the CIT or underlying investments.
  • Prohibited transactions under §406(a) (transfers to or use by/for a party in interest) and §406(b) (fiduciary self-dealing, acting for its own account in transactions involving plan assets).

4. Concrete conflict themes you can plead or put in a memo

Here are a few angles you can directly plug into the “State-Regulated CITs as Vehicles for ERISA Prohibited Transactions” piece:

  1. PE-owned fiduciary pushing non-SEC–registered products
    • Great Gray publicly promotes the fact that its CITs are exempt from the ’33 and ’40 Acts, and that the bank trustee (itself) holds “ultimate fiduciary authority.” Great Gray Trust Company+2Great Gray Trust Company+2
    • At the same time, Great Gray is owned by a private-equity firm whose investors benefit when flows leave low-margin, transparent mutual funds and enter higher-fee, opaque private-market products.
    • That creates a structural incentive to:
      • Prefer CITs over mutual funds, even where mutual funds are cheaper and more transparent.
      • Prefer CITs that allocate to private markets (and other alternative strategies) over low-cost index CITs.
  2. Cross-platform steering and “ecosystem capture”
    • Because MDP also owns RPAG and other wealth/retirement platforms, the sponsor controls both the manufacturing (Great Gray CIT / TDF products) and a big piece of the distribution (advisors using RPAG tools). Wall Street Journal+3Great Gray Trust Company+3Ropes & Gray+3
    • That raises classic loyalty and prudence issues: plan-level fiduciaries may be relying on “independent” advisor tools and research that are, in fact, owned or influenced by the same private-equity sponsor that profits if CITs/PE win the mandate.
  3. Party-in-interest + hidden fee streams
    • Great Gray Trust, Great Gray Group, and affiliates (including RPAG) all plausibly become parties in interest once they provide services to the plan or receive direct/indirect compensation from plan assets.
    • If a Great Gray CIT invests in private markets or uses sub-advisers, and:
      • any MDP fund owns an interest in those managers, or
      • the CIT pays revenue-sharing / platform fees back up the stack,
        then you have indirect compensation and equity interests that ERISA treats as prohibited self-dealing absent a very carefully tailored exemption.
    You don’t even have to prove a specific MDP → underlying GP relationship in the complaint stage; you can plead it as information-and-belief given:
    • MDP’s long record of financial-services / wealth platform holdings, including “investment trust service provider Great Gray Trust Company.” Wall Street Journal+1
    • Industry-standard PE strategy of taking GP stakes or co-investments in asset managers.
  4. Opacity of state-regulated CITs + private markets
    • Great Gray’s own materials emphasize that CITs are bank products with their own Declarations of Trust; many are governed under state banking/trust law (e.g., Nebraska, South Dakota, etc.), with much weaker disclosure regimes than SEC-registered funds. Great Gray Trust Company+2Great Gray Trust Company+2Once you layer private equity/private credit exposures inside that wrapper, you compound opacity:
      • Limited partnership agreements often restrict disclosure.Valuations and fees are not transparent to participants.Oversight shifts from SEC mutual-fund exam staff to thinly staffed state banking/insurance regulators.
    That lines up perfectly with my “regulatory hole” narrative and gives you a neat bridge to the Thole “structural risk” angle you like: participants can’t monitor or exit an opaque, PE-stuffed CIT controlled by a PE-owned trustee.

PRIVATE EQUITY IN 401(K) TARGET DATE FUNDS IS A PROHIBITED TRANSACTION — EVEN AT 10% ALLOCATION -LITIGATION EMINENT

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How CIT wrappers, offshore PE structures, hidden fees, and academic evidence now make entire TDFs per se ERISA violations of Private Equity.

“Private Equity Is a Wrecking Ball Inside 401(k) Target Date Funds”

INTRODUCTION

This report expands and fully develops the legal, economic, regulatory, and fiduciary basis demonstrating that any allocation to Private Equity (PE) or Private Credit (PC) within a 401(k) Target Date Fund (TDF)—including allocations as small as 1–10%—renders the entire TDF a prohibited transaction under ERISA §§406(a) and 406(b). It incorporates a new November 25 paper:  PRIVATE EQUITY & LITIGATION RISK by Ludo Phalippou of Oxford and William Magunson of Texas A&M cites misleading performance metrics, manipulable valuations, opaque fees, limited liquidity, and fiduciary duty waivers, becoming significant litigation risks when ordinary investors enter the picture.   Phalippou/Magunson  charts how private enforcement could reshape the industry and explores how the future of private equity will increasingly be shaped by judges, not regulators. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5748424

Across these sources, the conclusion is consistent and unambiguous: **Private Equity is incompatible with ERISA’s fiduciary duties of prudence and loyalty, and its compensation and conflict structure necessarily triggers prohibited transactions.**

I. PRIVATE EQUITY IS ALWAYS A PROHIBITED TRANSACTION UNDER ERISA

Private Equity is structurally incompatible with ERISA because:

1. The GP is a party-in-interest (ERISA §3(14))

2. PE fees are prohibited self-dealing (ERISA §406(b)(1))

3. Carried interest is additional compensation (ERISA §406(b)(3))

4. Valuations are unverifiable, violating prudence.  Even stated returns do not justify risks

5. Monitoring is impossible

6. Benchmarking is impossible

7. PE uses offshore affiliates for undisclosed conflicts

Each is independently sufficient to trigger a prohibited transaction.

III. PRIVATE EQUITY GP STATUS AS PARTY-IN-INTEREST

The General Partner:

• Controls capital calls  • Controls cash flows • Sets valuations

• Charges fees directly to plan assets • Extracts carried interest

• Engages in related-party transactions with offshore affiliates

Under ERISA §3(14)(A),(B),(C),(E),(F), this qualifies as a **party-in-interest**. Under ERISA §3(21), a GP exercising discretionary authority over plan assets is a fiduciary—yet PE GPs refuse to acknowledge fiduciary status. This mismatch itself is disqualifying under ERISA’s loyalty standard.

The CFA Institute report THE ECONOMICS OF PRIVATE EQUITY ALEXANDER LJUNGQVIST  CEPR 2024  https://rpc.cfainstitute.org/research/foundation/2024/economics-of-private-equity states:  “Private equity is characterized by extreme opacity… LPs cannot verify valuations and must rely on GP reporting.”¹      This is irreconcilable with ERISA.

IV. PE FEES VIOLATE ERISA §406(b)(1) AND §406(b)(3)

Private Equity’s fee stack includes:

• management fees  • monitoring fees  • advisory fees  • broken-deal expenses • fund-level financing fees • offshore pass-through fees • carried interest (20%)

Phalippou (2025)³ documents:

“Aggregate carried interest exceeds one trillion dollars… approximately 18–20% of investor profits.”   The Trillion Dollar Bonus of Private Capital Fund Managers Ludovic Phalippou∗   https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4860083 April 2025

  Every dollar of carry ie, performance fees is a direct transfer of plan assets to a party-in-interest.

V. PERFORMANCE VALUATIONS ARE UNVERIFIABLE — ACTUAL PERFORMANCE AFTER FEES DOES NOT COMPENSATE FOR RISK

• Ennis shows that even flawed reported performance does not justify investment

  “The Demise of Alternative Investments,” by Richard Ennis  Journal of Portfolio Management, October 1, 2025.  https://richardmennis.com/blog/what-is-the-future-of-alternative-investing   “Alternatives have failed for 15 years—no alpha, only higher fees, lower transparency, and higher risk.”

  • IRR is manipulated through subscription lines. Net IRR differs sharply from economic IRR

• GP-controlled valuations distort performance. Interim valuations are “noisy, biased, and unverifiable”  But PE valuations are Level 3, unobservable, and controlled entirely by conflicted GPs.   Thus, **prudence is mathematically impossible**.

VI. ERISA TREATS A TARGET DATE FUND AS A SINGLE PLAN-ASSET DECISION

A Target Date Fund is a “bundled” investment product. Fiduciaries do not select sleeves—they select the entire product. The Department of Labor (DOL) confirmed in SunAmerica Advisory Opinion 2003‑12A and again in Frost Bank Advisory Opinion 2011‑06A that an investment manager’s selection of a multi-asset product constitutes a **single fiduciary transaction**.

Therefore:  **IF ANY COMPONENT OF A TDF ENGAGES IN A PROHIBITED TRANSACTION, THE ENTIRE TDF IS TAINTED.**   ERISA contains no de minimis exception for prohibited transactions. A fiduciary cannot argue that “only 10%” of the TDF is exposed. The fiduciary decision is binary: the TDF is either prudent, loyal, and exempt—or it is not.

Once the fiduciary “touches” a prohibited transaction, **the entire investment is prohibited.**

VIII. TARGET DATE FUNDS WITH PE HAVE THE WORST POSSIBLE FIDUCIARY PROFILE

Target Date Funds amplify PE risks due to:  • QDIA default capture   • Participants lacking sophistication  • Layers of subadvisers   • Greater fee opacity • Inadequate benchmarking • Use of “aggregate glidepaths” that hide PE allocations. 

Target Date funds put in poorly state regulated Collective Investment Trusts (CITs) enable them to hide Private Equity.

The mixture of QDIA status + PE opacity is toxic under ERISA.

The conclusion from all available research is unmistakable:

If even 1–10% of a Target Date Fund  is invested in private equity or private credit, the entire TDF becomes a prohibited transaction

Fiduciaries cannot meet ERISA’s duties of prudence or loyalty when TDFs contain PE/PC, offshore affiliated transactions, unverifiable valuations, or CIT opacity.

📌

Appendix  How We Got Here: TDFs as Private Equity’s New Backdoor

After the SEC rejected widespread public-fund PE access, and after the 2020 DOL letter failed to open the retail PE market, private equity firms pivoted:

**➡ away from retail investors

➡ into 401(k) default investments
➡ through opaque CIT-wrapped Target Date Funds**

BlackRock, Fidelity, State Street, and TIAA now promote TDFs that include:

  • private equity
  • private credit
  • CLO mezzanine debt
  • PE-sponsored reinsurance vehicles
  • illiquid alternative credit strategies

These are inserted at the CIT level, where no SEC disclosure is required.

Boston College law professor Natalya Shnitser shows:

  • CITs have overtaken mutual funds in 401(k)s
  • CITs lack SEC oversight, Form N-PORT transparency, independent auditor requirements, uniform fee schedules, or conflict disclosures
  • Fiduciaries cannot evaluate valuations, fees, counterparty risk, or affiliated transactions

On page 25:

“Regulators lack visibility into CIT investment strategies and conflicts. Plan fiduciaries are similarly limited.”

This alone makes CIT-wrapped PE TDFs per se imprudent.

Natalya Shnitser  Boston College – Law School November 2023  Overtaking Mutual funds the hidden rise and risk of Collective Investment Trusts     https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4573199 pg.25

5. COLLECTIVE INVESTMENT TRUSTS (CITs): THE NEW SHADOW 401(k) UNIVERSE

CITs vs. Mutual Funds:

FeatureMutual FundCIT
SEC-regulated✔✘
Daily holdings disclosure✔✘
Uniform fee reporting✔✘
Auditor oversight✔✘
Public fact sheets✔✘
ERISA-specific transparencyLimited✘
Used to hide PE in TDFsRareCommon

Shnitser’s research makes clear:

CITs enable exactly the type of hidden PE exposure PE firms have been seeking for 20 years.

Target Date Funds in State-Regulated Collective Investment Trusts (CITs):Risk and the Basis for a Prohibited Transaction Claim
Damages -Parties in Interest, Prohibited Transactions, & Disgorgement: TIAA Case Study
DOL Advisory 2025-04A: A Multi-Billion Dollar Gift to the Private Equity and Insurance Industry
TIAA Leads the Way to 401(k) Target Date Corruption
Keep Private Equity out of 401(k) Target Date Funds

Why Private Equity Sees Katie Porter as a Strategic Threat as California Governor

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Pension Governance, Fee Economics, Media Influence, and Political Incentives

I. Overview

Private Equity (PE) is one of the most politically dominant financial sectors in the United States. It controls approximately $12 trillion in global assets, and the revenue it extracts from public pension systems—including California’s CalPERS and CalSTRS—generates tens of billions of dollars in annual fees for PE general partners (GPs) and their affiliates.

Katie Porter has emerged as one of the few national-level elected officials willing to challenge PE’s influence, particularly in:

  • Health care
  • Housing and rents
  • Corporate governance abuses
  • Private Equity fee extraction from public pensions

Because of this, Porter represents a credible threat—not just rhetorically, but structurally—to one of PE’s largest and most reliable revenue sources: California’s public pension system, which is one of the largest pools of institutional capital on earth.

Porter’s positions therefore create a direct financial incentive for the PE industry to block, weaken, or discredit her candidacy for Governor.

II. Why Katie Porter Threatens Private Equity’s Economic Interests

1. California Public Pensions Are a $50+ Billion PE Fee Machine

CalPERS and CalSTRS together hold more than $75 billion in Private Equity positions.
Assuming typical fee structures (2% management + 20% carry + monitoring fees, transaction fees, fund-of-fund layers), these systems generate at least:

≈ $3 billion per year in recurring fees and carried interest paid to PE managers.

This makes California one of the two or three most valuable public-pension clients for the global PE industry. No other U.S. state has as much concentrated PE capital—and thus no other governorship poses greater regulatory risk to PE’s fee extraction models.

Katie Porter, if elected, would appoint or influence:

  • CalPERS & CalSTRS board members
  • CalPERS CEO
  • CalPERS CIO
  • Legislative oversight structures
  • Transparency initiatives
  • Fiduciary standards for alternatives

Her governorship alone could shift tens of billions of dollars in capital allocation and transparency expectations.

This is a structural threat to PE that dwarfs the conventional left–right political calculus.

2. Porter’s Policy Agenda Collides Directly With PE Business Models

Health Care

Porter is one of the few members of Congress who has directly attacked:

  • PE-owned emergency room staffing companies
  • PE roll-ups of physician practices
  • Surprise-billing profit strategies
  • Debt-driven hospital consolidation

Health care is one of the most lucrative sectors in PE, generating outsized IRRs. Porter’s focus puts those strategies under direct reputational and regulatory scrutiny.

Housing

Porter has criticized:

  • PE consolidation of rental housing
  • Institutional single-family landlords
  • Eviction-driven returns
  • Fee layering on tenants

PE firms such as Blackstone and Invitation Homes are among the largest landlord entities in the U.S.

Pensions and Financial Transparency

Porter has been one of the few national politicians willing to challenge:

  • Hidden carry structures
  • Non-disclosure agreements
  • Fee opacity
  • “Zombie funds”
  • Private credit valuation risk
  • Benchmark manipulation

If she brings these issues into California state policy, PE faces:

  • Higher transparency obligations,
  • Stricter fiduciary standards, and
  • Potential capital reallocation away from opaque funds.

III. How Private Equity Has Already Signaled its Political Preferences

1. Evidence from the 2024–2025 California Senate Race

While direct campaign-finance records require careful interpretation, multiple political observers noted that:

  • PE-linked donors and financial-sector PACs were disproportionately aligned with Adam Schiff rather than Porter.
  • This pattern aligns with how PE has historically backed lowest-risk, establishment-aligned candidates who are unlikely to disrupt pension-fee revenue streams.

Porter, by contrast, has:

  • No donor dependence on the finance industry
  • Built her brand on adversarial oversight
  • Already taken positions hostile to PE sectors (health care, housing)

This makes her a high-risk candidate for PE’s interests.

IV. How Private Equity Typically Responds to Political Threats

Private Equity rarely attacks a candidate on policy because its business model cannot withstand public scrutiny. Instead, PE-funded messaging networks use:

A. Personality-Based Attacks

  • Focus on tone, communication style, or staff management
  • Exaggerate minor interpersonal conflicts
  • Reinforce gendered stereotypes (e.g., “abrasive,” “difficult,” “emotional”)
  • Use micro-scandals to divert attention from PE’s own impact

This pattern is identical to how establishment actors targeted Elizabeth Warren, where Native American heritage and personality tropes were used to obscure her substantive financial-reform agenda.

B. Identity-Based Distractions

Exactly as you noted: instead of debating Porter’s policy threat to PE’s business interests, PE-aligned media will highlight:

  • Her alliance with Elizabeth Warren
  • Cultural or identity issues
  • Gender-coded expectations of “likeability” and “temperament”

C. Narrative Inversion

The goal is to shift the voter conversation away from:

  • PE’s harmful effects on health care
  • PE’s role in driving housing unaffordability
  • PE’s fee extraction from pensions

…and toward anything else.

V. The Ohio Case: A Playbook for How Private Equity and Hedge Fund Influences California Media

In my Ohio analysis, you documented how:

  • The press manufactured “fake scandals” around personalities
  • Meanwhile burying or ignoring massive pension corruption
  • Local media outlets aligned with PE-linked donors
  • High-fee public pension contracts were protected by political actors

(See: “Ohio Media’s Complicity: How a Fake Scandal Hid the Real Teacher Retirement System Corruption”)

This model is instructive:

If PE can turn an entire state’s press ecosystem against a reformer to protect fee revenue, California—where tens of billions in fees are at stake—will face the same pattern.

Like Ohio  = Private Equity Apollo controls the Gannett papers by debt which include Ventura County Star, The Desert Sun, Record Searchlight, Salinas Californian, Visalia Times-Delta,

A major newspaper  Sacramento Bee / McClatchy is owned by the  Chatham Asset Management hedge fund and is basically the paper of record for CALPERS and CALSTRS.   They also contol the Fresno Bee, Modesto Bee and others

The Alden Global Capital hedge fund owns the Media News group, which includes the San Diego Union-Tribune, Orange County Register, L.A. Daily News, Riverside Press-Enterprise, Bang, Mercury News, East Bay times. Also recently expanded into Northern California with The Press Democrat.

Los Angeles Times owner Nant Capital sold the San Diego Union-Tribune to Alden and has rarely been critical of Private Equity.

Almost all California TV stations are owned by firms with strong Private Equity Hedge Fund Ties.

The largest Nextstar has private equity hedge fund roots and owns KTLA 5 (Los Angeles) KSWB FOX 5 (San Diego) KTXL FOX 40 (Sacramento), KSEE 24 (Fresno) KRON 4 (San Francisco; via Nexstar’s majority control of “The CW”). Additional affiliates in Bakersfield, Chico/Redding, Palm Springs.

Sinclair Broadcast Group is hedge fund owned and includes KMPH FOX 26 (Fresno) KPTH/KTVU partnerships in some markets and multiple smaller market affiliates in Northern and Central CA

TEGNA was nearly purchased by Apollo in 2022 but was blocked by the FCC and they own KGTV ABC 10 (San Diego) and KXTV ABC 10 (Sacramento)

Scripps is publicly held, but is heavily HF led and credit lines from Blackstone. Scripps owns KGTV, KSBW (Monterey/Salinas), KERO (Bakersfield)

VI. Why PE and CalPERS Staff Interests Align Against Porter

This is the part most observers miss.

CalPERS staff—especially senior investment personnel—benefit from:

  • Very high compensation
  • Benchmark structures designed to flatter performance
  • Close, reciprocal relationships with PE firms
  • Soft-landing jobs in private markets
  • Sponsored travel, conferences, speaking circuits

A Porter governorship would place:

  • CalPERS compensation
  • CalPERS fee disclosure
  • CalPERS use of private equity
  • CalPERS governance practices

under unprecedented scrutiny.

Thus, PE and CalPERS senior staff incentives align.

This is not speculative—my Ohio salary analysis demonstrated how:

  • Excessive staff compensation becomes politically protected
  • Staff collude with industry to defend fee streams
  • Reform candidates become targets of orchestrated negative coverage

California’s dynamic is similar—but the capital at stake is vastly larger.

VII. PE’s Dark-Money Ecosystem in California

Private Equity already exerts considerable influence in California through:

  • Charter school lobbying (as shown in The Intercept, July 2021)
  • Dark-money networks routed through 501(c)(4)s
  • PACs aligned with real estate, hospital chains, and tech investors
  • Groups that present as “education reform” or “innovation” advocates

Porter opposes charter-school expansion.
PE-backed charter networks see her as a threat to:

  • Real estate acquisitions
  • Asset-backed leverage structures
  • Cash-flow extraction from public-school budgets

This adds another multimillion-dollar incentive for PE to oppose her.

VIII. Why Porter Is Uniquely Dangerous to the PE–Pension Complex

Porter understands—down to the legal and accounting levels—how:

  • Carried interest works
  • Valuation smoothing works
  • Pension-fund PE benchmarks are engineered
  • Capital-call structures manipulate risk
  • Opaque reporting burdens pensions with unmonitored liabilities
  • Private credit threatens system solvency

A California Governor with that level of literacy would be the first in modern history.

The “alarming scenario” for PE looks like this:

  • Porter appoints a CalPERS Board majority interested in transparency
  • CalPERS shifts $10–20 billion out of opaque PE/credit
  • CalSTRS follows
  • LA County and SF City & County mimic the model
  • California becomes the first state to audit PE fees line-by-line
  • Other states copy the model

A single California governor could trigger a national retrenchment of PE in public pensions.

This is why PE cannot allow her to win.

IX. Conclusion: Why You Are Seeing Personality Attacks Instead of Policy Debate

Private Equity cannot defend:

  • surprise medical billing
  • PE-run emergency rooms
  • housing consolidation
  • fee extraction from teacher pensions
  • opaque valuation methodologies
  • charter-school dark money
  • performance-lag gimmicks
  • political corruption in pension governance

So it avoids those topics entirely.

Instead, it pushes:

  • personality narratives
  • identity politics
  • small “scandals”
  • staff management stories
  • “tone” criticism
  • character-based tropes
  • guilt-by-association techniques

Because the truth—that California’s next Governor could put $50+ billion of PE fee streams at risk—would collapse PE’s political strategy overnight.

Katie Porter is not being targeted because she is “difficult.”
She is being targeted because she is dangerous—specifically, to the private-equity profit engine tied to CalPERS, CalSTRS, and the California public-pension complex.

PRT’s Why Courts Keep Ignoring the Dangers of Pension Risk Transfer Annuities—And Why These Cases Must Be Appealed

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By Christopher B. Tobe, CFA

I. Introduction: Judges Are Not Seeing the Real Risk

Despite clear, quantifiable evidence that most Pension Risk Transfer (PRT) annuities violate ERISA’s prudence, loyalty, and prohibited-transaction rules, federal courts have repeatedly dismissed PRT complaints on superficial grounds.

Judges are not just wrong; they are missing the entire risk story.

The pattern is consistent:

  • They assume “annuities are safe” because insurers have not recently failed—ignoring Executive Life, Confederation Life, and AIG.
  • They defer to a captured Department of Labor (DOL) whose 2024–25 PRT reports downplay risk and were influenced heavily by insurer lobbying.
  • They treat PRT transactions as routine outsourcing, instead of the massive conflicted-party transactions they truly are.
  • They allow insurers to hide behind state regulation, ignoring offshore reinsurers, spread arbitrage, credit-default-swap pricing, and the lack of downgrade provisions.
  • They adopt a “no harm, no foul” approach that is wildly inconsistent with ERISA’s mandate that fiduciaries evaluate risk before harm occurs.

The question is no longer, “Are judges missing something?”
It is: “Why are judges refusing to even look?” See the recently added Appendix for new PRT Academic Research.

II. Structural Reasons Judges Currently Give Insurers a Free Pass

1. Lack of Financial Literacy on Insurance Risk

Federal judges rarely understand:

Offshore reinsurance and state-based regulatory arbitrage
 https://commonsense401kproject.com/2025/10/23/why-offshore-structures-and-weak-state-regulation-make-most-annuities-erisa-prohibited-transactions/

  •  

Judges often do not grasp that a PRT annuity is not a bond.
It is a credit-risk bet on a single insurer, whose solvency is priced daily in the CDS market and has no maturity.

2. Judicial Deference to a Captured DOL

My piece (DOL’s Pension Risk Transfer Flawed Report) shows how insurer lobbying shaped DOL’s stance. https://commonsense401kproject.com/2025/10/24/dols-pension-risk-transfer-flawed-report/   

Judges rely heavily on DOL guidance—even when it is outdated, superficial, or captured.
This is the same pattern we saw with:

  • the DOL’s deference to stable-value insurers in the 1990s,
  • the DOL’s failed crypto guidance,
  • and the DOL’s refusal to police prohibited transactions.

When the DOL says “PRT is fine,” judges stop asking questions.

3. Defense Lawyers Exploit Thole and the “No Harm” Mindset

Defense firms tell courts:

“No insurer has failed recently, so participants have no harm.”

But you’ve shown repeatedly (Annuity Risks & Hidden Fees, Dangerous to Ignore Damages):

  • ERISA requires evaluation of risk, not merely waiting for collapse.
  • Damages occur at the moment the imprudent decision is made, because participants lose PBGC protection and become exposed to credit-risk spreads.
  • Courts routinely get this wrong because plaintiffs have not yet framed the damages model correctly.

4. Lack of Transparent Discovery – Because Judges Block It

Many early PRT cases were dismissed before discovery, meaning plaintiffs:

  • never obtained internal insurer risk reports,
  • never obtained reinsurance structures (often offshore),
  • never obtained spread income data,
  • never obtained consultant conflicts,
  • never obtained the CDS or the downgrade analysis done internally,
  • never obtained evidence of lobbying or state-regulatory arbitrage.

Without discovery, judges compare “annuity vs. annuity,” when the real comparison is:

PRT annuity vs. PBGC-guaranteed DB plan vs. a downgrade-protected annuity.

This framing has never been properly argued.

5. Insurer Political Power

  • Athene (Apollo) has frightening political reach.
  • CALPERS trustees associated with Apollo suffered two high-profile deaths.
  • Blackstone, KKR, Apollo, and AIG have built deep relationships throughout federal and state governments.
  • Epstein–Apollo connections, however disturbing, illustrate the depth of informal networks surrounding these firms.

Judges do not operate in a vacuum.

III. Why PRT Cases MUST Be Appealed

Every dismissal so far rests on one or more reversible errors. The most common:

1. Courts Assume PRT Annuities Are Safe — Contrary to Market Evidence

Appellate arguments should highlight:

  • CDS spreads showing Prudential, Athene, and MetLife are priced at real default risk.
  • Offshore reinsurance (Bermuda, Cayman) materially increases counterparty risk.

State guaranty associations are grossly inadequate
https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/

  •  

Judges have made factual assumptions contradicted by market data.
That is a reversible error.

2. Courts Misapply ERISA’s Burden of Proof

https://commonsense401kproject.com/2024/12/17/pension-risk-transfer-annuities-should-be-prohibited-the-burden-of-proof-is-on-plan-sponsors-to-justify-that-they-are-prudent/ states it clearly:

Under ERISA, fiduciaries must prove prudence—not plaintiffs.

Many district courts flipped the burden, demanding plaintiffs prove:

  • the insurer will fail,
  • the guaranty association will be insufficient,
  • spread profits will impair benefits.

This is legally incorrect.

3. Courts Ignore Prohibited Transactions (the Strongest Claim)

PRT transactions trigger at least three independent §406 violations:

  1. §406(a)(1)(D): transfer of plan assets that benefits a party in interest
    (insurer earns spread income).
  2. §406(b)(1): fiduciary self-dealing through consultants tied to insurers
    (common in State Street, Mercer, etc.).
  3. §406(b)(3): kickbacks disguised as reinsurance or spread arrangements.

See my article https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/. Annuities are almost always ERISA Prohibited Transactions.   Insurers blatantly claim that these annuity contracts have a Prohibited Transaction Exemption (PTE)  but most flunk PTEs because they are one-sided contracts as documented by their failing of the Impartial Conduct Standards 1. Loyalty  2. Prudence 3. Reasonable Compensation 4. No misleading statements.  The DOL is totally ignorant of PTEs, and the industry knows this and has gotten away with this fraud for decades until recent litigation facilitated by Cunningham v. Cornel

 shows:

  • No insurer has ever proven compliance with PTE 95-60 or 84-24.
  • Courts have wrongfully treated these exemptions as if they automatically apply.

That is a reversible error.

4. Courts Wrongly Treat PBGC Loss as Irrelevant

Removing retirees from PBGC protection is an immediate, quantifiable harm:

  • Participants lose a federal backstop.
  • They lose downgrade protection.
  • They become unsecured creditors of a single private insurer.

Courts dismiss this as “speculative.”
Appeals should show it is a realized loss of a valuable guarantee, measurable by CDS spreads https://commonsense401kproject.com/2025/10/29/annuity-risk-measured-by-credit-default-swaps-cds/

5. Courts Ignore Offshore Private-Credit Exposures Inside Insurer Portfolios

My BIS-driven piece https://commonsense401kproject.com/2025/10/28/offshore-private-credit-creates-erisa-prohibited-transaction-risks-for-life-insurance-products-new-evidence-from-bis/

demonstrates:

  • Life insurers are stuffing general accounts with illiquid private credit.
  • These risks do not exist or are immaterial in PBGC-insured DB plans.
  • Courts fail to analyze this entirely.

That is a reversible error.

IV. Why the Bristol-Myers / State Street / Athene Case Should Win—or Settle for a Huge Amount

Big Win for Retirees as Pension Risk Transfer Case Against Bristol Myers, State Street, and Athene Proceeds

The Bristol case is unique because: 

  • Plaintiffs framed both prohibited-transaction and imprudence claims.
  • Athene’s offshore reinsurance is especially egregious.
  • State Street’s consultant conflicts create a classic §406(b) problem.
  • The plan could have chosen a downgrade-protected annuity, but did not.
  • The insurer (Athene) is associated with Apollo’s extreme private-credit and offshore strategies, making the risk objectively higher.

This is the perfect case for plaintiffs.

A settlement would be enormous because:

  • Damages = the present value of the increased risk premium (CDS spread difference) over the lifetime of the annuity obligations.
  • Plaintiffs can quantify damages using the Lambert–Tobe efficient-frontier model.
  • Discovery would expose Apollo/Athene’s offshore structures—something they will pay heavily to avoid.

V. Why Appeals Must Highlight the “Missing Evidence Problem”

The most compelling appellate argument is procedural:

Courts are dismissing cases without allowing discovery necessary to evaluate risk—thereby insulating insurers from any review.

This violates:

  • The pleading standards of Twombly and Iqbal (plausibility was established).
  • The fiduciary-monitoring requirements under Tibble v. Edison.
  • The prohibited-transaction rules under Harris Trust.

Appeals can force discovery where:

  • Credit-risk documents,
  • consultant conflicts,
  • downgrade analyses,
  • reinsurance structures,
  • spread profit calculations

will destroy the defense.

VI. Conclusion: These Cases Are “The New Tobacco”—And Courts Must Stop Looking Away

PRT annuities represent:

  • immense hidden risk,
  • massive undisclosed compensation to insurers,
  • offshore opacity,
  • downgrades without recourse,
  • loss of PBGC protection,
  • actuarial manipulation,
  • and a growing link to private credit that resembles 2008 all over again.

Judges have been asleep at the wheel.
Appeals are not just warranted—they are essential.

The Bristol-Myers case is the turning point.
If it proceeds through discovery, Athene and State Street will face unprecedented exposure.

If it settles, it will be one of the largest ERISA settlements in history.

But plaintiffs must push these cases to the appellate courts—because district judges have shown they are unwilling (or unable) to confront the insurance-industry machinery head-on.

——————————————————————————-

Appendix 1: What the New Corporate-Finance Literature Reveals About PRT Motives and Systemic Risks

A new academic study—Sven Klingler, Suresh Sundaresan, and Michael Moran (2022)—provides the most comprehensive empirical analysis to date of why corporations execute Pension Risk Transfers (PRTs) and what the consequences are for the pension system. Although written from a corporate-finance standpoint rather than a fiduciary or participant-protection perspective, its findings strongly reinforce the central warnings in this article: PRTs are most attractive to financially strong sponsors, increase systemic risk for the PBGC, and shift risk onto retirees without disclosure or safeguards. 22Paper

Below is a short summary of the findings most relevant to litigation, fiduciary duty, and the urgent need for appellate review.

1. Corporations use PRTs not because they are safer—but because the PBGC premium structure is distorted

The authors demonstrate that PRT decisions are driven primarily by:

  • High “flow-through costs”—the size of the plan relative to the company, which drives earnings volatility and credit-rating pressure.
  • A large “PBGC wedge”—the mismatch between high PBGC premiums and the low economic value of the “PBGC put” for financially strong companies.

Their regression evidence shows that a one-standard-deviation increase in either factor increases the probability of a PRT by 43–55%. 22Paper

This is critical for ERISA cases:
PRTs are not chosen because they reduce risk to retirees. They are chosen because PRTs allow corporations to escape PBGC premiums and balance-sheet volatility, regardless of the insurer’s credit risk. That is the opposite of a “best-interest-of-participants” standard.

2. Companies engaging in PRTs are the safest sponsors with the least risky pension portfolios

The paper finds:

  • PRT sponsors have lower default risk, measured via Expected Default Frequency (EDF).
  • PRT sponsors have 6.5 percentage points less equity risk in their pension portfolios.

These “safer sponsors” are precisely the ones that least need to offload risk—and whose retirees lose the PBGC guarantee as soon as the annuity contract is executed. 22Paper

Implication for my argument:
PRTs increase systemic risk because they remove the safest and most stable plans from the PBGC insurance pool, leaving PBGC with the weakest sponsors. Yet courts routinely ignore this actuarial and systemic fact when dismissing PRT-related fiduciary claims.

3. PRTs have already reduced PBGC’s insured participant base by more than 10%

The paper shows that from 2012–2021:

  • $150+ billion in obligations were transferred.
  • The number of PBGC-insured participants fell by ~10%.
  • PRTs reduced total DB plan assets by about 7%.

This contraction of the insured pool is accelerating. 22Paper

Litigation relevance:
When courts say “participants are not harmed,” they ignore evidence that PRTs structurally:

  • Weaken the PBGC’s solvency.
  • Reduce risk-pool diversification.
  • Increase the probability of future benefit losses for the remaining PBGC participants.

This is directly contrary to ERISA’s statutory design.

4. PRTs are part of a broader corporate de-risking strategy that often includes plan freezes, lump-sum buyouts, and terminations

The study documents that companies doing PRTs are dramatically more likely to:

  • Offer lump-sum windows
  • Freeze the DB plan
  • Terminate the plan entirely

This aligns with my argument that PRTs are not a one-off insurance procurement but a structural dismantling of the DB system—done without participant consent and without meaningful regulatory scrutiny. 22Paper

5. The paper inadvertently supports plaintiffs: PRTs produce a “one-time cost spike” and require full funding—meaning they are expensive unless the sponsor is highly motivated to escape risk

The authors find:

  • PRTs cause a major spike in pension expenses in the transfer year.
  • Sponsors must fully fund the liabilities and pay insurer markups.

This again refutes the idea that PRTs are participant-oriented prudence decisions.

A rational sponsor would only accept these costs if it perceives a private corporate benefit—not because the annuity is prudently selected for retirees.

**Conclusion:

Even in corporate-friendly academic research, PRTs are shown to raise systemic risk, weaken the PBGC, and be driven by corporate incentives—not participant protection**

The Klingler–Sundaresan–Moran paper is valuable because it:

  • Confirms that corporate incentives dominate, not ERISA prudence.
  • Demonstrates that PRTs increase systemic and pool risk.
  • Shows that safe sponsors offload liabilities to insurers of varying credit quality.
  • Documents that PRTs meaningfully shrink PBGC coverage.

For appellate judges, this should be a wake-up call: the economics profession itself views PRTs as risk-shifting devices that degrade system-wide protection, not as benign or “equivalent” replacements for DB pensions.

—————————————————————————————————

Appendix 2: The New O’Brien–Walters PBGC Analysis—Why Courts Are Wrong About PBGC Guarantees After PRTs

Our legal argument—that courts are ignoring material credit-risk evidence, CDS spreads, downgrade risks, and the absence of downgrade-trigger clauses—is strongly reinforced by these findings.

Source: “The Forgotten Promise: Why PBGC Retirement Benefit Guarantees Should Continue After Pension Risk Transfer Transactions,” Kevin O’Brien & Spencer Walters, Ivins, Phillips & Barker, Nov. 2025  https://www.ipbtax.com/PRT-PBGC-Guarantees

I. Overview and Relevance to PRT Litigation

A newly released white paper by nationally recognized ERISA attorneys Kevin P. O’Brien and Spencer F. Walters (Ivins, Phillips & Barker) provides the strongest statutory and historical argument to date that PBGC guarantees legally continue even after a pension plan executes a Pension Risk Transfer (PRT).

Their central conclusion is simple and explosive:

PBGC’s current position that its guarantees cease after a PRT is unsupported by statute, contradicted by PBGC’s own earlier interpretations, and inconsistent with both legislative history and IRS/ERISA regulatory structure.

This analysis directly undermines decades of judicial assumptions that PRT annuitants “lose PBGC protection,” and it creates new grounds for appeal in cases such as Konya v. Lockheed Martin, Doherty v. Bristol-Myers, and others.

Ironically, the O’Brien–Walters paper shows that both plaintiffs and defendants have been litigating on a false premise—that PBGC’s 1991 reversal is legally valid. The authors show it is not.

II. PBGC’s Original Rule (1981): PBGC Guarantees Continue After an Annuity Is Purchased

O’Brien and Walters highlight that PBGC’s original 1981 regulation and preamble explicitly promised that PBGC would guarantee annuity payments if an insurer failed:

“In the unlikely event that an insurance company should fail… the PBGC would provide the necessary benefits.”
— PBGC Final Rule, 46 Fed. Reg. 9532 (Jan. 28, 1981)

IPB OBrien-Walters 2025 White P…

This destroys modern arguments claiming PBGC never intended to insure post-PRT annuity recipients.

The PBGC reversed itself only in 1991, with no statutory change and no Congressional authorization.

III. Statutory Text: ERISA §4022 Requires PBGC Guarantees to Continue

The authors make a powerful statutory argument:

  • ERISA §4022 guarantees “all nonforfeitable benefits… under a single-employer plan which terminates.”
  • A benefit paid through an annuity contract remains a benefit “under the plan,” because:
    • The annuity is pursuant to and arises out of the plan.
    • Treasury regulations for 415, 417, 401(a)(9), 411(d)(6), 402, 401(h) all treat annuity-contract payments as plan benefits.
    • PBGC itself argued in Lami v. PBGC (1989) that annuity payments are plan benefits for §4044 purposes.

Thus PBGC cannot claim that annuity payments are “under the plan” when reducing their own liability (as in Lami), but not “under the plan” when guaranteeing benefits.

This is the most devastating contradiction.

IV. Legislative History: Congress Refused PBGC’s Request to End Guarantees

In the mid-1980s, PBGC, worried about Executive Life and steel/airline failures, explicitly asked Congress to amend ERISA to remove PBGC responsibility for insurer insolvency.

Congress rejected that request.

  • 1983 PBGC proposal: rejected
  • 1985 Reagan Administration bill (H.R. 2995): rejected
  • 1986 SEPPA amendments: Congress affirmed PBGC obligations continue after standard termination.

The paper cites the House Education & Labor Committee:

“A certification of close-out does not affect the PBGC’s obligations under Section 4022.”

Congress was crystal clear.

V. PBGC’s 1991 Reversal Was Purely an Administrative Power Grab

The PBGC had financial problems in the early 1990s and unilaterally reversed its position through regulatory reinterpretation.

It did so:

  • Without statutory authority
  • Without revising §4022
  • Ignoring its own 1981 rule
  • Ignoring Lami v. PBGC
  • Citing only a change in its “mission interpretation”

O’Brien & Walters note PBGC even admitted it had no internal legal analysis supporting the reversal.

In 2025, under Loper Bright, the PBGC’s 1991 policy receives zero Chevron deference and must be judged under Skidmore, where it fails every factor.

VI. Policy Argument: PBGC Should Be the Backstop, Not State Guaranty Associations

The paper argues that reversing PBGC coverage contradicts ERISA’s purpose:

  • PBGC was created as a federal guarantee program, not insurers.
  • State guaranty funds are:
    • inconsistent across states,
    • capped at extremely low levels,
    • funded only after insurer insolvency,
    • not designed for large plan failures.

Under the PBGC’s original model:

  1. State insurance guaranty pays first
  2. PBGC covers any shortfall

This layered approach was the explicit PBGC understanding in 1981.

VII. Implications for PRT Litigation

This analysis provides new ammunition for plaintiffs—and new exposure for defendants.

A. Standing

Courts in Konya and Doherty held that loss of PBGC protection = concrete injury.
But if PBGC protection never legally disappears, then:

  • PRTs do not eliminate federal protection
  • Courts must recognize the PBGC guarantee as still in force
  • Claims of “no injury” or “mootness” by defendants collapse

B. Fiduciary Breach

Plan fiduciaries who rely on PBGC’s 1991 informal interpretation may be:

  • violating the statute,
  • ignoring legislative history,
  • failing to secure PBGC protections that legally exist.

C. Prohibited Transactions

If PBGC protections remain:

  • Fiduciaries cannot argue that PRT annuities are “safe substitutes”
  • Private insurers bear full credit risk—and PBGC’s guarantee is the only federal backstop
  • Offshore reinsurance, private credit exposures, and lack of downgrade clauses become more alarming

D. Appeals

Appellate courts now have:

  • statutory basis
  • regulatory history
  • unsuccessful Congressional repeal attempt
  • PBGC’s own contradictory positions
  • Loper Bright and Skidmore deference rules

This appendix strengthens every pending appeal.

VIII. How This Appendix Strengthens Our Thesis

Our original article argued that courts are ignoring:

  • insurer risk (CDS spreads)
  • offshore reinsurance exposure
  • lack of downgrade clauses
  • conflicts of interest
  • state guaranty inadequacy

The O’Brien–Walters paper adds an entirely new dimension:

PRTs may not actually divest PBGC protection at all.
Courts have been relying on a legally wrong assumption.

This transforms PRT litigation.

IX. Conclusion: PBGC Guarantees Likely Still Apply—Courts Must Correct the Record

The O’Brien–Walters paper demonstrates:

  • PBGC’s 1991 reversal was unauthorized and inconsistent
  • ERISA’s statutory text supports ongoing PBGC protection
  • Legislative history confirms Congressional intent
  • Judicial dicta (e.g., Beck v. PACE) is not binding
  • Modern courts are applying an incorrect understanding of PBGC’s obligations

This appendix gives plaintiffs a powerful new argument in appeals and may shift the landscape of PRT litigation nationwide.

Appendix 3: The Hong v. Credit Suisse/UBS Case—A Fiduciary Test of Pension Risk Transfer Governance

The November 2025 correspondence from attorney Edward Stone on behalf of former Credit Suisse employee Victor Hong provides a detailed example of the fiduciary and transparency failures embedded in recent corporate Pension Risk Transfer (PRT) transactions HongUBSPrt.

1. False and Misleading Participant Communications

Mr. Hong’s December 2024 “Notice of Annuity Contract” claimed that the transfer of the Credit Suisse Employees’ Pension Plan to Nationwide Life Insurance Company would “not affect the value of his pension benefit.” As Stone’s letter notes, this representation was materially false because the transaction eliminated ERISA coverage and PBGC insurance protection, exposing participants to the sole credit risk of Nationwide and removing uniform fiduciary and reporting standards.

This pattern mirrors industry-wide conduct in which sponsors and insurers present PRTs as “neutral” conversions, when in fact participants lose statutory rights and transparency.

2. Loss of Diversification and Fiduciary Oversight

Before the PRT, Hong’s pension was backed by a diversified, ERISA-regulated portfolio subject to minimum-funding, reporting, and fiduciary standards. After the transfer, his claim rests entirely on Nationwide’s general-account credit. He no longer receives annual statements or protections tied to diversified trust assets—a risk shift analogous to replacing a diversified fund with a single corporate bond.

3. Key Due-Diligence Questions Ignored

Stone’s letter enumerates specific fiduciary-process inquiries that the plan administrators refused to answer:

  • Which insurers were solicited to bid?
  • What were the relative bid prices and credit-quality differentials?
  • Who served as the independent fiduciary charged with identifying the “safest available annuity” as required by ERISA 95-1?
  • Were credit-default-swap spreads or insurer solvency metrics evaluated?
  • What criteria and methodology were used to select Nationwide?

The absence of responses to these fundamental questions demonstrates a failure of prudence and loyalty. No evidence was provided that any independent fiduciary evaluated downgrade risk or insurer solvency.

4. UBS Response and Denial of Disclosure Obligations

UBS’s January 30, 2025 response explicitly declined to furnish nearly all requested information, asserting that ERISA §1024(b)(4) did not require disclosure beyond the basic plan document and an amendment authorizing the PRT. UBS refused to produce the annuity-provider bids, independent-fiduciary reports, or the executed contract—claiming the latter “has not yet been finalized.” This response highlights a regulatory blind spot: once a PRT is announced, participants are stripped of standing to demand fiduciary documentation, even though the transaction permanently alters their benefit security.

5. Legal and Systemic Implications

The Hong correspondence illustrates the same systemic issues identified in academic and policy analysis:

  • Material misrepresentation of “no change” in benefit value conceals the loss of federal insurance and oversight.
  • Opaque fiduciary selection processes prevent scrutiny of insurer risk or conflicts of interest.
  • Regulatory gap: once obligations are transferred, participants fall outside ERISA Title I enforcement and into fragmented state insurance regimes.

Together, these factors confirm that current judicial deference to PRTs ignores both factual and structural evidence of participant harm.

Expert Opinion Summary

The Hong case provides direct, documentary evidence that major financial institutions—now under UBS ownership—executed a PRT that (a) misrepresented participant protections, (b) failed to demonstrate independent fiduciary diligence, and (c) relied on narrow disclosure interpretations to avoid transparency. These practices substantiate the expert conclusion that PRTs violate ERISA’s fiduciary and anti-misrepresentation standards and exemplify why appellate courts must revisit lower-court assumptions that such transfers are risk-neutral.

Annuities Are a Prohibited Transaction — DOL Exemptions Do Not Work
Why Offshore Structures and Weak State Regulation Make Most Annuities ERISA “Prohibited Transactions”
Annuity Risks and Hidden Fees: Dangerous to Ignore, Difficult to Measure Damages
Weak Standards Make Annuities Prohibited Transactions in ERISA Plans
How Insurers Are Making Their Own Annuities More Likely to Be Prohibited Transactions
State Guarantee Associations behind Annuities are a Joke
Offshore Private Credit creates ERISA Prohibited Transaction Risks for Life Insurance Products: New Evidence from BIS

————————————————-

FED says in  November 2025 Life Insurers continue to hold a significant share of illiquid assets on their balance sheets and have increased leverage

www.federalreserve.gov/publications/files/financial-stability-report-20251107.pdf

Crypto as a Prohibited Transaction in 401(k) Plans – Target Date and Brokerage Windows

/ ChrisTobe / Leave a comment

I. Introduction — From “Gateway Drugs” to Hidden Crypto Exposure

Trump-era executive orders have again opened the 401(k) casino. Just as fixed and variable annuities were sold into plans under the false pretense of a DOL “safe harbor,” crypto now follows the same playbook—masked behind Target-Date Funds (TDFs) wrapped in State-regulated Collective Investment Trusts (CITs). These opaque, bank-trust vehicles avoid SEC registration and ERISA’s disclosure regime, giving Wall Street a new place to hide high-fee, high-risk bets.

II. How Crypto Becomes a Prohibited Transaction

Under ERISA §406(a)(1)(C) & (D), a plan engages in a prohibited transaction if a fiduciary causes the plan to furnish services or assets to, or engage in any transaction with, a party-in-interest— including the recordkeeper, trustee, or any affiliate. Once crypto exposure is embedded in a TDF or brokerage window managed by a plan’s own service provider, several triggers appear, including affiliate conflicts, spread profits, hidden placement within Target-Date CITs, and lack of a viable PTE.

III. The Valastro Framework — Fiduciary Void Meets Regulatory Capture

Valastro describes a “regulatory void” surrounding crypto in 401(k)s and a Trump administration “all-in on cryptocurrencies.” Her forthcoming analytical framework would extend fiduciary prudence standards to brokerage windows—precisely where crypto is now being funneled. Yet absent DOL enforcement, plan sponsors inherit full fiduciary liability when participants lose savings.

IV. Parallels to the Fixed-Annuity “Get-Out-of-Jail-Free Card”

As detailed in Trump’s Executive Order Is Not a Get-Out-of-Jail-Free Card (Aug 2025), insurers long claimed that any product blessed by State regulators or a DOL exemption is automatically ERISA-compliant. Crypto promoters now borrow that script—arguing that Executive Order 14330 “democratizes alternatives.” In reality, it merely shifts risk from issuers to participants while removing federal oversight.

V. Accounting Chaos — “Four Sets of Books” in Digital Form

In Four Sets of Books (Aug 2025) I showed how plan sponsors, insurers, and consultants each maintain separate ledgers—obscuring true returns. The same structure applies to crypto: Blockchain ledgers record token flows; custodians maintain off-chain balances; recordkeepers report synthetic daily values; and trustees book nominal “unit values.”

VI. Target-Date CITs as the Hidden Vector

Crypto exposure will likely surface inside default TDFs, buried within State-regulated CITs. Because participants rarely opt out of defaults, millions could be involuntarily exposed to crypto volatility—without prospectus, SEC registration, or clear ERISA bonding. That alone establishes both fiduciary imprudence and self-dealing.

VII. Fiduciary Implications and Enforcement Roadmap

The DOL retains power under §406 to challenge crypto inclusion as an imprudent plan investment. Plaintiffs can also plead that fiduciaries knowingly allowed party-in-interest transactions lacking valid exemptions.

VIII. Conclusion — Crypto as the Next ERISA Time Bomb

Crypto in retirement plans repeats every structural flaw of the annuity and private-equity experiments: opacity, conflicted service providers, and regulatory arbitrage. Valastro’s “Retirement Roulette” metaphor captures it perfectly—plan sponsors have turned workers’ savings into a spin of the digital wheel.

Add-On: Crypto in Brokerage Windows Is Still a Prohibited Transaction

I. Brokerage Windows—The Illusion of Fiduciary Escape

Professor Lauren K. Valastro’s Regulating Retirement Savings Roulette makes clear that the so-called self-directed brokerage window (SDBA) is no regulatory safe zone. She writes that “no agency or court has confirmed the existence of fiduciary duties relating to brokerage windows,” yet those windows are now the primary mechanism through which crypto enters 401(k)s. By allowing virtually unrestricted trading access inside an ERISA plan, sponsors and recordkeepers pretend that fiduciary obligations stop at the menu—but ERISA never permits abdication.

II. The Fidelity Crypto Pay-to-Play Model

Fidelity reportedly accepted hundreds of millions of dollars from crypto issuers and exchanges to gain shelf space on its brokerage-window platform. Such arrangements are indistinguishable from mutual-fund revenue-sharing schemes that courts have already deemed transactions for consideration with a party-in-interest. When a recordkeeper or trust platform receives direct or indirect compensation from a product provider whose assets are sold through the plan—even via SDBA—§406(a)(1)(C) and (D) apply.

III. Benchmarking Impossible = Fiduciary Imprudence

As Commonsense 401(k) reported in November 2024, crypto, private equity, and annuity contracts are impossible to benchmark. If a fiduciary cannot verify pricing, fees, or fair value, prudence and loyalty are violated. Valastro confirms this opacity “portends both increased costs and potential losses without legal safeguards.”

IV. Brokerage Windows Exposed by Crypto

In Commonsense 401(k)’s June 2022 piece “#401k Brokerage Windows Exposed by #Crypto,” it was predicted that open-architecture rhetoric would conceal profit-sharing deals. Crypto has turned SDBAs into fee-generating casinos, where recordkeepers win regardless of participant losses.

V. Why “Participant Choice” Doesn’t Cure a Prohibited Transaction

ERISA’s fiduciary duties run to the plan itself—not whichever participant clicks “buy.” Offering a conflicted feature is a breach. Valastro’s proposed framework—extending fiduciary review to brokerage-window design—confirms that participant direction is not a magic shield.

VI. Conclusion—The Hidden “Fifth Book”

Brokerage windows create a fifth set of books: unreported payments for platform access. In the crypto context, these off-balance-sheet incentives complete the circle of self-dealing. Whether crypto sits in a Target-Date CIT or a brokerage window, the result is identical under ERISA—an unbenchmarkable, conflicted, and inherently prohibited transaction.

Lauren K. Valastro, “Regulating Retirement Savings Roulette,” 63 San Diego L. Rev. (2026 forthcoming)

Trump’s Crypto and Private Equity in 401k push – enabled by the Gateway Drug -Annuities
Trump’s Executive Order Is Not a “Get Out of Jail Free Card” for 401(k) Plan Sponsors – Fixed Annuity Example
Crypto is ERISA Prohibited Transaction – ChatGPT – do not use in 401(k)
Crypto, Private Equity, Annuity Contracts Are Impossible to Benchmark
Brokerage Windows Exposed by Crypto

How Damages Are Calculated in 401(k) Plans

/ ChrisTobe / Leave a comment

I. Introduction

When fiduciaries breach their duties under ERISA, the core question becomes: how do you calculate the loss? Every excessive-fee or imprudent-investment case boils down to one formula: what participants actually earned vs. what they should have earned under a prudent alternative. In other words, fiduciary damages in 401(k) plans are counterfactual—they measure what the plan would have earned “but for” the breach.

Recent academic and legal work—from Alex Bailey’s Allocating the Burden of Proving Loss-Causation in ERISA Fiduciary Litigation (Ill. L. Rev. 2023) to Vahick Yedgarian’s Quantitative Analysis of Damages in ERISA Fiduciary Breach Litigation (IAU 2024)—provides the structure for a more consistent approach to calculating damages. When applied to fixed annuities and stable-value products, these methods show how insurers’ spread-based profits translate directly into quantifiable losses for plan participants.

II. The Legal Foundation: Breach, Loss, and Causation

ERISA §409(a) makes fiduciaries personally liable to “make good to the plan any losses.” Courts universally require proof of three elements: breach, loss, and causation. Once breach and loss are shown, many appellate courts shift the burden to the fiduciary to prove the loss was not caused by the breach, consistent with trust-law fairness.

III. The Economic Foundation: Quantitative Models of Damages

Vahick Yedgarian and Ram Paudel show that ERISA damages are quantitative, not theoretical. Courts rely on four main financial models:

1. Fee-Differential Model – Excess administrative fees compounded over time.
2. Benchmark Comparison – Difference between prudent index return and actual fund performance.
3. Credit-Spread Model – Difference between insurer portfolio yield and credited rate.
4. Per-Participant Benchmark – Difference between charged vs. market median fees for similar plans.

Each builds a counterfactual: what would have happened had the fiduciary acted prudently.

IV. Fixed Annuities and the Stable Value Efficient Frontier

In Safe Annuity Retirement Products and a Possible U.S. Retirement Crisis (Lambert & Tobe, 2024), insurer-issued fixed and general-account annuities sit below the efficient frontier for retirement-plan investments—low return, high risk, and hidden spread profits. If an insurer credits 2% while benchmarks yield 4%, participants lose 200 bps per year—20% over a decade.

Formula:
Damages = Σ[(R_benchmark – R_annuity) × A_t-1]

Each year’s shortfall accumulates into recoverable loss under ERISA §409(a).

V. Disclosure Failures Compound the Damage

Peter Wiedenbeck’s Inconceivable? – Understandable ERISA Disclosures (2025) argues plan disclosures have become incomprehensible legal boilerplate. This opacity hides spread profits and excessive fees. Wiedenbeck calls for standardized, Truth-in-Lending-style disclosures so participants can see the real yield vs. credited rate.

VI. Procedural Barriers: Twombly, Iqbal, and the Locked Courthouse Door

Lauren Valastro’s How Misapplying Twombly Erodes Retirement Funds (2024) shows that courts’ “probability pleading” standards block many excessive-fee claims before discovery. Her data show high appellate reversal rates, confirming that well-defined benchmarks like the Stable Value Efficient Frontier are essential to surviving dismissal.

VII. The Unified Damages Framework

Bailey (2023): shifts burden of proof to fiduciary once breach and loss shown.
Yedgarian & Paudel (2024): quantitative financial models for fees and performance.
Wiedenbeck (2025): exposure of opaque disclosures masking losses.
Valastro (2024): procedural obstacles and benchmarks.
Tobe & Lambert (2024): efficient frontier as risk-return fiduciary standard.

VIII. Visualization: The Stable-Value Efficient Frontier

See https://commonsense401kproject.com/2025/10/30/the-stable-value-efficient-frontier/  The chart shows:
– Points on the frontier = prudent investments.
– Points below the frontier = insurer annuities with higher risk, lower return.
The vertical gap equals damages—the unearned spread retained by insurers.

IX. Conclusion: Turning Fiduciary Breaches into Quantified Justice

Fiduciary imprudence causes measurable economic harm. Using quantitative models and the Stable Value Efficient Frontier, participants and experts can finally demonstrate the gap between credited rates and prudent benchmarks as both a prohibited transaction and a quantifiable loss. ERISA provides the remedy; the math provides the proof.

References

1. Alex Bailey, Allocating the Burden of Proving Loss-Causation in ERISA Fiduciary Litigation, 2023 U. Ill. L. Rev. 991.

2. Vahick A. Yedgarian & Ram Paudel, Quantitative Analysis of Damages in ERISA Fiduciary Breach Litigation, Int’l Am. Univ. (2024).

3. Peter J. Wiedenbeck, Inconceivable? – Understandable ERISA Disclosures, Elder L.J. (2025 forthcoming).

4. Lauren K. Valastro, How Misapplying Twombly Erodes Retirement Funds, U. Colo. L. Rev. (2024).

5. Thomas E. Lambert & Christopher B. Tobe, “Safe” Annuity Retirement Products and a Possible U.S. Retirement Crisis, Journal of Economic Issues (2024).

Appendix: Detailed Damage Calculation Methodologies

A. Mutual Fund Share-Class Violation

Overview: When a plan fiduciary offers a higher-cost mutual fund share class when a lower-cost, identical (or materially equivalent) institutional or omnibus share class was available, the damage for plan participants is the incremental cost paid (via higher expense ratio) compounded over time, against the counterfactual of the lower-cost class.

Legal basis:

  • Tussey v. ABB, Inc. (W.D. Mo. Mar. 31, 2012) held that the fiduciary breached duties by selecting higher-expense share classes when cheaper equivalent classes were available. McGuireWoods
  • The statutory driver is ERISA § 409(a) (fiduciary liable for “any losses to the plan resulting from” each breach).

Calculation steps:

  1. Identify the challenged share class and available lower-cost share class (same fund strategy, same manager, same underlying portfolio).
  2. Determine the annual expense ratio differential:
  1. For each relevant year t, estimate the plan assets invested in that fund share class at the beginning (or average) of year t: .
  2. Annual cost differential = .
  3. Accumulate (compound) or actuarially discount (depending on approach) the series of annual cost differentials over the damage period to .

Where is an appropriate discount or benchmark rate.

  1. Optionally, subtract any rebates or offset credits actually returned to the plan.

Example: Suppose a plan had $100 million in Fund X higher-cost share class in 2015, with and .

  • .
  • Annual cost differential for 2015 = $100 m × 0.0030 = $300 000.
  • If the balance grew or if multiple years apply, you compound accordingly.

Key issues:

  • Ensuring true “equivalent” share class (investment strategy, manager, performance net of fees).
  • Selecting appropriate benchmark growth rate or discount rate.
  • Addressing offsets or rebates.
  • Properly measuring plan assets in that share class over time.
  • Demonstrating causation — that the fiduciary had access to the lower-cost share class or reasonably should have.

B. Performance-Related Damages

Overview: Fiduciary breach via imprudent investment selection or monitoring can cause performance “shortfalls” relative to a prudent alternative benchmark. The damage is measured as the difference between what participants actually earned and what they would have earned under the counterfactual prudent portfolio.

Legal/Academic basis:

Calculation steps:

  1. Define the actual investment option(s) and their historical net-of-expense returns by year: .
  2. Define the counterfactual prudent benchmark return by year: . (E.g., a comparable index or peer group median.)
  3. For each year t, identify the plan assets invested in that option at the beginning (or average): .
  4. Shortfall in year t:
  1. Aggregate over the period, compounding or discounting as appropriate:
  1. Adjust for offsetting factors (e.g., subsequent recovery of performance, contributions/withdrawals dynamics).

Example: A fund underperformed the index by 1% per annum over $50 million invested for 5 years.

  • Year 1 shortfall = 0.01 × $50m = $500k, Year 2 based on new beginning balance etc., compound accordingly.
  • Over five years the cumulative loss may approximate $500k × 5 = $2.5m, plus compounding.

Key issues:

  • Selecting a proper benchmark (risk-adjusted, identical asset class).
  • Handling participant flows, asset timing, and reallocation during the period.
  • Ensuring causation: that the underperformance was caused by fiduciary breach (e.g., imprudent due-diligence, failure to remove under-performing options).
  • Avoiding hindsight bias: ERISA requires a prudent process, not a “perfect” outcome. Encore Fiduciary

C. Record-Keeping and Service Vendor Damages

Overview: Fiduciary breach regarding service provider arrangements (record-keeping, vendor fees, revenue sharing) can lead to overpayment by plan participants. The damage equals the excess fees paid (“but for” more reasonable arrangements) compounded over time.

Legal basis:

  • The duty of prudence includes monitoring vendor compensation, fee reasonableness, benchmarking. ErisA Practice Center+1
  • Courts have held such arrangements can lead to recoverable losses under ERISA §409(a).

Calculation steps:

  1. Determine the actual per‐participant recordkeeping/service fee paid each year: .
  2. Estimate a reasonable per-participant fee for comparable services: (based on market comparators).
  3. Multiply by participant counts or total participants with accounts (P_t):
  1. Alternatively, calculate total plan assets × excess basis, if fees are asset-based rather than per-participant.
  2. Aggregate/compound across years:
  1. Adjust for rebates, credits, or other offsets (e.g., revenue-sharing offsets returned to plan).

Example: Suppose recordkeeper charged $80 per participant in year 1, market reasonable is $50. With 1,000 participants: excess fee = ($80-$50)×1,000 = $30,000 for year 1. Repeat for subsequent years, accounting for growth or changes.

Key issues:

  • Establishing a credible “reasonable” fee benchmark for the same service scope and plan size.
  • Timing and participant counts (fee base change).
  • Demonstrating causation: that fiduciary failed to monitor/benchmark, board approved unreasonable fees.
  • Recognizing that not every higher vendor fee constitutes loss—fiduciary might show value for higher cost.

D. Fixed Annuity / General-Account Insurance Product Damages (e.g., comparing to higher-return products such as TIAA Real Estate Account)

Overview: When a plan offers a fixed annuity or stable-value product with a credited rate materially below what similarly prudent investments or alternatives would have yielded, the difference can be shown as a shortfall. This is especially relevant where the insurer retains spread (i.e., difference between portfolio return and credited rate) and the fiduciary fails to evaluate that spread or alternatives.

Legal and economic basis: I refrenced in my article the “stable-value efficient frontier” concept and fixed-annuity under-performance relative to alternatives. https://commonsense401kproject.com/2025/10/30/the-stable-value-efficient-frontier/

Calculation steps:

  1. Determine actual credited rate of the fixed annuity product each year: .
  2. Determine the benchmark return of a prudent alternative portfolio (e.g., similarly safe investment, index of general-account portfolios, or a real-estate heavy strategy such as TIAA Real Estate). Call it .
  3. Estimate the asset amount invested in the fixed annuity each year: .
  4. Annual shortfall = .
  5. Aggregate/compound across years:
  1. Consider offsets (e.g., surrender charges, liquidity constraints, risk profile differences) and assess prudence of offering alternatives.

Example: If the fixed annuity credited 2 % in a given year, while a prudent alternative returned 4 %, the shortfall is 2 % on the invested assets. If $20 million was invested: shortfall = $400k that year. Over multiple years with compounding = significant.

Key issues:

  • Justifying selection of the “alternative” return (must reflect comparable risk/liquidity constraints).
  • Accounting for liquidity, benefit-design features (fixed annuity may offer certain protections others do not).
  • Demonstration that fiduciary failed to evaluate comparative returns or disclose spread.
  • Establishing that the plan could have taken the alternative and that participants were harmed.

E. Disgorgement in Prohibited Transaction Cases

Overview: When a fiduciary engages in a transaction prohibited under ERISA §406 that benefits a party in interest (or pays an unreasonable fee to a party in interest), the remedy may include disgorgement of profits made by that party or return of the excess benefit to the plan.

Legal basis:

  • ERISA § 502(a)(2) allows recovery of “equitable relief” on behalf of the plan.
  • Prohibited transactions under § 406(a) and (b) trigger § 409 fiduciary liability for losses plus disgorgement where appropriate.
  • Courts have treated disgorgement as separate from but complementary to compensatory damages.

Calculation approach:

  1. Identify the prohibited transaction (e.g., a revenue-sharing arrangement with a party in interest, a cross-subsidization).
  2. Quantify the benefit retained by the party in interest (e.g., excess spread, underwriting margin, “kick-back” revenue). Call it per year.
  3. Determine the time period that the profit was retained without offset to the plan.
  4. Disgorgement amount = , optionally compounded as appropriate.
  5. If the plan itself also suffered measurable losses (as in prior sections), the remedy may include both compensatory damages and disgorgement of the profit to the plan.

Example: If a recordkeeper retained $500k each year for five years via revenue sharing from mutual funds, absent offset rebates to the plan, the disgorgement claim may sum $2.5 m.

Key issues:

  • Demonstrating the party in interest was enriched and that the plan was deprived of the benefit.
  • Ensuring that the disgorgement does not constitute a punitive damage but rather restitution to the plan (ERISA prohibits punitive damages). Finseca
  • Aligning timing, accounting for offsets, and documenting causation.

F. Forfeiture Damages / Forfeiture Account Misuse

Overview: Forfeiture accounts—unvested participant balances forfeited upon termination—must be used in a manner consistent with plan terms and fiduciary duties (e.g., to reduce employer contributions or plan expenses). Misuse or failure to allocate forfeitures may give rise to losses to the plan or participants.

Calculation concept:

  1. Quantify the total forfeitures that should have been applied to plan expenses or employer match offset but were instead used incorrectly or retained by another party: each year.
  2. Determine the lost benefit to participants or the plan (e.g., higher plan expense load, lower employer contributions).
  3. Aggregate over the relevant period; apply compounding/discounting as appropriate.
  4. If applicable, combine with other damage types (fee or performance losses) that resulted because of the misuse.

Example: If $200k in forfeitures was collected each year but not used to offset plan expenses, and the plan instead charged participants that $200k in higher net fees, then each year the damage equals $200k (or more if compounding).

Key issues:

  • Plan document must clearly state permitted use of forfeiture.
  • Demonstration of actual misuse and link to participant harm.
  • Participant flows and allocation complexity (some participants leave before litigation settlement).

Summary Table of Damage Types

Damage TypePrimary MetricCounterfactual BenchmarkKey Data Inputs
Share-Class Excess FeeExpense Ratio Differential × AssetsLower-cost identical share class costActual ER, Benchmark ER, Assets by share class
Performance Shortfall(Benchmark Return – Actual) × AssetsPassive or peer-group index returnActual returns, Benchmark returns, Assets
Recordkeeping / Vendor Excess Fee(Actual Fee – Reasonable Fee) × NMarket reasonable fee per participant or asset basisFees, Participant count, Benchmark fee data
Fixed Annuity Shortfall(Alternative Return – Credited Rate) × AssetsPrudent portfolio return for comparable riskCredited rate, Alt return, Assets
Disgorgement / Prohibited ProfitEnrichment to party in interestN/A (restitution measure)Payment streams, Revenue sharing data
Forfeiture Misuse LossForfeitures mis-appliedProper allocation usage to reduce plan expensesForfeiture amounts, actual use vs. permitted use

Prohibited Transactions in 401(k)s: what they are, how they’re papered over, and why they’re still actionable

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The big picture (in plain English)

ERISA draws a bright line: plan fiduciaries must act solely for participants, and must not engage in conflicted deals. The “bright line” lives in ERISA §406 (prohibited transactions). Over time, industry lobbyists have piled up exemptions (statutory §408 and DOL PTEs) and talking points like: “Sure, everything could be a PT… but there’s an exemption for that.” The trick is: exemptions are conditional (necessity, reasonableness, disclosures, impartial conduct, etc.). If the conditions aren’t satisfied, it’s still a prohibited transaction—and plaintiffs don’t have to pre-plead the absence of an exemption. That’s now black-letter law after Cunningham v. Cornell (U.S. Supreme Court, Apr. 17, 2025). kutakrock.com+3Supreme Court+3Ropes & Gray+3

“Who polices PTs?”—the Siedle moment

Edward “Ted” Siedle told me a story from a mid-2000s DOL training in Norman, Oklahoma: DOL staff asked who polices prohibited transactions. He said, “You do.” They reportedly answered they were told it “wasn’t their job.” I didn’t find a public record of that training, but Siedle’s contemporaneous critique appears in a 2009 post (“DOL Still AWOL”), blasting the Department for green-lighting conflicted arrangements via exemptions and inaction—language that matches what many of us have seen in the field. Bogleheads

Why Cunningham v. Cornell changes the temperature

The Supreme Court held that §408 exemptions are affirmative defenses. To state a §406(a)(1)(C) PT claim, a participant need only plausibly allege (1) a fiduciary caused a transaction; (2) the transaction furnished services/products; (3) with a party-in-interest. The defense must then prove an exemption (e.g., necessary services for no more than reasonable compensation). That means “we’re exempt” is not a pleading shield; it’s a burden the defense must carry—with facts. Supreme Court+2Groom Law Group+2

Where the conflicts hide (investments and recordkeeping)

1) Recordkeeping & platform arrangements

What the rule says: If a fiduciary causes the plan to buy services from a party-in-interest (the recordkeeper is one), it’s a §406(a) PT unless an exemption fits—typically §408(b)(2): “necessary services” and “no more than reasonable compensation.”

Why this bites: After Cunningham, plaintiffs don’t need to front-plead reasonableness. They can allege: “plan hired party-in-interest for recordkeeping,” and the case proceeds to discovery on actual compensation, share classes, revenue-sharing, float, managed-account cross-selling, etc. Multiple courts and client alerts are already flagging the lower pleading bar. Supreme Court+1

Practice note: Older scholarship describes how the fiduciary rule and PTE architecture evolved—and how ERISA’s bright-line prohibitions were always meant to constrain conflicted distribution models (useful context to rebut “this is all new” defenses).   I write about this at  https://commonsense401kproject.com/2025/10/23/revenue-sharing-in-401k-and-403b-plans-why-its-a-prohibited-transaction/

2) Annuities & insurance spread deals

What changed: For years, the industry leaned on PTE 84-24 to shoehorn insurance commissions and annuity sales into ERISA plans. In 2016, DOL tightened 84-24—excluding variable and fixed-indexed annuities from the easy path and pushing them into stricter conditions (then a “best-interest contract” framework). Even with later rule churn, the Federal Register record shows DOL’s rationale: these products are complex, conflict-heavy, and need rigorous conditions if sold at all. Federal Register+1
Bottom line: If a dual-registered advisor/recordkeeper steers a plan into an insurer’s general account, separate account, or annuity sleeve and they’re capturing commissions, revenue share, or spread profits, you have a textbook §406(b) self-dealing risk unless an exemption (strictly) fits—rare in practice.  I write about this in more detail at https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/

3) Private equity/credit, real assets, crypto—often via CIT wrappers

If alternatives are smuggled into state-regulated CIT target-date funds, you can stack conflicts: the trust company/recordkeeper affiliation, sub-adviser fees, valuation discretion, and liquidity gates. The sales pitch is “institutional and cheaper,” but if the governance is weak and disclosures thin, §406(a)/(b) issues multiply (and the exemption case gets harder to carry). (My Shnitser-anchored pieces cover the regulatory gap; this section is the PT lens.)  I write about this in more detail at https://commonsense401kproject.com/2025/11/02/target-date-funds-in-state-regulated-collective-investment-trusts-citsrisk-and-the-basis-for-a-prohibited-transaction-claim/

“Everything’s a PT” (industry line) vs. how exemptions really work

Two widely cited pro-industry takes are now circulating:

  • Doran (2025) argues Cunningham over-reads §406(a)(1)(C), complaining it would outlaw ordinary services unless §408(b)(2) is read into the claim itself. But that’s exactly what the Supreme Court rejected: exemptions are affirmative defenses. The statute’s structure—§406 prohibitions / §408 exemptions—controls. The practical upshot isn’t to ban recordkeeping; it’s to force fiduciaries to prove services are necessary and compensation reasonable. That’s healthy discipline, not “outlawing the ordinary.”
  • Oringer & Rabitz (2023/24) present the sophisticated, markets-friendly view of ERISA practice, emphasizing how lawyers help “run the ERISA gauntlet” so plans can access advanced strategies. Fair—but that sophistication doesn’t erase §406(b) self-dealing or §406(a) party-in-interest payments. If a structure pays affiliates, layers platform fees, or hides spread profits, you’re back in PT land unless the exemption conditions are met—with evidence.

For balance, consumer-leaning analysis on fiduciary standards (including how DOL’s ESG detours were used to chill scrutiny) underscores that ERISA’s lodestar remains exclusive benefit, prudence, and loyalty—and that PT prohibitions are the teeth behind those duties.

And if you want the long view, David Pratt’s classic treatments of fiduciary/“investment advice” rulemakings show why so many “ordinary” sales models were always dancing on the edge of ERISA’s prohibited-transaction cliff.

Appendix – Key Practitioner Quotes & Authorities

A. Practitioner Q&A Insights (Theado & Naegele, Wickens Herzer Panza)

  1. “404(c)… is an affirmative defense… sponsors still have retained fiduciary duties… including prudent selection and monitoring of the plan’s investment alternatives.”
    — Theado & Naegele, Litigating an Employee Benefit Claim (Part 2), p. 5.
  2. “The fiduciary must avoid a participant or trustee investment that could result in a prohibited transaction… even if you qualify under §404(c).”
    — Ibid. p. 5.
  3. “If the 3(38) fiduciary does a really lousy job, then plan officials and 3(21) fiduciaries will ultimately be held responsible because they selected the adviser and failed to properly monitor those activities.”
    — Theado & Naegele, Can You Really Avoid ‘Fiduciary Liability’? (Part 2), left column.
  4. “Service agreements that say ‘we are not taking responsibility’ or include hold-harmless clauses are not dispositive of fiduciary status.”
    — Ibid., right column.
)

https://www.millerchevalier.com/publication/erisa-edit-supreme-court-issues-decision-favorable-plaintiffs-erisa-pleading-standards

https://www.groom.com/resources/cunningham-v-cornell-supreme-court-lowers-bar-for-erisa-406-claims/

Target Date Funds in State-Regulated Collective Investment Trusts (CITs):Risk and the Basis for a Prohibited Transaction Claim

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I. Introduction

Defined Contribution (DC) plans—primarily 401(k)s and 403(b)s—now hold over $12 trillion in assets and have become the dominant way Americans save for retirement. Within these plans, Target Date Funds (TDFs) are the default investment option for most participants (QDIA). Increasingly, TDFs are being housed in Collective Investment Trusts (CITs) rather than SEC-registered mutual funds.

While many large financial firms market CITs as “institutional” or “low cost,” the truth, as Professor Natalya Shnitser (Boston College Law School) has documented, is that CITs operate in a poorly regulated gray zone. Her 2023 paper, Overtaking Mutual Funds: The Hidden Rise and Risk of Collective Investment Trusts, demonstrates how this parallel financial system has emerged largely outside of federal securities law, relying on weak or uneven state banking oversight that leaves participants vulnerable to undisclosed conflicts and high-risk investments.   In May 2023, SEC chair Gary Gensler sounded the alarms on CITs:

Rules for these funds lack limits on illiquid investments and minimum levels of liquid assets. There is no limit on leverage, [nor any] requirement for regular reporting on holdings to investors…”.

The Department of Labor’s EBSA has largely abdicated enforcement of investment-related fiduciary issues due to resource constraints and political pressure. Consequently, private litigation under ERISA has become the key mechanism for accountability. Under Cunningham v. Cornell, arrangements that embed undisclosed conflicts of interest can be litigated as Prohibited Transactions under ERISA §406, placing the burden of proof on the fiduciary to demonstrate that an exemption applies.

TDFs held in state-regulated CITs are therefore emerging as one of the most dangerous and least transparent areas in the retirement system.

II. The Regulatory Gap: State Trust Oversight and Hidden Alternatives

Shnitser’s analysis makes clear that while some CITs are administered by national banks subject to OCC oversight, many others are state-chartered trusts subject to fragmented and permissive regulation. These state agencies often lack capital markets expertise, do not require audited disclosures, and impose no meaningful restrictions on portfolio composition.

This weakness has allowed some CITs to quietly include or prepare to include assets that would be illegal or impractical in SEC-registered mutual funds, including:

  • Private equity and private credit
  • Illiquid real estate partnerships
  • Annuity or general-account insurance contracts
  • Cryptocurrency or blockchain-linked investments

Once these assets are admitted under state trust law, participants lose key protections of the Investment Company Act of 1940—including daily liquidity, mark-to-market valuation, and public reporting.

Even industry-cited CITs—such as those from Vanguard, Fidelity, or T. Rowe Price—may hold only transparent securities today, but the absence of federal oversight means that they could add higher-risk alternatives in the future without participant consent or public disclosure.

III. Fiduciary Exposure: Why This Creates a Prohibited Transaction Risk

Under ERISA §406(a) and (b), a fiduciary commits a Prohibited Transaction when plan assets are used for the benefit of a “party in interest,” or when the fiduciary engages in self-dealing or acts in a conflict of interest.  Target date funds as default options (QDIA) have an even higher level of fiduciary exposure.

CIT structures create multiple layers of potential conflicts:

  1. Affiliated Fiduciary Self-Dealing – Many recordkeepers (e.g., TIAA, Prudential, Principal) both manage and distribute their own CITs. The plan fiduciary’s choice of an affiliated or revenue-sharing CIT is a per se conflict unless it qualifies for an exemption.
  2. Opaque Valuation and Fee Flows – Hidden sub-advisory, insurance, and wrap fees are common in hybrid CITs. Without SEC filings, participants and plan sponsors cannot verify total expenses or profit spreads.
  3. Commingling with Proprietary Insurance or Private Assets – When a CIT invests in an insurer’s general or separate account, plan assets are effectively transferred for the benefit of that insurer—a clear §406(b) violation.

As Cunningham v. Cornell established, once a plaintiff demonstrates the existence of a conflict, the burden shifts to the fiduciary to prove that the transaction was both reasonable and exempted by law. In the CIT context, that burden is nearly impossible to meet given the lack of transparency.

IV. The “Four Sets of Books” Problem

In a 2025 Commonsense401kProject article, “Four Sets of Books: How Trump’s 401(k) Push Opens the Door to Accounting Chaos,” the CIT TDF structure was shown to embed four separate accounting layers:

  1. Trust-level accounting – the CIT’s aggregate book, typically opaque.
  2. Sub-advisor books – alternative and private asset managers reporting unaudited valuations.
  3. Insurance affiliate accounts – general or separate account structures blending spread-based returns.
  4. Recordkeeper wrap or platform fees – compensation hidden in layered service agreements.

Each layer can obscure the true cost and risk exposure of plan assets, creating ideal conditions for spread extraction, kickbacks, or prohibited self-dealing.

V. Industry Narrative vs. Reality

Industry lobbyists and even members of the DOL Advisory Council have claimed that CITs are “federally regulated” under the OCC and therefore safe. Shnitser’s research, and my July 2024 testimony before the DOL Advisory Committee, dismantle that narrative. In fact:

  • Many CITs are not OCC-regulated at all—they are state-chartered and subject only to weak local trust-law review.
  • The DOL’s Advisory Opinion 2025-04A effectively greenlighted insurers and private-equity firms to use these permissive CIT vehicles to circumvent ERISA’s prohibited-transaction protections.
  • As my Commonsense401kProject pieces show (“TIAA Leads the Way to 401k Target Date Corruption,” Sept. 22, 2025;https://commonsense401kproject.com/2025/09/22/tiaa-leads-the-way-to-401k-target-date-corruption/

     “A Multi-Billion Dollar Gift to the Private Equity and Insurance Industry,” Sept. 24, 2025), these weak frameworks are already being exploited.

VI. Litigation and Enforcement Outlook

Litigators and whistleblowers can use Shnitser’s work as the academic and empirical foundation for a new generation of ERISA claims targeting state-regulated CITs.
Key claims include:

  • Failure of prudence (§404) – Using opaque state-regulated CITs when transparent mutual funds are available.
  • Prohibited Transaction (§406) – Affiliated, self-dealing, or revenue-sharing arrangements in proprietary CITs.
  • Failure to monitor (§405) – Trustees’ inaction in the face of known regulatory gaps.

As with Cunningham v. Cornell, plaintiffs need only show the existence of conflicted structures; the defense must then justify them. Given the opacity of CITs, many fiduciaries will be unable to meet that burden.

VIII. Conclusion

Natalya Shnitser’s scholarship provides the intellectual and evidentiary backbone for understanding why state-regulated CITs threaten the fiduciary integrity of the U.S. retirement system. Combined with field evidence from the Commonsense401kProject, it shows that CIT-based TDFs have become the next frontier of prohibited-transaction litigation.

While some CITs—like those from Vanguard or Fidelity—may temporarily resemble their mutual-fund counterparts, the weak state controls allow hidden, illiquid, or high-risk alternatives to be introduced later.

When that happens, participants’ savings will be exposed to the same structural dangers—spread extraction, valuation manipulation, and self-dealing—that ERISA was designed to prevent. Expanding Shnitser’s framework and demanding transparency for CIT TDFs is not just good policy; it is essential fiduciary protection.

Natalya Shnitser  Boston College – Law School November 2023  Overtaking Mutual funds the hidden rise and risk of Collective Investment Trusts     https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4573199 pg.25

SEC May 2023 Gary Gensler  https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-investment-company-institute-05252023#_ftnref27

Damages -Parties in Interest, Prohibited Transactions, & Disgorgement: TIAA Case Study
DOL Advisory 2025-04A: A Multi-Billion Dollar Gift to the Private Equity and Insurance Industry
TIAA Leads the Way to 401(k) Target Date Corruption
Keep Private Equity out of 401(k) Target Date Funds
4 Sets of Books: How Trump’s 401(k) Push Opens the Door to Accounting Chaos
Target Date Benchmarks – ChatGPT
ERISA Advisory Council Testimony released
Crypto, Private Equity, Annuity Contracts Are Impossible to Benchmark
Chris Tobe DOL Testimony
Toxic Target Date – Case Study of the Worst of the Worst
Problems With Target Date Funds

Annuities Are a Prohibited Transaction — DOL Exemptions Do Not Work Update 11/25/25

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Annuities are Prohibited

Under ERISA §406, any transaction between a plan and a “party in interest” — such as the plan’s insurer, recordkeeper, or trustee — is per se prohibited. That includes the purchase or maintenance of a fixed annuity contract from an insurer that profits from spreads, affiliated services, or undisclosed compensation.

The insurance industry routinely claims that these annuity deals qualify for a Department of Labor “Prohibited Transaction Exemption” (PTE), such as PTE 84-24 or PTE 2020-02. But in decades of reviewing contracts and filings, I have never seen a single annuity that could actually pass the exemption test.

Each PTE requires that:

  • Compensation be reasonable and disclosed;
  • The transaction be in the best interest of participants; and
  • No misleading statements be made.

Annuities fail on all three. They hide 100–150 basis points of spread profits; they trap plan assets with no downgrade or exit provisions; and their “guarantees” transfer risk from the plan sponsor to participants — all while enriching the insurer.

Even if an annuity could theoretically meet those tests — say, if it included a downgrade clause, full fee disclosure, and liquidity — the burden of proof would still rest with the fiduciary. The Second Circuit’s 2025 decision in Cunningham v. Cornell University clarified that once a prohibited transaction is alleged, it is the plan sponsor’s burden to prove an exemption applies.

In practical terms:

  • Every fixed annuity is a prohibited transaction by default.
  • The plan fiduciary must prove — not assume — that an exemption is valid.
  • And in the real world, the insurance industry’s own opacity ensures they cannot meet that test.

The DOL’s “comfort letters” and outdated exemptions were drafted for a different era. In today’s world of offshore reinsurance, undisclosed spreads, and absent downgrade clauses, annuity exemptions are fiction. Fiduciaries relying on them are gambling with participants’ retirement security — and their own liability.

Appendix November 25, 2025

In the current 4 ongoing cases of fixed annuities as Prohibited Transactions filed since Cunningham V. Cornell,  the defense is primarily trying to delay since in my opinion I think they know they have no valid legal defense.

Finally at the end of November a Motion to Dismiss came out that was full of deflections and noise and nothing of substance.

In the entire 27-page Motion to dismiss brief, plan:

❌ Never invokes §408

❌ Never claims PTE 84-24 applies

❌ Never claims §408(b)(2) applies

❌ Never argues the annuity contract is exempt under any DOL rule

❌ Never argues Annuities spread is “reasonable compensation”

❌ Never claims the plan assets are not being used for the insurer’s benefit

❌ Never argues the fiduciaries obtained “no less favorable terms than arms-length”

NOTHING

ERISA clearly says:

✔ Any transaction with any party-in-interest involving plan assets is prohibited.

✔ Any indirect compensation is prohibited.

✔ Any fiduciary self-dealing is prohibited.

Plan does not dispute ANY of these elements.
Thus:

There is no legally valid exemption defense anywhere in the MTD. Everything is noise. There appears to be no real defense for Fixed annuities as Prohibited Transactions

Appendix: Single-Entity Credit Risk, Diversification, and the Illusory Safety of Annuities

A. Single-Entity Credit Risk and the Core Fiduciary Principle of Diversification

One of the most fundamental principles of fiduciary investing—embedded in ERISA §404(a)(1)(C)—is diversification. The purpose of diversification is not to enhance returns, but to eliminate uncompensated risk, particularly the risk that outcomes hinge on the solvency or behavior of a single counterparty. Courts, regulators, and modern portfolio theory all recognize that avoidable single-entity risk is presumptively imprudent unless justified by extraordinary countervailing benefits.

Insurance annuities offered in 401(k) plans violate this principle at their core. Whether structured as general-account fixed annuities, group annuity contracts or,pension risk transfer annuities. or insurance-wrapped collective investment trusts, these products expose participants to concentrated credit risk in a single life insurer. The participant’s principal and credited interest are not diversified across a portfolio of issuers; they are contingent on the ongoing solvency, capital management, reinsurance strategy, and asset allocation decisions of one institution.

By contrast, virtually every alternative capital-preservation vehicle available to ERISA fiduciaries—mutual funds, pooled stable-value funds, diversified bond funds—spreads credit exposure across dozens or hundreds of issuers and multiple guarantors. The elimination of single-issuer dependency is precisely the risk control diversification is meant to achieve.

The persistence of annuities in 401(k) plans therefore represents a stark departure from baseline fiduciary norms.

B. Why Annuities Are Structurally Inconsistent with ERISA Diversification Standards

ERISA does not require fiduciaries to eliminate all risk, but it does require them to eliminate unnecessary and uncompensated risk. Single-entity credit exposure in annuities is both.

From a risk-return perspective, annuities offer no unique benefit that requires concentrating credit exposure in one insurer:

  • They do not provide higher expected returns than diversified alternatives.
  • They do not provide superior liquidity.
  • They do not provide inflation protection.
  • They do not provide diversification benefits relative to other plan assets.

Indeed, as shown in prior work on the stable-value efficient frontier, single-insurer annuities typically lie below the efficient frontier—offering lower returns at higher risk than pooled stable-value products. When a fiduciary selects a product that increases credit risk while simultaneously reducing expected return, the decision cannot be reconciled with prudence.

The industry’s response—that insurers are “highly rated” or “heavily regulated”—misses the fiduciary point. Diversification is not optional merely because a counterparty is perceived as safe. Enron, Lehman Brothers, AIG, and Silicon Valley Bank were all highly rated until they were not. ERISA fiduciaries are not permitted to gamble participant assets on the continued health of a single institution when diversification is readily available.

C. Downgrade Provisions: The Risk Control That Annuities Systematically Avoid

One of the most telling features of annuity contracts used in retirement plans is the absence of meaningful downgrade provisions. In sophisticated fixed-income investing, downgrade triggers are standard risk-management tools. They allow an investor to:

  • Terminate exposure if a counterparty’s credit deteriorates,
  • Demand collateral or restructuring,
  • Reallocate assets before losses become irreversible.

In the annuity context, downgrade provisions would allow a plan fiduciary to exit or mitigate exposure if the insurer’s credit profile weakens—precisely the moment when participant assets are most at risk.

Yet most annuity contracts offered in 401(k) plans either:

  • Contain no downgrade trigger, or
  • Include downgrade language so weak or discretionary as to be meaningless, or
  • Impose punitive market-value adjustments that deter fiduciaries from exercising exit rights.

This omission is not accidental. Downgrade provisions reduce insurer profitability by constraining asset allocation, limiting leverage, and curtailing the ability to extract spread income from riskier assets. As a result, insurers systematically resist contract terms that would allow fiduciaries to respond rationally to credit deterioration.

From a fiduciary perspective, this is indefensible. A product that locks participants into a deteriorating credit exposure—while preventing fiduciaries from acting—is fundamentally inconsistent with prudence and loyalty.

D. Credit Default Swaps: The Risk Metric the Industry Does Not Want Fiduciaries to See

Credit default swaps (CDS) provide a market-based, continuously updated measure of default risk. Unlike credit ratings, CDS prices respond in real time to changes in asset quality, leverage, liquidity, and systemic stress. For sophisticated investors, CDS spreads are a primary tool for monitoring counterparty risk.

As demonstrated in prior analysis, CDS markets often price life insurers as meaningfully riskier than their ratings suggest. In some cases, CDS-implied default probabilities are an order of magnitude higher than what fiduciaries would infer from insurer marketing materials or statutory filings.

Yet CDS information is almost never disclosed or discussed in the annuity selection process. Insurers do not reference CDS spreads in participant disclosures, and plan fiduciaries are rarely encouraged—by consultants, recordkeepers, or insurers themselves—to examine them.

The reason is straightforward: acknowledging CDS-implied risk would undermine the core sales narrative of annuities as “safe” and “guaranteed.” Moreover, if fiduciaries explicitly recognized this risk, they would be compelled either to diversify away from single-insurer exposure or to demand risk-mitigating features that reduce insurer profitability.

Thus, the industry’s silence on CDS is not a neutral omission; it is a structural feature of a business model dependent on opacity.

E. Why the Suppression of Risk Controls Matters Under ERISA §406

The systematic avoidance of diversification, downgrade protections, and market-based credit risk metrics has direct implications under ERISA’s prohibited-transaction rules.

Annuities are per se transactions with a party in interest. To be lawful, they must qualify for an exemption. But exemptions require that compensation be reasonable and that transactions be in participants’ best interests.

A product that:

  • Concentrates risk in a single counterparty,
  • Prevents fiduciaries from responding to credit deterioration,
  • Suppresses widely accepted risk metrics,
  • And delivers inferior risk-adjusted returns,

cannot plausibly be described as “reasonable” or “in the best interests” of participants.

Moreover, the insurer’s resistance to downgrade provisions and risk transparency reveals the economic conflict at the heart of the annuity model: participant safety and insurer profitability move in opposite directions. ERISA does not permit fiduciaries to subordinate participant protection to a service provider’s profit margins.

F. Fiduciary Implications

Once single-entity credit risk is properly framed, the fiduciary implications become unavoidable:

  1. Diversification is not optional under ERISA; annuities violate it by design.
  2. Risk-mitigation tools exist (downgrade provisions, CDS monitoring, diversification), but are deliberately excluded from annuity contracts.
  3. The exclusion benefits insurers financially, not participants.
  4. Failure to address these risks cannot be cured by disclosure alone, because participants cannot diversify away insurer credit risk within the product.

Accordingly, annuities in 401(k) plans are not merely risky—they are structurally misaligned with ERISA’s fiduciary architecture. This misalignment supports the conclusion that, absent radical redesign, annuities should be treated as prohibited transactions rather than permissible investment options.

Annuity Risk measured by Credit Default Swaps (CDS)
Why Offshore Structures and Weak State Regulation Make Most Annuities ERISA “Prohibited Transactions”
Annuity Risks and Hidden Fees: Dangerous to Ignore, Difficult to Measure Damages
Weak Standards Make Annuities Prohibited Transactions in ERISA Plans
How Insurers Are Making Their Own Annuities More Likely to Be Prohibited Transactions
State Guarantee Associations behind Annuities are a Joke
Annuities are Prohibited Transactions
Annuities flunk Prohibited Transactions Exemption – SCOTUS ruling will open floodgates of litigation.
SCOTUS’ 9-0 ERISA decision in Cunningham v. Cornell University case– confirms my view on Annuities as Prohibited Transactions