Over half of all 401(k) assets are invested in Target Date Funds (TDFs), the default investment for most workers. Proposals to embed 15% allocations to private equity (PE) in these TDFs raise severe fiduciary, legal, and policy concerns.
Private equity’s opaque self-valuations, smoothed returns, and layered fees (≈600 bps) make it wholly unsuitable for retirement savers—particularly in default funds where workers have no choice. This is not innovation; it is regulatory arbitrage designed to funnel billions in hidden fees out of participant accounts.
Key Findings
1. Fees 100x higher than index funds.
PE all-in costs: ~6.0% annually (Phalippou 2020).
Index funds: 0.03%–0.05%.
A 15% sleeve adds 0.90% annual drag to the entire TDF—cutting lifetime wealth by 20–25%.
2. Fraudulent return smoothing.
PE funds self-price and delay write-downs.
Reported volatility and correlations are artificially low.
Asset allocation models therefore over-allocate to PE, embedding mispriced risk in retirement glidepaths.
3. Liquidity mismatch.
TDFs promise daily liquidity.
PE funds lock up capital for 10+ years.
Participants could face redemption delays, gates, or markdowns inconsistent with plan representations.
4. Weakest regulator wins.
SEC and OCC rules demand transparency and independent valuation.
Sponsors are instead turning to state-chartered CITs, where oversight is minimal and disclosure optional.
This is textbook regulatory arbitrage.
5. Fiduciary red flags.
ERISA requires prudence and reasonable fees.
Supreme Court precedent (Tibble; Hughes) obligates ongoing monitoring and removal of high-cost options.
Embedding PE in QDIAs (defaults) is especially egregious because workers never affirmatively opt in.
Policy Recommendations
DOL & SEC Joint Guidance: Prohibit private equity allocations in QDIAs until independent valuation and full fee disclosure are mandatory.
State CIT Oversight: Close the loophole by requiring federal standards (SEC/OCC level) for any retirement-plan CIT.
Fee Disclosure Reform: Mandate reporting of all fees, including portfolio company monitoring and transaction charges.
Participant Protections: Require opt-in consent, with plain-English disclosures, before allocating participant funds to PE.
Conclusion
Private equity in 401(k) Target Date Funds is not diversification—it is defaulting American workers into opaque, fee-rich products they cannot understand or escape. This violates fiduciary duty under ERISA and undermines retirement security. Regulators and policymakers should act now to prevent a massive transfer of wealth from retirement savers to private equity sponsors.
President Trump’s recent Executive Order promoting the inclusion of private equity, crypto, and annuities in 401(k) plans has been widely interpreted in the retirement industry as a green light for sponsors to load plans with opaque, high-risk, or high-fee products. But as fiduciary attorney Jim Watkins makes clear in his August 11 article, the Executive Order does not erase the fundamental duties under ERISA. Plan sponsors still bear the highest obligation of loyalty and prudence. Courts have consistently ruled that failure to independently investigate and evaluate investments constitutes a breach of fiduciary duty.
The Legal Precedent: Independent Investigation Required
Federal courts have long reinforced this principle, and it is nearly impossible to do an independent investigation of Private Equity, Crypto, or Annuities. Tip to Jim Watkins on cites
Liss v. Smith, 991 F. Supp. 278, 297 (S.D.N.Y. 1989), citing In re Unisys Savings Plan Litigation, 74 F.3d 420, 435 (3d Cir. 1996), and Whitfield v. Cohen, 682 F. Supp. 188, 195 (S.D.N.Y. 1988), emphasized that “the failure to make any independent investigation and evaluation of a potential plan investment” is itself a fiduciary breach.
In In re Citigroup ERISA Litigation, 112 F. Supp. 3d 156 (S.D.N.Y. 2015), aff’d 2017, the court underscored that fiduciaries must independently and thoroughly evaluate each investment option offered in a 401(k) plan.
The message is clear: no Executive Order can override statutory fiduciary standards established by ERISA and reinforced by decades of case law.
Application to Fixed Annuities in Today’s 401(k) Plans
The most immediate application of these rulings is to fixed annuities offered in 401(k) plans—especially those marketed by insurers and recordkeepers:
Conflicted Providers: Fixed annuities are often offered by the plan’s recordkeeper, a “party in interest” under ERISA (Cunningham v. Cornell). This creates an inherent conflict when the recordkeeper profits from spreads or commissions embedded in the product.
Undisclosed Spreads: Unlike mutual funds, fixed annuities lack transparent expense ratios. Insurers earn investment returns on their general account portfolios—often 6–7%—but credit participants only 2–3%. The undisclosed spread, sometimes exceeding 400 basis points, is pure profit to the insurer and impossible for a plan sponsor to evaluate without disclosure.
Hidden Commissions: Many consultants and brokers recommending fixed annuities receive undisclosed insurance commissions, further tainting the fiduciary process.
Opaque Contracts: Few plan sponsors, and even fewer consultants, actually read or understand the dense insurance contracts that govern these products.
Transparency Failures = Fiduciary Breaches
Because fixed annuity spreads are concealed, plan fiduciaries cannot meet their duty of prudence to “independently investigate and evaluate” the investment option. As the courts in Liss, Unisys, Whitfield, and Citigroup ruled, the absence of such an investigation is itself a breach—regardless of whether the investment later performs well or poorly.
Trump’s Executive Order does not insulate plan sponsors from liability when they rubber-stamp insurer products without rigorous due diligence. Fiduciaries who rely on conflicted recordkeepers or consultants, accept opaque annuity contracts at face value, or fail to benchmark spreads against transparent stable value alternatives are exposing themselves—and their participants—to enormous risks.
Conclusion
The lesson for plan sponsors is straightforward: ERISA’s fiduciary duty of prudence cannot be waived by presidential decree. Courts have already provided the roadmap: every investment option, especially opaque fixed annuities, must be independently investigated and evaluated. Failure to do so is a fiduciary breach.
In today’s environment, the real danger is that plan sponsors misinterpret political signals as permission to ignore their duties. The law says otherwise.
Ohio State Teachers Retirement System (STRS) regularly states that its investment program is audited for compliance with the CFA Institute’s Global Investment Performance Standards (GIPS®). In fact, STRS highlights the “ACA Performance Services Letters” as if they are an independent certification that the entire portfolio — including private equity — meets these rigorous standards.
The Problem: GIPS Does Not Cover Everything
Traditional assets like public equities and bonds can be benchmarked and reported under GIPS, which require daily pricing, market valuation, and time-weighted returns.
Private equity and other alternatives are fundamentally different:
Returns are often based on manager self-valuations, not market pricing.
Cash flows are irregular and subject to GP discretion.
Leverage, subscription lines of credit, and co-investments distort reported returns.
GIPS itself has special guidance for alternative assets, but these provisions cannot cure the fact that STRS only gets opaque, manager-provided marks, not independent valuations.
Why the ACA Letters Mislead
The ACA Performance Services assurance letters STRS shows to members don’t certify the quality of the numbers — they only certify that certain composites were presented “in accordance” with GIPS procedures.
This is an attestation engagement, not a financial audit. It does not:
Verify the accuracy of private equity valuations;
Guarantee that fees and expenses are correctly applied;
Confirm that all assets are included.
Importantly, ACA letters are limited-scope. They may only cover selected composites or asset classes — not the entire STRS portfolio.
Why This Matters for Fiduciary Duty
Teachers are being told that STRS’s entire investment program is GIPS-compliant, when in reality the most opaque, highest-fee asset class — private equity — falls outside the effective scope.
The assurance letters create a false sense of security, leading members to believe that their money is being measured with the same transparency as public mutual funds.
Fiduciaries who repeat these claims risk breaching their duty of loyalty and prudence by substituting “compliance marketing” for real transparency.
Bottom Line
STRS’s claim of “full GIPS compliance” is misleading at best, deceptive at worst.
Yes, portions of the portfolio may follow GIPS procedures.
But the private equity portfolio — where billions are at stake and transparency is weakest — is not independently validated under GIPS.
Until STRS subjects its private equity program to true independent valuation and public disclosure of contracts, no compliance letter can change the fact that teachers are being misled about their returns.
Possible CFA Ethics Violations by STRS Ohio Charterholders
According to LinkedIN there are at least 10 CFA charterholders working at STRS Ohio. CFA Charterholders sign an annual statement affirming they will comply with the CFA Institute Code of Ethics and Standards of Professional Conduct. At a minimum, three key principles apply here:
Standard I(C): Misrepresentation — Members must not make or allow false or misleading claims.
Standard I(D): Misconduct — Members must not engage in conduct that compromises professional reputation or integrity.
Standard V(A): Diligence and Reasonable Basis — Members must exercise diligence, independence, and thoroughness in making recommendations and ensuring performance reporting is accurate.
Standard VII(A): Conduct as Members and Candidates — Members must not engage in conduct that compromises the integrity of CFA Institute or the CFA designation.
1. Misleading GIPS Compliance Claims
Issue: STRS claims full GIPS compliance, and public-facing ACA “assurance” letters are used to reinforce this. In reality, compliance does not extend to private equity — the largest and most opaque asset class.
Possible Violation:
Standard I(C): Misrepresentation — By signing off on these claims (or staying silent while they’re used in STRS materials), CFA charterholders could be complicit in misrepresenting performance standards to members.
Standard V(A): Diligence and Reasonable Basis — If CFAs knew or should have known private equity returns were not validated under GIPS, endorsing compliance is not diligent or reasonable.
2. The Anonymous Letter → QED Case Against Trustees
Issue: Attorney General Yost’s case against reform trustees Steen and Fichtenbaum was built on an anonymous staff letter, very likely authored or supported by STRS investment staff (including CFA charterholders).
Possible Violation:
Standard I(D): Misconduct — Participating in or enabling an anonymous smear campaign violates the professional duty of honesty and integrity.
Standard IV(A): Loyalty — A CFA charterholder’s duty is to their client — in this case, Ohio teachers — not to protecting STRS management from scrutiny.
Standard VII(A): Conduct as Members — Hiding behind anonymous letters to trigger “lawfare” undermines the integrity of the CFA designation.
3. Endorsing ACA as “Governance Consultant”
Issue: Instead of hiring an independent governance consultant, STRS hired ACA, a firm with a track record of legitimizing excessive pay (see CalPERS case via Naked Capitalism). ACA also backs STRS’s questionable GIPS claims.
Possible Violation:
Standard VI(A): Disclosure of Conflicts — CFA charterholders involved in recommending ACA had a duty to disclose potential conflicts — namely, ACA’s incentive to validate STRS’s compensation structure.
Standard I(C): Misrepresentation — By presenting ACA as “independent,” when ACA’s business model favors staff, charterholders may have misled the board and members.
Standard III(A): Loyalty, Prudence, and Care — Endorsing conflicted advisors who rationalize excessive fees and bonuses undermines fiduciary duty to beneficiaries.
Broader Concern: Culture of Silence vs. “Name and Shame”
The CFA Code emphasizes integrity of markets and protecting clients first. Charterholders are expected to “name and shame” — meaning they should call out unethical practices even when doing so is uncomfortable.
At STRS, instead of whistleblowing, CFA charterholders:
Accepted inflated bonuses linked to opaque valuations,
Backed staff-driven narratives over independent governance, and
Stayed silent while trustees were attacked with the QED distraction.
That silence itself could be construed as a violation of Standard I(D) Misconduct and Standard VII(A) Conduct as Members.
Conclusion
There is a colorable case that multiple CFA Standards may have been violated by STRS charterholders:
Misrepresentation (I(C)) — GIPS compliance claims that omit private equity.
Misconduct (I(D)) — Anonymous letters weaponized against trustees.
Conflicts of Interest (VI(A)) — Supporting ACA despite conflicts.
Loyalty, Prudence, and Care (III(A)) — Failing to protect teachers from excessive fees and secrecy.
At minimum, these raise grounds for referral to the CFA Institute’s Professional Conduct Program.
Ohio educators and retirees have been betrayed not only by their pension system but also by much of their state’s press corps. While the State Teachers Retirement System (STRS) funnels hundreds of millions annually into secret no-bid private equity contracts, the Ohio media—with rare exceptions—has amplified a manufactured scandal around “QED,” a firm with no assets, no SEC registration, and no role in managing STRS money.
Instead of asking why billions in opaque contracts remain hidden, much of Ohio’s press corps acted as enablers for Attorney General Dave Yost and Governor Mike DeWine, echoing their narrative and distracting from the real corruption.
II. The QED Distraction
QED was a concept firm, never SEC-registered, with $0 in assets and $0 in fees from STRS. Yet Yost’s office pushed QED into headlines as if it represented a major scandal. Media outlets latched on, running story after story about a phantom firm while ignoring the forensic audit’s findings that STRS pays nearly $1 billion per year in opaque fees through secret contracts with private equity managers.
This strategy—spotlighting a harmless decoy while burying the billion-dollar issue—is straight out of the FirstEnergy HB 6 playbook: focus public attention on a side-show while dark money flows in the shadows.
III. The Toledo Blade: A Lone Voice for Transparency
Amid this landscape, the Toledo Blade stood out. Its editorials and reporting consistently called for:
Full transparency of STRS private equity contracts.
An end to excessive bonuses for staff tied to opaque performance benchmarks.
Alignment with teachers’ interests, not Wall Street’s.
The Blade connected STRS to Ohio’s broader pay-to-play culture, warning that without transparency, the system was vulnerable to the same type of scandal that exploded with FirstEnergy. Their editorials declared plainly: teachers want indexing, transparency, and no bonuses—and that is what the board should deliver.
IV. Columbus Dispatch & Cincinnati Enquirer: A Different Agenda
Contrast this with the Columbus Dispatch and Cincinnati Enquirer, both owned by Gannett, which itself is controlled by Apollo Global Management—one of the largest private equity managers in the world and a major STRS contractor.
Instead of scrutinizing the hidden fees or Apollo’s role, the Dispatch and Enquirer often:
Echoed Yost’s QED talking points, portraying the phantom firm as the scandal.
Downplayed or ignored the forensic audit, which documented real abuses.
Dismissed reform trustees and teacher groups as disruptive or politically motivated, rather than whistleblowers.
It is no coincidence: media outlets owned by private equity have a structural incentive to protect private equity’s reputation and suppress stories that could threaten their fee streams.
V. Have Ohio Media Learned Nothing from FirstEnergy?
The FirstEnergy HB 6 scandal should have been the media’s wake-up call. For years, Ohio outlets treated HB 6 as just another political fight, underestimating the depth of corruption. It took federal prosecutors to expose that dark-money entities had funneled tens of millions to secure favorable legislation.
Now history repeats itself:
Dark money + opaque contracts + complicit officials.
A press corps (outside Toledo) unwilling to follow the money.
Ownership structures that align major newspapers with the very private equity firms extracting fees from STRS.
The question is not whether STRS corruption is real—it is whether Ohio’s media will expose it, or repeat the mistakes of HB 6 by shielding political and financial power until federal indictments force their hand.
VI. Conclusion
Ohio teachers deserve better than a pension system riddled with conflicts and a press corps that enables misdirection. The Toledo Blade has set the example, insisting on transparency and reform. The rest of Ohio’s media must decide whether they stand with educators and retirees, or with politicians and private equity firms.
Until then, the “QED scandal” will be remembered not as a revelation, but as a cover-up—engineered by officials and amplified by a complicit press—to protect the real scandal hiding in plain sight.
Ohio Media Coverage of STRS: A Tale of Two Narratives
Outlet
Ownership / Control
Coverage of STRS Private Equity
Treatment of QED
Editorial Stance on Bonuses & Transparency
Conflict Context
Toledo Blade
Locally owned (Block Communications, family-run)
Consistently presses for transparency of all private equity contracts; cites forensic audit; highlights hidden fees & conflicts
Treated QED as irrelevant side-show; focused on real issue of opaque contracts
Published multiple editorials demanding: (a) no bonuses, (b) indexing over alternatives, (c) full contract disclosure
Independent paper not owned by national PE-controlled conglomerates; fewer conflicts
Columbus Dispatch
Gannett (controlled by Apollo Global Management, a PE giant with STRS contracts)
Downplays or omits forensic audit findings; avoids deep reporting on opaque PE fees
Elevated QED into a “scandal,” often repeating Attorney General Yost’s narrative
Editorials and coverage have tended to portray reform trustees as disruptive; have not demanded transparency
Apollo’s ownership of Gannett creates structural conflict: a PE firm managing STRS assets also controls the Dispatch
Cincinnati Enquirer
Gannett (Apollo Global Management)
Similar to Dispatch: minimal investigative coverage of hidden PE fees
Reported heavily on QED, framing it as the “problem” at STRS
Teacher reformers framed as political; bonuses and staff defended as “market practice”
Same Apollo conflict; reinforces “protect private equity” editorial line
Cleveland Plain Dealer / Cleveland.com
Advance Publications (Condé Nast parent, not PE owned)
Coverage sporadic; tends to echo state officials’ talking points; limited forensic investigation
Reported on QED, but not as aggressively as Gannett papers
Mixed coverage: sometimes sympathetic to teachers, but little editorial leadership on reform
No direct Apollo conflict, but resource-constrained newsroom often reprints wire and official narratives
Limited investigative reporting; tends to cover STRS in political rather than financial terms
Mentioned QED scandal, not skeptical of it
Rare editorials; neutral to deferential toward STRS staff and officials
Not PE-owned, but relies heavily on statehouse reporting that echoes official narratives
Key Contrasts
Toledo Blade – Only paper to frame STRS as a transparency and fiduciary crisis, consistently supporting teachers. Editorials directly linked STRS secrecy to potential corruption and called for reform.
Gannett Papers (Dispatch & Enquirer) – Amplified the QED distraction while burying the story of $900m+ in hidden fees. Their ownership by Apollo Global Management (a major STRS contractor) creates an unavoidable structural conflict of interest.
Other Ohio Papers – Often echo official statements and lack resources for deep financial investigations, leading to coverage that reinforces the AG/Governor narrative rather than challenging it.
Lessons from FirstEnergy HB 6
Just as most Ohio media failed to follow the money during the FirstEnergy scandal—until federal prosecutors forced the issue—so too with STRS.
The same dark-money channels and conflicted law firms are at play, but the press (outside Toledo) is not connecting the dots.
Ownership conflicts (Apollo → Gannett) raise questions about editorial independence when covering private equity’s role in STRS.
APPENDIX
Ohio TV STRS/QED framing in Private-Equity Shaped Media Ecosystem
Core points:
Ownership & financing matter. Apollo’s majority stake in Cox Media Group puts Ohio broadcasting squarely within a private-equity ownership model. Scripps (public) is a large consolidator; Gannett’s statewide print/digital network runs on Apollo-financed debt—creating a broader sponsor-centric news economy. Axios+1
Narrative selection favors scandal over substance. WEWS/News 5’s STRS/QED packages emphasize alleged steering/ethics, while complex fiduciary issues (fees, benchmarking, PE smoothing) get less oxygen—matching a broader national pattern in PE-adjacent media. News 5 Cleveland WEWS
Result: Viewers receive a vivid story about “QED and bad actors,” but less on how STRS’s alternative-asset costs and benchmarks may drive funding gaps—information retirees need to evaluate stewardship.
1) Who owns the Ohio TV megaphones?
Cox Media Group (CMG) — majority-owned by Apollo Global Management affiliates since 2019; CMG historically held significant Ohio TV and newspaper assets (e.g., WHIO-TV Dayton and Dayton Daily News). Apollo’s 2019 buyout put local TV/newspapers under a PE umbrella; CMG later sold 12 stations to Imagicomm (2022), but Apollo’s CMG stake is a clear PE footprint in Ohio broadcasting. Axios
Gannett/GateHouse (newspapers, not TV) — relevant for statewide news agendas. The 2019 New Media/GateHouse merger that created today’s Gannett was financed by Apollo ($1.792B loan @ 11.5%, per NewsGuild; similar coverage in Forbes). While not TV, their statewide print/digital network sets a parallel tone that TV often follows. The NewsGuild – CWA+2Forbes+2
E.W. Scripps (NASDAQ: SSP) — publicly traded broadcaster headquartered in Cincinnati; owns WEWS Cleveland (News 5) and WCPO Cincinnati, among many others. Scripps is not PE-owned but relies on Blackstone for debt lines
Why it matters: Even when a broadcaster (Scripps) is not PE-owned, adjacent ownership ecosystems (Apollo-controlled CMG; Apollo-financed Gannett) can shape shared sourcing, editorial framing, and agenda-setting across markets.
2) The STRS/QED arc on Ohio TV (WEWS/News 5)
Reporter: WEWS’s Morgan Trau covers the Statehouse and authored multiple STRS/QED pieces; her station page and X profile confirm role/location. News 5 Cleveland WEWS+1
Coverage themes: News 5’s recent report (example: “whistleblower, investment firm at center of … testify…”) advances the alleged ‘QED steering’ narrative (AG Yost’s case), framing QED as central to impropriety and tying it to reform board members—echoed by Ohio Capital Journal and AP summaries of the litigation timeline. News 5 Cleveland WEWS+2Ohio Capital Journal+2
What’s notable for your critique:
The “QED as bogeyman” frame dominated airtime while long-running questions about STRS fees, benchmarks, and alternative-asset underperformance got less sustained, technical coverage—mirroring the concern in your essay about Ohio media focusing on scandal optics over the fiduciary substance. (Your linked analysis.)
That imbalance aligns with national patterns where PE-connected media ecosystems emphasize personality/process controversy while de-emphasizing fee/benchmark mechanics.
3) Private-equity touchpoints in Ohio TV
Apollo → CMG (majority owner): PE has a direct station-ownership footprint via CMG; Ohio viewers are within that distribution (e.g., WHIO-TV market). Even when not dictating day-to-day editorial, ownership incentives (leverage, cost-cutting, reliance on wire/centralized content) can narrow bandwidth for technical pension reporting. Axios
Scripps (public) interacts with debt/portfolio reshuffles (Gray swaps, sales) that similarly reward scalable, conflict-friendly narratives (short packages, political drama) over deep dives into private-market fees, benchmark engineering, and smoothing—the very topics reformers press. Scripps
Gannett (Apollo-financed) sets parallel print/digital agendas statewide. Even though it’s not TV, those newsrooms’ story selection cascades into broadcast rundowns, magnifying frames that are comfortable for financial sponsors and burdensome for reformers. The NewsGuild – CWA
4) Conclusion
Safe, supportable claims:
Apollo-affiliated funds control Cox Media Group (since 2019) and thus have direct ownership exposure to Ohio TV markets. Axios
Scripps is publicly traded and owns WEWS & WCPO; it actively swaps/sells stations to optimize portfolio scale depends on PE firms like Blackstone for credit. Scripps+1
WEWS’s Morgan Trau produced multiple STRS/QED stories; News 5 coverage foregrounds QED/board-misconduct allegations that AG Yost pursued. News 5 Cleveland WEWS
AP and Ohio Capital Journal pieces show the state’s litigation narrative advancing the “contract-steering/hostile takeover” frame, which TV then amplifies. AP News+1
For decades, insurers have promoted annuities as “safe” retirement products—whether offered inside 401(k) plans, 403(b) plans, or used in large pension risk transfer (PRT) deals. But recent developments suggest insurers themselves are eroding the transparency and prudence standards that fiduciaries must meet under ERISA. By lobbying for secrecy, suppressing solvency disclosures, and hiding their spread profits, insurers are virtually ensuring that plaintiffs’ attorneys will argue these contracts amount to prohibited transactions under ERISA §406.
This article builds on my earlier work:
1. Annuities as Prohibited Transactions via ChatGPT¹ 2. Annuities Flunk Prohibited Transaction Exemptions² 3. Diversification Abandoned: Why Fiduciaries Must Rethink Fixed Annuities and PRTs³ 4. Four Sets of Books: How Trump’s 401(k) Push Opens the Door to Accounting Chaos⁴ 5. State Guarantee Associations Behind Annuities Are a Joke⁵ 6. PRT Annuities Should Be Prohibited Unless Sponsors Prove Prudence⁶
I. Secrecy Around Prudential and New Jersey Insurers
A researcher recently noticed that quarterly statutory filings of Prudential (domiciled in New Jersey) are not available on S&P Capital IQ. Why? Because New Jersey Statute 17-23-1 makes quarterly statements confidential: “Quarterly statements shall be confidential and shall not be subject to public inspection…”⁷
This means one of the largest providers of PRT annuities in the country shields crucial solvency data from plan sponsors, fiduciaries, participants, and even researchers. Fiduciaries relying on Prudential annuities cannot access the same information they would demand of any mutual fund or bank counterparty.
II. NAIC’s Push to Hide Risk-Based Capital Scores
The National Association of Insurance Commissioners (NAIC) is now moving to extend this secrecy nationwide. In a 2025 proposal (p.56 of NAIC CADTF meeting packet⁸), regulators suggest prohibiting any public reporting or dissemination of an insurer’s Risk-Based Capital (RBC) ratio. The Society of Actuaries has opposed this move, warning that transparency is essential.
III. The Spread Profits Problem
As I detailed in ‘Four Sets of Books’⁴, insurers earn vast hidden profits by crediting plan participants only 2–3% while investing their general accounts at 6–8%. Unlike asset managers who must disclose fees, insurers keep their “spread” opaque. Cases like Cunningham v. Cornell University suggest courts will increasingly demand disclosure of how insurers make their money. Refusals to disclose will support claims of prohibited transactions.
IV. Why This Matters for 401(k) and PRT Litigation
Fixed annuities and guaranteed investment accounts offered inside 401(k)s are increasingly challenged as prohibited transactions, especially when recordkeepers steer participants into affiliated insurance products. The secrecy around solvency metrics compounds the fiduciary risk.
In Pension Risk Transfers, when a plan sponsor transfers billions in obligations to a single insurer, the current rule fiduciaries must prove the annuity provider is financially strong. (I believe that this rule could be challenged since even a strong annuity provider may not live up to Imprudent Conduct Standards) If solvency data is withheld, plaintiffs can argue that fiduciaries could not have satisfied their duty to monitor and therefore, engaged in a prohibited transaction.
V. The Coming Litigation Wave
With insurers lobbying to suppress information, fiduciaries are left in an impossible position. Courts will not accept “we couldn’t get the data” as a defense. Instead, lack of transparency will be framed as evidence that annuities:
By suppressing solvency disclosures, hiding spread profits, and lobbying for even greater secrecy, insurers are accelerating their own downfall in the courts. What once passed as prudence will now be reframed as prohibited self-dealing. Fiduciaries who continue to use annuities—whether in 401(k)s or PRTs—without demanding full transparency may soon find themselves on the losing end of ERISA litigation.
For decades, 401(k) investment accounting lived in a relatively clean world. Most plans are used primarily:
One set of books – a portfolio of SEC-registered mutual funds, all marked to market daily; or, around 25% used mark to market for 90% of their options, with perhaps one or 2 stable value options using book value accounting a second set of books.
Now, under Trump’s crypto and private equity in 401(k) push, we are rapidly heading toward four incompatible accounting systems inside the same retirement plan. One accounting standard is essential for transparency and accountability—but the direction we’re heading guarantees neither.
1. Mutual Funds: The Gold Standard of Market Value Accounting
Accounting Standard:
GAAP / FASB rules for investment companies, enforced by the SEC.
Mark-to-market daily pricing based on observable market prices.
Independent custodians and pricing vendors.
Audited annual reports with standardized disclosures.
Why It Works:
Participants see a daily NAV (Net Asset Value).
Prices are transparent, comparable, and difficult to manipulate.
Fiduciaries can benchmark performance accurately.
This is the historic standard that most investors think applies to their 401(k) across the board. Unfortunately, it’s only true for the mutual fund portion of a plan.
2. Annuities: Book Value Accounting in the Shadows
Accounting Standard:
Statutory accounting under the NAIC Accounting Practices and Procedures Manual.
Regulated by a single “cherry-picked” state insurance commissioner—chosen by the insurer, not the plan sponsor.
Assets are held at amortized cost or “book value,” not market value.
Key Differences from Mutual Funds:
Gains/losses on investments are not reflected daily—only when sold or impaired.
Investment returns to participants are set by the insurer’s discretion, often far below what the general account earns.
Spread profits (difference between what the insurer earns and what it credits) are not disclosed in plan reports or participant statements.
Fiduciary Implications:
Because statutory accounting hides market swings, risk appears lower than it is.
As I’ve argued before, annuities were the gateway drug that allowed non-standard accounting to creep into 401(k)s【https://commonsense401kproject.com/2025/08/07/trumps-crypto-and-private-equity-in-401k-push-enabled-by-the-gateway-drug-annuities/
ASC 820 (Fair Value Measurement) applies, but with a catch—private assets are often valued using Level 3 inputs (unobservable data).
Valuations are performed by the managers themselves or by “independent” appraisers hand-picked by the managers.
Why It’s Problematic:
There is no daily pricing—valuations are often quarterly, lagged, and subjective.
Conflicts of interest are rampant; managers have incentives to overstate values to boost reported returns or maintain fee levels.
Cash flows, capital calls, and distributions make performance comparisons difficult.
I’ve called this mark to make believe because, unlike mutual funds, these valuations can be engineered to smooth returns and hide losses until a crisis forces a markdown.
but the bigger danger is that, without strong accounting rules, you may never know what your crypto holdings are really worth.
Comparison Table: The Four Sets of Books in 401(k) Plans
Investment Type
Accounting Basis
Valuation Frequency
Regulator
Transparency Level
Fiduciary Risks
Mutual Funds
Market value (GAAP/FASB, SEC rules)
Daily
SEC
High – daily NAVs, audited
Low, unless fees are excessive
Annuities
Book value (NAIC statutory accounting)
Infrequent, market values not shown
State insurance commissioner (insurer-chosen)
Low – returns set by insurer, spread hidden
High – opaque returns, single-entity credit risk
Private Equity / Alternatives
“Fair value” with Level 3 inputs (ASC 820)
Quarterly or longer, lagged
SEC for registered funds; otherwise state banking/trust regulators for CITs
Low to moderate – manager-controlled valuations
High – valuation bias, illiquidity, conflicts
Crypto
Intangible asset model under GAAP
Continuous in theory, but source-dependent
SEC/CFTC (fragmented oversight)
Very low – price feeds vary, no unified custody standard
Very high – volatility, custody risk, fraud potential
The Bigger Danger: Mixing the Books in Target Date Funds
The most alarming development is blended accounting inside target date funds, especially those structured as state-regulated CITs instead of SEC-regulated mutual funds.
Why this matters:
A single target date fund could hold mutual funds (market value accounting), annuities (book value accounting), private equity (manager valuations), and even crypto—all in one NAV.
The net asset value the participant sees will be a cocktail of different accounting standards, some transparent, some opaque.
You could be looking at a “smooth” performance line without realizing risk is hidden under the hood.
How It Will Happen:
Poorly regulated CITs allow private equity or annuities to be layered inside other CITs.
I predict a 10%–15% private equity allocation will be buried inside a CIT that’s then wrapped into a target date fund.
Advisors will tell fiduciaries that a “trusted professional manager” can handle these complex allocations—removing the incentive to dig deeper.
ERISA’s Prohibited Transactions: The Untapped Defense
ERISA’s prohibited transaction rules were designed to stop creative accounting and self-dealing before they harm participants. But:
The DOL has not enforced these rules aggressively in the annuity or CIT context.
Litigation is only starting to touch on these accounting mismatches.
I believe annuities, private equity, and crypto in 401(k) plans are all prohibited transactions unless they fall under narrow exemptions—which most don’t in practice.
Conclusion
We are moving from one uniform, transparent accounting system to four incompatible ones inside the same retirement plan. This is not just an accounting curiosity—it is a structural shift that enables opacity, hides risk, and erodes fiduciary accountability.
Mutual funds gave us a clean, daily-marked-to-market view of investments. Annuities broke that standard, private equity exploited it, and crypto may blow it wide open. Without one standard of accounting, ERISA fiduciaries will be flying blind—and so will participants.
Trump’s bill allowing non-securities-based investments like Crypto, Private Equity, and Real Estate, was enabled by the Gateway Drug – Annuities and the way they have decimated, especially smaller retirement plans. Does this Executive Order overturn hundreds of years of fiduciary legal protections? Probably not, but it erodes it and exposes millions of Americans to unnecessary risk and losses in their retirements.
The law protecting 401ks ERISA is based on fiduciary law, which in general, bans one-sided contracts. The DOL has never enforced this law in the 800,000 401k plans with annuities. The only check has been in litigation, which really only looks at the top 1%, the 8000 largest plans over $100 million in assets.
The Annuity playbook is to minimize federal regulation, and cherry-pick weak state regulators who have little or no transparency so they can maximize hidden fees and profits. I testified to the DOL Advisory Committee in July 2024, warning about the use of weak state-regulated Collective Investment Trusts (CITS). https://commonsense401kproject.com/2024/07/31/chris-tobe-dol-testimony/
SEC-registered Mutual funds have too much transparency, which is why Annuities, Crypto, and Private Equity will look to other vehicles.
Trump selling out retirees to enrich Wall Street and the Crypto industry is not a shock. Hopefully, the majority of responsible plans will not fall for the sales pitch
Welcome Back to the Dealership—Without the Internet
There was a time not too long ago when buying a car meant walking into a dealership and bracing for a battle. You knew better than to pay the sticker price. There was no CarFax, no Kelly Blue Book at your fingertips—only your grit and your negotiating skills stood between you and a bad deal. Fast forward to today, and while consumers have gained power in most financial transactions thanks to transparency and competition, one part of the retirement world remains stubbornly stuck in that old sales model: fixed annuities in 401(k) plans.
When it comes to these insurance-based investments, especially general account fixed annuities, the rate you receive isn’t always about the market—it’s about your leverage. Your negotiating power. And for too many plans, that means quietly accepting returns well below what other, savvier plans are earning. The result? A two-tiered system where uninformed or unempowered fiduciaries leave millions on the table while others cash in.
Sticker-Price Rates for the Uninitiated
Let’s start with what most plan sponsors and fiduciaries are seeing: general account fixed annuity 2 to 3% rates with some less than 2%. In most cases, these rates have been locked in for years. Plan fiduciaries assume that’s the best available. They’ve never asked for better. They trust the insurance company’s glossy marketing and ratings and their consultants.
Prudential, for example, publicly posts general account rates of 3%–4% on consultant platforms like FI360/Broadridge. Some like TIAA and Mass Mutual post rates of 4%-5% for basically the same or less risky product. But the rates with many insurers like Prudential can vary from 1.5% to nearly 7%, with little rhyme or reason. In at least one case, a savvy union plan in New Jersey negotiated a general account fixed annuity rate of 6.8%—within the same 401(k) framework.
Yes, you read that right. Nearly five full percentage points higher than what other plans were receiving from the same insurer for the same product type. The only difference? They knew they could ask.
A Broken Marketplace
What we’re seeing is not an efficient marketplace. It’s a holdover from a time when product pricing was opaque and negotiation was king. But here’s the problem: this isn’t used car sales. These are retirement assets regulated by ERISA, with fiduciary standards that prohibit arbitrary pricing structures that benefit one plan over another without justification.
If an insurance company retains total discretion over annuity rates, then it also retains the ability to allocate higher yields to preferred clients—possibly to reward larger assets, political influence, or favored consultants—and lower yields to everyone else. This unequal treatment is not only unfair; it’s potentially unlawful under ERISA.
As I argued in this recent piece, annuities in 401(k) plans often constitute prohibited transactions when they are offered with non-transparent, discretionary pricing structures. If plan fiduciaries do not negotiate, they are not fulfilling their duty of loyalty or prudence under ERISA.
Consultants Are Not Always Your Friend
A deeper concern is that some consultants—the very advisors plan sponsors rely on to protect them—are complicit. Rather than push for higher negotiated rates or run competitive bids, some simply accept posted rates or worse, recommend insurers where they may have their own compensation arrangements or conflicts. Some consultants have insurance licensees where they can receive hidden insurance commissions. Sometimes rates are burned off to pay for recordkeeping fees, consultant fees etc.
Some consultants may use databases like FI360/Broadridge, which show insurer-published general account rates many conflicted consultants do not even do that. But unless they go further—soliciting competitive proposals or uncovering the higher rates being granted to others—they are not doing their job. Worse, in some cases they actively steer plans toward underperforming fixed annuities while pocketing fees from the insurers themselves.
A Fiduciary Wake-Up Call
The key message for fiduciaries of 401(k) plans is this: you get what you negotiate.
If your plan holds a general account annuity yielding 2%-4%, and you’ve never asked for more, you may be in violation of your fiduciary duty. Your peers—especially in larger or union-affiliated plans—may be earning triple your rate simply because they demanded better terms.
That’s not just a bad deal. It’s a fiduciary breach.
The Solution: Demand Transparency and Competition
Require Competitive Bids – Treat your annuity provider like any other investment manager. Get multiple quotes. Benchmark rates.
Disclose the Spread – Insist on full transparency on how the insurer earns money. What’s the gross yield on their general account? What are they keeping?
Use Independent Experts – Be cautious of consultants who may have undisclosed relationships with insurers. Get independent advice or a second opinion.
Document the Negotiation – Keep records of the steps you took to secure the best rate. It’s your defense in any potential ERISA litigation.
Over time get rid of your Conflicted Non-Transparent fixed annuities, switch to a diversified Synthetic based stable value fund like the Vanguard RST, or Fidelity MIPS, this may take time because many fixed annuities are known as “Roach Motels” you easily get in but getting out may require a substantial penalty
Conclusion
Fixed annuities in 401(k) plans should not be sold like used cars. They should reflect a competitive, prudent process.
In the end, it’s simple: when it comes to annuity rates, you get what you negotiate—or what you fail to.
Back in the early 1990s, after the fallout from several major insurance company failures, the industry scrambled for a new story to tell. Enter the ‘separate account’ — a clever rebranding of the same old insurance guarantee wrapped in a new package. Meant to reassure jittery retirement plan sponsors, these products were marketed as safer, more transparent, and more sophisticated than their general account predecessors. By 2000, most of the larger plans had moved on to synthetic diversified stable value as a prudent fiduciary choice. However, many mid-size to smaller plans, with a few large plans, have held on to this misleading product.
A Glossy Exterior, a Hollow Core
Separate accounts claim to offer a customized portfolio insulated from the insurer’s broader financial health. But the reality is far less reassuring. Plan sponsors hold nothing more than a contractual promise. They don’t own the assets, they can’t see inside the portfolio, and they have no control over the investment strategy. The insurer remains in full command — and the assets remain on its balance sheet. There are no strict investment guidelines, so if the annuity provider is downgraded, they can shift the high-quality assets supposedly in the Separate account ie, investment grade, and replace them with illiquid private credit.
Behind the Curtain: How the Spread Game Works
Here’s the secret sauce: insurers earn a ‘spread’ — the difference between what their investments yield and what they credit to plan participants. Sometimes that spread is over 2%, and that’s just what we can see. Insurers disclose yields on a selective basis, and often only once a year, making it impossible for fiduciaries to truly assess whether the rates offered are fair or competitive. One former Transamerica manager even described a ‘true-up’ day, where the safer, prettier assets are momentarily held just long enough to create a nice snapshot for clients. The rest of the month? Back to the riskier general account.
No Transparency, No Fiduciary Duty
Separate account contracts typically avoid any fiduciary obligations. There’s no obligation to disclose holdings, no responsibility to ensure investment prudence, and no transparency into fees, risks, or performance. The entire structure functions as a black box, with the insurer firmly in control. And if the insurer fails? Plan assets tied to a separate account are not guaranteed safe harbor — they could be frozen, impaired, or even lost in a liquidation.
Why Consultants Still Fall for It
Despite the red flags, many retirement plan consultants continue recommending these products. Why? Sometimes it’s a matter of inertia — separate accounts have been around so long that they’ve become familiar. Other times, it’s conflict: insurers often reward consultants through indirect compensation or other incentives. Whatever the reason, the end result is the same: plan participants are exposed to unnecessary risk while insurers quietly profit.
Better Alternatives Already Exist
Synthetic GICs — stable value products with transparent plan-owned bond portfolios and independent wrap providers — offer a far safer, more fiduciary-friendly alternative and are used by the majority of large plans. These products separate management, ownership, and strict transparent investment guidelines and crediting rate formulas.
The Illusion Persists
It’s time to call separate accounts what they are: a mirage. They simulate transparency. They simulate safety. But at their core, they rely on the same concentration of risk, lack of disclosure, and one-sided control that make general account annuities so problematic. Fiduciaries owe their participants better.
Accounting and Q&A NOTES
There are 3 tests to show that a Separate Account is a Fake
Lack of strict investment guidelines in the contract. This allows the insurance company, when they get in a liquidity credit squeeze, to swap out the higher grade bonds in the suppossed separate reference portfolio with alternative private credit, perhaps worth 80 cents on the dollar.
Lack of a strict crediting rate formula in the contract. While they will pretend to calculate a rate off of a reference portfolio of higher quality, that is mostly a game to justify the low yield. They control all the inputs to the formula with no transparency, so they can manipulate it to anything they want
No Downgrade provision. If it were really separate, they would not mind giving out.
PWC did a good description of a Separate Account Fixed Annuity in some 401 (k) 5500 financials
The Plan is a party to a fully benefit-responsive investment contract with the John Hancock Trust Company, LLC (“John Hancock”) for the years ended December 31, 2023, and 2022. John Hancock maintains the contributions in a general account. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The contract earnings represent the income from specific assets owned by John Hancock in a pooled separate account. The contract issuer is contractually obligated to repay the principal.
Maersk does not own any assets or a portfolio, just a contract. JH bases the rate they pay in the contract on a lower-yielding subset of assets they own in a separate account portion of the general account. The general account is filled with investments ranging from 2% to 12%. They carve out in a pretend portfolio some of the lower-yielding and lower-risk and come up with a rate of 3% pay it out. So they make a general account return of 7% overall and keep a 4% spread as profit. The plan takes nearly half of the alternatives, but only gets the returns of the lowest 1/4.
There are many more examples of Separate Account examples (MassMutual Great Grey). In Chapter 32 on Separate Accounts in the book on US tax reserves for Life Insurers, Separate Account revenues are rolled up with General Account revenue on tax reporting. The DOL in 20111-07A disclosure clearly distinguishes Separate Account from Synthetic Stable Value. Blue Prairie in a 2014 study, found that the Separate Account had a 60% higher duration than synthetic, 4.42 vs. 2.53. See also the Mercer Nevada Presentation.
S&P, in general, gives the same crediting rates to General Account and Separate Account annuities from the same issuers. S&P analysts, in a chapter in the Handbook of Stable Value Investments, show that states differ so much in their credit protection for separate accounts that identical contracts could result in different ratings in different states:
In an era where fiduciary prudence should be paramount, many plan sponsors have dangerously abandoned the foundational ERISA principle of diversification in favor of single-insurer annuity contracts. Billions of dollars in retirement savings are now concentrated in fixed annuities—both general and separate account types—as well as through pension risk transfer (PRT) annuities. These contracts rely entirely on the credit risk of a single private insurance company. In doing so, plan sponsors not only increase participant risk—they also take on an additional fiduciary burden: to evaluate the solvency of that insurer, going far beyond the superficial comfort of a credit rating.
The Mirage of Ratings
Credit ratings are not a shield against fiduciary liability. The 2008 financial crisis laid bare the failures of the rating agencies, with AIG maintaining top-tier ratings until days before its collapse. Even today, insurers like Prudential—formerly designated as a Systemically Important Financial Institution (SIFI)—have lobbied to remove that designation to escape heightened scrutiny. As the Stanford Graduate School of Business has documented, this de-designation eliminates oversight that might have prevented excessive risk-taking within the general account structure.
Despite this, insurers continue to receive high ratings from S&P, Moody’s, and Fitch, often with little transparency about underlying investment risks—particularly with respect to private debt. As discussed in “Private Debt Problematic in ERISA Plans”, these opaque, illiquid assets dominate many insurer portfolios and are used to inflate yield—benefiting the insurer through spread profits while increasing default exposure for plan participants.
S&P has itself acknowledged that state-level regulation of Separate Accounts differs so widely that an identical contract could receive different ratings depending on the state of issuance. In their own words:
“While there have been insolvencies involving separate accounts, the circumstances under which a separate account might be consolidated with the insurer’s general account remain substantially undefined.”
In other words, despite claims that Separate Accounts are “insulated,” policyholders—including ERISA plans—have no clear priority in an insolvency. The assumption that Separate Accounts are safer than General Accounts is unsubstantiated without state-specific legal protections and a higher, documented rating. Yet, no recent insurer appears to have sought such enhanced Separate Account ratings for fixed annuity products—despite billions flowing into them through 401(k) and PRT deals.
State Guarantee Associations: False Security
Plan fiduciaries also wrongly assume that State Guarantee Associations (SGAs) provide meaningful protection in the event of insurer failure. As explained in “State Guarantee Associations Behind Annuities Are a Joke”, these entities are riddled with limitations:
Coverage caps often top out at $250,000 per participant.
Coverage is limited to annuities considered insurance policies—a classification that remains unsettled in many states for group annuity contracts.
Plans that invest via Separate Accounts may not be covered at all.
SGAs are slow to pay and require insolvency proceedings to trigger.
This patchwork system of protection undermines the uniform national standards intended under ERISA, replacing them with the legal uncertainty of 50 different state frameworks.
Pension Risk Transfer: A Regulatory Shell Game
In the PRT context, the problem becomes even more acute. Plan sponsors offload pension liabilities to an insurer and call it a day. But as outlined in “Pension Risk Transfer Annuities Should Be Prohibited”, this shift removes ERISA protections from participants and exposes them to pure credit risk—often without even basic downgrade protection.
These annuities, once purchased, are irrevocable. There is no mark-to-market pricing, no participant choice, and no fiduciary oversight after transfer. Unlike defined contribution plan assets—where fiduciaries can replace a fund or manager—PRT annuities place participants in the hands of a single insurer, often for life.
Incentives Misaligned: Kickbacks and Structuring Fees
Plan sponsors frequently benefit from “structuring fees,” “rebalance profits,” or “rebates” paid by insurers to corporate treasury departments. These functionally operate as kickbacks that create a dangerous conflict of interest: the employer’s financial interest in closing the pension or reducing balance sheet liabilities directly conflicts with the participants’ need for long-term security. The insurer’s profit model—maximizing spread between illiquid, risky investments and low fixed crediting rates—comes at participant expense.
Going Beyond Ratings: The Fiduciary Obligation
ERISA fiduciaries are held to the highest duties of care and loyalty. In choosing a single-issuer annuity, they must:
Evaluate the insurer’s asset allocation, exposure to private debt, and leverage.
Require downgrade protections, triggers, and collateralization where appropriate.
Consider alternative structures, including diversified stable value arrangements that maintain ERISA protections.
Avoid reliance on state-level guarantees or superficial representations of safety.
In the capital structure, plan participants in annuities without downgrade protections are subordinated to sophisticated Wall Street creditors, private equity owners, and even commercial reinsurers. They deserve better.
Conclusion
If an ERISA fiduciary would not invest 100% of a participant’s 401(k) balance into the high-yield bonds of a single insurer, they should not do so implicitly by placing it into an annuity backed by that insurer’s general or separate account. Ratings are not a fiduciary process. Participants cannot diversify away from default once locked into a single-issuer annuity.
The burden is on the fiduciary to prove prudence—not to presume it.
The CommonSense 401k Project 