In a shocking irony, the highest-paid public employees in the United States are not Governors, Presidents or Cabinet officials— but staff at the State Teachers Retirement System of Ohio (STRS), based in Columbus, Ohio.
Teachers, meanwhile, have been denied modest cost-of-living adjustments (COLAs) for years, told the fund “can’t afford it.”
At the same time, investment staff in that same building are pocketing Wall Street–level pay — and the Ohio Attorney General’s office is spending taxpayer money protecting the excess in a sham trial going on this week.
1. A Two-Tier System of Public Servants
STRS is one of the largest public pensions in America, managing about $90 billion for active and retired teachers. Yet in 2024 alone, according to Ohio’s official Checkbook transparency portal, the system paid out staggering salaries:
4 employees earned over $600,000.
20 employees earned over $400,000.
49 employees earned over $300,000.
85 employees earned over $200,000
STRSsalaries2024.csv
.
By comparison, the average Ohio teacher earns $68,000, with many retirees living on less than $45,000 per year — without a COLA.
In 2019, STRS had only one employee earning over $600,000. By 2024, there were four, with salaries and bonuses doubling or tripling across multiple positions. The growth wasn’t driven by investment success — STRS underperformed comparable funds, ranking in the bottom quartile nationally — but by internal decisions to inflate pay and bonuses.
2. The “Lawfare” Campaign: How Reform Was Crushed
When reform-minded trustees such as Rudy Fichtenbaum, a respected economics professor, and Wade Steen, a CPA appointed by the governor, began to challenge the excess, Attorney General Dave Yost unleashed what many observers now describe as “lawfare” — the use of legal process as a weapon to silence oversight.
The AG’s office accused Fichtenbaum and Steen of “dereliction of fiduciary duty”, using a so-called QED report that originated from an anonymous staff letter — believed to include STRS insiders with direct conflicts of interest. STRS never invested one penny in QED, never paid one dollar in fees it was just a discussion and in fact QED was not even a real firm but a concept. But the “scandal” achieved its political goal: it neutralized reform.
As one Columbus observer put it:
“They went after the watchdogs, not the thieves.”
The result? Trustees backed off from cutting excessive salaries. STRS staff hailed the AG’s intervention as a “political victory.”
3. From Oversight to Capture
After the QED lawfare episode, STRS moved quickly to consolidate control. The board, under pressure, voted to hire a “Governance Consultant” — ACA Global Governance Advisors, the same firm criticized by Naked Capitalism for recommending excessive pay at CalPERS, another public fund mired in private equity conflicts. Instead of independence, the firm provided justification for more bonuses and less transparency.
The Ohio Attorney General — who is supposed to represent STRS members — instead defended the staff and administrators, spending public resources to protect inflated pay.
4. The Salary Explosion: Data Speaks
Comparing 2019 vs. 2024 STRS data:
Year
Over $600K
Over $400K
Over $300K
Over $200K
2019
1
14
30
67
2024
4
20
49
85
That’s a 90% increase in six-figure employees in just five years — during a period when teachers’ COLAs were frozen. Several investment directors saw total compensation increases of $150,000–$300,000 in that time frame, driven by bonuses unrelated to outperformance.
The STRS Checkbook data shows that investment staff like Matthew Worley (Deputy Executive Director, Investments) earned $731,797, while directors of various asset classes regularly earned $600,000–$700,000. Worley’s salary went up 59% over 5 years. Chief Legal Officer Stacey Wideman saw her salary jump 76% from $143k to $253k. Lynn Hoover jumped 92% from $207k to $400k. Aaron DiCenzo, Director of Alternative Investments, went up 111% from $281k to $593k. Ryan Collins, director of Fixed Income, went up 111% from $306k to $646k. Garret Wofford, a Portfolio Manager in Alternative Investments, went up 115% from $156k to $337k.
STRSsalaries2024.csv
.
Yet, none of these individuals have published investment research, appeared in CFA Institute journals, spoken at major conferences, or been recruited to higher-paying private-sector roles — the usual markers of genuine talent. They are public bureaucrats, paid as if they were hedge fund stars.
5. Why So Much? Following the Money
The answer may lie in what STRS pays others — particularly Private Equity firms.
STRS invests billions in Blackstone, Apollo, KKR, Carlyle, and other politically connected firms, paying an estimated $800 million annually in hidden fees through secret no-bid contracts. When a judge ordered disclosure of these contracts, STRS refused, providing only heavily redacted documents and claiming confidentiality.
Parallel litigation in Kentucky (involving the same Blackstone partnerships) revealed what Ohio hid: the contracts contain fee offsets, leverage limits, and LP Advisory Committee powers — all material to fiduciary oversight.
In short:
STRS staff are paid not for performance, but for looking the other way.
6. Dark Money and Media Silence
Since the Citizens United decision, Private Equity firms have become major dark-money donors to Republican campaigns. Blackstone, KKR, fund GOP-aligned SuperPACs, while Bain Capital gave rise to Mitt Romney and GTCR to Illinois Governor Bruce Rauner, Carlyle to VA Governor Younkin, and General Catylst to MA gov Charlie Baker. Wilbur Ross, Trump’s Commerce Secretary, was himself a PE baron.
In Ohio, Apollo Global Management — whose founder Leon Black paid Jeffrey Epstein $170 million for “tax advice” — wields extraordinary influence. Apollo-affiliated entities now control Gannett, owner of the Columbus Dispatch, Cincinnati Enquirer, and dozens of smaller Ohio papers — the same media ecosystem that has largely ignored STRS corruption. See: Ohio Media’s Complicity (Commonsense401kProject, 2025). Apollo was involved in the CALPERS scandal, where Ex. Director was sent to prison for 5 years and a trustee committed suicide.
7. Political Protection and Pay-to-Play
Attorney General Yost — a likely recipient of dark-money political support — continues to shield STRS leadership. His office’s “lawfare” tactics against reform trustees effectively destroyed independent oversight. Meanwhile, STRS’s own lobbyist, Alexander Strickmaker, has deep ties to FirstEnergy, the utility at the center of Ohio’s largest bribery scandal.
This is pay-to-play 2.0 — pension money, politics, and private equity all fused into a self-protecting system.
8. The Consequences for Teachers
While STRS insiders enrich themselves, retirees live with shrinking purchasing power. Ohio’s Republican leadership fights to block even modest COLA restoration bills, claiming “fiscal prudence” — yet funds millions for bonuses, travel, and legal fees to suppress transparency. Teachers’ lifetime savings have been turned into an ATM for insiders.
As one retired educator put it:
“They’re giving themselves Wall Street pay for Main Street performance — and we’re the ones footing the bill.”
Professor Thomas Lambert (University of Louisville) and I wrote a paper accepted by the Journal of Economic Issues: “Safe” Annuity Retirement Products and a Possible U.S. Retirement Crisis (https://ir.library.louisville.edu/faculty/943/). One of the central contributions of the paper is a simple chart — the risk–return efficient frontier for stable value funds and annuities. For the first time, we plotted these so-called “safe” retirement products on the same terms that investment managers use to evaluate mutual funds and stocks. The results are eye-opening.
The Chart
What It Shows
– Risk (x-axis): Diversified pooled products like Vanguard RST or the Hueler stable value universe sit at the low-risk end. By contrast, single-entity general account annuities (Prudential, Athene, Lincoln, etc.) fall far to the right. Actuarial evidence (Griffin, Fabozzi Handbook of Stable Value, 1998) confirms they carry ten times the risk of diversified stable value. – Return (y-axis): Crediting rates. TIAA and the TSP G Fund are transparent; most other insurers are not. They vary rates from client to client — not by size or efficiency, but by what they think they can get away with.
Why Distances Matter
– Vertical gaps = lost earnings. Example: Valley’s plan chose Lincoln at 2.05% while peers like TIAA and MassMutual pay 4–6%. That’s measurable damages, compounded over years. – Horizontal gaps = reckless risk. Two products may credit the same rate, but one carries ten times the credit risk. That is fiduciary malpractice. – Distance from the efficient frontier = fiduciary breach. If a product is dominated (worse risk and worse return than available alternatives), fiduciaries cannot justify keeping it.
Why This Matters
– For participants: The “safe” annuity in your plan may actually be the riskiest product you own. – For fiduciaries: This chart is a one-page prudence test. If your plan’s dot sits below the frontier, you are failing participants. – For courts: Juries and judges understand pictures. The vertical drop equals lost earnings, the damages owed.
-General Account portfolio returns are estimated on the graph because even the highest yielding fixed annuity, like TIAA, still has excessive spreads of around 150 basis points.
The Transparency Problem
Outside of TIAA and the TSP G Fund, insurer rates are hidden. Consultants quietly sell access to FI360 or Hueler data, but participants can’t see what they’re earning. That opacity masks insurer spread profits and keeps fiduciaries blind.
Bottom Line
Stable value and pooled products sit on the efficient frontier. Most fixed annuities don’t. The distances between the dots aren’t abstract — they are the measure of fiduciary failure, and the dollar value of retirement savings lost.
Journal of Economic Issues Accepted 2024 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/
Background: CDS, spreads and fiduciary/prohibited-transaction relevance
How could you neutralize or hedge the single entity credit risk of an Annuity product and the answer is a Credit Default Swap (CDS). While a high-risk annuity like Athene has a double the default rate of a moderate-risk annuity like Prudential over the next 5 years, the risk differential increases significantly beyond 10 to 20 years, as most annuities have no maturity date.
What is a CDS
A credit default swap is a contractual derivative in which one party (the protection buyer) pays a periodic premium in basis points (bps) to another party (the protection seller) in exchange for a contingent payment if a reference entity suffers a “credit event” (e.g., default, restructuring) on its debt. The “spread” of a CDS (the premium in bps per annum) reflects the market’s assessment of the default-risk (or credit deterioration risk) of the reference entity. Credit default swaps are typically for a certain time, and the market for insurers typically only extends to 5 years for U.S. insurance providers. CDS in general do not exceed 10 years. However, many annuities are evergreen, lasting 20 years or more with no maturity, so these swaps only capture part of the risk.
Why the spread level matters
A higher CDS spread implies higher perceived risk of default (or higher risk of credit deterioration) for the reference entity.
For a fiduciary (e.g., under Employee Retirement Income Security Act of 1974 (ERISA)), when plan assets (or investment vehicles) have exposures to insurers, annuities, or other counterparties whose credit risk is elevated, the fiduciary may have a duty to monitor, disclose, hedge, or avoid those exposures (depending on context), especially if the risk was or should have been known and could materially affect the promised benefits or underlying guarantee.
For prohibited-transaction analysis (e.g., revenue sharing, platform fees, cross-subsidies, insurer compensation layers), evidence that an insurer’s credit risk was materially elevated could support a “should have known” or “imprudent” argument regarding the selection/retention of that insurer, the structure of the product, or the disclosure given to the plan or participants.
In the context of annuity/insurance products offered inside 401(k) plans, the insurer’s relative credit risk may affect the amortization of the “spread” compensation, the insurer’s ability to honor guarantees, and thus potentially the cost/damages metric. If CDS spreads are widening (i.e., compensation increasingly scarce, market‐perceived risk rising), a fiduciary reviewing a product with a “hidden spread” could argue that the risk component should have been captured and disclosed.
CDS rates do fluctuate. Prudential’s 5 year CDs rate went up to 62 bps in October 2025, but it has spiked to 86bps as late as January 2025 and was at 117bps in January of 2023.
The spread is an objective market signal; it reflects trading, not just rating‐agency assessments.
In a higher‐interest‐rate, higher‐spread environment, insurers may pursue riskier assets (e.g., private credit, leveraged finance) to maintain margins (as multiple recent studies show). That, in turn, can increase the tail risk of the insurer.
From a damages perspective, if an insurer’s CDS spread increased materially after the fiduciary decision point (or was elevated at the time), one could argue that the “cost of guarantee” embedded in an annuity product was understated, or that the residual risk was underpriced. This could also have been seen as a failure to monitor the risk.
In Pension Risk Transfers (PRT) it could capture the difference between a Private Equity Insurer, Athene, at 118bps and a more traditional insurer like Prudential at 57bps.
The CDS rate quantifies a portion of the risk damages to participants in a particular annuity product. This applies whether it is a fixed annuity or a lifetime income annuity in a DC 401(k) plan or a Pension Risk Transfer (PRT) annuity in a Defined Benefit Plan and creates a floor for damages.
Appendix: Why 5-Year CDS Understate the True Risk of Long-Dated Annuity Promises
1. The Mismatch Between 5-Year CDS Markets and 20–30-Year Annuity Liabilities
Credit Default Swaps (CDS) — the primary market-based measure of insurance-company credit risk — trade almost exclusively in 5-year maturities. But annuity guarantees are evergreen obligations:
IPG fixed annuities,
Stable-Value general-account annuities, and
Pension Risk Transfer (PRT) annuities
are effectively 20- to 30-year promises (or longer). Most never “mature” at all — they persist until the insurer fails, is downgraded, or closes the block of business.
This creates a structural distortion: we are measuring a multi-decade promise using a 5-year price of risk. No informed investor would price a 30-year bond from a single, BBB+/A- insurer based solely on its 5-year CDS cost — but that is exactly how the annuity industry presents itself to fiduciaries.
2. Why Risk Increases Exponentially With Time, Not Linearly
Credit risk does not accumulate in a straight line.
It increases non-linearly, because:
Probability of adverse events compounds over long horizons.
Insurer balance sheets change — often deteriorate — across cycles.
Regulatory forbearance and accounting games increase in long tails.
A 30-year horizon necessarily crosses multiple recessions, multiple interest-rate regimes, and at least one insurance-industry credit cycle.
This is why life insurers themselves never price long-term mortality risk by extrapolating short-term mortality tables. But the annuity industry encourages fiduciaries to make exactly that mistake for credit risk.
3. Life-Insurance Pricing as an Analog for Annuity Credit Risk
A clean, intuitive analogy exists inside the same companies that issue PRT and IPG annuities: life-insurance pricing.
Consider a 50-year-old male purchasing:
A 5-year term life policy (coverage to age 55), versus
A lifetime policy (whole life or GUL).
The pricing difference is enormous:
The insurer’s risk of the 50-year-old dying in the next 5 years is small.
The insurer’s risk of that same person dying sometime between age 55–95 is essentially 100%.
Thus:
Long-dated promises cost exponentially more, not linearly more.
This mirrors annuity-credit economics:
A 5-year CDS is like a 5-year term life policy: Cheap, because the insurer is unlikely to fail within a short window.
A 20- or 30-year annuity guarantee is like a lifetime mortality promise: The chance the insurer encounters a solvency event approaches certainty, not possibility.
4. The “Smoker Effect”: Why Impaired Insurers’ Long-Horizon Risk Blows Up Even Faster
Now assume the 50-year-old is a smoker.
The cost of the 5-year term policy increases slightly.
The cost of the lifetime policy increases dramatically.
This is the exact analog for insurers with higher CDS spreads (e.g., Lincoln, Athene, Fidelity & Guaranty).
A 50–100 bps 5-year CDS spread today is:
A minor uptick over 5 years, but
A geometric explosion of cumulative default probability over 20–30 years.
This is precisely the dynamic ignored by fiduciaries who use short-dated CDS as if they were long-dated measures of credit risk.
5. From 5-Year CDS to 30-Year Annuity Risk: The Mathematical Intuition
If a 5-year CDS implies a 3–4% cumulative default probability over 5 years (typical for BBB+ / A- insurers like Lincoln or Prudential), then:
Over 20 years, the cumulative probability compounds to 12–16%,
Over 30 years, it can reach 20–25% or higher,
And when you incorporate loss given default, state guaranty cap exposure, and transfer-risk, the participant’s exposure becomes unacceptable for any plan fiduciary who claims prudence.
Thus:
A stable-value annuity or PRT annuity is effectively a long-dated corporate bond without a market exit. No fiduciary would buy a 30-year BBB+ bond as the principal-preservation option in a retirement plan. Yet they buy insurer general-account annuities every day.
6. Why This Matters for ERISA Fiduciaries
ERISA requires fiduciaries to evaluate all material risks, including:
Credit risk,
Single-entity risk,
Liquidity risk, and
Long-horizon solvency risk tied to the structure of the investment product.
But many fiduciaries — especially in health-system 401(k) plans — look only at:
Current credit rating, or
5-year CDS levels.
This is the equivalent of analyzing a 50-year-old smoker’s mortality risk solely by looking at whether he is likely to die by age 55. It ignores where the real risk lies.
7. Conclusion: Fiduciaries Should Treat Long-Dated Annuity Promises Like Long-Dated Mortality Promises
A universal rule applies across insurance and finance:
Short-term guarantees are cheap because the risk is small. Long-term guarantees are expensive because the risk approaches certainty.
The entire annuity industry depends on fiduciaries not understanding this basic fact.
And just as no rational person would conclude that a smoker’s 5-year mortality risk says anything about his risk of dying sometime over the next 30 years, no prudent fiduciary should treat a 5-year CDS spread as a reliable indicator of long-dated annuity-credit stability.
ERISA requires better. Participants deserve better. And the data is clear: long-dated annuity risk is exponentially higher than 5-year CDS markets reveal.
November rate updated Lincoln 105bps Prudential 62bps
The October 2025 Bank for International Settlements (BIS) report, ‘The Transformation of the Life Insurance Industry: Systemic Risks and Policy Challenges,’ provides authoritative evidence that strengthens the arguments made in my recent article on Commonsense401kProject regarding offshore private credit causing increased risk in retirement products backed by Insurance Company General Accounts. The findings demonstrate how structural changes in the life insurance and private equity sectors reinforce ERISA prohibited-transaction concerns. [BIS (2025), pp. 1–3] [Tobe, Commonsense401kProject (2025)]
1. BIS Findings with ERISA Implications
The BIS report documents how life insurers, increasingly owned or partnered with private equity, are reshaping their balance sheets with higher allocations to opaque private credit and structured securities. Key findings include:
Private equity acquisitions of insurers have created conflicts of interest, with affiliated managers steering assets into their own private credit deals.
Offshore reinsurance has surged, with U.S. insurers ceding over $2 trillion of reserves by 2023, 40% to Bermuda and Cayman affiliates subject to lighter regulation.
U.S. insurers now allocate roughly 30% of general account assets to corporate debt and 18% to structured securities, many rated internally or opaquely.
Liquidity stresses are rising from surrender spikes and collateral calls on derivatives, forcing insurers into procyclical asset sales.
The Eurovita case shows how a private-equity-owned insurer collapsed in 2023, requiring a ‘surrender holiday’ and taxpayer-backed resolution. [BIS (2025), Box B, p. 15; Reuters (2023)]
3. Why This Reinforces Prohibited Transaction Risks
The BIS findings strengthen three ERISA prohibited transaction arguments:
Party-in-Interest Conflicts – Affiliated transactions between private equity sponsors, insurers, and offshore reinsurers constitute prohibited self-dealing.
Prudence and Reasonableness – Fiduciaries cannot verify valuations or spreads when private ratings and opaque fee structures dominate.
Offshore Arbitrage – By ceding assets to offshore affiliates, fiduciaries place plan money into regulatory regimes with weaker solvency and disclosure standards.
4. Systemic Risk as Fiduciary Breach
The BIS study shows insurers’ systemic risk contribution (measured by SRISK and ΔCoVaR) has risen relative to banks, particularly in North America. As insurers adopt riskier private credit portfolios, ERISA fiduciaries exposing plan participants to these structures cannot argue they are prudent or diversifiable. The systemic nature of the risk means it is embedded in the financial system, not isolated to one plan or product. [BIS (2025), pp. 18–22]
5. Policy and Litigation Implications
This evidence has three main uses:
Litigation: BIS provides an independent, global authority confirming that PE-linked insurer structures create conflicts, opacity, and systemic risks, supporting claims under ERISA §406.
Policy: BIS recommendations—standardized reporting, capital charges, macroprudential oversight—map directly onto ERISA fiduciary requirements for prudence and exclusive benefit.
Advocacy: Regulators and courts should treat offshore PE-insurer structures as per se prohibited transactions unless they disclose spreads, risks, and conflicts transparently.
Conclusion
The BIS report validates and deepens the concerns outlined in our earlier article. Offshore private equity and private credit structures of life insurers are not just opaque—they are riddled with self-dealing, systemic risk, and regulatory arbitrage. These are exactly the types of arrangements that ERISA’s prohibited transaction rules were designed to prevent. For fiduciaries, the message is clear: reliance on these products is not only imprudent but may be per se unlawful.
UPDATE November 6 2025: Insurers use small ratings agencies to get favorable ratings on Private Credit. The SEC is investigating Egan-Jones for this Practice. Egan Jones has only 20 analysts rating over 5000 different issues. https://www.bloomberg.com/news/articles/2025-11-06/egan-jones-probed-by-sec-over-its-credit-ratings-practices Bloomberg Analysis of NAIC shows that capital charges for AA- rated issues is half of what an A rating is so the incentive in $billions is to inflate ratings.
Private equity has long been marketed to U.S. retirement plans as a source of diversification and “illiquidity premium.” But for ERISA fiduciaries, private equity contracts are not simply another asset class; they are contracts structured to evade transparency, domiciled in offshore havens, and riddled with conflicts. Unlike mutual funds or collective investment trusts (CITs) subject to SEC or OCC oversight, private equity partnerships are bespoke, one-sided agreements with managers and affiliates who extract hidden fees and indemnify themselves against liability.
II. ERISA’s Fiduciary and Prohibited Transaction Framework
ERISA imposes the highest fiduciary standard in U.S. law. Fiduciaries must act solely in participants’ interests, with the prudence of an expert, and for the exclusive benefit of plan participants (29 U.S.C. §1104(a)(1)). The statute also flatly prohibits certain transactions: deals with “parties in interest” (29 U.S.C. §1106(a)) and self-dealing by fiduciaries (29 U.S.C. §1106(b)). Once triggered, they are per se violations unless the fiduciary demonstrates an exemption under §408, and under Cunningham v. Cornell Univ. the burden rests with fiduciaries.
III. Offshore Domiciles and Regulatory Arbitrage
Most private equity funds are domiciled offshore — Cayman Islands, Luxembourg, or Jersey — or structured in Delaware partnerships. These domiciles provide tax and secrecy advantages to managers while obscuring risks and fees from investors. Trustees at Kentucky TRS admitted they could not even disclose which offshore jurisdictions were used for their private equity allocations, illustrating how these structures undermine fiduciary transparency.
IV. The “25% ERISA Exemption” and Its Abuse
Under the DOL’s plan asset regulation, if less than 25% of a fund’s investors are ERISA plans, the fund is exempt from ERISA’s fiduciary standards. This loophole allows private equity managers to deliberately structure investor pools to avoid ERISA oversight, commingling ERISA assets in vehicles designed to evade fiduciary duties. Fiduciaries allocating into these structures are still liable for knowingly participating in prohibited transactions.
V. Hidden Fees, Four Sets of Books, and Conflicts
Private equity funds extract multiple layers of fees: management fees, carried interest, monitoring and transaction fees, and financing spreads on affiliated debt. Managers often maintain multiple sets of records for tax, investors, and regulators. Independent research by Phalippou and others shows that all-in costs exceed 600 basis points annually. This far surpasses index fund costs of 3–10 basis points and violates ERISA’s requirement that expenses be reasonable.
VI. Friends and Family Side Letters
Side letters grant favored investors preferential disclosure, liquidity, or fee terms. ERISA plans are rarely among the favored class. Instead, insiders profit at the expense of plan participants. Offering documents often warn that these selective disclosure practices may violate applicable law. Under ERISA, they are transfers of plan value to other investors without adequate consideration — a prohibited transaction.
VII. Illiquidity and Monitoring Failures
Private equity contracts bind fiduciaries for 7–12 years with little or no exit rights. Valuations are controlled by the GP, preventing fiduciaries from independently monitoring prudence as required by Tibble v. Edison. Secondary sales are restricted and discounted, leaving fiduciaries unable to act if investments become imprudent.
VIII. Why Private Equity is a Prohibited Transaction
Bringing the evidence together: 1. GPs and affiliates are parties in interest, receiving compensation directly and indirectly. 2. Waivers of fiduciary duty and indemnification clauses create textbook self-dealing. 3. Side letters transfer value away from ERISA investors. 4. Offshore domiciles and 25% exemptions are deliberate attempts to evade oversight. 5. Illiquidity and opaque accounting make prudence and monitoring impossible.
Therefore, private equity contracts are per se prohibited transactions unless an exemption applies, and fiduciaries bear the burden of proof. No credible exemption exists.
IX. Policy Implications
Allowing private equity in 401(k)s undermines participant protections, normalizes opaque insider-driven contracts, and invites other high-risk vehicles like crypto and offshore private credit. Courts should recognize that PE in ERISA plans is incompatible with fiduciary duties and prohibited transaction rules.
Appendix Update – Financial Times (Dec. 10, 2025): Retailization of Private Equity Deepens Fiduciary Risk
A new Financial Times analysis, co-authored by Ludovic Phalippou and William Magnuson, documents a significant industry push to extend private equity access to everyday investors, including 401(k) and other retail retirement savers — and explains why this “retailization” of private funds heightens legal and fiduciary risks rather than mitigating them. Financial Times
1. Private Equity Designed for Sophisticated Investors, Not Retail Plans
Historically, private equity funds operated under a light regulatory regime because they were assumed to be accessible only to sophisticated institutional investors with the capacity to evaluate complex fee structures, valuation conventions, illiquidity, and bespoke governance arrangements. In contrast, everyday retirement savers — including 401(k) participants — lack these institutional safeguards and repeat-player advantages. LinkedIn
2. Rising Legal Vulnerabilities When Exposed to Retail Savers
The FT article highlights specific vulnerabilities that are now exposed when private equity products are marketed to non-institutional investors:
Opaque Performance Measures: Common private-equity metrics such as internal rate of return (IRR) can be misleading, particularly when used without context on timing, reinvestment returns, or hurdle structures.
Hidden and Complex Fee Structures: Catch-up clauses, waterfall provisions, and other bespoke compensation mechanics are often poorly understood even by institutional LPs, and are likely to be poorly understood by retirement plan fiduciaries and participants.
Valuation and Liquidity Risks: The infrequent and GP-controlled nature of valuations in private equity obscures true risk and may misstate returns relative to liquidity needs of retirement plans.
Suitability and Disclosure Gaps: Retail investors expect public company-style disclosures and safeguards that private equity by design does not provide. Their lack prompts higher litigation risk when practices are perceived as misleading or unfair. Financial Times
Because retail investors do not fear being cut off from future funds — unlike institutional LPs — the FT commentary underscores that courts, not regulators, may become the primary venue for enforcing accountability in cases of misrepresentation, unfair practices, and lack of transparency. The piece suggests that “tobacco-style” legal challenges could emerge as investors challenge private equity’s opaque practices once retail capital is involved. LinkedIn
3. Implications for ERISA Fiduciaries and Prohibited Transaction Analysis
This Financial Times critique strengthens the view that private equity’s intrinsic structural and disclosure characteristics make it incompatible with the ERISA fiduciary and prohibited-transaction framework:
ERISA’s prudence standard requires fiduciaries to act with the care of a “prudent man” in light of the information available. When basic valuation, fee, and liquidity information is non-standardized and opaque, the prudence standard cannot be meaningfully satisfied.
ERISA’s disclosure requirements and prohibited-transaction rules are premised on transparency and arm’s-length conflict discipline — conditions that private equity’s documented marketing and structuring practices actively undermine when extended to retail retirement assets.
The heightened legal risk of misrepresentation claims — foreshadowed in the FT coverage — underscores that reliance on traditional private equity justification (e.g., institutional sophistication, negotiated side letters, bespoke GP terms) does not extend to 401(k) fiduciaries, whose participants are not repeat sophisticated actors.
The FT commentary thus reinforces that private equity, particularly as it is evolving to include retail investor access (e.g., through 401(k) platforms or retailized vehicles), presents novel and acute ERISA compliance challenges and potential prohibited transaction risks not addressed by current industry guardrails. Financial Times
Appendix: Private Equity Contracts and Prohibited Transactions
Excerpt: “Other sections of limited partnership agreements waive the general partner’s fiduciary duty. One common means of doing that is to provide that the general partner may consider interests other than that of the investors in his fund, including his own interest. Pension funds should never indemnify vendors against criminal liability. Officers and directors who approved such an indemnification would breach their fiduciary duty to the fund. Indeed, pension funds should not indemnify vendors for the vendors’ own negligence.”
Cited examples: Blackstone V, Blackstone VI, Oak Hill III (all held by KRS). Kentucky Retirement Systems (KRS) held Blackstone and Oak Hill contracts where indemnification clauses explicitly covered “criminal” conduct, while other sections allowed the GP to consider its own interests ahead of investors
ERISA impact: This constitutes a transfer of value from plan participants to insiders — a clear §406(a)(1)(D) violation (transfer of plan assets for less than adequate consideration).
Exhibit 2: Offshore Domiciles & 20% Plan Asset Exemption
Excerpt: “Most private equity and private credit funds used by U.S. pension and 401(k) plans are organized in offshore domiciles like the Cayman Islands, Luxembourg, or Jersey. The purpose is tax avoidance and regulatory arbitrage—not participant protection. These structures often shield disclosure of true expenses and valuation practices, and favor affiliates through preferential terms hidden in side letters.”
“KY TRS counsel Beau Barnes replied that members and taxpayers do not have a right to know what offshore tax haven TRS has put his money. The only source of domicile information is within confidential documentation.”
ERISA impact: If a fund claims exemption under the 20% rule, then ERISA fiduciaries cannot rely on statutory protections inside the contract. That makes any allocation itself a prohibited transaction, as plan assets are knowingly commingled into structures designed to evade ERISA
Exhibit 3: Friends and Family Side Letters
Source: Tobe AltsCrypPE11mar25.docx book chapter in upcoming book 401k invesments
Excerpt: “Private equity fund offering documents often disclose that investors agree to permit managers to withhold complete and timely disclosure of material information. The fund may have agreed to permit the investment manager to retain absolute discretion to provide certain mystery investors with greater information. As a result, the fund you invest in is at risk that other unknown investors are profiting at its expense. Offering documents warn these nondisclosure policies may violate applicable laws.”
Excerpt: “Private equity and private credit contracts typically lock fiduciaries into long-term, illiquid structures (7–12 years for PE). ERISA requires fiduciaries to monitor and, if necessary, remove imprudent investments. But in these vehicles, no liquidity exists to exit a deteriorating manager. Secondary sales are limited, heavily discounted, and often require GP consent.”
ERISA impact: Lock-in periods and GP-controlled valuations make ongoing prudence impossible.
Excerpt: “Private equity and private credit funds generate fees in layers: management fees, carried interest, transaction, monitoring, and advisory fees paid to affiliates, and financing spreads embedded in affiliated lending. Managers often keep multiple sets of records—one for investors, one for regulators, one for tax, and one for themselves. This opacity mirrors the hidden spread profits problem with annuities.”
ERISA impact: Hidden fee extraction is a prohibited transaction: plan assets are transferred to parties in interest for less than adequate consideration (§406(a)(1)(D)).
Add-On Section: The Trillion-Dollar Carry—Private Equity’s Hidden Fee Machine
Ludovic Phalippou’s latest research (April 2025) quantifies, for the first time, the aggregate “carried-interest” compensation earned by private-equity fund managers—and the findings expose just how massive and opaque this income stream has become. Using fund-level cash-flow data and fee terms from over 12,000 funds representing $8 trillion in deployed capital, Phalippou estimates that aggregate carried interest now exceeds $1 trillion, absorbing roughly 18 percent of all investor profitsLudoNov25.
1. Concentrated and Conflicted
Over 70 percent of all carry flows to U.S.-based managers, and more than half accrues to leveraged-buyout funds, not venture-capital vehicles. Venture capital accounts for less than 10 percent of total carry, undermining the industry’s long-standing political claim that favorable tax treatment is needed to “encourage innovation.” If carry were taxed as ordinary income rather than capital gains, Phalippou estimates that the United States would have collected roughly $250 billion in additional tax revenue over the study periodLudoNov25. In ERISA terms, this represents a massive transfer of plan-asset profits to the general partners (GPs) of private-equity partnerships—exactly the sort of self-dealing compensation Congress sought to prevent through the prohibited-transaction rules.
2. Effective Fees Far Above the Advertised “2 and 20”
Phalippou’s investor-level analysis of 15,900 limited partners (LPs) reveals that a subset of LPs—particularly asset managers and captive insurers—pay effective carry rates exceeding 25 percent of profits, and occasionally above 40 percent. By contrast, endowments and public pensions experience somewhat lower incidence because their portfolios are more diversified and include more funds-of-funds. This means ERISA-plan investors committing to private-equity funds may, in practice, be paying double-digit “spread” compensation above the stated contractual rate—precisely the hidden remuneration that should trigger a §406(a)(1)(C) and (D) prohibited-transaction analysis.
3. Fiduciary Implications for ERISA Plans
The study’s trillion-dollar total underscores that carried interest is not a side bonus—it is a dominant source of profit for private-equity general partners, effectively functioning as a performance-based revenue-sharing scheme. When ERISA plan assets are invested in such funds, the GP becomes a party-in-interest receiving variable compensation from plan assets, violating the core prohibition on self-dealing unless a specific exemption (e.g., PTE 84-14 or PTE 77-4) can be affirmatively proven to apply. Nothing in the LPA structure or disclosure regime ensures that such exemptions are satisfied. In fact, Phalippou’s finding that carry payments track “scale and incidence” rather than actual alpha performance supports the argument that these fees constitute unearned, conflicted compensation.
4. Policy and Enforcement Takeaways
Phalippou’s trillion-dollar estimate transforms the policy debate:
The “carried-interest loophole” is not a minor tax quirk but the largest single unreported compensation pool in global finance.
Because public and ERISA-regulated pensions are among the dominant limited partners, a substantial fraction of that trillion dollars was extracted from retirement trust assets.
The data provide a quantitative foundation for DOL and SEC enforcement: if even a small portion of these payments derive from plan-asset funds without a valid exemption, the entire structure constitutes a systemic prohibited-transaction breach
Appendix 2: Why Even AI Cannot Cure Private Equity’s Structural Problems — Reinforcing the Prohibited-Transaction Thesis
A. Setting the Stage: AI Hype vs. Private Market Reality
Recent commentary by Ludovic Phalippou highlights a growing trend among allocators: the belief that artificial intelligence (AI) and machine-learning (ML) tools can overcome private markets’ opacity and complexity — making them more “manageable,” transparent, or at least assessable. Top1000funds.com+1
Yet according to Phalippou, and echoed by multiple practitioners and academic studies, the core structural problems of private equity remain — and in many respects, AI may even make them worse. Top1000funds.com+2Interactive Brokers+2
B. Key Limitations of AI in Private Equity — Implications for ERISA Fiduciaries
PE Structural Problem
Why AI Fails to Resolve It (per Phalippou & other experts)
Implication for ERISA Plans / Fiduciary Duty
Opacity & strategically framed disclosures (fund documents, LP agreements, side letters, fee structures, recycled fees, exemptions, special clauses)
AI tools often rely on summarizing large text volumes — but in private-market funds, the “meat” is hidden in footnotes, exceptions, complex clauses, and custom contractual terms. What matters (e.g., how “net invested basis” is calculated, how portfolio-company fees are “rebated,” how recycling clauses are triggered) is typically buried in dense legal prose that AI summarizers may gloss over or misinterpret. Top1000funds.com+2Interactive Brokers+2
Using AI-based due-diligence or screening tools gives a false sense of transparency. Fiduciaries relying on AI summaries may miss critical risks, conflicts, or hidden fees. The result: imprudent allocations based on inadequate information — exactly what ERISA’s prudence standard is meant to prevent.
Non-standardized, inconsistent metrics across funds (e.g., different treatments of carry, recycled fees, expense allocations, valuation conventions)
AI algorithms — especially those trained on public markets or “standard” data sets — struggle when each fund uses its own bespoke conventions. The heterogeneity makes apples-to-apples comparisons deceptive or impossible. As Phalippou notes, inconsistent disclosures mean that even “basic elements” such as multiples of money can vary materially across funds. Top1000funds.com+2Top1000funds.com+2
Artificial standardization through AI can mask the true variability and risks across funds. Fiduciaries may be misled into believing they have comparable investments when hidden structural differences make actual risk/return profiles wildly divergent. That undermines the “reasonable and prudent person” analysis required under ERISA.
Long feedback loops and illiquidity — private-equity funds often lock up capital for 7–10+ years; valuations are infrequent, stale, and controlled by GPs
AI thrives on high-frequency data, rapid feedback loops, and standardized metrics. By contrast, private markets deliver delayed, sparse, fragmented, and strategically curated data — the very environment AI is ill-suited for, according to Phalippou. Top1000funds.com+2Interactive Brokers+2
The illusion that AI can “make PE manageable” undercuts the reality of undiversifiable illiquidity and stale, opaque valuations. Fiduciaries cannot rely on AI-generated “model valuations” or “screening outputs” as a substitute for real transparency and periodic, reliable valuation and oversight.
Potential for manipulation, “gaming,” and hidden disclosures — GPs aware of AI screening may adapt their documents to obscure downside, over-emphasize favorable metrics, or bury adverse info in footnotes or hidden clauses
Phalippou warns that as asset owners adopt AI tools, GPs will adapt — inserting more obfuscation in footnotes, complex side-letter terms, and ambiguous language designed to mislead summarization tools. Top1000funds.com+1
This dynamic magnifies the conflict-of-interest risk: AI-powered “transparency” becomes a veneer. Because AI can be fooled, fiduciaries may unwittingly accept flawed assumptions or understates risks — a recipe for imprudence and potential self-dealing under ERISA.
C. Why This Matters: AI Doesn’t Substitute for ERISA Protections — It Reinforces Their Necessity
The described AI-driven efforts to “quantify” or “standardize” private equity obscure how deeply non-standard and bespoke PE funds are. That heterogeneity is exactly why ERISA’s fiduciary and prohibited-transaction framework — requiring transparency, independent valuation, disclosure of conflicts, and prudent monitoring — is critically important. AI doesn’t eliminate the need; it makes poor compliance more plausible.
The use of AI may give fiduciaries — and plan sponsors — a false sense of security, especially if they believe AI screening suffices for due diligence. But given the structural limitations and possibility of AI being “gamed,” that confidence would be misplaced.
In fact, the presence of “AI due diligence” as a selling point or justification for including PE in pension plans may represent a new layer of misrepresentation — akin to “tech-enabled opacity.” If a PE fund pitches itself to a pension with “AI-optimized reporting / analytics,” that may signal not transparency, but an effort to automate obfuscation.
Thus, far from mitigating the risks of PE as a plan asset, the rise of AI-enhanced private-market investing amplifies the prudential and fiduciary risks — buttressing the argument that PE contracts should be treated as per-se prohibited transactions under ERISA (or at least subjected to the strictest scrutiny).
D. Addendum to Original Appendix Exhibits: AI & “Model Risk” as Additional Evidence of Conflicted Compensation and Lack of Prudence
You may insert an additional exhibit — something like:
Exhibit 6: AI-Enabled Private-Equity as New Mode of Obscured Risk Compensation
Summary of Phalippou’s remarks at the 2025 Fiduciary Investors Symposium (footnote-buried clauses, non-standard metrics, risk of GP adaptation to AI screening). Top1000funds.com+1
Reference to academic evidence on AI/LLM bias, confirmation bias, and model risks when applied to complex, non-standard financial contracts. arXiv+1
Correlation to hidden-fees & carried interest issues already documented: AI does not substitute for oversight, but may facilitate deeper concealment.
Conclusion (for the Appendix)
The latest scholarship and industry commentary — especially from Phalippou — confirms an uncomfortable truth: AI does not resolve private equity’s underlying conflict, opacity, and risk structure. If anything, by enabling a new veneer of “data-driven sophistication,” it may exacerbate the very problems that make PE incompatible with ERISA’s fiduciary and prohibited-transaction framework.
Accordingly, the proliferation of AI-driven investment tools and “AI-optimized” PE funds should strengthen — not weaken — the case that PE allocations in retirement plans like 401(k)s, defined-benefit pensions, or other ERISA-regulated vehicles are fundamentally incompatible with the statutory duty of prudence and prohibited-transaction rules.
The Epstein story is far more than the sexual-abuse scandal that captures headlines. Beneath the surface lies a massive web of financial flows, offshore structures, institutional clients, and retirement-system exposure. What is being hidden when Epstein’s files remain sealed is less about individual misconduct and far more about the architecture of global finance.
The Jeffrey Epstein saga is often framed as a grotesque sex scandal, full of private islands, mansions, and alleged kompromat tapes. But the fixation on lurid details misses the bigger story.
What is really being protected when Epstein’s files are blocked or sealed? Not only the reputations of billionaire predators, but the offshore financial system that underpins modern Wall Street power.
The Vatican’s Warning – Trumps Enablement
The Vatican under Pope Francis, and now Pope Leo, has condemned this system. In its 2018 declaration, the Church warned:
“The offshore system constitutes an opportunity for illegal financial operations and grave disordered conduct… Such practices tend to enrich only a few while harming the common good.”
Trump’s administration, in contrast, functioned as the political shield for the very practices the Church identified as immoral.
Donald Trump did not just tolerate this system — his administration strengthened it.
Eugene Scalia, Trump’s Secretary of Labor (and son of Justice Antonin Scalia), oversaw policies weakening fiduciary standards for retirement plans, paving the way for offshore annuities and private equity in 401(k)s.
Jay Clayton, Trump’s SEC Chair (and a longtime Wall Street lawyer whose clients included Apollo and Goldman Sachs), blocked stronger disclosure rules for private equity and hedge funds.
Steven Mnuchin, Trump’s Treasury Secretary, was a hedge fund and private equity insider who steered tax policy to favor offshore holdings.
Mick Mulvaney, acting White House Chief of Staff and a deregulation zealot, openly pushed to gut consumer and financial oversight.
Randal Quarles, Trump’s Fed appointee (and a former Carlyle Group partner), eased restrictions on private equity and alternative asset managers.
Together, they created an environment where the offshore system flourished — and where products tied to offshore reinsurers and private equity funds could be funneled into retirement accounts.
Banking Connections
Epstein’s banking ties matter for two reasons: (1) they show banks that should have been the first line of defense against money-flows tied to abuse and trafficking may have instead served as plumbing for concealment; (2) they link Epstein’s operations to major institutional finance—thus extending the risk beyond his personal network into the banking sector, and thereby into the broader financial system.
New lawsuits against Bank of America and BNY Mellon allege that both banks knowingly facilitated Jeffrey Epstein’s enterprise by opening and maintaining accounts, processing hundreds of millions of dollars, and delaying suspicious-activity reporting—echoing the patterns that already cost JPMorgan and Deutsche Bank big settlements. These cases widen the frame: Epstein’s power flowed through systemically important banks, not merely boutique private platforms.
House Judiciary Democrats (Ranking Member Jamie Raskin) have already flagged the new BNY case to press for disclosures on how Epstein moved money through those institutions.
Apollo, Leon Black, and Offshore Power
The clearest example is Leon Black, co-founder of Apollo Global Management.
Black admitted to paying Epstein $158 million after Epstein’s 2008 conviction.
Apollo routes billions through Cayman Islands and Luxembourg private equity funds.
Apollo exerts extreme influence over the largest U.S. public pension fund, California Public Employees’ Retirement System (CalPERS). Apollo’s long shadow still falls across CalPERS. The fund’s pay-to-play past—Buenrostro’s prison term and Villalobos’ suicide in the wake of an SEC action in 2010 that centered on Apollo-related fees—defined a generation of governance failures, yet allocations endured even as Apollo paid SEC penalties for fee/expense abuses.
.
The Offshore System: The Hidden Infrastructure
The more I examined the record, the clearer it became that offshore finance is the plumbing behind the Epstein phenomenon.
These vehicles allow fee-generation, tax minimization, regulatory arbitrage, and concealment of beneficial ownership or activity.
His banking links suggest that major institutions processed these flows despite red flags.
His private-equity connections mean that major institutional investors (like pensions) potentially invested or had exposure to firms that paid Epstein, used offshore structures, and may have funneled public-money into opaque entities.
This convergence — offshore secrecy + bank facilitation + institutional pension-fund investment — is the larger story. The sealed records of Epstein may hold not just sex-trafficking evidence, but ledger entries, bank wires, trust formation documents, hedge/private-equity fund flows, reinsurance contracts, and pension-fund allocations that trace the path of money from ordinary savers to the very heart of offshore finance.
The Real Scandal
Yes — the sex-trafficking revelations of Epstein are shocking. But the bigger scandal is: the offshore finance system that facilitated it, and the institutional structures that allowed money from savers and public pensions to flow into that system. These are the stakes: banks under scrutiny, private equity firms under investigation, pensions exposed, retirement savers at risk.
And the files? They’re locked away for a reason. Because once the ledger sheets, trust documents, bank filings, and fund allocators are exposed, the protective veil around the offshore system begins to unravel.
The Department of Labor’s June 2024 49-page “Report to Congress on Interpretive Bulletin 95-1” concludes that IB 95-1’s factors remain “relevant,” endorses a principles-based approach, and declines to materially strengthen fiduciary obligations for selecting PRT annuity providers. In doing so, the report ignores core ERISA prohibited-transaction risks and understates the post-transfer risk shift to retirees—risks that are amplified by offshore reinsurance, thin capital, and state-level guaranty limits that are far weaker than PBGC protection. DOL+1
What the DOL says—and why that’s not enough
The DOL affirms that IB 95-1’s existing factors (claims-paying ability, creditworthiness, etc.) still guide fiduciaries and that the guidance “should remain principles-based.” It even notes that the factors are “not exhaustive” and provide no safe harbor if a provider later defaults. Yet the report does not grapple with how today’s PRT ecosystem actually works—and how it creates party-in-interest conflicts and structural opacity incompatible with ERISA. DOL
Two omissions are fatal:
PBGC is gone after PRT. The DOL never squarely centers the reality that once benefits are off-loaded to an insurance company, participants lose PBGC insurance. That’s not theoretical; it’s PBGC’s own statement of fact. Any prudence analysis that treats an annuity the same as a PBGC-backed pension is misleading by omission. Pension Benefit Guaranty Corporation+1
State guaranty caps are a fraction of typical liabilities. Most states cap individual annuity protection around $250,000 present value (details vary). For many retirees, that is well below the exposure transferred. Treating state guaranty funds as a PBGC substitute is wrong as a matter of law and math. NAIC+2Federal Reserve Bank of Chicago+2
The risk the DOL doesn’t model: Offshore reinsurance + private-credit asset mixes
Since IB 95-1 (1995), life insurers have pivoted to asset-intensive models funded by PRT cash flows and supported by offshore reinsurers (often Bermuda). U.S. insurers shifted ~$800 billion of reserves offshore from 2019–2024 (and more than $1 trillion of offshore reinsurance liabilities by end-2024), to jurisdictions with different capital regimes and looser transparency, while allocating heavily to private credit—illiquid, mark-to-model assets whose behavior in stress is uncertain. None of that complexity is reflected in the DOL’s minimal update. Reuters+2Financial Times+2
Even foreign prudential regulators have flagged funded reinsurance risks and connected-party exposures—warning they may restrict deals if controls aren’t improved. The DOL report makes no comparable, concrete risk tests for ERISA fiduciaries selecting annuity providers engaged in those practices. Financial Times+1
Prohibited-transaction blind spot
ERISA §406 prohibits transactions that transfer plan assets to, or benefit, a party in interest—and bars self-dealing. A PRT executed with an insurer that (a) relies on affiliated/offshore reinsurers and (b) captures large undisclosed spreads from private-credit allocations raises classic §406 questions:
Conflicted economics: Affiliates capture spread profits while participants bear solvency and liquidity risk—especially post-PRT when PBGC is gone.
Opacity: Offshore cessions and private-credit marks reduce visibility into the actual asset-liability profile backing “guarantees.”
Process failure: Absent enforceable downgrade/exit rights or spread transparency, fiduciaries cannot monitor or remove an imprudent provider, which also frustrates their duties under Tibble/Hughes-style “continuing duty to monitor.”
The DOL report barely acknowledges these §406 avenues, treating PRT as a one-time prudence screen, rather than an ongoing conflict-management problem that can’t be solved by generic “factors.” DOL
“No injury” litigation head fakes don’t negate the risk
Industry commentary trumpets recent standing dismissals (no immediate injury) in PRT cases, as if that validates the structures. It doesn’t. Standing rulings say nothing about whether the PRT increased risk or violated ERISA; they only say plaintiffs sued too early. Meanwhile, at least one high-profile PRT case has survived a motion to dismiss—recognizing that allegations about substantial default risk and reduced protections are plausible. ASPPA+1
What a minimally competent DOL framework should require
If the DOL were serious about aligning IB 95-1 with today’s market, it would explicitly require fiduciaries to:
Model post-PRT risk vs PBGC: Quantify the relative default/severity risk gap between (a) PBGC-backed plan and (b) the selected annuity, including state guaranty caps and reinsurer counterparty risk. Pension Benefit Guaranty Corporation+1
Contract for downgrade/exit rights: Hardwired downgrade clauses, transfer/commutation rights, and spread transparency so fiduciaries can satisfy the continuing duty to monitor—without trapping retirees.
Address §406 directly: Treat affiliated reinsurance and undisclosed spread capture as presumptively conflicted, demanding either a clear prohibited-transaction exemption showing compliance with Impartial Conduct Standards (best interest, reasonable comp, no misstatements) or a redesign of the transaction.
Participant-level disclosure: Plain-English notice that PBGC protection ceases after PRT, and a side-by-side comparison of guarantees and limits under state guaranty funds. Pension Benefit Guaranty Corporation+1
Bottom line
By blessing a status-quo, principles-only reading of IB 95-1, the DOL has underwritten opacity at the precise moment PRT risks are surging from offshore reinsurance and private-credit exposures. Once the PBGC net is cut, participants shoulder a risk profile 10–20× higher than a PBGC-insured plan—while insurers and sponsors monetize the spread. A modern IB 95-1 must start with that reality, or it will remain a roadmap for transferring risk away from retirees’ protections and toward insurer profits. DOL+2Pension Benefit Guaranty Corporation+2
Sources
DOL, Report to Congress on Interpretive Bulletin 95-1 (June 2024) & news release. DOL+1
When it comes to offshore money games, Donald Trump has chosen the side of secrecy, speculation, and Wall Street greed — in direct opposition to the moral vision of the Catholic Church.
In 2018, the Vatican under Pope Francis issued a landmark rebuke of offshore finance. In Oeconomicae et pecuniariae quaestiones, the Holy See declared:
“The offshore system constitutes an opportunity for illegal financial operations and grave disordered conduct… that are capable of destabilizing the entire world economic system.”
The Vatican condemned tax havens, shell companies, and shadow finance, insisting that:
“Such practices tend to enrich only a few while harming the common good.”
Francis made clear that offshore secrecy was not clever capitalism, but a betrayal of human dignity. Following his death, Pope Leo has pledged to carry on this mission, reaffirming Francis’ call for transparency and stewardship over speculation and greed.
Trump’s Offshore Gift
Trump, however, has planted his flag on the opposite side. His Department of Labor’s Advisory 2025-04A delivers a multi-billion dollar gift to private equity, crypto, and insurance giants — encouraging offshore vehicles to flow directly into 401(k) retirement plans.
Where Francis and Leo denounce offshore secrecy as immoral, Trump is institutionalizing it.
Wall Street Allies in the Shadows
The real beneficiaries are Trump’s Wall Street allies:
Apollo Global Management, tied to offshore annuity giant Athene.
Blackstone, the world’s largest private equity firm, with billions routed through the Caymans and Luxembourg.
KKR, which relies heavily on offshore private credit funds.
Prudential, MetLife, TIAA, and Lincoln Financial, insurers that reinsure risky annuities through Bermuda to avoid U.S. oversight.
Crypto promoters seeking Cayman-style secrecy while flooding into retirement accounts.
These players gain the secrecy, fees, and leverage they want — while ordinary teachers, nurses, and factory workers bear the risk.
Offshore Products, Legal Landmines
As I’ve written, these offshore annuities and private equity funds are riddled with ERISA prohibited transaction risks — from undisclosed spread profits to “party in interest” conflicts.
The Vatican warned precisely against this kind of abuse:
“Money must serve, not rule. Financial speculation, driven by an aim for maximum profit, without regard for the common good, endangers the stability of the entire system.”
Trump’s DOL is not preventing such dangers — it is writing them into the rulebook.
Who Gets Hurt?
The largest 401(k) plans — about 8,000 with more than $100 million in assets — are the ones most likely to be litigated when fiduciary abuses occur. But the offshore promoters aren’t stopping there. They are targeting smaller 401(k)s, public pensions, 457s, 403(b)s, and individual annuity buyers, where litigation risk is minimal and oversight weak.
This is precisely the scenario the Vatican condemned: the powerful exploiting regulatory gaps while ordinary people carry the risk.
The Moral Divide
Pope Francis (and now Pope Leo): Offshore secrecy is immoral, destabilizing, and corrosive to the common good.
Donald Trump and his Wall Street allies: Offshore finance is a profit machine, and workers’ 401(k)s are the next feeding trough.
Trump has not just ignored the Vatican’s call for ethical finance — he has actively reversed it. If Francis stood for transparency and justice, Trump stands for opacity and greed. If Pope Leo carries on Francis’ moral warning, Trump functions as its antithesis: the Anti-Pope of offshore investing.
The rise of private equity and private credit allocations in defined contribution (DC) and defined benefit (DB) plans has been framed as innovation: diversifying returns, reducing volatility, and capturing “illiquidity premiums.” But beneath the marketing is a reality of offshore tax havens, opaque fee structures, and conflicted party-in-interest relationships. Just as offshore-leveraged annuities fail ERISA’s prudence and impartial conduct tests, so too do many private equity and private credit vehicles.
The common denominator: hidden conflicts and offshore structures designed to enrich asset managers at the expense of plan participants—precisely what ERISA’s prohibited transaction rules were designed to prevent.
Offshore Structures and Regulatory Arbitrage
Cayman, Luxembourg, and Jersey Havens
Most private equity and private credit funds used by U.S. pension and 401(k) plans are organized in offshore domiciles like the Cayman Islands, Luxembourg, or Jersey. The purpose is tax avoidance and regulatory arbitrage—not participant protection. These structures often:
Shield disclosure of true expenses and valuation practices.
Favor GP/affiliates through preferential terms hidden in side letters.
Conceal leverage through offshore blockers and SPVs.
Much like Bermuda reinsurance in annuities, these offshore domiciles create legal distance between fiduciaries and the assets that actually back participant promises.
Hollow Oversight
Unlike mutual funds (SEC-regulated) or bank-sponsored CITs (OCC/state banking oversight), private equity partnerships are lightly overseen partnerships where GPs dictate terms. Fiduciaries cannot claim meaningful monitoring when reporting is delayed, opaque, and selectively disclosed.
Hidden Fees, Spreads, and “Four Sets of Books”
Private equity and private credit funds generate fees in layers:
Management fees (typically 1.5–2% annually).
Carried interest (20%+ of profits).
Transaction, monitoring, and advisory fees paid to affiliates.
Financing spreads embedded in affiliated lending arrangements.
As you noted in “4 Sets of Books”, managers often keep multiple sets of records—one for investors, one for regulators, one for tax, and one for themselves. This opacity mirrors the “hidden spread profits” problem with annuities. Participants are charged multiples of what equivalent public-market exposure would cost, without transparency.
Fiduciary Conflicts and Parties in Interest
ERISA §406 prohibits fiduciaries from causing plans to engage in transactions with parties in interest, and from allowing transactions that transfer plan assets to such parties for less than adequate consideration. Private equity and private credit funds trigger these concerns:
Affiliated service providers: Many funds pay transaction/advisory fees to GP-owned affiliates—direct self-dealing.
Recordkeeper relationships: Some plan recordkeepers (e.g., insurers offering CITs or annuities) also sponsor private credit funds. Selecting those funds creates a party-in-interest loop, exactly the theory I advanced in my TIAA case study.
Valuation manipulation: Private credit managers often mark assets to model, creating inflated NAVs that justify higher fees—an undisclosed, prohibited transfer of wealth from participants to managers.
Illiquidity and Lack of Exit Rights
Like annuities without downgrade clauses, private equity and private credit contracts typically lock fiduciaries into long-term, illiquid structures (7–12 years for PE, 5–10 for PC). ERISA requires fiduciaries to monitor and, if necessary, remove imprudent investments. But in these vehicles:
No liquidity exists to exit a deteriorating manager.
Secondary sales are limited, heavily discounted, and often require GP consent.
IPS conflicts arise because most Investment Policy Statements require diversification and credit quality standards—yet fiduciaries cannot enforce them once capital is locked.
This mismatch between ERISA monitoring duties and fund design makes many private market vehicles structurally imprudent.
Why This is a Prohibited Transaction
Bringing the pieces together:
Offshore domiciles create opacity and reduce enforceability of participant rights.
Hidden fee streams constitute transfers of plan assets to parties in interest for less than adequate consideration.
Affiliate conflicts (e.g., GP affiliates providing services to the same fund) are textbook self-dealing.
Illiquidity makes fiduciary monitoring impossible, violating prudence.
Under ERISA, these features combine to make private equity and private credit funds presumptive prohibited transactions unless fiduciaries can demonstrate clear exemption and compliance with Impartial Conduct Standards—something managers resist by refusing full disclosure.
Conclusion
Private equity and private credit may be marketed as diversification, but in practice they replicate the same flaws that make modern annuities dangerous under ERISA: offshore loopholes, hidden spreads, weak regulation, opaque fees, and inability to monitor or exit.
The fiduciary takeaway is simple: until these conflicts are eliminated, private equity and private credit funds in ERISA plans should be treated as prohibited transactions, not prudent investments.
APPENDIX: How Mainstream Finance Scholarship (CFA Institute 2024) Supports ERISA Prohibited-Transaction Concerns for Offshore Private Equity & Private Credit
Source:Alexander Ljungqvist, “The Economics of Private Equity: A Critical Review,” CFA Institute Research Foundation (2024). PE EconomicsCFA
1. Opacity, Unverifiable Valuations, and Conflicts of Interest
Ljungqvist makes clear that PE funds are structurally opaque, with:
No public performance disclosure obligations
No market-to-market valuation
No liquidity
Heavily GP-controlled reporting
“Private equity is an opaque asset class…funds have no obligation to disclose performance to the public…LPs rarely account for opportunity cost, so publicly reported metrics overstate economic returns.” PE EconomicsCFA
This directly supports my argument that ERISA fiduciaries cannot prudently monitor these structures—especially offshore, Cayman, Bermuda, Luxembourg vehicles—because reporting is entirely at the discretion of the conflicted GP. This is classic ERISA §406(b) self-dealing risk.
2. IRR Manipulation and Misleading Performance Reporting
The CFA article openly acknowledges:
Interim IRRs are easily manipulated
Subscription facilities are used to artificially raise IRRs
LPs rely on “noisy” or “biased” performance metrics
“[IRR] is subject to manipulation…subscription lines increase reported IRRs by 1.9 percentage points on average…even ‘final’ IRRs may be misleading.” PE EconomicsCFA
This provides authoritative backing for my claim that fiduciaries using IRR or pro forma GP-supplied numbers are breaching ERISA’s duty of prudence, especially when GPs are offshore and disclosure is weaker.
3. Evidence PE Returns Do Not Equal Risk-Adjusted Alpha
Ljungqvist summarizes the academic literature showing no consensus on whether PE generates any risk-adjusted alpha after fees.
Many cited studies find zero or negative abnormal returns when adjusting for:
leverage
liquidity risk
market factor loadings
“Driessen, Lin, and Phalippou (2012) find no evidence of outperformance after adjusting for risk…Gupta and van Nieuwerburgh (2021) find negative abnormal returns.” PE EconomicsCFA
This supports my argument that ERISA fiduciaries cannot justify high-fee, conflicted offshore structures on the grounds of superior performance, because credible research shows the returns do not compensate for risk, liquidity, or opacity.
4. GP/LP Conflicts Are Structural and Severe
The CFA review highlights conflicts that align directly with ERISA §406(a) and §406(b):
a. GP has complete informational control
LPs “are passive sources of capital” and risk losing limited liability if they intervene.
b. GP timing of capital calls is discretionary
LPs effectively hold “a sequence of options” that the GP exercises for its own benefit.
c. GP controls valuation of unrealized assets
Key for ERISA prohibited-transaction theory: valuation affects GP carry, fees, and continuation funds.
d. GP can use financing techniques to distort results
Subscription lines, delayed capital calls, etc.
“LPs act as passive sources of capital…GPs exercise control over the timing of capital calls in ways that inflate IRRs…LPs bear liquidity and valuation risk but have little recourse.” PE EconomicsCFA
This strongly supports my argument that the GP is a fiduciary of plan assets and is engaging in self-dealing prohibited under ERISA §406(b)(1).
5. Evidence of Negative Externalities & Social Harm
This strengthens my argument that private equity and private credit may increase systemic risk—relevant to ERISA prudence and loyalty analyses.
CFA cites evidence that PE ownership can lead to:
Higher mortality in nursing homes
Higher costs in healthcare systems
Regulatory arbitrage in insurance companies
Increased leverage and bankruptcy risks
Conflicts that harm workers, consumers, and taxpayers
“PE-owned life insurers take greater risk…policyholders are exposed to greater losses when things go wrong.” “Higher mortality rates among Medicare patients in PE-owned nursing homes.” PE EconomicsCFA
This supports my theme that offshore PE/PC vehicles increase systemic and counterparty risk to ERISA plans.
6. Performance is Pro-Cyclical & Degrades When Capital is Plentiful
Classic fiduciary red flag:
“Cheap debt and abundant capital reduce subsequent returns…funds overpay…performance is lower for vintages with abundant leverage.” PE EconomicsCFA
This aligns with my argument that fiduciaries following PE marketing cycles (instead of countercyclical discipline) breach prudence.
7. LPs Cannot Accurately Monitor, Benchmark, or Exit
Ljungqvist emphasizes that:
There is no genuine secondary market.
Exit rights of LPs are controlled by GPs.
LPs cannot determine if reported NAVs are credible.
Under ERISA, any asset that:
Cannot be valued,
Cannot be benchmarked, and
Cannot be liquidated
is per se imprudent (DOL Advisory Opinion 2020-02, Cunningham, Tibble, etc.).
This directly reinforces my prohibited-transaction argument: if monitoring is impossible, prudence is impossible.
8. Key Point for My Offshore Argument: Jurisdiction + Opacity = Extreme Fiduciary Risk
The CFA article does not explicitly discuss offshore domiciles—but its analysis makes the implications obvious:
If private equity is already opaque, offshore structures amplify that opacity.
If valuations are already unverifiable, offshore administrators worsen the problem.
If GPs already control timing and reporting, offshore structures reduce LP recourse and regulatory visibility.
Thus, offshore domiciles exacerbate every fiduciary defect identified in the CFA review.
You can legitimately argue:
“Mainstream finance literature from the CFA Institute demonstrates that even domestically domiciled PE/PC funds operate with high levels of conflict, opacity, and valuation manipulation risk. Offshore domiciles multiply these risks and place ERISA fiduciaries in an untenable position with respect to prudence, monitoring, and prohibited-transaction rules.”
✔️ APPENDIX 2: IMF Evidence on Offshore Private Equity–Controlled Insurers, Regulatory Arbitrage, and Systemic ERISA Fiduciary Risks
Source: IMF Global Financial Stability Note 2023/001, “Private Equity and Life Insurers.” IMFPe23
1. IMF Confirms the Core of My Thesis: PE-Influenced Insurers Increase Illiquidity, Risk, and Opacity
The IMF unequivocally states:
“PE-influenced life insurers own a significantly larger share of illiquid assets than do other insurers.” (Figure 4; Section III) IMFPe23
These illiquid exposures include:
structured credit
CLOs
private RMBS/CMBS
private credit
mortgage loans
This supports my ERISA argument that fiduciaries cannot prudently monitor offshore PE/private-credit portfolios due to opacity, complexity, and lack of valuation reliability.
The IMF adds:
“Private assets are not able to be readily liquidated… forced sale… is likely to cause a discount.” (Section III) IMFPe23
For ERISA fiduciaries, this reinforces:
liquidity mismatch = imprudence
unverifiable valuation = prohibited transaction under §406(b)
inability to monitor = fiduciary breach under Tibble, Hughes, Cunningham
2. Strong Support for My Offshore Argument: Bermuda Reinsurance Is Used Explicitly for Regulatory Arbitrage
The IMF describes in explicit, damning terms how private equity uses offshore vehicles to escape U.S. or EU prudential rules:
“PE companies have established their own offshore-based reinsurers, primarily in Bermuda… limiting the ability of onshore regulators to monitor these activities.” (Reinsurance & Regulatory Arbitrage section) IMFPe23
This is exactly the mechanism you describe in my article:
U.S. life insurers reinsure liabilities offshore
Offshore reinsurer uses lighter regulatory capital rules
Assets backing annuities are replaced with much riskier PE private credit
The appearance of solvency is created via accounting arbitrage rather than real capital
This is powerful support for my thesis that:
Offshore PE reinsurers are intentionally used to evade solvency, valuation, and capital rules — which inherently violates ERISA prudence and loyalty.
3. IMF Confirms: Offshore PE Reinsurers Hold Even More Illiquid Assets Than Domestic PE-Owned Insurers
The IMF finds:
“Bermuda-based PE-influenced reinsurers… allocate about 20 percent of their investments into illiquid investments… much higher than global insurers.” (Figure 6; Section III) IMFPe23
This is critical evidence for my point that:
Offshore structures amplify all the risks of domestic PE ownership.
ERISA fiduciaries cannot possibly monitor this.
Such investment structures are inherently conflicted, opaque, and imprudent.
4. IMF Confirms Widespread Use of Highly Opaque Transactions: “Modified Coinsurance” and “Funds Withheld”
The IMF writes:
“These involve complex paper transactions… highly complex and less transparent… not transparent to the public.” (Section III) IMFPe23
These transactions:
obscure capital adequacy
obscure asset location (onshore vs offshore)
obscure solvency
obscure the true risk being transferred
This directly supports my ERISA position that fiduciaries relying on insurer representations about solvency or risk transfer are being misled — and are breaching their duty to independently verify.
5. IMF Confirms PE Uses Regulatory Loopholes to Artificially Inflate Capital
This is one of the strongest connections to my argument on improper gain and self-dealing:
“The use of the Scenario-Based Approach allows the additional spread on illiquid investments to result in upfront profits booked as capital.” (Regulatory Arbitrage section) IMFPe23
This provides authoritative evidence that these vehicles:
manufacture capital via accounting magic, not real solvency
are inherently misleading to fiduciaries
create a prohibited transaction because the insurer’s affiliate profits immediately from the risk transfer
This perfectly aligns with my argument that offshore PE insurers are extracting spread-based profits that ERISA plans cannot detect or evaluate.
Billions of dollars in U.S. Retirement plans are in fixed annuities in 401(k) and 403(b), pension risk transfer annuities in Defined Benefit pensions, and other annuity and insurance products. The modern annuity business under U.S. life insurers is far removed from the stable, conservative guarantees many plan fiduciaries assume. A growing body of evidence shows that large life/annuity companies are off-loading liability, investing in opaque private credit, and relying on offshore reinsurance domiciles with lighter regulation. These structural features raise serious concerns for retirement plans subject to Employee Retirement Income Security Act of 1974 (ERISA) fiduciary and prohibited-transaction rules. In short: unless an annuity contract is carefully designed, it may expose the plan to a prohibited transaction or breach of prudence.
This article draws on prior analysis of annuity risks — particularly my posts on downgrade clauses, hidden fees, pension-risk transfers, diversification failures, and guarantee association weaknesses — and integrates recent regulatory and industry data. The conclusion: fiduciaries must view most standard annuities as structurally incompatible with ERISA’s fiduciary protections unless key safeguards are present.
The Offshore/Reinsurance Loophole
Leverage and Jurisdictional Arbitrage
Major life insurers and annuity writers have increasingly used offshore reinsurance arrangements to improve capital efficiency and hide risk. According to a recent report by Moody’s Investors Service, U.S. life insurers shifted nearly $800 billion in reserves offshore between 2019 and 2024, primarily to Bermuda and the Cayman Islands. Reuters Another report from AM Best Company states that Bermuda accounted for over 40% of U.S. life-annuity writers’ ceded reserves in 2024. AM Best News+1
Offshore domiciles often permit looser regulatory requirements: different accounting rules, lower capital charges, and less public transparency than U.S. domestic state-based regulation. For example, one commentary notes that Bermuda allows insurers to file under GAAP rather than U.S. statutory accounting, enabling deferral of recognizing certain liabilities. Insurance News | InsuranceNewsNet+1
Reinsurance Risk and Embedded Illiquidity
When a U.S. insurer issues an annuity contract but then cedes the liability (and perhaps assets) to an affiliated or offshore reinsurer, plan participants face counterparty risk: if the reinsurer fails, the original issuer may be exposed to a recapture risk or be unable to meet obligations. Research from the Institute and Faculty of Actuaries (UK) on “reinsurance recapture risk” documents limited industry transparency and significant risks inherent in these arrangements. ResearchGate
In addition, offshore vehicles allow insurers to invest in illiquid, high-yield private assets (private credit, side-cars, private equity) which may not match the liquidity of participant-facing guarantees. A recent brief from the American Academy of Actuaries states that these “asset-intensive” reinsurance structures require strong governance — which is often lacking. Actuary.org
The Weakness of State Regulation for U.S. Insurers
Most annuity writers are regulated at the state level, under state insurance departments and guaranty associations. But there are multiple structural weaknesses:
Inconsistent standards: Each state sets its own solvency requirements, reserve methods, and guarantee-association limits.
Guarantee associations are limited: Many states cap the payout under guarantee associations at a level far below typical retirement-income exposures (often $250k). My prior post “State Guarantee Associations Behind Annuities Are a Joke” pointed this out.
Regulatory arbitrage: Insurers exploit weaker jurisdictions (via offshore reinsurance) to reduce capital without necessarily reducing risk. The Bank of England warned that offshore “funded reinsurance” transfers can be a form of regulatory arbitrage, prompting potential intervention. Financial Times
Taken together, these features mean the “guarantee” behind many annuities is only as strong as the balance sheet of an insurer backed by high-leverage offshore structures, not the simple promise to participants.
Why This Creates ERISA Fiduciary & Prohibited Transaction Risk
Fiduciary Prudence and Diversification
Under ERISA, plan fiduciaries must act prudently and diversify plan investments “so as to minimize the risk of large losses.” But an annuity contract backed by offshore-leveraged insurer structures and illiquid investments introduces concentrated and correlated risks: a market downturn could impair the entire insurer’s ability to meet guarantees. Without exit rights or downgrade protections you flagged in your prior blog (“Why ERISA Plans Require a Downgrade Clause…”), a fiduciary cannot monitor or respond to deteriorating credit/exposure.
Prohibited Transactions Under ERISA
ERISA §406 prohibits plan fiduciaries from causing the plan to engage in transactions with parties in interest on terms that are less than fair, or that result in the plan being operated for the benefit of a party in interest over participants. When an insurer (or affiliated reinsurer) is both a plan investment provider and engages in internal profit extraction via spreads, leveraged private investments, and offshore reinsurance, the following concerns arise:
Self-dealing – When an insurer transfers risk offshore and pockets spread profits rather than returning them to participants, it may be acting as a party in interest engaging in self-serving transactions.
Lack of transparency / disclosure – Plan fiduciaries cannot evaluate the terms of the annuity contract if the underwriting, assets backing the guarantee, or reinsurer credit quality are unknown or offshore-opaque.
Lack of exit/monitoring rights – Without appropriate contract terms (e.g., downgrade clause, liquidity rights) the fiduciary cannot prudently monitor or remove the investment when risk changes. Prior blog posts (“Annuities Are Prohibited Transactions via ChatGPT” and “Annuities Flunk Prohibited Transaction Exemptions – SCOTUS Will Open Floodgates”) explain how these deficiencies render many annuities ineligible for safe-harbor exemptions.
In combination, these structural flaws mean the plan is exposed to prohibited-transaction risk by investing in annuities under these conditions. The contract terms plus the insurer’s structure make the transaction with the insurer a transaction with a party in interest that is not “fair” to participants and lacks the fiduciary protections required under ERISA.
Practical Steps for Plan Fiduciaries
Require contract protections: Insist on downgrade clauses, an exit right or commutation right, transparency on backing assets, and reinsurer credit/investment disclosures.
Avoid offshore-leveraged providers: If an insurer uses offshore reinsurance in a way that shields its assets or elevates leverage, fiduciaries should treat the annuity as high risk.
Document the review process: A prudent process must show that the fiduciary evaluated the insurer’s structure, reinsurance arrangements, asset backing, regulatory domicile, and exit rights, and determined that the annuity still meets the plan’s IPS.
Benchmark alternatives: Consider whether pooled group annuity contracts with clean credit and transparent structure provide a better option; avoid “black-box” private-credit-levered annuities.
Conclusion
The convergence of offshore reinsurance, weak state regulation, insurer leverage, and lack of contract exit/monitoring rights means many modern annuities are structurally incompatible with ERISA’s dual requirements of fiduciary prudence and prohibited‐transaction avoidance. Unless a plan contract is designed specifically to account for these risks (and mitigate them via downgrade language, transparency, exit rights, plain-vanilla asset backing, strong domicile/underwriter credit), fiduciaries should treat the default assumption as: This annuity may be a prohibited transaction and a prudence breach waiting to happen.
Bottom line: Perennial industry marketing about “guarantees for life” hides the fact that many of these contracts are built on offshore arbitrage, high leverage, and opaque assets. That architecture is antithetical to retirement-plan fiduciary governance and safe plan design.
The CommonSense 401k Project 