Many members of Congress have received $millions from financial firms linked to Jeffrey Epstein. Andy Barr of KY a member of the US House Financial Services Committee is a good example.
Here’s an in-depth article exploring the network linking Congressman Andy Barr to major financial contributors with ties to Jeffrey Epstein:
Andy Barr’s Financial Industry Backers
Apollo Global Management
In the 2023–2024 election cycle, Apollo Global Management emerged as one of Barr’s top contributors, donating $55,800 via individuals and PACs Forbes+13OpenSecrets+13Business Insider+13.
Apollo’s connection to Jeffrey Epstein is well‑documented through its former CEO, Leon Black, who reportedly paid Epstein around $158 million between 2012 and 2017 for tax and estate planning—an arrangement that entangled significant public scrutiny and congressional investigation Vanity Fair+3Axios+3The Daily Beast+3.
JPMorgan Chase & Co.
In the first quarter of the 2025 election cycle, Barr’s campaign received the maximum $10,000 donation from the JPMorgan PACOpenSecrets.
JPMorgan’s entanglement with Epstein included a prolonged relationship even after his 2008 criminal conviction, forcing internal compliance to raise red flags as late as 2013 Axios+9Business Insider+9TIME+9.
In 2022, the bank sued former executive Jes Staley, accusing him of deliberately shielding Epstein and neglecting red flags in order to keep Epstein as a client Axios+3AP News+3TIME+3.
Beyond Apollo and JPMorgan: Other Connections
Barr hasn’t only received funds from these two; he’s also tapped into other banks and private equity firms later scrutinized for Epstein links:
Wells Fargo: Contributed a total of $39,932 during the 2023–2024 cycle OpenSecrets. While Wells Fargo itself hasn’t been directly linked to Epstein, its high-ranking executives and financial dealings have come under broader oversight as part of financial industry safeguards post-Epstein revelations.
Blackstone Group: Donated $39,204 in the same cycle OpenSecrets. Co-founded by Stephen Schwarzman, Blackstone has not been tied to Epstein in the same way Apollo was; however, it remains part of the broader private‑equity ecosystem that’s been called to account by investigations like those spearheaded by Senator Ron Wyden Senate Finance Committee.
The Epstein Backdrop
Leon Black’s controversy: The former Apollo CEO paid Epstein nearly $170 million for financial advice—and settled for $62.5 million with the U.S. Virgin Islands over his alleged enabling of Epstein’s illicit activities AP News+4The Daily Beast+4Forbes+4.
JPMorgan’s long delay: The bank kept Epstein as a client until 2013, despite internal concerns following his 2008 guilty plea The New Yorker.
Linking the Dots: Barr & Epstein-Linked Money
Funder
Amount Donated
Epstein Link
Apollo Global Management
$55,800
Leon Black payments to Epstein; public controversy
JPMorgan Chase PAC
$10,000
Bank’s long relationship; executive lawsuit involvement
Wells Fargo
$39,932
Part of general financial ecosystem with Epstein oversight
Blackstone Group
$39,204
Ecosystem affiliation; under scrutiny in Epstein probe
A well-crafted Investment Policy Statement (IPS) is not merely a procedural formality—it is the fiduciary firewall that protects 401(k) plan participants from the encroachment of conflicted, high-fee, and opaque investment products. In the absence of a strong IPS, plan sponsors expose themselves—and their participants—to a host of fiduciary landmines, including private equity, cryptocurrency, and insurance-based annuities that fail the Department of Labor’s Impartial Conduct Standards and risk classification as prohibited transactions under ERISA.
The IPS: Cornerstone of Fiduciary Oversight
“If an employee benefit plan does not have an investment policy statement, it does not have an investment policy.” — IFEBP Investment Policy Handbook, Eugene Burroughs
A detailed IPS is essential to satisfying the fiduciary duties of prudence, loyalty, and diversification under ERISA. As the CFA Institute’s Pension Trustee Code of Conduct underscores, trustees must “draft written policies that include a discussion of risk tolerances, return objectives, liquidity requirements,” and review these policies at least annually to ensure they remain current.
The Department of Labor (DOL) reaffirmed this in its amicus brief in Pizarro v. Home Depot, stating that vendors have strong incentives to exploit plan design weaknesses, and that ultimate accountability for plan investments resides squarely with the plan sponsor.
From Mutual Funds to Murky Waters: The Rise of CITs and Alternatives
Historically, 401(k) plans were dominated by SEC-registered mutual funds, which provided relatively robust protections via daily pricing, audited disclosures, and strict regulation. Today, over 50% of 401(k) assets are housed in target date funds (TDFs)—and increasingly, these are delivered via poorly state-regulated Collective Investment Trusts (CITs) instead of mutual funds. While CITs promise lower fees, they often come with less transparency, fewer investor protections, and more hidden leverage or illiquid assets.
Without an IPS that explicitly defines allowable structures, asset classes, liquidity limits, and credit quality minimums, plan sponsors may unknowingly allow risky assets like:
Private credit or private equity vehicles priced internally
Insurance company annuities backed by opaque general accounts
Cryptocurrency products that fail liquidity, valuation, and prudence tests
Contract-Based Products and Annuities: Unacceptable Fiduciary Risks Without IPS Controls
The shift toward contract-based investment products—especially fixed annuities within DC plans—is perhaps the most troubling. These investments:
Fail diversification screens, often representing single-issuer credit exposure
Lack downgrade provisions (unlike traditional bond funds), leaving participants stuck in junk-rated or insolvent insurance contracts
Obscure fees and spread profits, particularly in general and separate account annuities
Violate GIPS performance transparency standards required for prudent monitoring
As noted in Fi360’s Fiduciary Handbook for Plan Stewards, these investments often cannot be valued reliably or marked to market and can present major conflicts of interest—especially when offered by a plan’s recordkeeper.
Each TDF Is a Bundle of Risk: Call for Sub-Policy Statements
According to Ron Surz, co-author of Fiduciary Handbook for Understanding and Selecting Target Date Funds, each target date fund should be governed by its own IPS. This is especially critical as modern TDFs increasingly embed exposure to non-transparent alternatives like:
Private equity stakes
Real estate limited partnerships
Derivatives and synthetic structures
A sound IPS must:
Disclose the asset-level guidelines within each TDF
Demand transparency on holdings, fees, and valuation methodology
Prohibit assets that are not SEC-registered or that lack daily pricing
Require performance benchmarking against risk-adjusted, diversified indices
Avoiding Prohibited Transactions and Conflicts of Interest
The presence of annuities or proprietary alternative products tied to the recordkeeper or affiliated parties raises red flags for prohibited transaction claims under ERISA §406. Fi360 stresses that fiduciaries must “avoid or manage conflicts of interest in favor of the investors and beneficiaries.” Disclosure alone is insufficient—conflicted investments must be affirmatively excluded or justified via documented due diligence.
As the CFA Institute and Fi360 both emphasize, fiduciaries must:
Adopt written investment guidelines specifying asset classes and due diligence protocols
Evaluate each option inside TDFs as if it were a stand-alone fund
Reject opaque products that cannot meet minimum fiduciary standards for liquidity, transparency, and valuation
Conclusion: A Weak IPS Is a Breach Waiting to Happen
There is growing consensus—from the CFA Institute, Fi360, and the DOL—that weak IPS documents enable fiduciary breaches. Without an IPS that explicitly bans or scrutinizes illiquid, high-risk, or non-transparent investments, sponsors may:
Breach fiduciary duties of prudence and loyalty
Invite litigation over prohibited transactions
Allow vendors to exploit structural loopholes for their own benefit
In short, a strong IPS is a fiduciary necessity, not a formality. It is the legal and ethical framework that separates prudent governance from reckless delegation. It must evolve with the changing landscape of target date funds, CITs, and alternative assets—before it’s too late for participants and plan fiduciaries alike.
Private Debt is in DB and DC pension plans. In 401k plans it is limited so far mostly to Insurance Company Separate Accounts and other stable value products, but there are plans to increase its use dramatically by hiding it in Target Date Funds. Private Debt is problematic for a number of reasons The following is from ChatGPT
VIOLATION OF ERISA’S DUTY OF PRUDENCE
Inclusion of Private Credit, Private Mortgages, and Other Illiquid, Self-Priced Assets
Plans breached their fiduciary duties by offering and/or maintaining investments in private credit, private mortgages, and other illiquid private debt instruments within the Plan’s investment lineup, in violation of the prudent man standard of care and the Impartial Conduct Standards incorporated by regulation under ERISA.
ERISA §404(a)(1)(B), 29 U.S.C. §1104(a)(1)(B), mandates that plan fiduciaries act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use.”
Under ERISA’s Impartial Conduct Standards, fiduciaries must:
Act in the best interest of the plan and participants;
Charge no more than reasonable compensation;
Refrain from making misleading statements or omissions about risks or characteristics of investments.
The growing use of Private Credit, Private Mortgages, and similar private debt instruments in ERISA retirement plans—either through direct investments, pooled vehicles such as collective investment trusts (CITs), or via allocations in target-date funds (TDFs)—fails to meet these obligations for the following reasons:
A. Self-Pricing and Lack of Transparency Violates Prudent Fiduciary Conduct
Unlike publicly traded debt securities, private credit and mortgage loans are generally not marked to market and lack reliable, third-party price discovery. Many are valued using internal models by asset managers or by affiliated valuation agents—creating obvious conflicts of interest.
Industry studies and academic research have documented how private debt assets are often “smoothly priced” or marked to model, which artificially suppresses volatility, misleading fiduciaries and participants about the true risk of these investments.
As noted in the CFA Institute’s guidance on fair value pricing (Refresher Readings on GIPS and Risk Standards), reliance on self-pricing undermines comparability, transparency, and ultimately fiduciary prudence:
“Valuations derived from internal models, absent market validation, are inherently susceptible to bias and present conflicts when used to report performance or fees.”
B. Credit Risk Not Accurately Reflected: Ratings by Unregulated or Conflicted Firms
Many private debt instruments are assigned credit ratings not by nationally recognized statistical rating organizations (NRSROs) but by smaller, conflicted firms such as Egan-Jones, which have been previously sanctioned by the SEC for rating conflicts and failing to properly manage issuer-pay conflicts.
In SEC v. Egan-Jones Ratings Co., the SEC found repeated compliance failures, reinforcing that ratings used for fiduciary investment decisions must be independently verifiable and subject to rigorous controls. Use of such ratings in retirement plans undermines ERISA’s prudence standard and exposes plan participants to credit losses that are systematically under-disclosed.
C. Lack of Liquidity Creates Participant Harm in Defined Contribution Plans
Many private credit and mortgage assets are held in vehicles with multi-year lockups or limited redemption terms, inappropriate for the liquidity needs of daily-valued, participant-directed ERISA plans.
Target-date funds (TDFs) and pooled vehicles holding private credit often fail to disclose liquidity limitations or redemption restrictions clearly to participants, despite ERISA’s requirement that plan information not be misleading. This structure raises the same concerns that led the SEC to place limits on illiquid investments in mutual funds.
D. Valuation and Risk Mischaracterization Is a Fiduciary Breach
In Whitley v. JPMorgan Chase & Co., No. 12 Civ. 2548 (S.D.N.Y.), plaintiffs alleged that synthetic stable value funds using smoothed or manipulated private credit valuations constituted imprudent investments. Similarly, the American Century arbitration with JPMorgan uncovered concealed private credit holdings in layers of CITs, affirming the systemic risk of hidden illiquidity and valuation opacity.
These cases demonstrate that failure to properly vet, monitor, and disclose the true risks of private debt and mortgage exposures may constitute fiduciary imprudence and violate the statutory obligations imposed by ERISA §404.
E. Excessive Fees Hidden in Complex Structures
Private credit and private real estate vehicles often layer management, servicing, origination, and performance fees, resulting in total compensation that exceeds reasonable bounds—in violation of ERISA’s requirement that only reasonable compensation be paid to service providers (§408(b)(2)).
The lack of pricing transparency and comparables in private debt enables fee padding, where fiduciaries cannot accurately benchmark fees against public alternatives. This inability to assess the reasonableness of compensation itself constitutes a breach of fiduciary duty.
F. New Study Debunks Private Credit Craze
The Journal of Private Markets Investing (Fall 2025) just published a seminal study that debunks the private credit performance ‘pitch’:
Across all seasoned vintage years (2015–2020), a significant share of Total Value to Paid-In (TVPI) is composed of Residual Value (RVPI or unliquidated loans) rather than realized cash returns (DPI).
This underscores a potential major risk in the private credit asset class as this illiquid investment performance is largely dependent upon fund managers’ assessment of their values (“mark-to-myth”).
When compared to appropriate public market benchmarks, the study find that private credit funds – both senior (direct lending) and mezzanine – do not exhibit significant outperformance.
The three authors are affiliated with Johns Hopkins Carey Business School and UC Davis Graduate Management School, respectively.
I asked ChatGPT questions on Jeffrey Epstein and ties to Apollo and state pensions and it came up with this interesting story.
Here is a structured summary of the known facts and plausible linkages:
🔴 1. Leon Black’s Relationship with Epstein (2000–2018)
Black paid Epstein $158 million between 2012 and 2017 for “tax and estate planning services,” even after Epstein’s 2008 conviction for soliciting a minor.
Black continued associating with Epstein until at least 2018, including visiting his Manhattan townhouse and wiring large payments through Epstein-controlled entities.
A 2021 investigation commissioned by Apollo found that Black used Epstein’s advice personally, but no Apollo funds were allegedly involved.
🟠 2. Apollo Clients: Public Pensions with Investments During the Epstein Period
Apollo received billions in commitments from public pensions during the time of Black’s Epstein payments:
🔹 CALPERS (California Public Employees’ Retirement System)
CALPERS had over $1 billion committed to Apollo funds throughout the 2000s and 2010s.
In 2021, CALPERS publicly expressed concern after the Epstein revelations:
“We are troubled by the allegations surrounding Mr. Black… We are monitoring the situation closely.” — CALPERS spokesperson, January 2021 (per Reuters)
Yet CALPERS continued investing in Apollo funds during this period.
🔹 New York State Common Retirement Fund (NYSCRF)
NYSCRF had invested in Apollo funds since at least 2004.
No public statements were made regarding the Epstein connection.
[State Comptroller Thomas DiNapoli] did not comment after the Epstein story broke.
🔹 PSERS (Pennsylvania Public School Employees’ Retirement System)
PSERS invested in Apollo throughout the 2000s and 2010s.
In 2021, PSERS halted new investments in Apollo citing “reputational concerns,” though it’s unclear if the Epstein revelations or fee transparency were the primary driver.
🔵 3. Epstein’s Financial Ties: Were Public Funds Ever Routed Through Apollo or Epstein Entities?
There is no public evidence that Jeffrey Epstein directly managed or influenced public pension fund assets. However:
Epstein had ties to multiple billionaires and institutions that did business with Apollo, such as:
Glenn Dubin, co-founder of Highbridge Capital (later acquired by JPMorgan)
Les Wexner, former L Brands CEO, who helped fund Epstein early on
Epstein had extensive ties to JPMorgan, which continued banking him until 2013. JPMorgan is also a massive pension fund service provider (recordkeeping, private equity).
🟡 4. Legal and Reputational Fallout: Are Fiduciaries Complicit?
Despite:
Epstein’s 2008 conviction
Ongoing media coverage
Black’s continued payments until 2017
Many pension funds continued (or even increased) their allocations to Apollo funds during this time. This raises fiduciary questions, including:
🔹 Did pension fund staff and consultants perform enhanced due diligence after 2008? 🔹 Should ongoing associations with figures like Epstein have triggered ethics reviews or investment committee action? 🔹 Are fiduciaries responsible for investing in firms led by individuals involved in known predatory or criminal associations?
These questions are especially relevant under ERISA’s duty of prudence and loyalty for Taft-Hartley and other quasi-ERISA public funds.
🧾 Summary Table: Epstein–Apollo–Pension Fund Triangulation
Entity
Relationship to Epstein
Relationship to Apollo
Pension Exposure
Leon Black
Paid Epstein $158M; personal and professional relationship
Co-founder, CEO until 2021
CALPERS, PSERS, NYSCRF, and others
CALPERS
None directly documented
Major LP in Apollo PE funds
Continued investment through 2021
PSERS
None directly documented
Barred Apollo in 2021
Long-time investor
NYSCRF
No public comment
Major Apollo LP
Continued investment
JPMorgan
Epstein’s bank until 2013; now facing civil suits
Co-investor and counterparty to Apollo in some deals
Recordkeeper and PE manager for public pensions
🔚 Conclusion
While no direct Epstein–public pension link has been publicly documented, the indirect reputational and fiduciary exposure from Apollo’s long-term relationship with Epstein is substantial. The fact that most pensions continued to fund Apollo after Epstein’s first conviction in 2008—and after public reporting of payments—raises critical questions about the due diligence, risk oversight, and accountability of plan fiduciaries.
Apollo Global Management has managed to avoid full accountability despite a history of serious legal and ethical violations involving both misleading fee practices and pay-to-play corruption, largely due to a combination of structural legal advantages, regulatory capture, and a complicit investment culture in the pension fund world. Here’s a breakdown of how Apollo has avoided deeper consequences:
1. SEC Fine in 2016 — No Admission of Guilt
In 2016, Apollo paid $52.7 million to settle SEC charges that it misled investors about:
Accelerated monitoring fees after portfolio company sales
Failure to disclose conflicts of interest regarding interest from loans made to its funds
Inadequate supervision regarding a senior partner’s expense-related misconduct
⚠️ Why this wasn’t true accountability:
No criminal charges were filed.
Apollo did not admit or deny the allegations.
The fine was relatively small compared to Apollo’s multi-billion-dollar asset base.
👉 This is a typical outcome of SEC settlements with large private equity firms: civil penalties, no admissions, and limited deterrent effect.
2. CALPERS Corruption Scandal — Apollo Avoided Legal Exposure
Apollo was deeply entangled in the CALPERS pay-to-play scandal in the 2000s. The scandal involved:
Alfred Villalobos former LA Deputy Mayor and CALPERS Trustee as a placement agent was paid millions to steer CALPERS money to Apollo
Fred Buenrostro, CALPERS CEO, who forged documents and later pled guilty
Apollo paid Villalobos over $48 million in fees between 2002 and 2008
Villalobos committed suicide in 2015 before serving a prison term. Buenrostro was sentenced to 4.5 years in prison.
⚠️ Why Apollo escaped further consequences:
Apollo claimed it was defrauded by Villalobos and that it relied on Buenrostro’s forged documents.
The DOJ and SEC did not pursue charges against Apollo.
The Dodd-Frank Act outlawed such placement-agent arrangements after the fact.
Apollo was later barred by the Pennsylvania Public School Employees’ Retirement System (PSERS) in 2021 due to lingering concerns, a rare action by a major pension.
Target-date funds are over 50% of 401(k) assets. Litigation around target date funds I think shows a lack of knowledge around investment performance. Target date funds were created to hide fees and mask performance concerns, and are impossible to benchmark. In fact, many were created to manipulate benchmarks. I feel many plaintiff attorneys are not getting the full potential out of their cases by not looking under the hood of Target Date funds to find out what is really going on.
In my testimony for the June 2009 joint SEC-DOL hearing on target date funds, I contended that it’s huge growth would further concentrate management into an oligopoly and higher fees. I also criticized the target date structure as a step backward for transparency of fees, performance, and risk. I thought it would push plans toward a one-provider, closed platform that would lead to conflicts of interest and higher fees.
Target Date Fund Asset Allocation Drives Risk and Performance
Asset allocation is the main driver of performance and risk. Because of the lack of transparency and investment policy guidelines, performance gaming of the benchmark in target date funds in invited. Target date fund specialist Ron Surz warns against target date funds holding high equity allocations for those close to retirement
Joe Nagengast of Target Date Analytics in the June 2009 joint SEC-DOL hearing on target date funds. “The way to win the short-term performance horse race for target date funds (and the resulting market share) has been, in many time periods, through higher equity allocations.”
I asked ChatGPT to elaborate on this issue and specifically benchmarking to the S&P target date fund index
—————————————————————————-
From ChatGPT. Asset allocation explains ~90% of return variability, then comparing TDFs with vastly different glide paths or allocations is not apples-to-apples.
⚖️ Why It’s a Problem
401(k) Target Date Funds often differ dramatically in:
Equity vs. bond allocations (e.g., 90/10 vs. 60/40 at the same “target date”)
Glide path design (to retirement vs. through retirement)
Exposure to alternatives, real assets, or high-yield bonds
Risk levels (volatility and drawdown potential)
So, simply comparing returns (e.g., over 1, 3, or 5 years) may reward higher-risk funds during bull markets, misleading fiduciaries and participants.
🧠 Bottom Line
You cannot responsibly compare TDFs on return alone when their asset allocations diverge. Fiduciaries must benchmark based on:
Risk-adjusted performance
Glide path risk levels
Appropriateness for the participant demographic
Alignment with ERISA’s fiduciary standards
ChatGPT said:
benchmarking Target Date Funds (TDFs) to something like the S&P Target Date Fund Index can be misleading and easily gamed, particularly because:
Benchmarks like the S&P Target Date Index only reflect the average allocation (e.g., average equity/glidepath of funds in that vintage),
There is no requirement that the TDF match the risk profile of the benchmark, and
A higher equity allocation will often outperform the benchmark in bull markets, misleading fiduciaries into thinking the fund is “better managed” rather than just riskier.
🔎 How This Benchmarking Can Be Gamed
TDF managers can “game” the benchmark by:
Allocating more to equities (especially international or small-cap)
Taking more duration risk in bonds
Adding alternative assets like private equity or real estate (often with smoothed NAVs)
Using leverage (in CITs especially)
These tactics may result in higher performance in a rising market compared to the benchmark, even though the fund is taking on significantly more risk.
📊 Examples of Equity Overweighting vs. Benchmark
Let’s compare some common 2040 TDFs with the S&P Target Date 2040 Index, which in 2024 had approximately:
Equity: ~74%
Fixed Income: ~24%
Cash/Other: ~2%
Target Date Fund
Equity Allocation
Overweight vs S&P Index
Comments
Fidelity Freedom 2040 (Investor)
~84%
+10%
Higher US equity tilt, more aggressive glidepath
T. Rowe Price Retirement 2040
~89%
+15%
Very equity-heavy approach; often leads in returns in bull markets
American Funds 2040
~78%
+4%
Slight overweight, includes active mgmt in underlying funds
Vanguard Target Retirement 2040
~72%
-2%
Closest to S&P Index; more conservative relative to peers
BlackRock LifePath Index 2040
~74%
0%
Benchmarked tightly to average; often used as a baseline
State Street Target Retirement 2040 (CIT)
~78%
+4%
Slightly more risk in equity; often embeds alternatives in CITs
Sources: Fund prospectuses, Morningstar, 2024 allocation snapshots
⚠️ Fiduciary Implications under ERISA
Plan fiduciaries may be misled into thinking a fund is “better performing” when it simply takes more risk.
Impartial Conduct Standards under ERISA require fiduciaries to consider both performance and risk—a higher return via higher risk is not inherently better.
Courts may ask: Did the fiduciary understand that this TDF’s outperformance came from taking more risk than the benchmark?
This is especially risky when plan sponsors do not document why they selected or retained a more aggressive fund.
🧠
2. How Much Does It Matter?
The 1986 Brinson, Hood & Beebower (BHB) study found that asset allocation explained 93.6% of the variation in quarterly returns of pension fund portfolios.
Later updates and critiques (e.g., by Ibbotson & Kaplan in 2000) clarified that while asset allocation doesn’t explain everything, it still dominates over market timing or security selection in terms of predicting return variability.
Strategic asset allocation (long-term mix) accounts for about 90% of return variability.
Tactical allocation, timing, and security selection account for much less.
3. Impact on Performance vs. Variability
Asset allocation drives risk-adjusted returns, not just variability.
Picking the right mix of stocks, bonds, and alternatives greatly affects total returns, especially over longer horizons.
During market crises or recoveries, asset classes behave very differently—diversification reduces drawdowns.
Key Takeaway
TDFs should not be benchmarked only on return versus the S&P TDF Index—risk-adjusted performance and glidepath assumptions matter. A 2040 fund with 90% equity will likely beat the benchmark in good years, but may collapse harder in downturns—especially harming near-retirement investors if the glidepath is too steep.
There are no valid benchmarks for Target Date Funds. Comparing funds with different asset allocations does not work either. Target date funds are specifically designed to avoid accountability and thus need the most scrutiny. You have to look under the hood at the individual investment allocations and benchmark those. Attorneys are defying investment principles and basic math in insisting on using TDF benchmarks in litigation.
Target Date funds that allocate to Private Equity, can become Prohibited Transactions.
I asked ChatGPT how Private Equity cheats on performance and risk.
⚠️ Core Concern:
Private Equity (PE) self-reports inflated returns and artificially smooths volatility, which distorts inputs used in mean-variance optimization (MVO), risk-parity models, and target-date glidepaths.
🔍 How the Distortion Happens:
1. Self-Reported, Marked-to-Model Valuations
Unlike publicly traded equities, PE funds are not marked to market.
General Partners (GPs) have wide latitude in determining “fair value” using Level 3 inputs under GAAP/IFRS.
There’s no external price discovery like in public markets—creating upward bias in reported IRRs and TVPIs.
Example: GPs may hold a portfolio company at $2.3B valuation for 12 months—until a sale occurs at $1.8B, but all the prior return models assumed $2.3B.
2. Return Smoothing Reduces Apparent Risk
PE firms smooth returns by reporting only quarterly, and avoiding mark-downs in downturns unless forced (e.g., in LP secondaries).
This lowers measured standard deviation, making PE appear less risky than it truly is.
Ludovic Phalippou, in multiple SSRN papers, shows that real economic volatility of PE is closer to or greater than public equities, but accounting practices mask this.
3. Low Correlation Is Largely an Illusion
PE is often shown to have low correlation with the S&P 500 or public equity indices.
This is not because the underlying assets are fundamentally different—but because quarterly smoothed valuations fail to reflect the real-time economic correlation.
Empirical studies (e.g., Ang, Chen, Goetzmann 2013) show that lagged public-equity returns can explain much of PE fund performance.
📉 Implications for Asset Allocation Models:
1. Misleading Inputs into MVO and Risk Budgeting
MVO and Black-Litterman-type optimizations overweight PE due to inflated Sharpe ratios (high returns / low volatility).
Allocators wrongly assume PE offers high return with diversifying low risk.
2. Target-Date Funds and Pension Glides Paths Are Over-Allocating
Plan sponsors may use PE-heavy CITs or TDFs based on deceptively low risk and attractive correlation stats.
This is especially problematic in state-regulated CITs, where oversight of inputs is weak.
3. Stress Testing Fails to Capture Liquidity & Downside Risk
Smoothing hides tail risk and liquidity gaps during downturns (e.g., GFC, COVID).
PE dry powder and capital calls may spike just when public markets are down.
🔎 Supporting Academic and Regulatory Sources
Ludovic Phalippou, “An Inconvenient Fact: Private Equity Returns & the Billionaire Factory” → Calls out manipulated IRRs, opaque fees, and correlation illusions.
Andrew Ang (Columbia/BlackRock) → PE appears low beta only due to infrequent marking; in reality, it is leveraged equity.
U.S. SEC under Gensler has warned of valuation opacity and risk-model distortions in private funds.
CFA Institute (2021 paper): “Asset Allocation to Alternative Investments” (CFA Institute, 2025): Highlights that illiquid assets often have stale and artificially smoothed returns, recommends testing for serial correlation, and states clearly that analysts “need to unsmooth the returns to get a more accurate representation of the risk and return characteristics of the asset class.”blogs.cfainstitute.org+13cfainstitute.org+13
2019 SSRN paper “Unsmoothing Returns of Illiquid Assets” by Couts, Gonçalves, and Rossi, which critiques existing methods and proposes a novel three-step unsmoothing technique—highly relevant for private equity modeling. papers.ssrn.com+2
🧨 Bottom Line:
Private equity appears safer and more diversifying than it really is because it controls its own marks. This undermines the integrity of asset allocation models and can lead to over-allocation, particularly in pensions, endowments, and TDFs.
This misrepresentation may expose fiduciaries to legal risks under ERISA’s Impartial Conduct Standards or trust law’s duty of prudence—especially if they’ve failed to adjust for these distortions.
How can cryptocurrency not be an ERISA Prohibited Transaction under the Impartial Conduct Standards? Is Bitcoin different than other types? Does putting Crypto in an ETF fix it?
ChatGPT said:
Great question—cryptocurrency, including Bitcoin, poses serious risks under ERISA’s fiduciary and prohibited transaction rules, especially when evaluated through the lens of the Impartial Conduct Standards (ICS) issued by the Department of Labor (DOL) in the context of the Fiduciary Rule and PTE 2020-02.
Act loyally (duty of loyalty—no self-dealing or conflicts)
Pay only reasonable compensation
Not make misleading statements or omissions
The Impartial Conduct Standards, applicable to rollovers and IRA advice under PTE 2020-02, reinforce these duties and apply broadly when fiduciaries recommend or select investments for ERISA-covered plans or IRAs.
🔶 Why Cryptocurrency (like Bitcoin) Often Violates These Standards
Lack of a prudent process:
DOL issued Compliance Assistance Release 2022-01 warning fiduciaries to “exercise extreme care” before including crypto in retirement plans.
Crypto’s volatility, speculative nature, custodial risks, and regulatory uncertainty raise prudence red flags.
Duty of loyalty / potential for conflicts:
Many crypto providers (e.g., exchanges, fund managers) stand to profit from high fees or self-dealing structures.
Fiduciaries recommending crypto could be conflicted if they share revenue, hold equity in crypto firms, or lack independence.
Reasonable compensation:
Many crypto platforms and funds (e.g., Grayscale Bitcoin Trust) charge excessive fees relative to the risk/return profile—potentially violating the “reasonable compensation” standard.
Risk of misleading statements:
Marketing crypto as “hedges against inflation,” “digital gold,” or “safe diversification” can be misleading if not backed by robust fiduciary analysis.
⚖️ Prohibited Transaction Risk
Crypto holdings may involve:
Conflicted compensation (e.g., revenue-sharing with crypto platforms),
Use of plan assets in self-dealing by fiduciaries or related parties,
Indirect party-in-interest transactions, such as recommending affiliated crypto custodians or ETFs.
This could trigger ERISA §§ 406(a) and 406(b) violations unless a DOL exemption applies—and none exist specific to crypto.
🔹 Is Bitcoin Different from Other Cryptocurrencies?
Yes, Bitcoin is viewed somewhat differently, but it’s not exempt from fiduciary scrutiny:
Bitcoin is not a security, per SEC Chair Gensler (most others are), which may reduce some regulatory hurdles.
Bitcoin has longer history, greater liquidity, and institutional acceptance than most altcoins.
However, its volatility, custodial concerns, and speculative nature still pose ICS and prudence issues under ERISA.
🔹 Does Putting Bitcoin in an ETF Solve the Problem?
Not necessarily. Using a Bitcoin ETF (e.g., BlackRock’s IBIT or Grayscale’s GBTC) addresses some custodial and valuation issues, but fiduciary risks remain:
Still speculative and volatile—may not meet prudence test.
High fees (especially with trusts like GBTC) may violate “reasonable compensation.”
ETF sponsor conflicts (e.g., marketing fees, cross-selling) may still trigger 406(b) violations.
DOL has not approved any PTE specific to crypto ETFs in retirement plans.
🔍 Key DOL Guidance & Enforcement
2022 DOL Crypto Guidance: Warned fiduciaries about crypto’s inclusion in 401(k)s; issued investigative subpoenas to plans considering it.
ForUsAll v. DOL: Lawsuit over DOL’s crypto warning; DOL defended its authority to flag fiduciary risks.
Ongoing enforcement: DOL is watching this space closely and likely to bring enforcement actions if crypto is imprudently included in plans.
✅ Summary
Question
Crypto (esp. Bitcoin) in DC Plans
Is it a Prohibited Transaction under ERISA?
Very likely yes unless clearly exempt and without conflicts
Does it violate the Impartial Conduct Standards?
Often yes — due to volatility, lack of prudence, high fees, and conflicts
Is Bitcoin treated differently?
Slightly, but not enough to justify inclusion
Does a Bitcoin ETF fix this?
No — may reduce some risks, but not prudence or ICS violations
📌 Bottom Line for Fiduciaries
Unless crypto becomes clearly supported by regulatory exemptions, has stable pricing, low fees, and a credible long-term track record in retirement portfolios, its inclusion in ERISA plans is a high-risk move likely to draw litigation and regulatory scrutiny.
Charge high, opaque fees (violating the reasonable compensation prong),
Rely on complex, non-transparent disclosures (violating the no misleading statements prong),
Are marketed by non-fiduciary parties (violating care and loyalty obligations),
Fail to accept ERISA fiduciary status in the PE offering documents, disclaiming responsibility.
This makes them vulnerable on all four elements of the Impartial Conduct Standards, which apply to the DOL’s Prohibited Transaction Exemption (PTE) 2020-02 that governs conflicts of interest.
So, on its face, allowing Private Equity into 401(k)s should be a prohibited transaction unless a strong exemption applies.
🧩 2. How PE Tries to Avoid Prohibited Transaction Classification
Despite these red flags, here’s how PE sponsors and platforms often try to thread the needle:
A. Structuring through Commingled Products
PE is typically offered via:
Target Date Funds (TDFs) or
Collective Investment Trusts (CITs) These are multi-manager, pooled vehicles in which PE is only a sleeve. The fiduciary responsibilities then shift to the TDF or CIT manager, who may be a fiduciary — but the underlying PE managers are not.
➤ This layering dilutes fiduciary clarity and avoids direct ERISA responsibility for the PE firms themselves.
B. Relying on the DOL’s 2020 “Information Letter”
The Department of Labor’s 2020 Information Letter (requested by Pantheon and Partners Group) did not bless PE in DC plans, but it did not ban it either. It merely said:
“…a plan fiduciary would not violate the duties of prudence and loyalty per se by including PE as a component of a diversified investment option.”
This gave cover — but did not offer an exemption or remove fiduciary obligations. Yet many sponsors are treating it as a green light.
C. Outsourcing Fiduciary Responsibility
Plan sponsors may rely on third-party investment consultants (e.g., Mercer, Aon, Callan) or TDF providers (e.g., BlackRock, Fidelity) and claim reliance on prudence of the delegated manager.
However, delegation does not absolve fiduciary liability under ERISA § 405 (co-fiduciary liability), especially if the sponsor fails to monitor the advisor or conduct due diligence on PE’s costs, liquidity, and performance opacity.
📉 3. Why This Still Fails Under the Impartial Conduct Standards
The Impartial Conduct Standards (ICS) were developed under the DOL fiduciary rule and carried into PTE 2020-02, which applies when there are conflicted recommendations (e.g., plan fiduciaries profiting from fund inclusion or relying on conflicted consultants).
Private Equity fails ICS because:
Fees and valuation models are rarely benchmarked objectively.
Performance data is not standardized (e.g., IRRs vs. time-weighted returns).
Contracts often contain waivers of fiduciary duty, arbitration, or non-transparent fee disclosures.
There is often no fiduciary warranty under ERISA by the PE provider.
This opens the door to prohibited transaction claims, especially if the PE recommendation:
Directly or indirectly benefits the advisor/fiduciary financially.
Lacks documentation of a prudent process.
⚖️ 4. What Would Trigger Liability
Plaintiffs could pursue claims under:
ERISA §406(a) (dealing with conflicts of interest/self-dealing),
ERISA §404(a) (fiduciary duties of prudence and loyalty),
And potentially ICS violations under PTE 2020-02.
Courts and regulators could hold:
Plan fiduciaries liable for imprudence or prohibited transactions,
PE managers liable if they acted as de facto fiduciaries or benefited from self-dealing.
I think any plan sponsor who is pitched a Target date fund with any Private Equity, however small, to be wary. Private Equity will sneak into Target Date Funds first, maybe at 5% then grow to perhaps 20% to increase fees. BlackRock and Empower are cutting deals in which I believe they are getting lucrative fees from Private Equity in exchange for taking the fiduciary liability for the Private Equity in their target date funds. I would think when looking at the Private Equity sleave, it would be a party in interest. My contention is that if the Private Equity sleeve is a prohibited transaction, then the entire target date fund is a prohibited transaction.
Investment Fiduciaries James Watkins and Chris Tobe
James Watkins is an attorney with Invest Sense LLC. His current practice provides forensic fiduciary audits for plans and other trustees. Chris Tobe is the Chief Investment Officer for the Hackett Robertson Tobe Group. He works as a consultant to retirement plans and serves as a litigation consultant.
Mr. Watkins stated there are three cases that he refers to as the “responsibility trinity,” that defines the area of fiduciary responsibility right now: 1. Tibble v. Edison – recognized the Restatement of Trusts (Restatement) as a legitimate resource in resolving fiduciary issues and ruled that a plan sponsor has an ongoing fiduciary duty to monitor plan investment options for prudence 2. Hughes v. Northwestern – ruled that a plan sponsor has a fiduciary duty to ensure that each investment option within a plan is prudent and to remove any that are not 3. Brotherston v. Putnam – ruled that comparable index funds can be used for benchmarking purposes, citing Section 100 b(1) of the Restatement, that index funds are proper comparators Mr. Watkins stressed that he is a big proponent of cost benefit analysis and believes the math is not that hard to do, especially as it is being used to determine whether an investment is in the best interest of a participant. Mr. Watkins stated that the industry does not support his focus on cost benefit analysis given studies that show the majority of actively managed funds are not cost efficient.
Regarding annuities within a QDIA, Mr. Watkins noted that he most often is asked by the plan sponsor considering an in-plan annuity solution whether a participant can get out of it, and if so, how. Mr. Watkins’s understanding is the only way a participant can get out of an annuity without harsh tax penalties is to do a 1035 exchange (a tax-free exchange of an existing annuity contract, life insurance policy, or endowment for another of like kind). Mr. Watkins stated that he is aware of a lot of annuity providers trying to embed annuities into target date funds within qualified plans. He suggested that this raises the question about the 50 feasibility of a 1035 exchange in a qualified plan, and whether it is the only way you can make this move or can a participant make an exchange from a like product to another like product.
Mr. Watkins thinks that enhanced disclosures should be provided to participants with the appropriate information to ensure that they understand the annuity product, which should include the conditions for them to “break even” and how that would work if they were to surrender the annuity contract. Mr. Watkins stated that, if annuities are embedded in QDIAs, there needs to be much more meaningful, clear, and simple disclosures provided to enable the participant to make an informed decision and comply with IRC section 404(c). Mr. Watkins concluded by stating he does not believe annuities should be offered in a plan nor specifically in a QDIA. If ERISA does not require that a plan offer guaranteed income products or annuities, he does not see a reason to do so. His biggest concern is that once a participant is in an annuity, they lose control and are locked in. Mr. Watkins was asked if he has seen any ERISA 3(38) fiduciaries (those who have the authority to buy and sell assets, make strategic decisions, and otherwise handle all aspects of account investing) implementing annuity solutions in collective investment trusts or in unregistered products. He indicated that many plan sponsors are encountering products embedded in collective investment trusts and a lot of proprietary products. He believes that collective investment trusts are not transparent enough and participants do not understand or have access to information, as they would in a mutual fund that posts information in a newspaper or Morningstar. He stated that collective investment trusts typically do not publicly publish their performance results or their fees.
Mr. Tobe began his testimony by stating that target date funds hold 50% of all 401(k) assets and thinks they deserve more fiduciary oversight by regulatory agencies. Historically, TDFs have been primarily offered in mutual funds registered with the Securities and Exchange Commission (“SEC”), but the trend is that more target date assets are flowing into weakly regulated state collective investment trusts. The SEC does not allow investments in annuities, crypto currency, and private equity, for example, in mutual funds. By contrast, state-governed collective investment trusts do permit these types of investments, and do not offer the same level of disclosures and transparency as mutual funds. They also have lower capital requirements as well. 51 Mr. Tobe suggested the Council should examine federally-regulated investment vehicles being used as they are more transparent. He believes that collective investment trusts should become federally-regulated rather than being regulated at a state level. He noted that there are some collective investment trusts that are superior to mutual funds because they are “clones of a mutual fund” but have lower fees.
In his opinion, the collective investment trusts being offered by insurance companies are deploying illiquid investments (annuities, private equity). He stated that this is just a way to get highpriced annuities into the mainstream target date fund solutions. He raised concerns that there are no requirements for the insurance companies to disclose interest spreads, and that there is no transparency into the revenue that the insurance companies are earning. Mr. Tobe believes that QDIAs should be held to the highest standard, that all investments should be held to the highest federal standards, such as compliance with Global Investment Performance Standards, and that the Department should be pushing for more transparency for collective investment trusts. Mr. Tobe testified that he would not recommend annuities, private equity or crypto currency in any DC plan or embedded in a QDIA as those investments are too expensive and risky right now. When asked how participants should protect themselves from market volatility, Mr. Tobe suggested that a participant should move into the lowest risk target date fund; annuities bear embedded risks that are not readily transparent to the holder. He believes that annuities could be downgraded and that insurance companies have high default risk that translates to high risk for that component of a participants’ investment. He stated that the risks for partial annuitization are the same until there is more transparency and information on annuities.
Mr. Watkins stated that a lot of the concerns could be addressed if the insurance companies could guarantee that annuities could provide a commensurate return, but historically that has been very expensive.
Some Council members noted this was inconsistent with their professional experience and 52 suggested it should be researched further. Members of Council also questioned the witnesses’ opinions regarding the insurance companies default risks, noting that historical failure of insurance companies has been very low and less than 0.03%.
When asked where they would want to see changes that would provide them with comfort with the annuity products, Mr. Tobe suggested federal regulations that oversee the insurance agencies, coordinated in partnership with the Department for ERISA-based assets. When asked what level of fees and risk would satisfy the witnesses that a product is worthwhile, Mr. Watkins responded that the issuer would need to provide a cost benefit analysis that shows the return and guarantee. Mr. Tobe also offered a detailed example of how to diversify over 4 to 5 insurance companies to minimize the default risk and use synthetic stable value-like solutions for annuities to keep the fees low.
When asked if defined contribution plans should only use mutual funds due to their greater transparency, Mr. Tobe replied no and that he would rather see greater transparency requirements for collective investment trusts.
State Guaranty Associations are so flimsy that none are rated by S&P or Moody’s. There is no money in them, the reserves are not in the association, only in the companies themselves.
Most did not even pay out claims in the last major default, Executive Life – only Illinois and Pennsylvania associations made partial payments, only after court orders.
I asked ChatGPT about Guarantee Associations in the context of an ERISA Fiduciary and got the following response.
⚖️ ERISA Fiduciary Standards vs. State Guaranty Associations
1. Duty of Prudence and Care (§404(a)(1)(B))
ERISA requires fiduciaries to act:
“with the care, skill, prudence, and diligence under the circumstances then prevailing…”
SIGAs do not meet the “prudent expert” standard. A prudent expert would not rely on:
An entity with no prefunding or reserve capital
No federal backing
No credit rating from any recognized rating agency
A history of failure to pay during systemic defaults (e.g., Executive Life)
As you noted, only Illinois and Pennsylvania eventually made partial payouts, and only after litigation. That alone defeats the fiduciary standard of prudent selection and monitoring.
2. Duty of Loyalty (§404(a)(1)(A))
Fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits.
If a fiduciary chooses an annuity or insurance-based structure based on a belief that the SIGA will protect beneficiaries, without disclosing its inadequacy, they may be violating their loyalty duty.
Relying on industry marketing or regulatory illusion about SIGAs—when informed sources (like the Federal Reserve, EU regulators, and academics) have raised red flags—could be seen as self-serving or negligent.
3. Duty to Monitor and Evaluate Risk
ERISA fiduciaries must continually evaluate risks and the financial condition of providers.
Given the known systemic risks, including:
Private equity ownership of insurers (Kirti & Sarin 2020)
Long-duration illiquid assets in General Accounts
Minimal real oversight by state regulators
EU regulator concern in 2017 about systemic fragility of U.S. insurance regulation
…it’s arguable that no prudent fiduciary should rely solely—or even primarily—on SIGAs as a source of security.
📚 Supporting Academic and Regulatory Warnings
Lambert & Tobe (2024) – Warn of “a possible US retirement crisis” driven by misleading safety claims of annuities.
Todd & Wallace (1992, Fed Minneapolis) – Exposed the moral hazard of undercapitalized SIGAs and deceptive perceptions of insurance safety.
Perez (2016) – Documents political interference and regulatory capture at the state level.
EU Concerns (2017) – EU regulators raised cross-border solvency concerns for U.S. insurers, especially given weak state regulation.
🚫 What This Means for Fiduciary Actions
ERISA fiduciaries should not rely on State Guaranty Associations as a primary or sufficient reason to:
Justify annuity purchases for pension risk transfers (PRTs) or 401(k) plans.
Accept insurer counterparty risk without thorough, independent due diligence.
Claim “safety” without disclosing SIGA limits, lack of reserves, and legal uncertainty.
Instead, fiduciaries should:
Require contractual provisions for downgrade protections and capital reserves.
Insist on federal-level guarantees or fully collateralized structures.
Disclose the inadequacy of SIGAs in plan documents and fiduciary reports.
🧾 Bottom Line
State Guaranty Associations offer the illusion of safety, not the substance. No fiduciary acting under the ERISA standard of prudence and loyalty should rely on them as a meaningful risk mitigator.
Andy Barr’s Financial Industry Backers
Apollo Global Management
JPMorgan Chase & Co.
The Epstein Backdrop
The CommonSense 401k Project 