TIAA and its academic partners want you to believe they have discovered a free lunch in retirement investing: add a fixed annuity to a target date fund, and you magically get higher returns and lower risk.

That claim is now being aggressively promoted through a new TIAA Institute / Charles River Associates (CRA) paper, The Impact of TIAA Traditional in Target Date Glidepaths. The paper concludes that target date funds (TDFs) including TIAA Traditional “outperform” conventional TDFs across virtually every scenario—especially because the annuity appears to reduce volatility while maintaining bond-like returns.

There’s just one problem.

The “low risk” that drives these results isn’t real, and the analysis completely ignores the upcoming legal issue: fixed annuities issued by TIAA are prohibited transactions under ERISA when mixed into 401(k) target date funds.

This is not an academic quibble. It is the same kind of modeling sleight-of-hand that courts have rejected in employer stock cases, stable value cases, and valuation fraud cases for decades.

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The Core Trick: Fake Volatility

TIAA’s modeling rests on a simple but profoundly misleading assumption: that TIAA Traditional has lower volatility than bonds.

Why does it appear that way?

Because annuities are not marked to market.

TIAA Traditional’s returns are not set by market prices. They are set by internal crediting decisions, made at TIAA’s discretion, based on assets held in TIAA’s opaque general account. Losses are smoothed. Gains are withheld. Risk is buried on the insurer’s balance sheet.

That doesn’t make risk disappear—it just hides it.

Calling this “lower volatility” is like calling a non-traded REIT safer than public real estate because the price doesn’t move. Courts don’t buy that logic, and fiduciaries shouldn’t either.

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Bonds and Annuities Are Not the Same — TIAA Admits This (Then Ignores It)

In a quiet but telling footnote, the TIAA Institute paper admits:

“Per the Investment Company Act of 1940, an annuity cannot be part of a mutual fund.”

That should have been the end of the analysis.

Instead, TIAA proceeds to do exactly what the law forbids in substance if not in form: it embeds an insurance contract inside collective investment trusts and managed accounts and then models it as if it were a bond fund.

But annuities are not bonds:

• They are illiquid
• They cannot be freely sold
• They often cannot be exited without delay or penalty
• Annuitization is frequently irrevocable
• There are no downgrade or termination rights
• Participants bear insurer credit risk, not market risk

Diversification theory assumes liquidity. Once liquidity is gone, correlation statistics are meaningless. You are not “rebalancing” risk—you are locking it in.

---

The Prohibited Transaction Elephant in the Room

Most strikingly, the TIAA Institute analysis never mentions ERISA §406 prohibited transactions. Not once.

That omission is not accidental. It is essential to the conclusion.

Here is the reality TIAA’s modeling ignores:

• TIAA is the recordkeeper
• TIAA is the annuity issuer
• TIAA sets the crediting rates
• TIAA retains the spread
• TIAA is therefore a party in interest multiple times over

Under ERISA, when a fiduciary causes a plan to transact with itself—or retain a product that generates undisclosed compensation—that transaction is presumptively illegal, regardless of performance.

And make no mistake: TIAA Traditional generates compensation.

---

“No Fees” Is a Myth — The Spread Is the Fee

TIAA repeatedly claims that Traditional has “no fees.” That is simply false.

The compensation is taken as spread—the difference between what TIAA earns in its general account and what it credits to participants. Independent reporting, including NBC News, has reported that the hidden spread is around 150 basis points annually.

Importantly, this spread figure was not disputed by TIAA when given the chance by NBC.

Spread is compensation. Undisclosed compensation retained by a fiduciary is the textbook definition of ERISA §406(b)(1) self-dealing.

No amount of glidepath modeling can legalize that.

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Performance Does Not Cure a Prohibited Transaction

This is where TIAA’s entire argument collapses.

After the Supreme Court’s decision in Cunningham v. Cornell, plaintiffs do not need to plead around exemptions. Defendants must prove them.

That means:

• You do not get to justify self-dealing because a model looks good
• You do not get to ignore conflicts because returns are “competitive”
• You do not get to replace law with regression analysis

If a transaction is prohibited, the remedy is disgorgement, not benchmarking.

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Why This Matters for Courts, Fiduciaries, and Plaintiffs

Target date funds are now the default investment for tens of millions of workers. Embedding insurance contracts inside them—without liquidity, transparency, or ERISA-compliant compensation structures—creates a perfect storm:

• Participants cannot exit
• Fiduciaries cannot monitor properly
• Conflicts are structural, not incidental
• Losses may not show up until it’s too late

We have already seen courts reject “prudent process theater” in other contexts. The same reckoning is coming here.

.

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Bottom Line

TIAA’s target date modeling works only if you accept three false premises:

1. That hidden risk is no risk
2. That illiquid insurance contracts are bonds
3. That ERISA’s prohibited transaction rules don’t apply

None of those premises survives serious scrutiny.

Once annuities are properly treated as what they are—ongoing transactions with a party in interest that generate undisclosed compensation—the supposed diversification and risk reduction disappear.

What’s left is a glidepath built on a legal and economic illusion.

---

Related Commonsense 401(k) Project articles:

• TIAA Exposed for Excessive Hidden Annuity Spread Fees — Again
• https://commonsense401kproject.com/2025/09/21/tiaa-exposed-for-excessive-hidden-annuity-spread-fees-again/

Appendix: TIAA Is Not Alone — Target Date Funds Are Quietly Filling Up with Insurance Contracts

One of the most predictable responses to criticism of TIAA’s target-date modeling is:
“This isn’t just TIAA — everyone is doing it.”

That response is meant to normalize the problem. In reality, it does the opposite.

Recent Morningstar reporting confirms what fiduciary litigators and independent analysts have been seeing for several years: a growing number of target-date funds are quietly embedding fixed annuities inside 401(k) default investments — outside SEC regulation, with minimal transparency, and with little understanding by plan sponsors or participants of what they actually own.

This appendix explains why that trend is dangerous, legally flawed, and ripe for litigation.

---

Morningstar Confirms the “Hidden Trend”

In a 2025 article titled “A Hidden Trend Is Changing 401(k) Plans — Here’s What It Means for Investors,” Morningstar documents the increasing use of annuity-based components inside target-date strategies, particularly in large plans that use collective investment trusts (CITs).

Morningstar presents this as an innovation. It is better understood as regulatory arbitrage.

Key points Morningstar inadvertently confirms:

• These target-date products are not SEC-registered mutual funds
• They are primarily state-regulated CITs or managed accounts
• The annuity components are illiquid, opaque, and insurer-controlled
• Risk and return characteristics are not comparable to securities

That matters, because SEC-registered mutual funds correctly prohibit fixed annuities. They have done so for decades, precisely because annuities:

• Are not market-priced securities
• Cannot be fairly valued daily
• Introduce issuer credit risk
• Embed compensation through spread rather than disclosed fees

CITs, by contrast, sit in a regulatory gray zone — particularly state-chartered CITs, which often lack meaningful federal oversight.

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These Are Not Synthetic Stable Value Products

Industry defenders often try to blur the lines between:

• Synthetic stable value (e.g., Vanguard RST, Fidelity MIPS), and
• Insurance general-account or separate-account annuities

They are not the same.

Synthetic stable value:

• Uses transparent bond portfolios
• Has independent wrap providers
• Has explicit fees
• Has market-observable returns
• Generates little or no insurer spread profit

By contrast, the annuities now appearing in target-date funds are, in my opinion, almost entirely general-account (GA) or separate-account (SA) insurance products, for a simple reason:

There is no meaningful spread profit in true synthetic stable value.

Insurers and recordkeepers are not pushing annuities into target-date funds for diversification. They are doing it because spread is far more profitable than explicit fees — and far harder for fiduciaries to monitor.

---

Empower Pushes the Envelope Even Further

Empower has gone beyond traditional fixed annuities and is now actively marketing:

• Index annuities, and
• Target-date structures that explicitly combine annuities with private equity exposure, including partnerships with Blackstone.

Empower proudly announced the launch of what it called the “first ever zero-fee index fund.” That claim deserves skepticism.

“Zero fee” does not mean “no compensation.” It almost always means:

• Compensation is embedded
• Returns are engineered
• Pricing is discretionary
• Spread replaces fees

At the same time, Empower has partnered with Blackstone to insert private equity into retirement default investments — layering illiquidity on top of illiquidity, and valuation opacity on top of opacity.

This is not diversification. It is complexity as camouflage.

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The Great Gray Stable Value Appendix Tells the Truth

The most revealing disclosure may come not from critics, but from industry documents themselves.

In an appendix to the Great Gray Collective Investment Trust stable value fund, the sponsor discloses material issues with the underlying Empower General Account Fixed Annuity.

Most importantly, the document states that the crediting rate process is “discretionary and proprietary.”

That single sentence is devastating.

It is a direct admission that:

• Returns are not the transparent output of a portfolio
• Returns are not market-based
• Returns are not priced competitively
• Returns are the product of internal insurer decision-making

That is the definition of general-account spread mechanics.

For ERISA purposes, it means:

• Participants do not receive the return of the assets backing the contract
• The insurer retains the difference
• The compensation is undisclosed
• The fiduciary cannot independently verify reasonableness

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Why This Matters Under ERISA

Once fixed annuities are embedded inside target-date funds:

1. The plan is in an ongoing transaction with a party in interest
2. Compensation is taken through spread
3. The fiduciary cannot monitor or benchmark returns
4. Liquidity is lost without participant consent
5. Risk is shifted from markets to the insurer’s balance sheet

Performance modeling does not cure any of that.

After Cunningham v. Cornell, fiduciaries cannot rely on:

• “Everyone is doing it”
• “The glidepath looks good”
• “The model outperforms”

If the structure is a prohibited transaction, the remedy is disgorgement, not better charts.

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The Bigger Picture

Target-date funds were supposed to simplify retirement investing.

Instead, they are becoming the Trojan horse through which:

• Fixed annuities
• Index annuities
• Private equity
• Opaque insurance economics

are quietly introduced into ERISA plans — without SEC oversight, without transparent pricing, and without meaningful participant understanding.

TIAA may be the most visible example. It is no longer the only one.

---

Bottom Line

Morningstar is right about one thing:
There is a hidden trend changing 401(k) plans.

But what it means for investors is not innovation or safety.

It means:

• Less transparency
• More conflicts
• More prohibited transactions
• And a coming wave of litigation

Target-date funds are no longer just glidepaths.

They are becoming distribution platforms for insurance spread and alternative-asset fees — and ERISA was never designed to allow that.

SOURCES

https://www.morningstar.com/funds/hidden-trend-is-changing-401k-plans-heres-what-it-means-investors

https://www.empower.com/press-center/empower-launches-first-ever-zero-fee-index-fund

.  https://greatgray.com/wp-content/uploads/2025/05/0.08-Stable-Value-Funds-2024-Final.pdf  

Wall Street Journal Exposes Target Date CIT Corruption — Opens up Fiduciary Litigation

On January 9, 2026, the U.S. Department of Labor filed an amicus brief defending Pension Risk Transfer (PRT) annuities—arguing, astonishingly, that stripping retirees of ERISA protections, PBGC insurance, and diversified pension trusts causes no material harm to participants.

Click to access EBSA20260066.pdf

That position is not just wrong. It is dangerous.

This brief is not a neutral statement of law. It is an industry advocacy document that—if accepted by courts—would effectively legalize the quiet dismantling of defined benefit pensions, one annuity contract at a time.

Below is why the DOL’s position is fundamentally inconsistent with ERISA, economics, and basic fiduciary duty.

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1. The DOL’s Central Fiction: “Nothing Material Changes for Participants”

The DOL claims that when a pension is transferred to an insurer via a PRT, participants are “entitled to the same benefits” and therefore suffer no cognizable harm.

This is demonstrably false.

When a PRT occurs, participants immediately lose:

• PBGC insurance — a federal backstop worth hundreds of thousands of dollars per participant
• ERISA Title I fiduciary protections — prudence, loyalty, prohibited transaction rules
• Federal disclosure and reporting rights
• Diversification of backing assets — replaced with a single insurer credit
• Any ability to enforce ERISA standards going forward

Calling this “no material change” is like saying replacing a diversified investment portfolio with a single unsecured corporate bond is “economically equivalent.”

It isn’t.
And everyone in finance knows it.

https://www.dol.gov/newsroom/releases/ebsa/ebsa20260109-0

👉 See:

• PRTs: Why Courts Keep Ignoring the Dangers
  https://commonsense401kproject.com/2025/11/06/prts-why-courts-keep-ignoring-the-dangers-of-pension-risk-transfer-annuities-and-why-these-cases-must-be-appealed/

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2. PBGC Insurance Is Real Money — Not a Technicality

The DOL brief treats PBGC insurance as if it were a formality that can be discarded without consequence.

That position collapses under basic math.

PBGC publishes maximum guaranteed benefits every year. For a retiree age 65 in 2025, the present value of PBGC protection exceeds $1.1 million. Lose that protection, and the participant bears the full downside risk of insurer impairment, downgrade, or insolvency.

After a PRT:

• PBGC coverage is gone forever
• State guaranty associations are capped, fragmented, and far weaker
• There is no federal backstop

If PBGC insurance were meaningless, Congress would not have created it, funded it, or regulated it for 50 years.

👉 See:

• DOL’s Flawed PRT Report
  https://commonsense401kproject.com/2025/10/24/dols-pension-risk-transfer-flawed-report/

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3. The Brief Abuses Thole to Create Fiduciary Immunity

The DOL leans heavily on Thole v. U.S. Bank to argue that participants lack standing unless insurer failure is “certainly impending.”

This is a gross misapplication of Thole.

Thole addressed fluctuations in plan investments within an ongoing ERISA plan. It did not bless fiduciaries’ ability to:

• Strip statutory protections
• Transfer participants to weaker legal regimes
• Ignore credit and downgrade risk
• Concentrate retirement security in a single insurer

Loss of ERISA protections and PBGC insurance is a present injury, not a speculative one.

Under the DOL’s logic, fiduciaries could sell pensions to any insurer—no matter how risky—so long as collapse has not yet occurred.

That would turn ERISA into a “wait until retirees are harmed” statute, which is the opposite of what Congress intended.

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4. IB 95-1 Is Being Quietly Rewritten as a “Check-the-Box” Safe Harbor

The DOL insists that Interpretive Bulletin 95-1 is purely about “process,” not outcomes.

That is revisionist history.

IB 95-1 requires fiduciaries to act for the purpose of obtaining the safest available annuity. Safety is not a memo. It is a risk outcome.

Yet under the DOL’s litigation posture:

• CDS spreads are ignored
• Downgrade risk is ignored
• Contractual lock-ins are ignored
• Lack of termination or portability rights is ignored

A “process” that predictably results in riskier annuities is not prudent. It is negligent.

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5. The Most Damning Omission: Downgrade Risk Doesn’t Exist (According to DOL)

The amicus brief never seriously grapples with downgrade risk—the single most important risk in long-dated annuity contracts.

PRT annuities typically:

• Lack downgrade-trigger exit rights
• Lack of collateral posting requirements
• Lock participants into deteriorating credits
• Transfer upside to insurers, downside to retirees

Without downgrade provisions, participants are trapped in a slow-motion credit failure with no remedy.

If PRT annuities were truly safe, insurers would offer downgrade protections.
They don’t—because doing so would reduce profits and increase capital requirements.

👉 See:

• Retirement Plans Must Demand Downgrade Provisions for Any Annuity
  https://commonsense401kproject.com/2026/01/09/retirement-plans-must-demand-downgrade-provisions-for-any-annuity/

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6. “No Annuity Has Ever Failed” Is Not a Fiduciary Standard

The DOL reassures courts that no PRT annuity has failed yet.

That argument has been used before:

• Subprime CDOs (pre-2008)
• AIG Financial Products
• Silicon Valley Bank

ERISA is a forward-looking fiduciary statute, not a tombstone statute.

By the time an annuity fails, retirees have already lost.

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7. ERISA Was Designed to Avoid Exactly This Outcome

The DOL’s brief celebrates the shift from federal ERISA protections to state insurance regulation.

That is historically backwards.

ERISA was enacted because:

• State regulation was fragmented
• Workers were unprotected
• Promises were broken

PRTs reverse that progress—quietly and permanently.

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The Bottom Line

The Department of Labor’s PRT amicus brief is not pro-worker.
It is pro-insurer, pro-employer, and anti-enforcement.

If courts adopt this framework:

• Fiduciaries will be immune from scrutiny
• PBGC protections can be stripped without consequence
• Downgrade risk will be ignored
• ERISA will become unenforceable until after retirees are harmed

That is not statutory interpretation.
It is regulatory surrender.

PRT cases must be appealed—not just for retirees today, but to preserve the very idea that ERISA means something tomorrow.

Appendix: How Courts Are Weaponizing Thole to Immunize Pension Risk Transfers — The Verizon Case Study

The recent dismissal of the Verizon Pension Risk Transfer (PRT) case by Judge Alvin Hellerstein is a textbook example of how Thole v. U.S. Bank is being misused to eviscerate ERISA’s core protections for defined-benefit pension participants. The decision illustrates precisely why the Department of Labor’s January 2026 PRT amicus brief is so dangerous—and why appellate courts must intervene.

1. The Verizon Plaintiffs Alleged Immediate, Concrete Harm — Not Speculative Injury

The Verizon retirees alleged far more than abstract risk. According to the First Amended Complaint, Verizon transferred $5.7 billion in pension assets covering 56,000 retirees to Prudential (PICA) and RGA, permanently removing participants from:

• ERISA Title I fiduciary protections
• PBGC insurance coverage
• Uniform federal disclosure and enforcement rights

The complaint details that retirees went from uncapped, lifetime PBGC protection to state guaranty association caps—often $250,000–$500,000 per lifetime, depending on state of residence, with immediate haircut risk in states like California (80% cap) 2025-04-25 [dckt 55] PL FIRST A…. in addition the solvency of State guarantee associations are https://commonsense401kproject.com/2025/06/24/state-guarantee-associations-behind-annuities-are-a-joke/ That is not conjecture. That is quantifiable, present economic harm.

Yet the court dismissed the case on standing grounds, holding that because benefits were still being paid today, no Article III injury existed.

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2. This Is Not Thole — This Is the Destruction of Statutory Rights

Thole involved participants in an ongoing defined-benefit plan complaining about plan-level investment losses where benefits remained fully guaranteed by the sponsor and PBGC.

The Verizon case is fundamentally different:

Thole	Verizon PRT
Plan remained intact	Plan terminated
ERISA protections remained	ERISA protections eliminated
PBGC backstop intact	PBGC backstop extinguished
Sponsor still liable	Sponsor fully discharged

Judge Hellerstein nevertheless treated the case as indistinguishable from Thole, holding that loss of ERISA protections, PBGC insurance, and federal enforcement rights is not a cognizable injury unless and until an insurer fails 2026-01-08 [dckt 97] Opinion An….

That reasoning converts ERISA into a post-collapse remedy, not a preventive fiduciary statute.

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3. The Court Ignored Congress’s Explicit Response to Executive Life

The Verizon complaint correctly traced Congress’s reaction to the Executive Life collapse, which wiped out tens of thousands of annuitized retirees in the early 1990s. Congress responded with:

• The Pension Annuitants Protection Act (PAPA)
• A new statutory cause of action under ERISA § 502(a)(9)
• DOL’s Interpretive Bulletin 95-1, requiring fiduciaries to seek the safest available annuity

The Verizon court acknowledged these statutes—but rendered them meaningless by holding that participants cannot sue until after catastrophe strikes.

That reading nullifies § 502(a)(9) entirely.

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4. Downgrade Risk Was Pleaded — and Ignored

The Verizon plaintiffs alleged detailed facts showing that PICA and RGA:

• Relied heavily on affiliated captive reinsurers
• Used Modified Coinsurance (ModCo) to inflate capital ratios
• Had affiliated exposures exceeding $72 billion, dwarfing surplus
• Operated through regulation-light jurisdictions

These are not default allegations. They are downgrade-pathway allegations—exactly the type of slow-motion credit deterioration that destroys annuity value long before insolvency.

Yet the court dismissed these allegations as irrelevant because no payment had yet been missed.

This mirrors the DOL amicus brief’s central flaw: treating annuity credit risk as binary (fail / not fail) rather than probabilistic and dynamic.

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5. The Decision Confirms the Worst-Case Scenario of the DOL’s Amicus Brief

The DOL argues that participants lack standing to challenge PRTs absent imminent insurer collapse. The Verizon decision shows where that logic leads:

• Fiduciaries may ignore downgrade risk
• Fiduciaries may choose cheaper, riskier annuities
• Fiduciaries may strip PBGC protection without consequence
• Courts will dismiss suits with prejudice

In Verizon, the court did exactly that—dismissing the case with prejudice, despite extensive factual allegations, expert declarations, and historical precedent.

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6. The Practical Result: ERISA Becomes Unenforceable in PRT Cases

Under the Verizon / DOL / Thole framework:

• A participant cannot sue before a downgrade
• Cannot sue after a downgrade
• Cannot sue until benefits are cut
• And by then, ERISA no longer applies

This is not statutory interpretation.
It is functional repeal by judicial doctrine.

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Bottom Line

The Verizon decision is not an outlier. It is the inevitable outcome of the DOL’s current litigation posture on PRTs.

By misusing Thole, courts are transforming ERISA from a protective fiduciary statute into a “wait-for-collapse” regime—exactly the failure Congress sought to prevent after Executive Life.

This case should not be the model.
It should be the warning.

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Why This Appendix Matters

This appendix demonstrates, with a real case and a real dismissal, that the DOL’s amicus brief is not theoretical harm—it is already reshaping outcomes. Courts are no longer asking whether annuities are safe. They are asking only whether retirees have already been harmed.

By then, it is too late.

Without them, plans are locked into a death spiral toward default. With them,  annuities can actually work within a responsible fiduciary framework. By Chris Tobe, CFA

All annuities in plans, fixed annuities, and lifetime income annuities in DC plans need downgrade provisions.  However, the largest immediate use is the Pension Risk Transfer (PRT) annuities, which allow defined benefit plans to offload longevity risk. But there’s a hidden structural flaw in most annuity contracts: no downgrade protection. In plain English, that means a plan can pay millions or billions to an insurer and then be held hostage if the insurer’s credit deteriorates.

This is not a hypothetical risk. Recent litigation and real-world defaults show that without contractual protections tied to credit quality, plans are effectively locked into a downward spiral that can lead to underfunding, distress, or worse — a default without protection from any agency like the PBGC.

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What’s a Downgrade Provision — and Why It Matters

A downgrade provision is a contractual term that triggers plan protections if the insurer’s credit rating slips below agreed thresholds. These protections can include:

• Mandatory collateral posting
• Escrow or trust funding for future liabilities
• Termination or transfer rights
• Step-up pricing or premium refunds

In other words: if the insurer’s credit weakens, the plan gains leverage and protection.

Without downgrade protections, plans have no recourse until the insurer fails outright.

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Why Current Annuities Trap Plans in a Death Spiral

Most PRT contracts do not include meaningful downgrade provisions. Plans that sign these deals typically:

1. Pay upfront premiums that are irrevocable
2. Give up the assets and liability control
3. Lose leverage if the insurer’s credit deteriorates
4. Are left with nothing but hope that the insurer stays solvent

This creates a lock-in effect:

• The plan can’t go back to the market
• It can’t demand collateral
• It can’t shift to a stronger carrier
• It can’t adjust to changing market conditions

If the insurer is later downgraded — from A to BBB, or BBB to BB — the plan has zero contractual rights to protect its interests. The result? A death spiral where liabilities are fixed but the counterparty becomes riskier and less reliable.

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PRT’s Best Annuity Would Have Downgrade Provisions

DOL with PRT’s calls for the best available annuity. The best possible annuity for a plan isn’t necessarily the lowest-priced one. It’s the one that:

• Complies with the plan’s Investment Policy Statement
• Aligns with fiduciary duty and credit quality guidelines
• Includes meaningful downgrade triggers
• Protects the plan throughout the contract’s life

For example, an annuity that commits to posting collateral if the carrier drops below BBB investment grade, or that returns unamortized premium if the insurer is downgraded to BB, gives the plan real protections. Yes — these annuities would likely:

• Cost more upfront
• Require higher capital from carriers
• Be less profitable for insurers

And that’s exactly why carriers don’t offer them.

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If They’re Safe, Why Not Offer Downgrade Provisions?

Here’s the point that should make every fiduciary sit up:

If including downgrade protections truly made annuities safe, transparent, and better aligned with risk — insurers would offer them freely. The fact that they don’t tells you something important about incentive misalignment.

The most basic rules of fiduciary management — requiring collateral when credit risk increases, monitoring counterparty risk, aligning investments with the plan’s Investment Policy Statement — are absent in most annuity contracts. That’s not a bug. It’s a business model choice by carriers.

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Downgrade Provisions Are Consistent with a Responsible IPS

Plan fiduciaries are required to follow the plan’s Investment Policy Statement (IPS). An IPS typically includes:

• Credit quality guidelines
• Counterparty exposure limits
• Risk-adjusted return expectations
• Ongoing monitoring processes

However, ERISA does not explicitly require an IPS so plans with annuities typically do not have one or a weak IPS.

Annuities with downgrade provisions are the only ones that can be squared with a prudent IPS. Without them, an annuity contract:

• Ignores credit quality thresholds
• Ignores counterparty risk management
• Treats the insurer like a riskless utility
• Places the plan in a contractual black hole

Downgrade provisions aren’t exotic. They are the mechanism that forces the contract to behave like an investment — not a one-way bet on the carrier.

See: Investment Policy Statements & Fiduciary Duty — why IPS should govern annuity contracts.
https://commonsense401kproject.com/2023/03/12/investment-policy-statements-crucial-to-fiduciary-duty/

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Why Courts and Fiduciaries Miss This Danger

Despite defaults and downgrades in the marketplace, courts have repeatedly overlooked the structural risk in annuity contracts. As we explained previously:
PRTs: Why courts keep ignoring the dangers of pension risk transfer annuities — and why these cases must be appealed.
https://commonsense401kproject.com/2025/11/06/prts-why-courts-keep-ignoring-the-dangers-of-pension-risk-transfer-annuities-and-why-these-cases-must-be-appealed/

Two core mistakes courts make:

1. Treating insurers as effectively riskless
2. Ignoring that annuity contract terms — not actuarial models — determine real protections

The fact that there is a Credit Default Swap market on insurers and the premiums required prove that insurers are not riskless   https://commonsense401kproject.com/2025/10/29/annuity-risk-measured-by-credit-default-swaps-cds/

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Plans Should Insist on Downgrade Provisions — or Walk Away

A commonsense fiduciary framework for annuity purchases should include:

✅ Mandatory downgrade triggers tied to specified rating thresholds
✅ Contractual collateral or security requirements
✅ Termination/transfer rights on downgrade
✅ Alignment with plan IPS and credit risk guidelines
✅ Ongoing monitoring and enforcement mechanisms

If insurers won’t offer these terms, plans should ask:

“Why are you unwilling to protect the plan’s retirees? If this product is truly safe, why not put your money where your mouth is?”

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Conclusion

Annuities without downgrade provisions aren’t “safe” — they’re traps that embed counterparty risk without recourse.

Plans that insist on downgrade protections:

• Align with basic fiduciary duty
• Respect IPS credit and counterparty guidelines
• Protect assets and liabilities over time
• Avoid the death spiral into default

Plans that accept standard, non-protective annuity contracts:

• Give up leverage
• Ignore credit risk
• Lock themselves into potential catastrophe
• And leave retirees exposed

Plans should not buy an annuity without robust downgrade provisions. If carriers won’t offer them — that’s the plan’s answer.

My friend Edward Siedle, a former SEC attorney who has been involved in many ERISA suits was giving a training to DOL attorneys and regulators a few years back.   A DOL staffer asked Siedle who polices “Prohibited Transactions,” and Siedle answered you (the DOL) do.  The entire room of DOL staffers replied that we do not, we thought outsiders did.    So basically, for the last 5 decades, no one has policed prohibited transactions.    The industry has lobbied for exemptions, but upon scrutiny, most do not hold up with many products.

The Industry has become deadly fearful of prohibited transactions cases enabled by Cunningham v. Cornell, as they are in a desperate struggle to put in legislation to weaken ERISA https://commonsense401kproject.com/2025/11/29/rep-randy-fine-files-bill-to-force-private-equity-annuities-and-crypto-into-401ks/  to keep it from starting.    The Plaintiff bar has in general been slow to adapt because they are mostly focusing on the top 500 largest plans, where it is easier to find plaintiffs and they think they can find easier $$$$. 

How to Find ERISA Prohibited Transactions Using the IRS/DOL Form 5500

One of the most misunderstood facts in ERISA litigation is this:

Many prohibited transactions are disclosed by defendants themselves — on the IRS/DOL Form 5500.

The Form 5500 is not confidential. It is a public record, filed annually with the IRS, Department of Labor, and PBGC, and it often contains everything a regulator, journalist, or plaintiff attorney needs to identify conflicted compensation arrangements.  It is easily accessible on the web at https://www.efast.dol.gov/5500Search/

Below is a practical guide to finding prohibited transactions using nothing more than the Form 5500—illustrated with the Lakeshore Learning Materials 401(k) Plan (2024) filing.

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I. What Is the Form 5500—and Why It Matters

Form 5500 is the Annual Return/Report of Employee Benefit Plan, required under ERISA §§104 and 4065 and the Internal Revenue Code.

Key points:

• It is signed under penalty of perjury
• It is open to public inspection
• It requires affirmative disclosure of:
  • Service providers
  • Compensation
  • Indirect compensation
  • Party-in-interest relationships
  • Insurance contracts and collective trusts

This makes the Form 5500 one of the most powerful—and underused—tools for identifying ERISA prohibited transactions.

(Page 1 of the filing confirms this plan is a single-employer ERISA plan and that the Form is open to public inspection

LakeshoreSelect24

)

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II. Step One: Go Straight to Schedule C (Compensation)

Schedule C is where prohibited transactions often reveal themselves.

A. What Schedule C Discloses

Schedule C requires disclosure of:

• All service providers receiving $5,000 or more
• Whether they received:
  • Direct compensation
  • Indirect compensation
• Whether required disclosures were provided

This is where fiduciaries often admit conflicts.

---

III. Example: Principal and SageView Both Admit Indirect Compensation

A. Principal Life Insurance Company (Recordkeeper)

On Schedule C, page 2, the plan lists Principal Life Insurance Company as a service provider:

• Role: Contract Administrator / Recordkeeper
• Direct compensation: $158,327
• Indirect compensation: “Yes” (explicitly checked)
• Principal is identified as a party in interest

LakeshoreSelect24

This matters because:

• A recordkeeper receiving indirect compensation is, by definition, receiving payments from sources other than the plan sponsor
• Those payments often come from:
  • Proprietary investment products
  • Revenue sharing
  • Insurance spread profits
• When the recordkeeper is also offering proprietary investments, ERISA §406(b) is immediately implicated

---

B. SageView Advisory Group, LLC (Investment Advisor)

The same Schedule C shows:

• SageView Advisory Group, LLC
• Role: Investment Advisory
• Direct compensation: $59,924
• Indirect compensation: “Yes”
• Amount of indirect compensation reported: $16,898

LakeshoreSelect24

This is a critical red flag:

An investment advisor receiving indirect compensation is no longer acting solely on behalf of the plan.

This opens the door to:

• ERISA §406(b)(1): acting for one’s own account
• ERISA §406(b)(3): receipt of consideration from third parties
• https://commonsense401kproject.com/2025/11/18/why-401k-consultants-should-be-included-as-defendants-in-erisa-litigation/
•  

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IV. Step Two: Turn to Schedule H, Line 4i (Plan Assets)

After identifying indirect compensation, the next step is to identify what products are generating it.

That happens on Schedule H, Line 4i – Schedule of Assets (Held at End of Year).

---

V. Principal’s Proprietary Products Are Clearly Marked as Parties in Interest

On page 3 of the filing, the plan’s investments are listed in detail.

Several facts stand out:

A. Principal Target-Date CITs

The plan holds a full suite of Principal Life Time Hybrid CITs (2025 through 2070).

Each of these is marked with an asterisk:

“* Indicates party-in-interest”

LakeshoreSelect24

This confirms:

• The recordkeeper (Principal) is also the investment provider
• Plan assets are invested in party-in-interest products
• Any indirect compensation flowing to Principal is now tied directly to plan asset placement
• https://commonsense401kproject.com/2025/12/07/wall-street-journal-exposes-target-date-cit-corruption-but-theyve-only-scratched-the-surface/

• I specifically target Principal and Prudential target date funds in this piece https://commonsense401kproject.com/2022/06/07/toxic-target-date-case-study-of-the-worst-of-the-worst/  because they can hold alternatives and annuities
•  

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B. Principal Fixed Annuity Contract

The Schedule also lists:

• Insurance Company Contract
• Issuer: Principal Life Insurance Company
• Product: Principal Fixed Income Guaranteed Option
• Value: $8,866,376
• Marked as a party-in-interest
• Valued at contract value, not market value

LakeshoreSelect24

This is the classic prohibited-transaction setup:

• Party-in-interest insurer
• Fixed annuity / general account product
• Credited rate set by insurer
• Indirect compensation disclosed on Schedule C
• https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/

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VI. Why This Matters for Litigation and Enforcement

This single Form 5500 filing demonstrates how easy it is to identify prohibited-transaction fact patterns:

1. Schedule C
   • Identify indirect compensation
   • Identify parties receiving it
2. Schedule H (Line 4i)
   • Identify party-in-interest investments
   • Identify proprietary products
   • Identify insurance contracts valued at contract value
3. Connect the dots
   • Party-in-interest + indirect comp + asset placement
     = ERISA §406 red flag

No discovery required. No whistleblower needed. The defendants disclosed it themselves.

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VII. Bottom Line

The Form 5500 is not just a compliance filing—it is a roadmap to prohibited transactions.

If regulators, journalists, and courts paid closer attention to:

• Schedule C (indirect compensation), and
• Schedule H (party-in-interest assets),

many ERISA violations would be obvious on their face.

The problem is not lack of evidence.
The problem is lack of enforcement.

For more than 30 years, “stable value” has been marketed to retirement plan fiduciaries as a conservative, low-risk, bond-like option. That description is only accurate for one form of stable value: diversified synthetic stable value.

General Account (GA) and Separate Account (SA) stable value products are fundamentally different. They embed insurance spread products, opaque crediting decisions, and conflicted compensation structures that directly collide with ERISA’s duties of loyalty, prudence, and prohibited-transaction rules.

This distinction is not academic. It is measurable, documented, and long recognized in the academic literature.

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I. The Academic Baseline: General Account Risk Is an Order of Magnitude Higher

In The Handbook of Stable Value Investments (Frank J. Fabozzi, ed., 1998), Jacqueline Griffin’s chapter on wrap provider credit risk demonstrates that general account stable value products carry roughly ten times the credit risk of diversified synthetic GIC structures. https://www.amazon.com/Handbook-Stable-Value-Investments/dp/1883249422

Why?

Because in a general account product:

• Participants are exposed to the entire insurer balance sheet
• Assets are commingled with unrelated insurance liabilities
• Returns are driven by insurer spread management, not portfolio performance
• Risk is single-entity, undiversified credit risk

Synthetic structures, by contrast, isolate risk, diversify exposure, and enforce constraints.

This is not a matter of opinion. It is structural.

---

II. What Makes Synthetic Stable Value Fundamentally Different

Diversified synthetic stable value is not an insurance product. It is a bond portfolio plus third-party guarantees.

Its defining features are:

1. Enforced investment guidelines

• Duration limits
• Credit quality floors
• Sector concentration caps
• Prohibited asset classes

These guidelines are contractual and enforceable, not aspirational.

2. Independent wrap providers

• Multiple, unrelated wrap issuers
• Diversified counterparty exposure
• No dependence on a single insurer’s solvency

3. Transparent crediting-rate formulas

• Crediting rates are formula-driven
• Inputs are observable: yield, duration, market-to-book ratio
• No discretionary “pricing committee” authority

4. No embedded spread product

• No insurer decides how much return to “pass through”
• No opaque profit margin extracted from participant balances

This structure aligns cleanly with ERISA fiduciary principles:

• Diversification
• Transparency
• Process discipline
• Arm’s-length pricing

That is why synthetic stable value does not raise inherent prohibited-transaction concerns.

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III. General Account Stable Value: A Prohibited Transaction by Design

General Account stable value products invert every one of those principles.

A. Single-entity credit risk

A GA stable value fund is simply a fixed annuity backed by the insurer’s general account. Participants bear:

• Insurer credit risk
• Downgrade risk
• Liquidity restrictions
• Contract-value limitations

There is no diversification at the insurer level.

B. Discretionary, proprietary crediting rates

As shown in multiple audited disclosures (including recent Great Gray CIT filings  https://greatgray.com/wp-content/uploads/2025/05/0.08-Stable-Value-Funds-2024-Final.pdf), insurers admit that:

• Crediting rates are reset periodically
• Rate setting is “discretionary and proprietary”
• Decisions reflect internal profit targets, expenses, and capital management

That is not investment management. That is spread extraction.

C. ERISA prohibited-transaction implications

When a plan fiduciary selects a GA product:

• The insurer is a party in interest
• The insurer sets participant returns for its own account
• The plan is locked into a conflicted bilateral contract

This squarely implicates ERISA §406(a) and §406(b):

• Transfer of plan assets to a party in interest
• Fiduciary causing plan to engage in transaction benefiting a service provider
• Self-dealing through spread profits

No exemption cures the structural conflict.

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IV. Separate Accounts: “Synthetic-Like” in Marketing, GA-Like in Reality

Separate Account (SA) stable value products are often marketed as a safer alternative to GA products. That claim does not withstand scrutiny.

A. Illusory separation

While assets may be legally segregated, economic control remains with the insurer:

• Investment guidelines are often loose or discretionary
• Insurer retains rate-setting authority
• Participant returns remain subject to insurer spread decisions

B. Weak or non-binding guidelines

Unlike synthetic portfolios:

• SA guidelines frequently allow broader credit exposure
• Enforcement mechanisms are weak
• Insurers can “reinterpret” constraints during stress

C. Crediting rate discretion remains

Separate accounts still allow insurers to:

• Smooth returns to protect insurer margins
• Delay or suppress rate increases
• Internalize gains while socializing losses

As you’ve documented in The Great Annuity Mirage, separate accounts pretend to be synthetic while retaining the core conflicts of general account products. https://commonsense401kproject.com/2025/07/28/the-great-annuity-mirage-how-separate-accounts-continue-to-mislead/

From an ERISA perspective, SA products remain conflicted insurance arrangements, not arm’s-length investment products.

---

V. The Efficient Frontier Confirms the Legal Analysis

Your Stable Value Efficient Frontier work shows what theory predicts:

• Synthetic stable value delivers higher risk-adjusted returns
• GA and SA products underperform after adjusting for credit risk
• The “stability” premium is purchased with hidden tail risk

In other words, GA and SA products are not just legally problematic — they are economically inferior.

That makes their selection even harder to defend under ERISA’s prudence standard.

---

VI. Why This Matters for Litigation and Fiduciary Oversight

The takeaway is simple:

• Synthetic stable value
  • Diversified
  • Transparent
  • Formula-driven
  • Consistent with ERISA duties
• General Account stable value
  • Single-entity credit risk
  • Discretionary insurer pricing
  • Embedded self-dealing
  • Inherently conflicted
• Separate Account stable value
  • Cosmetic separation
  • Weak constraints
  • Same economic conflicts

Courts have increasingly recognized that process matters. When fiduciaries choose GA or SA products over available synthetic alternatives, they are not just choosing a different implementation — they are choosing a conflicted structure.

That is why GA and SA stable value products should be analyzed not merely as “imprudent,” but as ERISA prohibited transactions.

---

VII. Conclusion: Stable Value Done Right — and Done Wrong

Stable value itself is not the problem.

Insurance-based stable value is the problem.

Diversified synthetic stable value shows that it is entirely possible to deliver capital preservation, liquidity, and reasonable returns without exposing participants to insurer balance-sheet risk or conflicted rate-setting.

When fiduciaries instead choose GA or SA products, they are choosing opacity, concentration, and conflicted compensation — the very conditions ERISA was designed to prevent.

—————————————-

Why General Account (GA) and Separate Account (SA) Are ERISA Prohibited Transactions — and Diversified Synthetic Is Not

Feature	General Account (GA) Stable Value	Separate Account (SA) Stable Value	Diversified Synthetic Stable Value
Underlying structure	Fixed annuity backed by insurer’s entire general account	Insurer-managed separate account marketed as “bond-like”	Diversified bond portfolio + third-party wrap contracts
Primary risk bearer	Plan participants (single insurer credit risk)	Plan participants (still insurer-controlled)	Participants bear diversified bond risk; wrap providers guarantee liquidity
Credit risk profile	Single-entity, undiversified insurer balance-sheet risk	Still insurer credit risk; separation is largely cosmetic	Diversified across multiple wrap providers and issuers
Academic risk comparison	~10× the credit risk of diversified synthetic (Fabozzi Handbook)	Higher than synthetic; lower than GA only in marketing	Lowest structural credit risk
Investment guidelines	None applicable to participants; insurer invests freely	Often loose, discretionary, insurer-controlled	Strict, enforceable guidelines (duration, credit, sectors)
Guideline enforcement	Internal insurer discretion	Insurer discretion; weak enforcement	Contractual, third-party enforceable
Crediting rate determination	Discretionary and proprietary insurer decision	Insurer-set, discretionary, smoothed	Formula-driven, transparent, observable inputs
Crediting rate transparency	Opaque; internal pricing committees	Opaque; insurer methodology	High transparency; auditable formulas
Spread extraction	Explicit spread product (insurer profits from rate suppression)	Spread product remains	No embedded spread
Liquidity / exit risk	Contract-value limits; MVAs possible	Similar termination risk	Liquidity guaranteed by wraps, subject to formula
Diversification	None (single insurer)	Limited / illusory	True diversification
Party-in-interest status	Insurer is a party in interest	Insurer is a party in interest	Wrap providers are arms-length counterparties
ERISA §406(b) self-dealing risk	High – insurer sets returns for its own account	High – insurer controls rate setting	Low – no discretionary self-pricing
ERISA §404 prudence alignment	Weak (opaque, concentrated risk)	Weak (misleading structure)	Strong (process-driven, diversified)
Regulatory oversight	State insurance regulators	State insurance regulators	Plan fiduciaries + contractual oversight
Typical marketing narrative	“Guaranteed,” “safe,” “principal protected”	“Synthetic-like,” “separate,” “safer GA”	“Institutional,” “transparent,” “bond-based”
Economic reality	Insurance balance-sheet exposure	Insurance balance-sheet exposure with cosmetic separation	Bond portfolio + diversified liquidity protection
ERISA litigation posture	Inherently conflicted; prohibited transaction	Conflicted; prohibited transaction	Defensible investment structure

General Account and Separate Account stable value products embed insurer self-dealing, discretionary pricing, and single-entity credit risk, making them structurally incompatible with ERISA’s duties of loyalty and prohibited-transaction rules — while diversified synthetic stable value does not.

Journal of Economic Issues Thomas E. Lambert University of Louisville, Christopher B. Tobe , ““Safe” Annuity Retirement Products and a Possible U.S. Retirement Crisis,” https://ir.library.louisville.edu/faculty/943/ 

https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/ 

https://commonsense401kproject.com/2025/10/30/the-stable-value-efficient-frontier/    

Appendix: Documented Historical Risks of Insurance-Based Stable Value Products (1992–2009 and Beyond)

Why General Account and Separate Account Stable Value Products Fail Core Fiduciary Principles

This Appendix documents that the risks inherent in insurance-based stable value products—particularly general account and separate account contracts—are not theoretical, not novel, and not unforeseeable. These risks have been repeatedly identified by Federal Reserve economists, acknowledged by senior Federal Reserve officials during the Global Financial Crisis, and formally recognized by federal regulators through systemic-risk designations of major life insurers.

By contrast, diversified synthetic stable value structures were specifically designed to eliminate or mitigate these known risks through issuer diversification, transparent valuation, and contractual protections absent from insurance-based products.

---

I. The Federal Reserve (1992): SPDAs and GICs Are Not “Like Money in the Bank”

In its 1992 Quarterly Review, the Federal Reserve Bank of Minneapolis directly examined Single Premium Deferred Annuities (SPDAs) and Guaranteed Investment Contracts (GICs)—the functional predecessors of modern general-account stable value products—and rejected the industry narrative that such products were “safe” or bank-like

Federal Reserve economists Richard M. Todd and Neil Wallace concluded that SPDAs and GICs were credit instruments, not insured deposits, and that purchasers were effectively making unsecured loans to insurance companies, with repayment dependent on the insurer’s overall financial condition rather than on segregated assets or transparent investment strategies

Key findings include:

• Policyholders lack visibility into how insurers invest their funds;
• Claims are general creditor claims, not ownership interests;
• Insurers retain full discretion over asset allocation within broad regulatory limits;
• Rating agencies and state regulators repeatedly failed to detect mounting risk prior to insurer collapses (e.g., Executive Life).

The Federal Reserve explicitly warned that implicit and explicit guarantees create moral hazard, allowing insurers to attract large volumes of “docile capital” while taking risks that policyholders neither understand nor approve   https://www.minneapolisfed.org/research/quarterly-review/spdas-and-gics-like-money-in-the-bank

This analysis directly undermines the premise that general-account stable value products can satisfy ERISA’s prudence and diversification requirements.

---

II. Defined-Contribution Plans Were a Primary Vector for GIC Risk

The Federal Reserve further documented that defined-contribution pension plans, including 401(k) plans, were a primary driver of GIC growth, precisely because plan fiduciaries sought “simple” fixed-rate options for participants

Critically, the Fed noted that GICs were unallocated contracts, meaning:

• The insurance company’s liability was not tied to specific assets;
• Participants had no contractual claim to any segregated portfolio;
• In insolvency, plans competed with other general creditors.

These characteristics are identical to those of modern general account stable value contracts offered in 401(k) plans today.

---

III. 2008–2009: Bernanke Confirms the Failure of “Guarantees”

During the Global Financial Crisis, Federal Reserve Chairman Ben Bernanke publicly confirmed that the supposed protections embedded in insurance-based stable value products failed precisely when needed most.

In 2009 testimony, Bernanke stated:

“Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.”

https://www.federalreserve.gov/newsevents/testimony/bernanke20090324a.htm

This admission establishes three critical facts:

1. Stable value contracts are only as strong as the insurer providing them;
2. Counterparty failure risk is real and systemic, not remote;
3. Participants bear uncompensated risk when insurers falter.

The collapse of AIG’s Financial Products division exposed the fragility of insurance guarantees during periods of market stress—exactly when stable value is marketed as a “safe harbor.”

---

IV. Prudential’s Systemic Risk Designation Confirms Single-Entity Exposure

Federal regulators formally recognized these risks when the Financial Stability Oversight Council (FSOC) designated Prudential Financial as a systemically important financial institution (SIFI).

The FSOC’s determination emphasized that:

• Prudential’s general account liabilities are subject to discretionary withdrawal;
• A loss of confidence could trigger asset fire sales;
• Pension plans have large exposures to Prudential through stable value and annuity products;
• Distress at Prudential could impair retirement plans’ ability to meet obligations

SIFI Report Prudential Financia…

. https://www.stanfordlawreview.org/online/the-last-sifi-the-unwise-and-illegal-deregulation-of-prudential-financial/

This designation directly contradicts any claim that general-account stable value products present minimal or immaterial risk to plan participants.

---

V. Credit Default Swaps and Market-Based Evidence of Insurer Risk

Market-based measures further confirm that insurer risk is priced, observable, and variable over time. As documented in prior analysis, credit default swap (CDS) spreads for major life insurers fluctuate materially with market conditions, reflecting investors’ assessment of default and downgrade risk.

Plan participants in insurance-based stable value products are not compensated for bearing this credit risk, nor are they provided with tools—such as downgrade triggers or exit rights—to mitigate it.

---

VI. Offshore Private Credit and Regulatory Arbitrage

Recent evidence from the Bank for International Settlements (BIS) demonstrates that insurers increasingly use offshore reinsurance and private credit structures to enhance yield while obscuring risk. These structures:

• Reduce transparency;
• Complicate resolution in stress scenarios;
• Increase reliance on regulatory arbitrage rather than economic substance.

Such practices further erode any claim that insurance-based stable value products align with ERISA’s fiduciary standards of prudence, loyalty, and diversification.

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VII. Why Diversified Synthetic Stable Value Is Different

Unlike general-account or separate-account insurance products, diversified synthetic stable value:

• Separates custody, investment management, and wrap providers;
• Diversifies credit exposure across multiple, independent counterparties;
• Uses transparent, market-based valuation of underlying assets;
• Incorporates downgrade provisions and replacement rights.

These features were developed in direct response to the historical failures documented above.

---

Conclusion

Federal Reserve research as early as 1992, senior Federal Reserve testimony during the Global Financial Crisis, and formal systemic-risk determinations all confirm that insurance-based stable value products embed concentrated, opaque, and uncompensated credit risk.

Because these risks are known, documented, and avoidable, their continued use in ERISA-governed defined-contribution plans—when superior diversified alternatives exist—supports the conclusion that general-account and separate-account stable value products are structurally imprudent and prohibited transactions, while diversified synthetic stable value is not.

CASE STUDY Vanguard Synthetic vs. TIAA General Account from

Journal of Economic Issues Thomas E. Lambert University of Louisville, Christopher B. Tobe , ““Safe” Annuity Retirement Products and a Possible U.S. Retirement Crisis,” https://ir.library.louisville.edu/faculty/943/ 

 TIAA has at least 10 times the risk, 10 times the fees.

Comparing the most conservative and most highly rated fixed annuity, TIAA, to the Vanguard RST portfolio tells a story of two very different products. Vanguard holds 74% in high-quality (AA & above) rated securities, while TIAA only holds 12.5% in rated securities. While the Vanguard is nearly 96% liquid in public securities, the TIAA portfolio is only 48%, which is typical. T  

Table 1—Investment Portfolios

	TIAA	Vanguard Trust SV
Public Securities	48.0%	96.7%
Gov AAA	7.8%	63.8%
AA	4.7%	10.1%
A	14.0%	21.5%
BBB	16.6%	0.0%
Below Investment Grade	3.7%
Non-rated Public Securities	1.2%	4.6%
Other AA GICS		3.3%
Private Fixed Income	22.0%	0.0%
Private Mortgages	13.3%	0.0%
Real Estate	4.5%	0.0%
Other Non-Securities	9.6%	0.0%
Natural Resources	2.9%	0.0%

Sources: https://www.tiaa.org/public/pdf/performance/retirement/profiles/TIAA_Gen_Act_Fin_Strength.pdf

https://personal.vanguard.com/us/funds/holdings?FundId=0348&FundIntExt=INT&APP=PE&SelectedPlanId=093725&InstFund=true&RedemptionFee

Stable Value: The Good, the Bad and the Ugly-Avoiding Litigation

In late 2025, independent journalist and teacher  Jim Vail documented a striking confrontation between Teacher Trustee Erika Meza and the Chicago Teachers’ Pension Fund’s external consultant, Callan Associates, at a board meeting on December 11, 2025. The exchange highlights the growing tension between rank-and-file educator fiduciaries and institutional insiders pushing private markets — especially private equity — with all of the attendant cost, complexity, and opacity that has plagued many U.S. public pension systems. secondcityteachers.substack.com

A. Callan’s Defense of Private Equity Met With Skepticism

At the board meeting, Callan consultant Angel Haddad presented an upbeat defense of private equity, emphasizing “diversification” outside of traditional public equities and claiming that private equity offers exposure to businesses that might not otherwise be accessible. Haddad argued that private equity can provide “different return sources” for the pension fund. secondcityteachers.substack.com

Trustee Meza pushed back forcefully on several fronts:

• She highlighted the cost structure of private equity, including fees and carried interest, questioning whether the net returns justified the risk and cost. secondcityteachers.substack.com
• She pointed out that CTPF has a large number of managers relative to other large plans, and that the plan conducts frequent RFPs — “unheard of” in size and frequency, suggesting manager proliferation and consultant facilitation without demonstrable benefit. secondcityteachers.substack.com
• She directly asked Callan to prepare a true opportunity-cost comparison between the private equity portfolio and simple public market benchmarks (e.g., Russell 3000), including all fees and projected distributions. secondcityteachers.substack.com
• She questioned the fee structure for private equity manager searches, pointing out that CTPF paid Callan roughly $25,000 per search, an amount nearly equal to the cost of a three-day board trip. secondcityteachers.substack.com

Meza also observed (echoing academic research) that there is “mounting evidence that private equity is not outperforming a regular index fund” net of fees, and that the risk–return profile (higher volatility for marginal return improvement) may be unfavorable. secondcityteachers.substack.com

B. The Broader Context: Consultant Conflicts of Interest

This boardroom clash is not an isolated event — it reflects a systemic issue within the institutional consulting industry.

An analytical piece circulated in late 2025 argues that the largest pension consultants — including firms like Mercer, Aon, Russell, Wilshire, and even “independent” firms such as Callan — have become the distribution arm for private equity and private credit. The CommonSense 401k Project

Key points from this industry analysis include:

• Many major consultants are now owned by private equity firms, publicly traded with shareholder incentives to grow high-fee areas, or structured so that consultant compensation increases materially when clients allocate more to private markets. The CommonSense 401k Project
• Even independent, employee-owned consultants like Callan are implicated because they:
  • charge premium fees for alternative consulting services;
  • operate “paid access” events such as Callan College, where private markets managers pay for exposure to pension clients (a “pay-to-play” dynamic); and
  • have internal compensation structures that reward consultants for growing alternative allocations. The CommonSense 401k Project
• This creates an economic incentive tied not to net performance for beneficiaries, but to the expansion of high-fee private investments. The CommonSense 401k Project

In short, when consultants benefit structurally from helping private equity and credit grow within pension portfolios, their advice can no longer be presumed neutral or purely fiduciary — it is shaped by economic incentives that may be anti-beneficiary.

C. Confirmation from Chicago Trustee Questions

Across multiple meetings, Chicago Teachers trustees — both active and retired — have begun to question the role and performance of private markets allocations:

• Another trustee asked why Callan was not present or vocal in the decision process for new private equity commitments, despite being paid to vet these investments. secondcityteachers.substack.com
• Trustees also flagged questionable travel and due-diligence practices (e.g., a CIO trip to South Africa with unclear justification), underscoring weak internal oversight and consultant dependency. secondcityteachers.substack.com
• At least some trustees pushed back on relying solely on external narratives without transparent risk/return comparisons to public markets. secondcityteachers.substack.com

D. Public Pension Underfunding and Risk

The backdrop to these governance tensions is sobering: Chicago’s pension funds are among the most underfunded in U.S. history, with Chicago Police and Teachers plans facing deep fiscal stress attributable in part to high-cost, opaque alternative allocations and compounding actuarial pressures (a theme explored elsewhere in my Chicago Police Pension work). Wirepoints

Private equity — attractive in theory — is increasingly questioned by trustees who see:

• performance shortfalls,
• high fee drag,
• limited liquidity,
• and opaque valuations.

Despite these realities, consultants continue to advocate for expanded private markets commitments, creating friction between fiduciary responsibility and consultant incentives.

E. Hypocrisy of Charter-Aligned Investment Narratives

A further dimension of consultant capture relates to alignment of values and investment narratives. For example, some consultants and practitioners argue that private equity can finance projects like affordable housing or economic development, enabling social goals. secondcityteachers.substack.com

Yet this often sits alongside:

• Investments in charter school facilities or charter-aligned companies (which raise political/ideological concerns for many public educators),
• A lack of member disclosure about how fees and management decisions support private markets interests,
• And, as seen in other contexts (e.g., CalPERS, Kentucky Teachers), fiduciary narratives that prioritize consultant comfort over member outcomes.

Chicago trustees like Meza have pointed directly to the need for clarity on fees, opportunity costs, and benchmark comparisons, and against simply repeating diversification rationales that assume complexity is a virtue. secondcityteachers.substack.com

F. Takeaway: Governance, Fiduciary Duty, and Pension Reform

Jim Vail’s coverage — and the trustees’ questioning — highlights several key governance challenges now emerging across teacher pension funds:

1. Consultant incentives often diverge from beneficiary best interests, particularly around private markets expansion. The CommonSense 401k Project
2. Opaque valuations, smoothed return profiles, and non-investable benchmarks require trustees to demand better risk/return transparency. The CommonSense 401k Project
3. Trustees with fiduciary courage (like Erika Meza) are pushing back on narratives that protect consultant interests rather than member outcomes. secondcityteachers.substack.com
4. Public pension underfunding and elevated risk mean that expanded private markets exposure warrants heightened scrutiny, not automatic endorsement. Wirepoints
5. Hypocrisy and conflict concerns (e.g., charter connections and political influence) underscore the need for clear disclosure and accountability.

https://secondcityteachers.substack.com/p/teacher-trustee-questions-callans?

How America’s Largest Pension Consultants Became the Distribution Arm for Private Equity & Private Debt

Twisted Priorities

Executive Summary

Redactions are often justified as protecting “trade secrets,” “privacy,” or “ongoing investigations.” In practice, across public pensions, private-equity contracts, and the Epstein files, redactions serve a different function: concealing power, conflicts, leverage, and legal exposure.

The same institutional logic governs all three domains:

Redactions are not about secrecy for safety — they are about secrecy for control.

Public pension systems like CalPERS, OPERS, and Kentucky Retirement Systems, private-equity limited partnership agreements, and the Epstein financial files all exhibit the same pattern:

• Lawful access exists
• Disclosure is nominally promised
• Key economic and governance provisions are systematically hidden
• The hidden provisions implicate fiduciary breaches, political influence, or criminal exposure

This is not accidental. It reflects a shared ecosystem of elite finance, legal privilege, and political insulation.

---

I. Redactions in Public Pensions: Not Trade Secrets, but Fiduciary Violations

Public pension plans are governed by fiduciary law, not private-contract law. Their records are presumptively public. Yet, over the last 10–15 years, pension systems increasingly adopted private-equity redaction norms that contradict their statutory obligations.

What is Redacted — and Why It Matters

Your Essex Woodlands comparison (Kentucky unredacted vs. Ohio redacted) shows that redactions systematically hide:

1. Hidden leverage
   • 110% investment authority
   • Subscription-based leverage
   • Short-term borrowing authority
2. Excessive and opaque fees
   • Management fees disguised as quarterly percentages
   • Organizational expense caps vastly exceeding actual costs
   • Special GP distributions and expense reimbursements
3. Fiduciary breaches embedded in contract design
   • Heads-I-win / tails-you-lose allocation of risk
   • GP discretion over valuation, timing, and distributions
   • Weak or illusory clawbacks
4. Offshore custody and jurisdictional opacity
   • Non-US domiciles
   • Offshore SPVs and holding structures
5. Advisory committee composition
   • Names redacted because they reveal conflicts, inducements, or political access

These are not trade secrets. They are terms governing public money, and in many states they likely violate fiduciary statutes outright.

Your Ohio and Kentucky statutory analysis is crucial:

• Many state fiduciary codes do not even list limited partnerships as permissible investments
• Custody, diversification, leverage, and prudence standards are incompatible with these hidden provisions

Redaction is the mechanism that allows illegal investments to persist without challenge.

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II. The Normalization of Redaction Through Private Equity

Private equity did not just benefit from redactions — it institutionalized them.

Historically:

• Public pensions required RFPs, competitive bidding, and disclosures
• Contracts were subject to open-records laws
• Political donations were capped and disclosed

Post-Citizens United:

• PE firms lobbied for RFP carve-outs
• “Trade secret” exemptions were expanded
• Limited partnership agreements became the de facto governing documents
• Consultants and lawyers normalized redaction as “industry standard”

What changed was not the law — it was enforcement culture.

The result:

• Secret, no-bid contracts
• Benchmark engineering
• Consultant-blessed opacity
• Pay-to-play without receipts

Redactions are the operating system of this regime.

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III. Epstein Files: The Same Redaction Logic, Different Crime

The Epstein files expose the same structural pathology at a higher criminal level.

What Was Redacted — and Why

In Epstein-related disclosures:

• Names of financiers, lawyers, trustees, and intermediaries were withheld
• Banking relationships were obscured
• Offshore structures were shielded
• Correspondence revealing knowledge (not just participation) was suppressed

The justification again was:

• Privacy
• Ongoing investigations
• Risk of defamation

But as your Epstein article correctly notes, the files reveal:

“Not just pedophiles — but a corrupt offshore financial system.”

The redactions protected:

• Enablers, not victims
• Institutions, not individuals
• Networks, not isolated actors

Just as in public pensions, redaction functioned as a liability firewall.

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IV. The Common Denominator: Elite Financial Immunity

Across all three domains — pensions, private equity, Epstein — the same actors recur:

• Global law firms
• Private banks
• Offshore administrators
• Consultants and “independent” advisors
• Politically connected intermediaries

The same techniques recur:

• Jurisdictional fragmentation
• Complexity as camouflage
• Delegation to “experts”
• Legal privilege as a shield
• Redaction as a substitute for accountability

This is why redactions escalate when:

• Performance deteriorates
• Scrutiny increases
• Political stakes rise

Opacity is not incidental — it is defensive architecture.

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V. Why This Matters Now: CalPERS and the Next Phase

CalPERS sits at the center of this ecosystem:

• One of the world’s largest private-equity investors
• A key political actor in California
• A template for other pension systems
• A beneficiary of consultant-engineered benchmarks and compensation schemes

The same redaction logic now extends to:

• Executive compensation justification
• Performance benchmarking
• Liquidity risk disclosures
• Political relationships
• Contractual fee structures

As you’ve documented repeatedly, redactions are the glue that holds the system together.

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VI. Conclusion: Redactions Are the Scandal

The scandal is not just:

• Private equity underperformance
• Excessive fees
• Epstein’s crimes
• Pension mismanagement

The scandal is the shared refusal to disclose.

Redactions transform:

• Fiduciary violations into “complexity”
• Conflicts of interest into “customary practice”
• Political influence into “coincidence”
• Criminal facilitation into “privacy concerns”

Until redactions are treated as prima facie evidence of risk and misconduct, public institutions will continue to hemorrhage money, trust, and legitimacy.

Sunlight is not a threat to honest systems.
Redactions are a confession by dishonest ones.

California Needs a “Pension-to-Politics Transparency” Initiative — Montana Model and Apollo Shows Why

Epstein Files reveal more than Pedophiles – a corrupt Offshore Financial System

Introduction — Beyond Disclosure, Into violating ERISA Fiduciary Law

This Appendix analyzes how the embedding of lifetime income annuity elements inside Target-Date Funds (TDFs) violates core provisions of the Employee Retirement Income Security Act (ERISA). It updates the analysis laid out in:

Annuities Are a Prohibited Transaction — DOL Exemptions Do Not Work (Nov. 1, 2025),  https://commonsense401kproject.com/2025/11/01/annuities-are-a-prohibited-transaction-dol-exemptions-do-not-work/

401(k) Lifetime Income: A Fiduciary Minefield (Feb. 10, 2022), https://commonsense401kproject.com/2022/02/10/401k-lifetime-income-a-fiduciary-minefield/

Wall Street Journal Exposes Target-Date CIT Corruption… (Dec. 7, 2025), https://commonsense401kproject.com/2025/12/07/wall-street-journal-exposes-target-date-cit-corruption-but-theyve-only-scratched-the-surface/

By examining the structure of modern TDFs — particularly those using state-regulated CITs and insurance-wrapped annuity components — this Appendix explains why such constructions are not merely risky or opaque, but in many cases incompatible with ERISA’s fiduciary duties of prudence, loyalty, and prohibited-transaction regime.

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2. Lifetime Income “Guarantees” Inside TDFs: Substance Over Form

Target-Date Funds increasingly include lifetime income features — either through internal sub-portfolios or embedded insurance wrappers — promising participants “guaranteed income for life.” But these guarantees are not financial alchemy; they derive from general-account fixed annuities and similar insurance obligations that:

• Are backed by the balance sheet of a single insurer;
• Are priced using internal actuarial assumptions, not market pricing;
• Depend on insurer discretion over crediting rates and contractual terms;
• Obscure spread-based profits and other indirect compensation.

As explained in Annuities Are a Prohibited Transaction, these characteristics are not neutral features — they are economic modalities that define an insurance contract, not a diversified investment. Embedding them inside TDFs does not change their legal character; it simply hides them behind the Target-Date label. Atty. Jim Watkins has more at https://fiduciaryinvestsense.com/2026/01/04/upon-further-review-the-3-x-3-analysis-that-shows-why-prudent-plan-sponsors-will-never-offer-annuities-within-their-plan/

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3. ERISA §404 — Breaches of Prudence and Loyalty

ERISA §404(a)(1)(B) and (C) require fiduciaries to act with the care, skill, prudence, and diligence of a prudent expert and to diversify plan investments to minimize the risk of large losses.

A. Imprudent Integration of Insurance Risk

Lifetime income annuity elements impose single-entity credit risk on participants because the guarantees depend entirely on the solvency and internal pricing of one insurer’s general account. As has been documented in the TDF corruption analysis, investors often do not even realize they hold such exposures because:

• TDFs use state-regulated CIT structures that mask the insurance component,
• Consultants and recordkeepers classify these as “stable income” or “income enhancement.”

But from an economic perspective, a TDF containing a general-account annuity is functionally similar to a 401(k) that has placed a portion of participant assets into a fixed annuity inside an insurance general account — a structure courts have found problematic and ERISA fiduciaries must evaluate rigorously.

B. Improper Diversification

Diversification requires more than a target asset mix; it demands avoidance of undiversified exposures that can materially threaten principal. Embedding a single insurer’s guarantee into a diversified TDF portfolio does not diversify the insurer credit risk; it adds an undiversified risk factor.

The duty of loyalty is similarly breached when fiduciaries accept such exposures without transparent analysis and without evidence that the supposed lifetime income benefits outweigh the concentrated risk and fee opacity.

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4. ERISA §406 — Hidden Prohibited Transactions

ERISA §406(a) prohibits plan assets from being used in transactions involving a party in interest, including insurers and service providers, unless an exemption applies.

A. The Per Se Nature of Annuity Transactions

Lifetime income guarantees embedded in TDFs are derived from contractual relationships with insurers or their affiliates — parties in interest. Even if indirectly accessed through a CIT, the economic reality is that:

• Plan assets are committed to support insurance liabilities;
• Insurers extract spread income and embedded profits;
• Affiliated service providers benefit financially.

This meets the definition of a §§406(a) prohibited transaction: the plan transfers value to a party in interest, often in the form of fees and spread retention, without contemporaneous best-interest justification.

B. Failure of Prohibited-Transaction Exemptions

As detailed in Annuities Are a Prohibited Transaction, typical regulatory exemptions (e.g., PTE 84-24, PTE 2020-02) often cannot apply because lifetime income products:

• Fail to disclose all compensation clearly;
• Lack meaningful downgrade or termination provisions;
• Do not center participants’ best interests;
• Are structured with conflicts (e.g., insurer also acting as recordkeeper).

Thus, even if promoters claim exemption compliance, the underlying economics do not satisfy the statutory criteria.

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5. Citations from the TDF Corruption WSJ Analysis: Valuation and Transparency Risk

The Wall Street Journal story When Your Private Fund Turns $1 Into 60 Cents underscores a related structural issue: valuation opacity. When private assets once thought to be “stable” were exposed to market pricing, they collapsed in value. This same dynamic exists, often unobserved, in TDFs that:

• Hold non-transparent, non–market-priced private assets;
• Embed insurance guarantees with discretionary valuations;
• Report net asset values that are not subject to real-time market verification.

State-regulated CITs serve as the vehicle that allows this opacity to be recorded on participant statements as if it were transparent, diversified investment exposure. This practice is inconsistent with ERISA fiduciary norms requiring accurate valuation and disclosure.

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6. ERISA’s Prohibition on Conflicted Compensation

ERISA §408(b)(2) demands that compensation be reasonable and disclosed. Lifetime income guarantees inside TDFs obscure significant compensation:

• Insurance spreads not captured in traditional fee tables;
• Embedded guarantee costs not disclosed as numeric fees;
• Ancillary revenues to affiliates (e.g., asset-management fees, revenue sharing).

This is precisely the kind of undisclosed economic benefit that ERISA’s prohibited transaction and fiduciary standards were designed to prevent.

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8. Participant Harm — The Ultimate Consequence

Lifetime income elements inside TDFs:

• Increase cost without commensurate benefit;
• Conceal risk behind “guarantee” language;
• Reduce liquidity and choice;
• Mask fees through the attribution of spread income;
• Potentially deliver lower lifetime wealth than diversified non-annuitized options.

This harm is not speculative; it is structural.

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9. Conclusion: Structural Incompatibility with ERISA

Lifetime income annuity components hidden within Target-Date Funds — particularly in state-regulated CIT structures — are not merely risky investment choices. They are:

• Undiversified exposures, violating ERISA §404(a)(1)(C);
• Prohibited transactions with parties in interest under ERISA §406(a);
• Inconsistent with required fiduciary processes, including valuation, disclosure, and conflict management.

Policymakers, litigators, and fiduciaries alike must recognize that the packaging of insurance guarantees inside TDFs does not transform them into safe, diversified investment exposures.
It transforms them into trust law liabilities waiting to be litigated.

I.APPENDIX Introduction: Annuities as a CFA Ethics Issue, Not Merely an ERISA Issue

A few CFA charterholders has begun actively promoting lifetime annuities in 401(k) plans, often framing these products as prudent solutions to longevity risk. As discussed in 401(k) Lifetime Income: A Fiduciary Minefield (Commonsense 401k Project, Feb. 10, 2022), this framing ignores fundamental fiduciary risks embedded in annuity products—particularly single-entity credit risk, illiquidity, opaque pricing, and conflicts of interest.

While ERISA fiduciary standards already raise serious concerns, CFA Institute fiduciary and ethical standards are at least as strict—and in several respects stronger. CFA charterholders are bound not only by applicable law (including ERISA), but by an independent professional code that places client interests, transparency, and integrity of the profession above product sales or industry narratives.

This appendix demonstrates that actively recommending annuities in 401(k) plans may run afoul of multiple CFA Institute standards, particularly where the risks and conflicts inherent in annuities are minimized, obscured, or ignored.

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II. CFA Institute Pension Trustee Code: Knowledge, Liquidity, and Prudence

The CFA Institute Pension Trustee Code of Conduct makes explicit that effective fiduciaries must understand:

“How investments and securities are traded, their liquidity.”
(CFA Institute Pension Trustee Code of Conduct, p. 13)

This requirement is critical for annuities.

A. Liquidity Failures of Annuities

Lifetime annuities in 401(k) plans typically:

• Cannot be traded,
• Cannot be priced daily by a market,
• Cannot be exited without penalty,
• Are subject to insurer-controlled crediting rates and withdrawal restrictions.

A CFA charterholder who recommends a product whose liquidity disappears precisely when credit risk rises is failing the Code’s requirement of competence and diligence. Liquidity risk is not ancillary—it is central to DC plan design, where participants may need to rebalance, roll over, or withdraw assets.

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III. Core Fiduciary Obligations Under the CFA Pension Trustee Code

The Pension Trustee Code requires fiduciaries to:

• Act in good faith and in the best interests of participants
• Act with prudence and reasonable care
• Act with skill, competence, and diligence
• Maintain independence and objectivity
• Avoid conflicts of interest
• Communicate transparently and accurately

Each of these principles is strained—if not violated—by annuity recommendations.

A. Prudence and Diversification

Diversification is a foundational fiduciary principle. Annuities concentrate participant assets in a single insurer, creating uncompensated single-entity credit risk. This violates both ERISA §404(a)(1)(C) and CFA prudence standards.

CFA charterholders routinely criticize concentrated credit exposure in bond portfolios—yet often ignore the same risk when it is embedded in an insurance product.

B. Transparency and Communication

Annuities:

• Do not disclose spread-based compensation in a form comparable to expense ratios,
• Do not disclose CDS-implied credit risk,
• Do not provide transparency into offshore reinsurance or private credit backing liabilities.

Recommending such products without full transparency conflicts directly with the obligation to communicate accurately and transparently with beneficiaries.

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IV. “Putting Clients First”: The CFA Code of Ethics

Every CFA charterholder annually affirms adherence to the CFA Code of Ethics and Standards of Professional Conduct, including the obligation to:

“Place the integrity of the investment profession and the interests of clients above their own personal interests.”

This is the essence of fiduciary duty.

A. Annuities and Asymmetric Incentives

Annuities generate profits through:

• Spread income,
• Illiquidity,
• Opacity,
• Long-dated lock-in.

These features benefit insurers and intermediaries—not participants. When CFA charterholders promote annuities while downplaying these structural incentives, they elevate product narratives over client welfare.

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V. Application of CFA Standards to Annuities

Standard III(A): Loyalty, Prudence, and Care

Insurers exploit information asymmetry, :

• Complexity,
• Illiquidity,
• Participant unfamiliarity with insurance accounting.

Recommending such products without full disclosure fails the duty to act for the benefit of clients.

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Standard III(B): Fair Dealing

In annuities, insurers reserve discretion over:

• Crediting rates,
• Portfolio allocation,
• Reinsurance structures.

Participants bear downside risk, while insurers retain upside discretion—mirroring the “GP discretion” clauses widely criticized in PE LPAs.

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Standard III(D): Performance Presentation

Annuity performance is often:

• Presented using smoothed or declared rates,
• Not benchmarked to appropriate alternatives,
• Compared misleadingly to money market funds rather than diversified stable value funds.

This selective presentation is inconsistent with fair and complete performance communication.

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Standard VI(A): Conflicts of Interest

Conflicts arise where:

• Insurers also serve as recordkeepers,
• Consultants have relationships with insurers,
• Products generate hidden spread income.

Failure to disclose or mitigate these conflicts violates CFA conflict-of-interest standards.

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Standard VI(B): Priority of Transactions

Annuities prioritize insurer balance-sheet management over participant flexibility—similar to PE structures that prioritize GP economics over LP outcomes.

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Standard VI(C): Fee Disclosure

Just as PE firms have been sanctioned for undisclosed fees, annuity providers:

• Fail to disclose spread income,
• Embed costs in opaque crediting rates,
• Avoid standardized fee reporting.

CFA charterholders who accept this opacity are applying a double standard.

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Standard VII(A): Conduct as a CFA Charterholder

By recommending products that violate principles of:

• Transparency,
• Diversification,
• Liquidity,
• Conflict avoidance,

CFA charterholders risk cheapening the CFA designation itself

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VI. “50 Ways to Restore Trust in the Investment Industry”—Applied to Annuities

The CFA Institute’s 50 Ways to Restore Trust emphasizes:

• Naming unethical behavior,
• Advocating for stronger investor protections,
• Refusing willful ignorance,
• Holding bad actors accountable.

Silence around annuity risks—particularly by CFA charterholders—runs counter to this mandate. Ignoring annuity conflicts because they are “legal” or “industry standard” is precisely the ethical failure the CFA Institute has warned against.

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VII. Conclusion: Annuities as an Ethical Stress Test for the CFA Profession

Pushing annuities into 401(k) plans is not merely a product choice—it is an ethical stress test for fiduciaries and CFA charterholders.

• Annuities violate diversification principles.
• They suppress risk-mitigation tools like downgrade provisions and CDS analysis.
• They depend on opacity and illiquidity for profitability.
• They expose participants to risks they cannot manage or exit.

Under CFA standards—particularly the Pension Trustee Code and the Code of Ethics—putting clients first requires resisting products whose economics depend on clients not fully understanding the risks.

If CFA charterholders apply to annuities the same ethical scrutiny they apply to other assets, many annuity recommendations in 401(k) plans would be indefensible.

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

Private credit has become the darling asset class of pensions, endowments, insurers, and increasingly retail investors. It promises what every fiduciary wants to hear: near-equity returns, bond-like stability, and low correlation to markets. But as scrutiny increases—from PBS NewsHour, Bloomberg, academics, and regulators—the uncomfortable question is no longer whether private credit is risky.

It is whether the performance itself is real.

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Start With the Basic Economic Reality of Credit Markets

Credit markets are among the most competitive markets in finance.

In real-world lending:

• 10 basis points (0.10%) matters.
• Borrowers arbitrage relentlessly between banks, public bonds, syndicated loans, and revolvers.
• If a borrower can save 25–50 bps, they usually do.

This means true economic excess returns in credit are small unless you are:

1. taking materially more risk,
2. exploiting a temporary dislocation, or
3. benefiting from non-price advantages that are not scalable.

There is no magic fourth option.

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Now Add Private Credit Fees — This Is Where the Story Breaks

Private credit typically charges, conservatively:

• ~100 bps management fee,
• 10–20% performance fee (“carry”),
• plus fund expenses, leverage costs, and transaction fees.

Let’s translate that into economics.

Example (simplified but realistic):

• Gross loan yield: SOFR + 450 bps
• SOFR: 5.0%
• Gross yield: 9.5%

Subtract:

• Management fee: –1.0%
• Fund expenses & financing drag: –0.3%
• Expected carry (annualized): –0.7%

➡️ Net to LP ≈ 7.5%

Now ask the obvious question:

If the same borrower can access public credit or bank credit at SOFR + 250–300 bps, why is private credit earning SOFR + 450?

Answer:
It usually isn’t—not without additional risk or accounting distortion.

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Jeffrey Hooke and the “Mark-to-Myth” Problem

This is where the recent research by Jeffrey Hooke (Johns Hopkins), Xiaohua Hu, and Michael Imerman becomes pivotal.

In their Journal of Private Markets Investing article, the authors do something refreshingly simple:
They compare private credit funds to publicly traded ETFs with similar underlying assets, instead of the industry’s preferred, forgiving benchmarks.

Their findings are devastating:

• Private credit funds barely outperform or underperform comparable public benchmarks.
• Much of the reported “performance” comes from unrealized residual value—loans that have not been repaid and are not marked to market.
• This is “mark-to-myth” accounting, eerily similar to illiquid public investments before the Global Financial Crisis

Why Private Credit is a Fraud

.

As Hooke put it bluntly:

“Private credit performance is both lacking in alpha as well as a timely return of capital. The two main marketing points of the industry seem to be illusory.”

Why Private Credit is a Fraud

That is not activist rhetoric. That is an academic indictment.

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The Five Ways Private Credit ‘Works’ — None Are Free

There are only five possible explanations for private credit’s reported success:

1. Illiquidity Premium (Overstated)

True illiquidity premia in credit are typically 25–75 bps, not 200–300 bps.
Yet private credit markets:

• offer quarterly liquidity,
• have active secondaries,
• and show “smooth” NAVs.

That’s not illiquidity.
That’s delayed price discovery.

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2. Covenant and Structural Risk

Private credit often:

• lends to weaker borrowers,
• accepts looser covenants,
• uses PIK toggles and amend-and-extend,
• relies on sponsor goodwill rather than enforceable protections.

This isn’t alpha.
It’s selling insurance against default and downgrade.

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3. Regulatory Arbitrage

Private credit fills gaps where:

• banks are constrained by capital rules,
• borrowers fail public-market disclosure tests.

That’s not superior underwriting.
It’s regulatory arbitrage, and it disappears when losses arrive.

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4. Valuation Smoothing (The Big One)

Private credit is not market-tested:

• loans are marked by managers or friendly third parties,
• downgrades are slow,
• non-accrual is delayed,
• restructurings avoid default recognition.

Result:

• volatility is suppressed,
• losses are deferred,
• fees keep flowing.

Public credit shows pain early.
Private credit hides it.

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5. Survivorship and Selection Bias

What you see:

• successful funds,
• cherry-picked vintages,
• IRRs boosted by cash-flow timing.

What you don’t:

• funds quietly wound down,
• capital impairment absorbed years later.

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Why Consultants and Pensions Love This Illusion

As discussed in my recent post on how pension consultants became the distribution arm for private equity, the same conflicts apply to private credit. Smoothed returns:

• understate standard deviation,
• understate correlation,
• inflate Sharpe ratios,
• and mechanically justify over-allocation.

The CFA Institute has explicitly warned that illiquid assets often exhibit stale and artificially smoothed returns, and that analysts “need to unsmooth the returns to get a more accurate representation of risk and return.”

Yet consultants rarely do.

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Why This Matters for Pensions and ERISA Fiduciaries

For large plans:

• Public credit costs <5 bps
• Private credit costs 100–200+ bps all-in

The excess return hurdle must overcome:

• fees,
• illiquidity,
• valuation opacity,
• tail risk.

That is an extraordinary burden of proof—especially when borrowing spreads differ by tens of basis points, not hundreds.

Under ERISA principles, performance based on misleading valuation, smoothed risk, or delayed loss recognition raises serious questions about:

• prudence,
• reasonableness of fees,
• and prohibited transactions.

This is not a theoretical concern.
It goes directly to whether reported performance is materially misleading.

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So… Is Private Credit Performance a Fraud?

Fraud requires intent.
That is for regulators and courts to decide.

But systematic overstatement of returns, systematic understatement of risk, and performance driven by unrealized, unmarked residual value meet a lower—and more relevant—standard:

They mislead fiduciaries and beneficiaries about the true economics of the investment.

In a competitive credit market where 10 basis points matters, private credit cannot deliver persistent excess returns after 100-plus basis-point fees unless risk is being hidden, delayed, or transferred through opaque valuation and weak structures.

There is no third option.

Chris Tobe, CFA, CAIA has written extensively on Private Credit and its use in Public Pensions, and Life Insurance Portfolios backing annuities.  He was awarded the Private Debt Microcredential in 2023 by CAIA.  In his role as the Chief Investment Officer at Hackett Robertson Tobe in 2017 he completed a fiduciary review of the $4billion Private Credit Portfolio of the $40 billion Maryland State Retirement System.  His upcoming paper in the Journal of Economic issues looks at the Private Credit portfolios backing annuities.  

Appendix: Medallia Loan Valuation Divergence — Evidence of Private Credit Marking Discretion

A striking, real-world example of how private credit performance reporting can vary dramatically — even on the same economic exposure — comes from the valuation of a private credit loan to Medallia Inc., a software company taken private by Thoma Bravo in 2021.   Exposed by Leyla Kunimoto in her excellent piece at https://www.accreditedinsight.com/p/toilets-in-cvs-evergreen-trees-and?r=ibymp&utm_campaign=post&utm_medium=web&hide_intro_popup=true

According to multiple reporting outlets, different private credit lenders have marked the identical Medallia loan at materially different values as of late 2025:

• An Apollo Global Management private credit fund valued the loan at ~77 cents on the dollar (indicative of distress pricing). Private Debt News+1
• A KKR co-managed vehicle marked the same loan significantly higher, at ~91 cents on the dollar. Private Debt News
• In some fills of the same exposure by Blackstone’s BDC, values were reported between these levels, further highlighting divergence across managers. Private Debt News

This 14-cent or greater valuation gap on the same underlying asset — held contemporaneously by different private credit lenders — is among the largest spreads observed in regulatory filings to date, and underscores several important points for fiduciaries and analysts:

• Private credit valuations are highly discretionary

Unlike publicly traded bonds that have observable market prices, private credit lenders often determine marks based on internal assumptions regarding recoveries, default probabilities, liquidity, and expected cash flows. These assumptions can vary significantly across managers, even for the same borrower and capital structure.

• Reported performance is directly tied to valuation assumptions

Because private credit returns — particularly for illiquid loans — depend on periodic marks rather than realized cash flows, differences in pricing assumptions immediately translate into differences in reported returns. In the Medallia example, a 14-point valuation delta between Apollo and KKR alone would materially change realized and unrealized return metrics, absent any difference in actual credit performance.

• The divergence grows precisely where risk rises

As commentators noted, valuation spreads tend to widen especially when a loan is stressed. In the Medallia case, Apollo’s more distressed mark and KKR’s higher valuation reflect differing expectations about recovery and credit quality, rather than a single objective credit outcome. Private Debt News

• This kind of mark dispersion is incompatible with reliable performance reporting

If managers can assign widely divergent fair values to the same asset without observable market trades — and those marks drive net asset values (NAVs), performance statistics, fee calculations, and allocation decisions — then reported private credit performance is inextricably tied to manager discretion and valuation policy, rather than hard economic results.

In other words: when valuation assumptions vary by 14 points or more on identical exposures, reported returns cease to reflect reliable economic reality and instead reflect marking policy.

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Implications for My Overall Thesis

This Medallia valuation discrepancy sits precisely at the juncture of the major themes in my reporting:

• PBS and academic warnings about opaque valuations and illiquid asset risk; Accredited Insight
• Consultants’ reliance on smoothed private credit returns to justify over-allocation;
• The fundamental issue you raise: that private credit performance may not be grounded in observable market economics, but in manager discretion.

With this example, we can now point to actual data from regulatory filings and market reporting showing that even on the same risk exposure, private credit marks — and therefore reported returns — are not consistent, objective, or verifiable across major alternative asset managers.

This stands as one of the most compelling empirical pieces of evidence supporting my argument that private credit performance, as currently reported and used in fiduciary models, may be fundamentally misleading.

Related Reading

PBS Sounds the Alarm on Private Credit https://commonsense401kproject.com/2025/12/12/pbs-sounds-the-alarm-on-private-credit-a-warning-fiduciaries-and-regulators-can-no-longer-ignore/

Residual Risk: Benchmarking the Boom in Private Credit – Hooke et al  https://www.pm-research.com/content/iijpriveq/24/1/109

How America’s Largest Pension Consultants Became the Distribution Arm for Private Equity https://commonsense401kproject.com/2025/12/11/how-americas-largest-pension-consultants-became-the-distribution-arm-for-private-equity/

Private Debt as an ERISA Prohibited Transaction  https://commonsense401kproject.com/2025/07/18/private-debt-problematic-in-erisa-plans/

On December 11, 2025, PBS NewsHour did something that almost no mainstream media outlet has done to date: it warned the public—plainly and directly—about the risks of private credit. The segment, airing roughly between the 20- and 28-minute mark of the broadcast, treated private credit not as an exotic investment strategy for sophisticated institutions, but as a growing systemic risk that already touches ordinary Americans through pensions, insurance products, and retirement plans.  https://www.pbs.org/video/december-11-2025-pbs-news-hour-full-episode-1765429201/

That alone is significant. PBS is not a sensationalist outlet. When PBS NewsHour devotes prime airtime to a financial product, it is usually because the issue has matured from “industry concern” into a matter of broad public interest and potential harm. Private credit has now crossed that threshold.

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PBS Breaks the Silence on Private Credit Risk

What makes the PBS NewsHour segment so important is not just that it covered private credit, but how plainly it described the regulatory hole surrounding it. As PBS explained, “private credit is just lending by nonbanks — financial institutions like pension funds, insurance companies, sovereign wealth funds — but not regulated like the traditional banking system.” That simple framing strips away years of industry marketing and exposes the core issue: private credit performs a bank-like function without bank-level oversight.

Even more telling was the warning from Tom Gober, an insurance fraud examiner, who focused on who ultimately bears the risk. Gober stated: “A very large percent of the population is affected by this higher risk without knowing it.” That observation goes to the heart of the problem. Private credit risk is no longer confined to hedge funds or wealthy investors. It is increasingly embedded—quietly and indirectly—inside pension plans, insurance general accounts, pension risk transfer annuities, target date funds, and state-regulated collective investment trusts, where workers and retirees have no visibility, no pricing transparency, and no meaningful ability to opt out.

When PBS elevates this issue to a national audience, it confirms what fiduciary advocates have been warning for years: private credit is not just an alternative investment—it is a public exposure problem.

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The BIS, Financial Times, and the Credit Ratings Problem

PBS’s warning aligns closely with concerns raised by global regulators. In a recent report highlighted by the Financial Times, the Bank for International Settlements (BIS) warned that private loan credit ratings may be “systematically inflated.” The BIS focused on the growing reliance on small or lightly regulated ratings firms—particularly in insurance and private credit markets—where inflated ratings can dramatically reduce capital requirements and mask real credit risk.  https://www.ft.com/content/9d1f4e49-5edc-4815-9efb-d4ef41756d72

This is not an academic issue. Inflated ratings distort pricing, suppress risk premiums, and create the conditions for sudden repricing and fire sales when defaults rise or liquidity dries up. The BIS explicitly tied these dynamics to systemic fragility, drawing uncomfortable parallels to the mis-rated mortgage securities that fueled the 2008 financial crisis.

The danger is magnified because private credit assets are illiquid, thinly traded, and often self-priced. When confidence breaks, there is no transparent market to absorb losses—only forced write-downs that cascade through insurance balance sheets and pension portfolios.

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What This Means for ERISA Plans and Retirement Savers

These systemic warnings directly reinforce the concerns raised earlier this year in my CommonSense 401k Project’s article, “Private Debt Problematic in ERISA Plans.”  https://commonsense401kproject.com/2025/07/18/private-debt-problematic-in-erisa-plans/ As that piece explained, private debt and private credit are fundamentally misaligned with ERISA’s core fiduciary requirements of prudence, diversification, and fair valuation.  This will be dealt with in litigation around prohibited transactions in which the burden of proof is on the fiduciary that their private debt is exempt.

Private credit’s lack of observable market pricing, combined with long lockups and opaque fee structures, makes it exceptionally difficult for plan fiduciaries to demonstrate that participants are receiving commensurate value for the risks being taken. Embedding these assets inside target date funds or insurance-wrapped vehicles does not solve the problem—it hides it.

PBS’s reporting underscores an uncomfortable truth: millions of retirement savers are already exposed to private credit risk without knowing it, precisely the scenario ERISA was designed to prevent.

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Shadow Banking, Then and Now

None of this is new. Nearly a decade ago, analysts warned that private equity firms were evolving into shadow banks, providing credit outside the regulated banking system. That prediction has now fully materialized. Private equity sponsors control vast private credit platforms that originate, warehouse, and distribute loans with minimal public disclosure.

Naked Capitalism has tracked this evolution for years, repeatedly warning that pensions—including CalPERS—were increasing allocations to private equity and private debt simultaneously, often while adding leverage at the total-fund level. The result is layered risk: illiquidity on top of leverage, wrapped in optimistic assumptions about diversification and yield stability. https://www.nakedcapitalism.com/2016/02/the-new-shadow-banks-private-equity-becomes-private-credit.html?utm_source=chatgpt.com

PBS’s segment confirms that these concerns are no longer fringe critiques—they are entering mainstream financial discourse.

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Why the PBS Warning Matters Now

The convergence of warnings—from PBS, the BIS, the Financial Times, and independent analysts—signals that private credit has reached a dangerous inflection point:

• It has grown to systemic scale
• It operates largely outside traditional regulatory frameworks
• Its risks are mispriced through inflated ratings
• And its losses will not be confined to “sophisticated investors,” but absorbed by workers, retirees, and policyholders

When a trusted public broadcaster like PBS feels compelled to warn viewers, fiduciaries and regulators should take notice. The question is no longer whether private credit can create systemic problems—it is whether policymakers will act before those problems become visible through losses.

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Conclusion: An Alarm Bell for Fiduciaries

PBS did not mince words, and neither should fiduciaries. Private credit is increasingly intertwined with retirement systems that were never designed to absorb opaque, illiquid credit risk. The warning from Tom Gober—that a large portion of the population is already exposed without knowing it—should be taken as a direct challenge to ERISA fiduciaries, regulators, and courts.

Transparency, prudence, and accountability are not optional under ERISA. If private credit cannot meet those standards, it does not belong in retirement plans—no matter how attractive the yield looks on paper.